[Federal Register Volume 65, Number 132 (Monday, July 10, 2000)]
[Proposed Rules]
[Pages 42488-42505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17026]



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Part III





Department of Housing and Urban Development





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24 CFR Part 990



Allocation of Operating Subsidies Under the Operating Fund Formula; 
Proposed Rule

  Federal Register / Vol. 65, No. 132 / Monday, July 10, 2000 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 990

[Docket No. FR-4425-P-11]
RIN: 2577-AB88


Allocation of Operating Subsidies Under the Operating Fund 
Formula

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule is the first stage in HUD's rulemaking 
process to implement an interim Operating Fund Formula for determining 
the payment of operating subsidies to public housing agencies (PHAs). 
As required by statute, this proposed rule was developed through 
negotiated rulemaking procedures. The policies and procedures described 
in this proposed rule would govern the determination of funding 
distributions to PHAs under the Operating Fund until a final rule, 
reflecting the results of a congressionally requested public housing 
cost study, is developed and published. Pending the completion of the 
cost study and the issuance of superseding rules based on the study, 
HUD will proceed to consider the public comments received on this 
proposed rule and to issue, in the next stage of this rulemaking 
process, an interim rule based on this proposed rule and the public 
comments received on the proposed rule.

DATES: Comments Due Date: August 9, 2000.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Room 10276, Office of 
General Counsel, U.S. Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410. Comments should refer to the 
above docket number and title. A copy of each comment submitted will be 
available for public inspection and copying during regular business 
hours at the above address. Facsimile (FAX) comments are not 
acceptable.

FOR FURTHER INFORMATION CONTACT: Steve Sprague, Funding and Financial 
Management Division, Office of Public and Indian Housing, Room 4216, 
U.S. Department of Housing and Urban Development, 451 Seventh Street, 
SW, Washington, DC 20410; telephone (202) 708-1872 (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

A. The Performance Funding System (PFS)

    HUD currently uses a formula approach called the Performance 
Funding System (PFS) to distribute operating subsidies to public 
housing agencies (PHAs). HUD's regulations implementing the PFS can be 
found at 24 CFR part 990. Generally, the amount of operating subsidy 
received by a PHA is the difference between projected expenses and 
projected income, with the PFS regulations detailing how these 
projections will be made. PHAs calculate their PFS eligibility annually 
and submit a request for funding as part of their budget process. While 
the amount varies, this subsidy represents a substantial amount of 
revenue to a PHA. For example, in 1999, HUD distributed approximately 
$2.9 billion in operating subsidies to PHAs.
    The United States Housing Act of 1937 (42 U.S.C. 1437 et seq.) 
(referred to as the ``1937 Act'') establishes the statutory framework 
for HUD's public housing programs. The 1937 Act limits eligibility to 
public housing to low income families, and caps public housing rents at 
30 percent of a family's income. PHAs must therefore rely on the HUD 
operating subsidies (rather than rental income) to cover a significant 
amount of the costs associated with the operation of their public 
housing units.

B. Public Housing Reform

    On October 21, 1998, the Congress enacted the Quality Housing and 
Work Responsibility Act of 1998 (Public Law 105-276, approved October 
21, 1998) (referred to as the ``Public Housing Reform Act''). The 
Public Housing Reform Act makes sweeping changes to HUD's public and 
assisted housing programs. Among other changes, section 519 of the 
Public Housing Reform Act amended section 9 of the 1937 Act (42 U.S.C. 
1437g). Amended section 9 establishes an Operating Fund for the purpose 
of making assistance available to PHAs for the operation and management 
of public housing. Section 9(f) of the 1937 Act, as amended by the 
Public Housing Reform Act, requires that the assistance to be made 
available from that fund be determined using a formula developed 
through negotiated rule-making procedures as set forth in subchapter 
III of chapter 5 of title 5, United States Code (5 U.S.C. 561 et. 
seq.), commonly referred to as the Negotiated Rulemaking Act of 1990.

II. Negotiated Rulemaking

A. The Convening Report

    Negotiated rulemaking, or ``neg-reg,'' is a relatively new process 
for HUD. The basic concept of neg-reg is to have the agency that is 
considering drafting a rule bring together representatives of affected 
interests for face-to-face negotiations that are open to the public. 
The give-and-take of the negotiation process is expected to foster 
constructive, creative and acceptable solutions to difficult problems.
    In anticipation of possible congressional action, HUD entered into 
an interagency agreement in June 1998 with the Federal Mediation and 
Conciliation Service (FMCS) for convening and facilitation services 
associated with a negotiated rulemaking regarding a possible operating 
fund proposed rule. FMCS submitted its Convening Report in November 
1998. The report provided a list of individual PHAs and organizations, 
representing a wide range of interests, that were willing and able to 
work within a consensus framework on a new Operating Fund formula.

B. HUD's Negotiated Rulemaking Committee on Operating Fund Allocation

    On February 3, 1999 (64 FR 5570), HUD published a notice announcing 
its intent to establish a negotiated rulemaking committee for the 
Operating Fund. This notice identified a list of possible interested 
individuals and organizations to serve on the negotiated rulemaking 
committee. The list of possible interested individuals and 
organizations included PHAs, national organizations representing PHAs, 
residents organizations, advocates for low-income housing, and other 
housing experts.
    On March 16, 1999 (64 FR 12920), HUD published a notice announcing 
the establishment of its Negotiated Rulemaking Committee on Operating 
Fund Allocation (the ``Committee''). The notice also provided the list 
of Committee members and announced its first set of meetings. The 
members participating in the negotiated rulemaking procedure for the 
Operating Fund are:

 Large Housing Authorities
    1. Atlanta Housing Authority, Atlanta, GA
    2. Chicago Housing Authority, Chicago, IL
    3. New York City Housing Authority, NYC, NY

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    4. Pittsburgh Housing Authority, Pittsburgh, PA
    5. Seattle Housing Authority, Seattle, WA
 Medium Housing Authorities
    1. Akron Metro Housing Authority, Akron, OH
    2. Athens Housing Authority, Athens, GA
    3. Indianapolis Housing Agency, Indianapolis, IN
    4. Oakland Housing Authority, Oakland, CA
    5. Reno Housing Authority, Reno, NV
 Small Housing Authorities
    1. Marble Falls Housing Authority, Marble Falls, TX
    2. Meade County Housing and Redevelopment Commission, Sturgis, SD
    3. York Housing Authority, York, NE
 Non-PFS Housing Authority
    1. Puerto Rico Public Housing Administration, San Juan, PR
 Resident Organizations
    1. Massachusetts Union of Public Housing Tenants, Dorchester MA
    2. New Jersey Association of Public and Subsidized Housing 
Residents, Inc., Newark, NJ
 Public Interest Groups
    1. National Low Income Housing Coalition, Washington, DC
    2. Housing and Development Law Institute, Washington, DC
    3. Center for Community Change, Washington, DC
    4. National Organization of African-Americans in Housing (NOAAH)
 National PHA Associations
    1. Public Housing Authorities Directors Association (PHADA)
    2. National Association of Housing and Redevelopment Officials 
(NAHRO)
    3. Council of Large Public Housing Authorities (CLPHA)
 Federal Government
    1. U.S. Department of Housing and Urban Development

    Additionally, two FMCS representatives served as facilitators. The 
Committee first convened on March 23-24, 1999. Additional Committee 
meetings were held on April 13-14, May 13-14, June 15-16, July 7-8, 
September 14-15, November 30-December 2, 1999; February 16-17, 2000; 
and March 7-8, 2000. All Committee meetings were held in the 
Washington, DC metro area. The Committee meetings were announced in the 
Federal Register. Members of the public were invited to attend the 
meetings and to submit their views and recommendations.

III. This Proposed Rule

    This proposed rule is the product of the Committee's successful 
negotiations, and reflects the consensus decisions reached over nearly 
a year's worth of deliberations. The proposed rule is the first stage 
in the rulemaking process that will establish an Operating Fund 
formula, to replace the current PFS regulations located in 24 CFR part 
990. The rule thus represents a partnership among HUD, the PHAs, public 
housing residents, and advocates of public housing. The policies and 
procedures described in this proposed rule would govern the 
determination of funding distributions to PHAs under the Interim 
Operating Fund Formula until a final rule, reflecting the results of a 
Congressionally requested public housing cost study, is developed and 
published (see Section XIII. of this preamble for further information 
regarding the cost study).
    It became apparent to the Committee during its deliberations that 
sufficient data were not available to either establish the true costs 
of operating public housing or to develop final modifications to the 
existing PFS regulations without an unacceptable degree of 
unpredictability. The Committee determined, therefore, to recommend 
that a comprehensive cost study be undertaken to provide data and 
recommendations necessary for finalizing an Operating Fund Formula. A 
consensus also became apparent that, pending the results of the housing 
cost study, there exist urgent needs and tangible benefits from 
implementing the proposed Interim Operating Fund Formula. Accordingly, 
the Interim Operating Fund Formula that would be established by this 
proposed rule is largely based on the policies and procedures that have 
heretofore governed the PFS. The Committee has decided to recommend 
several important modifications to the existing PFS regulations. These 
modifications would address, to the extent feasible under data 
presently available to the public, five specific proposals considered 
important by members of the Committee.
    The proposed rule would: (1) Modify the method by which ``small 
PHAs'' are funded in order to assure an adequate minimum level funding, 
based on nationally averaged operating costs for multifamily housing 
projects insured by the Federal Housing Administration (FHA), adjusted 
for unit size differences and locational cost differences; (2) 
implement statutory changes permitting PHAs to retain certain rental 
and non-rental income without offset against operating subsidy; (3) 
retain the current method of estimating utility expenses, but would 
eliminate year-end adjustments, for the costs of utilities, reflecting 
the adjustments instead, in the PHA's operating subsidy calculation for 
the second PHA fiscal year following the year being adjusted, and in 
order to encourage energy efficiency, it would replace the current 50-
50 split of savings or increase in cost due to changes in utilities 
consumption to a 75-25 split between PHAs and HUD, respectively; (4) 
require each PHA to include in its operating subsidy calculation, $25 
per occupied unit per year for resident participation activities as an 
add on expense component for subsidy eligibility; and (5) include flood 
insurance costs in the computation of the Allowable Expense Level (AEL) 
by permitting a one-time permanent adjustment to reflect this cost. The 
proposed rule would also make several clarifying and technical changes 
to the PFS regulations and would remove several obsolete provisions.
    The most significant amendments made by this proposed rule to the 
current part 990 regulations are described in the following sections of 
this preamble. For the convenience of readers, this proposed rule 
republishes the text of subpart A of the part 990 regulations in its 
entirety. Except for the changes identified in this preamble, no 
additional revisions would be made to 24 CFR part 990.

IV. FHA-Based AEL (FHAEL) Adjustment for Small PHAs 
(Sec. 990.105(e))

    The proposed rule would modify how non-utility Allowable Expense 
Levels (AELs) are calculated. AELs were initially set in 1975 for most 
PHAs and have subsequently been updated only for inflation. In 1992, 
PHAs with AELs that fell significantly below a statistical regression-
based formula were allowed to receive increases up to 85% of the 
formula value. Many of those familiar with public housing have argued 
that the original AEL determinations had the effect of freezing into 
place whatever funding inequities then existed, and that the 1992 
revisions did little to correct this problem because the formula was 
based on an analysis of the existing distribution of AELs. The most 
common concerns relate to small PHAs.
    The Committee sought a proxy measure of the adequacy of small PHA 
funding; one not based upon public housing operating expense data since 
such data fails to provide an objective measure as to whether small PHA 
funding is adequate, inadequate, or excessive. The most readily 
accessible proxy information comes from HUD's Real Estate Management 
data system. This data system contains detailed time-series financial 
statements and project

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characteristics for approximately 11,000 multifamily housing projects 
insured by the FHA and/or assisted by HUD, of which approximately 90% 
have some form of housing subsidies.
    In reviewing applications for multifamily housing insurance, FHA 
requires that an applicant submit detailed budget estimates that 
demonstrate that the proposed project is financially feasible. 
Operating expense levels are normally required to be close to industry 
norms for similar projects in the area. This is done to reduce FHA's 
insurance risk--under-estimating operating expenses increases the risk 
that a project will go into default. Available data suggest that there 
is limited variability in normal operating expense levels for similar 
projects in similar locations.
    The Committee adopted an approach that used a national FHA-based 
operating cost average (referred to as the ``FHAEL'') for a two-bedroom 
public housing unit based on line-item expenses for non-utility 
operating costs that excluded property taxes. This figure was then used 
to calculate a PHA-specific equivalent factor by adjusting for average 
unit size differences and for locational cost differences. The unit 
size differential was calculated using Fair Market Rent (FMR) cost 
relationships (e.g., a one-bedroom costs 85% of a two-bedroom and a 
three-bedroom costs 125% of a two-bedroom). The location differential 
was based on the R.S. Means construction cost index, which effectively 
measures wage and material price differentials for a constant quality 
product. The R.S. Means and bedroom size adjustments had a high 
correlation with actual FHA operating expense differentials and a 
significant but lower unit-weighted correlation (83%) with PHA AELs.
    The FHA operating cost data used in the comparisons of FHA and 
public housing operating costs consisted of all FHA multifamily insured 
or subsidized projects for which audited operating expense data for 
fiscal year (FY) 1996 were available. Data for 1996 were selected 
because they had been extensively tested and used for other purposes 
(e.g., to develop operating cost standards and factors for FHA-managed 
properties). Comparisons with other years were made to eliminate 
projects which appeared to have atypical annual expenditures. A total 
of 8,651 projects were used for most analyses. Most of the projects for 
which all needed variables were available were assisted by some form of 
HUD subsidy.
    In practice, it was found that the AEL/FHA cost ratio was 101% for 
the public housing program as a whole, but that many small PHAs had 
AELs significantly below estimated FHA-based operating cost averages. 
Conceptually, there is no reason to expect a PHA to be able to provide 
maintenance levels typical of private market projects with 
significantly less funding. Therefore, this proposed rule would 
establish a one-time adjustment to AELs for certain PHAs with less than 
500 units.
    AELs for small PHAs would be set at the higher of a small PHA's 
current AEL or 70% of the FHAEL, and the AEL would be increased to the 
higher of their current AEL or 85% of the FHAEL for PHAs under 250 
units. The cost of these increases would be achieved by reducing the 
AELs of PHAs with more than 500 units. The proposed rule would provide 
an exception to this determination for small PHAs with AELs that are 
greater than 120% of the FHAEL, in which case the small PHAs will use 
an AEL equivalent to 120% of the FHAEL.
    PHAs with more than 500 units and AELs in excess of 85% of their 
FHAEL will use 98.64% of the FY 2000 AEL (which represents a 1.36% 
reduction in the FY 2000 AEL value) for purposes of calculating their 
FY 2001 subsidy determinations. This reduction offsets the cost of 
establishing minimum AELs for PHAs with less than 250 units at 85% of 
the value of the FHAEL, and of establishing minimum AELs for PHAs with 
250-499 units at 70% of their FHAEL values.

V. Treatment of Revenues (Secs. 990.102, 990.109, 990.110, and 
990.116)

A. Treatment of Non-Rental Income--Exclusion of Investment Income and 
Revised Definition of ``Other Income'' (Secs. 990.102, 990.109 and 
990.110)

    As noted above, the amount of operating subsidy received by a PHA 
is generally calculated by determining the difference between projected 
expenses and projected income. Projected income is categorized as being 
either dwelling rental income, investment income, or ``other income.'' 
This proposed rule would revise the definition of other income (for 
purposes of calculating subsidy) to only include income from: (1) Rents 
billed for dwelling units rented for non-dwelling purposes; and (2) 
charges to residents for excess utility consumption of PHA supplied 
utilities.
    Under the proposed definition, investment income would not be used 
to determine operating subsidy eligibility. Accordingly, the proposed 
rule would make a conforming amendment to Sec. 990.109, which governs 
the calculation of projected operating income levels. Specifically, the 
proposed rule would remove paragraph (e)(1) of that section, which 
regards a PHA's estimate of investment income for purposes of the 
operating subsidy calculation. The proposed rule would also remove the 
provisions dealing with adjustments for investment income located at 
Sec. 990.110(b). This regulatory change would codify HUD's revised 
policy regarding the treatment of non-rental income for FY 2000 and 
beyond, which was announced through an earlier issued Public and Indian 
Housing (PIH) Notice 2000-04 (HA), issued on February 3, 2000.

B. Computation of Projected Monthly Dwelling Rental Income 
(Sec. 990.109)

    The proposed rule would amend Sec. 990.109 to revise the method for 
calculating projected monthly dwelling rental income. Under the 
proposed rule, a PHA would determine its average monthly dwelling 
charge for the month that is six months before the start of its budget 
year (the ``current year average'') as well as the average monthly 
charge for the comparable month of its two previous years. An average 
would be computed for these three amounts (the ``three year average'') 
and compared with the current year average.
    If the current year average is not higher than the three year 
average, rental income has not increased and the current year average 
will be used to calculate projected rental income.
    If the current year average is higher than the three year average, 
the PHA shall be allowed to retain 50% of any increases in dwelling 
rental income, so long as the PHA uses the increased revenue for the 
provision of resident-related improvements and services as described in 
new Sec. 990.116 (see Section V.C. of this preamble below). The 
retained income will not be recognized in the PHA's calculation under 
the Interim Operating Fund Formula. The projected dwelling rental 
income for PHAs with increased rental income will be based on the three 
year average plus 50% of the increase.
    A change factor of 3% will then be applied. HUD intends to revise 
the 3% adjustment factor, for the duration of the interim rule, 
beginning in FY 2002, to more accurately reflect the inflationary 
pressure on the projection of monthly dwelling rental income. In 
determining such a factor for FY 2002, HUD will also take into 
consideration any negative impacts on incentives for PHAs to increase 
resident earned income, relevant and available indices of rental income 
inflation, historical trends in rental income changes, and the 
proportion and amount of increased

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income retained by PHAs using the rolling base method. There will be 
consultation with the appropriate stakeholders regarding the 
methodology for determining change factors to be used by HUD followed 
by publication of written notice and an opportunity for public comment.
    The PHA must adjust the rent rolls used for purposes of these 
calculations to reflect any change from PHA-paid utilities to resident-
paid utilities, or vice versa, between the rent roll date and the 
projected budget year.

C. Use of Increases in Dwelling Rental Income (Sec. 990.116)

    The proposed rule would replace the current Sec. 990.116 (which 
concerns three year incentive adjustments) with a new section 
concerning the eligible uses of increases in dwelling rental income, as 
calculated under Sec. 990.109 (see Section V.B. of this preamble 
above). The uses of the retained income must be described in the PHA's 
Plan submissions under 24 CFR part 903. The uses for the retained 
income must be developed with front end resident participation and 
ongoing input, and shall be made part of the PHA Plan submission. The 
proposed rule provides several examples of eligible uses for the 
retained income, including, but not limited to:
    1. Physical and management improvements that benefit residents;
    2. Resident self-sufficiency services;
    3. Maintenance operations;
    4. Resident employment and training services;
    5. Resident safety and security improvements and services; and
    6. Optional earned income exclusions.

VI. Utility Adjustments (Secs. 990.107 and 990.110)

    After consideration of various options for the treatment of 
utilities, the Committee decided to retain the current methodology for 
estimating utility expenses (located in Sec. 990.107). However, the 
proposed rule would make several changes to the regulations concerning 
utility adjustments (located in Sec. 990.110).
    First, the proposed rule would eliminate the so-called ``year-end 
adjustments.'' Under the current PFS regulations, a PHA must conduct a 
comparison of the differences between the actual costs and consumption 
of utilities during the immediate preceding year with the estimates 
used to determine the allowable utilities expense level for that year. 
The comparison of actual and estimated utility costs is to be reported 
to HUD within 45 days after the end of a PHA's fiscal year. Under the 
proposed rule, a PHA will continue to report its comparison of actual 
and estimated utility costs within 45 days after the end of the PHA's 
fiscal year. The adjustment would normally be made in the operating 
subsidy calculation for the second PHA fiscal year following the year 
being adjusted. These adjustments would be applicable to PHA fiscal 
years beginning on or after January 1, 1999.
    In order to strengthen the regulatory incentives to conserve 
energy, the current ``50-50'' sharing of additional costs or savings 
resulting from changes in consumption levels would be revised to a 
``75-25'' split. Under the proposed rule, if actual consumption levels 
are lower than estimated, PHAs would retain 75% of the savings 
resulting from decreased consumption. The remaining 25% of the savings 
would be deducted by HUD when determining future subsidy eligibility. 
Conversely, if actual consumption levels are higher than anticipated, 
HUD would allow 25% of the resulting cost. The remaining 75% of the 
increased consumption cost would be absorbed by the PHA.
    The risks associated with utility rates increasing after the 
estimate of utility costs has been approved will continue to be 
absorbed by HUD. In return, savings in utility costs due to decreases 
in rates that occur after the estimate of utility costs has been 
approved will accrue to HUD.
    By permitting PHAs to retain a greater share of the savings from 
decreased utilities consumption, the Committee expects to encourage 
energy conservation. PHAs are urged to implement policies and 
procedures that foster conservation and to reduce energy costs. The 
savings resulting from such cost reductions can more appropriately be 
used to improve existing living conditions in public housing. The 
Committee strongly recommends that energy conservation become a central 
component of each PHA's Annual and Five Year Plans.

VII. Resident Participation (Sec. 990.108(e))

    In its development of the proposed rule, the Committee discussed at 
substantial length the importance of resident participation to the 
success of public housing, including the Interim Operating Fund 
formula. The Committee noted that the Public Housing Reform Act places 
value on resident participation by requiring, with certain exceptions, 
at least one resident on the PHA Board of Commissioners, resident 
involvement in the PHA Plan process (through Resident Advisory Boards) 
and additional involvement as reflected in HUD's resident participation 
regulations (24 CFR part 964). Accordingly, the proposed rule would 
require each PHA to include, in its operating subsidy eligibility 
calculation, $25 per occupied unit per year for resident participation 
activities. These activities include (but are not limited to) those 
described in 24 CFR part 964. For purposes of this section, a unit may 
be occupied by a public housing resident, a PHA employee, or a police 
officer.
    The proposed rule would also authorize HUD to approve the use of 
vacant rental units for resident participation purposes and allow PHAs 
to receive subsidy support for those units. HUD will approve the use of 
vacant units for such purposes only if the PHA can demonstrate that 
safe and suitable space for the resident participation activities is 
not otherwise readily available. Only one site per public housing 
development, involving one or more contiguous units, may be used for 
resident participation activities. Further, the number of units must be 
the minimum necessary to support the resident participation activities. 
Any rental income generated as a result of the activity must be 
reported as income in the operating subsidy calculation.
    HUD is also taking various steps to promote resident involvement in 
creating and maintaining a positive living environment. For example, 
HUD is developing a proposed rule that will revise the part 964 
regulations in their entirety. HUD is committed to developing this 
proposed rule with the active participation of public housing 
residents. HUD will solicit resident input through the scheduling of 
public forums, solicitations for written comments, and/or other 
appropriate means. HUD's goal in undertaking this rulemaking is to 
develop a set of easy-to-understand regulations that reflect the 
meaningful contributions of public housing residents. Accordingly, the 
proposed rule will not only implement statutory amendments made by the 
Public Housing Reform Act, but will also streamline and reorganize 24 
CFR part 964 to simplify and improve the clarity of HUD's resident 
participation requirements.
    HUD is taking several other steps to increase resident 
participation in public housing. For example, HUD will conduct training 
for resident organizations and PHAs on the Public Housing Reform Act.

VIII. Flood Insurance Adjustment to AEL (Sec. 990.105(f))

    To simplify the calculation of operating subsidy, this proposed 
rule

[[Page 42492]]

would include flood insurance costs in the AEL computation. 
Specifically, the proposed rule would require that the AEL be adjusted 
by adding the flood insurance charge per unit month, as reflected in 
the last HUD approved subsidy calculation for FY 2000. This adjustment 
would be a one-time permanent adjustment made only in FY 2001. However, 
if the flood map is changed at a future date, HUD will adjust the AEL 
for the affected PHAs to reflect the revised flood insurance charges.

IX. Removal of Obsolete Provisions and Other Streamlining Changes

    In addition to the changes discussed above, this proposed rule 
would make several clarifying and technical changes to part 990. For 
example, the proposed rule would replace all outdated reference to the 
PFS with references to the Interim Operating Fund Formula. The proposed 
rule would also remove several obsolete provisions, which continue to 
be unnecessarily codified. HUD has also taken this opportunity to re-
format or clarify certain other provisions. These proposed changes are 
not substantive, and do not alter or modify existing requirements. 
Rather, these changes are designed to make the part 990 regulations 
easier to comprehend.

X. Treatment of Utility and Waste Management Savings

    Amended section 9 of the 1937 Act requires that ``the treatment of 
utility and waste management costs under the [Operating Fund] formula 
shall provide that a public housing agency shall receive the full 
financial benefit from any reduction in the cost of utilities or waste 
management resulting from any contract with a third party to undertake 
energy conservation improvements in one or more of its public housing 
projects'' (42 U.S.C. 1437g(e)(2)(C)).
    The proposed rule would address this statutory requirement by 
retaining the current PFS provisions at Sec. 990.107(f), which 
describes PHA incentives for non-HUD financed energy conservation 
improvements. Under this provision, a PHA, whose energy conservation 
measures have been approved by HUD as satisfying certain regulatory 
requirements, may retain 100% of the savings from decreased energy 
consumption after payment of the amount due the contractor until the 
term of the financing agreement is completed.
    With regard to waste management, these costs are treated as a 
maintenance expense (not a utilities expense) under the PFS and this 
proposed rule. The Allowable Expense Level (AEL) covers non-utility 
costs and is not adjusted when costs are reduced. Should a PHA be able 
to reduce its waste management costs below the amount assumed in its 
AEL, the PHA would retain all of the savings. This is true under the 
existing PFS, and would continue to apply under this proposed rule.

XI. Moving To Work PHAs

    Moving To Work (MTW) PHAs will continue to be funded under the 
provisions of their existing MTW agreements. These agreements may be 
renegotiated in view of the new Interim Operating Fund Formula, as 
requested by MTW PHAs and as agreed to by HUD. If MTW PHAs choose to be 
included under the new Interim Operating Fund Formula, then both the 
redistribution and funding benefits will apply. (See Sec. 990.104(d) of 
this proposed rule.)

XII. Applicability of the Interim Operating Fund Formula to Non-PFS 
PHAs

    This proposed rule would revise Sec. 990.103 (which concerns the 
applicability of the Interim Operating Fund Formula) to provide that 
the amendments described in sections IV. through X. of this preamble 
would be applicable to housing owned by the PHAs of the Virgin Islands, 
Puerto Rico, Guam and Alaska (the ``non-PFS PHAs''). Otherwise, the 
Interim Operating Fund Formula would not be applicable to these PHAs. 
Operating subsidy payments to these PHAs would continue to be made in 
accordance with subpart B of 24 CFR part 990. The non-PFS PHAs would 
not be subject to the AEL reductions necessary to offset the cost of 
establishing minimum AELs for small PHAs (see Section IV. of this 
preamble).

XIII. The Operating Fund Cost Study

    The Conference Report to the FY 2000 HUD Appropriations Act (Public 
Law 106-74, approved October 20, 1999) states, in part, that ``. . . 
before a proposed rule is published in the Federal Register, the 
conferees direct HUD to contract with the Harvard University Graduate 
School of Design (``Harvard'') to conduct a study of the cost incurred 
in operating well-run public housing and provide the results to the 
negotiated rulemaking committee and the appropriate congressional 
committees. . . .'' (Congressional Record of October 13, 1999, H10007).
    HUD has contracted for the study. HUD has also directed Harvard, as 
the cost-study contractor, to provide public opportunities (such as 
periodic forums, status reports, and other means) for interested 
persons and organizations to be informed of the study's research 
design, methodologies, and progress, and to provide input and feedback 
for consideration in the development of the study. Harvard, as the 
contractor for the cost study, will consult with interested individuals 
and organizations in developing the cost study findings and 
recommendations.
    During the period that the cost study is underway, HUD will proceed 
to consider the public comments received on this proposed rule and to 
issue an interim rule based on this proposed rule and the public 
comments received on the proposed rule. As part of the rulemaking 
process, HUD will submit the rule to the Office of Management and 
Budget (OMB) for review and clearance (as required under Executive 
Order 12866), and to HUD's Congressional committees for 15-day pre-
publication review (as required under section 7(o) of the Department of 
Housing and Urban Development Act (42 U.S.C. 3531 et seq.)).

XIV. Development of Final Rule

    Following and based upon the findings and recommendations of the 
completed cost study and the Public Housing Reform Act, HUD will 
develop the additional rulemaking to finalize the Operating Fund 
Formula, using the procedures of the Negotiated Rulemaking Act of 1990, 
subject to compliance with applicable legal requirements prerequisite 
to the establishment of a negotiated rulemaking committee for such 
purposes and to the appropriate approvals of any proposed or final rule 
as referenced in Section XII of this preamble above.

XV. Justification for Reduced Public Comment Period

    It is the general practice of the Department to provide a 60-day 
public comment period on all proposed rules. The Department, however, 
is reducing its usual 60-day public comment period to 30 days for this 
proposed rule. In an effort to have an interim Operating Fund Formula 
in place as close to beginning of FY 2001, and given that the formula 
was developed through the negotiated rulemaking process, in which 
representatives of all affected parties participated, the Department 
believes that a 30-day public comment period is justified under these 
circumstances.

[[Page 42493]]

XVI. Findings and Certifications

Information Collection Requirements

    The information collection requirements contained in 24 CFR part 
990 have been approved by the Office of Management (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). While this 
proposed rule would make several modifications to the existing 
regulatory requirements (described above), the rule would not increase 
the total reporting and recordkeeping burden related to the payment of 
operating subsidies to PHAs. The information collection requirements 
contained in Secs. 990.104, 990.105, 990.107, 990.108, 990.110, 
990.111, and 990.117 of this proposed rule correspond to information 
collections contained in HUD's current part 990 regulations. These 
information collection requirements have been assigned OMB control 
numbers 2577-0029 (expiration date May 31, 2001), 2577-0026 (expiration 
date June 30, 2001), and 2577-0066 (expiration date September 30, 
2002). In accordance with the Paperwork Reduction Act, 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 currently 
valid OMB control number.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been 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). The Finding of No Significant Impact 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 proposed 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. 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.

Regulatory Flexibility Act

    The Secretary has reviewed this proposed rule before publication 
and by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The proposed rule would implement a new system for formula 
allocation of funds to PHAs for their operating needs. The new system 
is established to provide minimum impact on all PHAs, small and large. 
Accordingly, the formula will not have a significant economic impact on 
any PHA. Notwithstanding HUD's determination that this proposed rule 
would not have a significant economic impact on small entities, HUD 
specifically invites comments regarding alternatives to this proposed 
rule that would meet HUD's objectives as described in this preamble.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on State and local 
governments and is not required by statute, or the rule preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This proposed rule would not have 
federalism implications and would 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 proposed 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.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Number for this program 
is 14.850.

List of Subjects in 24 CFR Part 990

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

    For the reasons discussed in the preamble, HUD proposes to amend 24 
CFR part 990 as follows:

PART 990--THE PUBLIC HOUSING OPERATING FUND PROGRAM

    1. Revise the heading of part 990 to read as set forth above.
    2. The authority citation for part 990 is revised to read as 
follows:

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

    3. Subpart A is revised to read as follows:

Subpart A--The Operating Fund Formula

Sec.
990.101   Purpose.
990.102   Definitions.
990.103   Applicability of the Operating Fund Formula.
990.104   Determination of amount of operating subsidy under the 
Operating Fund Formula.
990.105   Computation of allowable expense level.
990.106   Transition funding for excessively high-cost PHAs.
990.107   Computation of utilities expense level.
990.108   Other costs.
990.109   Projected operating income level.
990.110   Adjustments.
990.111   Submission and approval of operating subsidy calculations 
and budgets.
990.112   Payments procedure for operating subsidy under the 
Operating Fund Formula.
990.113   Payments of operating subsidy conditioned upon 
reexamination of income of families in occupancy.
990.114   Phase-down of subsidy for units approved for demolition.
990.116   Increases in dwelling rental income.
990.117   Determining actual and requested budget year occupancy 
percentages.
990.120   Audits.
990.121   Effect of recission.


Sec. 990.101  Purpose.

    This subpart implements section 9(f) of the United States Housing 
Act of 1937 (42 U.S.C. 1437g) (referred to as ``the 1937 Act''). 
Section 9(f) establishes an Operating Fund for the purposes of making 
assistance available to public housing agencies (PHAs) for the 
operation and management of public housing. The assistance made 
available from the Operating Fund is determined using a formula 
developed through negotiated rulemaking procedures. This subpart 
describes the policies and procedures for operating subsidy 
calculations under the Operating Fund Formula.


Sec. 990.102  Definitions.

    Allowable Expense Level (AEL). The per unit per month dollar amount 
of

[[Page 42494]]

expenses (excluding Utilities and expenses allowed under Sec. 990.108) 
computed in accordance with Sec. 990.105, which is used to compute the 
amount of operating subsidy.
    Allowable Utilities Consumption Level (AUCL). The amount of 
utilities expected to be consumed per unit per month by the PHA during 
the Requested Budget Year, which is equal to the average amount 
consumed per unit per month during the Rolling Base Period.
    Base Year. The PHA's fiscal year immediately preceding its first 
fiscal year of receipt of operating subsidy under this part (either 
under the Operating Fund Formula or its predecessor, the Performance 
Funding System (PFS)).
    Base Year Expense Level. The expense level (excluding utilities, 
audits and certain other items) for the Base Year, computed as provided 
in Sec. 990.105.
    Current Budget Year. The fiscal year in which the PHA is currently 
operating.
    Dwelling rent. The amount charged monthly for a dwelling unit 
occupied by a resident or family eligible for public housing as 
determined in Sec. 960.253 of this title. For purposes of determining 
subsidy eligibility, the dwelling rent will not reflect decreases 
resulting from the PHA's implementation of any optional earned income 
exclusions.
    Formula. The revised formula derived from the actual expenses of 
the sample group of PHAs receiving assistance under the Operating Fund 
Formula, which is used to determine the Formula Expense Level and the 
Range of each PHA (see Sec. 990.105(c)).
    FHA-based operating expense level (FHAEL). The per unit per month 
dollar amount of expenses (excluding utilities and expenses allowed 
under Sec. 990.108) computed in accordance with Sec. 990.105(e), which 
is used on a one-time basis to adjust the AEL for selected PHAs.
    Formula Expense Level. The per unit per month dollar amount of 
expenses (excluding utilities and audits) computed under the Formula, 
in accordance with Sec. 990.105.
    HUD Field Office. The HUD Field Office that has been delegated 
authority under the U.S. Housing Act of 1937 to perform functions 
pertaining to this subpart for the area in which the PHA is located.
    Local Inflation Factor. The HUD-supplied weighted average 
percentage increase in local government wages and salaries for the area 
in which the PHA is located and non-wage expenses.
    Long-term vacancy. This term means the same as it is used in the 
definition of ``Unit Months Available'' in this section.
    Nondwelling rent. The amount charged monthly, including utility and 
equipment charges, to a lessee for a dwelling unit that is being used 
for nondwelling purposes. For purposes of determining operating 
subsidy:
    (1) If the nondwelling unit has been approved for subsidy (e.g., 
the unit is being used for economic self-sufficiency services or anti-
drug activities) at the rate of the PHA's AEL, the PHA will include all 
charges as nondwelling rent;
    (2) If the nondwelling unit has not been approved for subsidy, a 
PHA will include as nondwelling rent only that portion of the charge 
that exceeds the rate of the PHA's AEL.
    Operating budget. The PHA's operating budget and all related 
documents, as required by HUD, approved by the PHA Board of 
Commissioners.
    Other income. Income from rent billed to lessees of dwelling units 
rented for nondwelling purposes, and from charges to residents for 
excess utility consumption for PHA supplied utilities.
    Project. Each project under an Annual Contributions Contract to 
which the Operating Fund Formula is applicable, as provided in 
Sec. 990.103.
    Project Units. All dwelling units of a PHA's Projects.
    Projected Operating Income Level. The per unit per month dollar 
amount of dwelling rental income plus other income, computed as 
provided in Sec. 990.109.
    Requested Budget Year. The budget year (fiscal year) of a PHA 
following the Current Budget Year.
    Rolling Base Period. The 36-month period that ends 12 months before 
the beginning of the PHA Requested Budget Year, which is used to 
determine the Allowable Utilities Consumption Level used to compute the 
Utilities Expense Level.
    Top of Range. Formula Expense Level multiplied by 1.15.
    Transition funding. Funding for excessively high-cost PHAs, as 
provided in Sec. 990.106.
    Unit Approved for Deprogramming. (1) A dwelling unit for which HUD 
has approved the PHA's formal request to remove the dwelling unit from 
the PHA's inventory and the Annual Contributions Contract but for which 
removal, i.e., deprogramming, has not yet been completed; or
    (2) A nondwelling structure or a dwelling unit used for nondwelling 
purposes which the PHA has determined will no longer be used for PHA 
purposes and which HUD has approved for removal from the PHA's 
inventory and Annual Contributions Contract.
    Unit months available. Project Units multiplied by the number of 
months the Project Units are available for occupancy during a given PHA 
fiscal year. For purposes of this part, a unit is considered available 
for occupancy from the date established as the End of the Initial 
Operating Period for the Project until the time the unit is approved by 
HUD for deprogramming and is vacated or is approved for nondwelling 
use. In the case of a PHA development involving the acquisition of 
scattered site housing, see also Sec. 990.104(b). A unit will be 
considered a long-term vacancy and will not be considered available for 
occupancy in any given PHA Requested Budget Year if the PHA determines 
that:
    (1) The unit has been vacant for more than 12 months at the time 
the PHA determines its Actual Occupancy Percentage;
    (2) The unit is not either:
    (i) A vacant unit undergoing modernization; or
    (ii) A unit vacant for circumstances and actions beyond the PHA's 
control, as these terms are defined in this section; and
    (3) The PHA determines that it will have a vacancy percentage of 
more than 3% and will have more than five vacant units, for its 
Requested Budget Year, even after adjusting for vacant units undergoing 
modernization and units that are vacant for circumstances and actions 
beyond the PHA's control, as defined in this section. (Reference in 
this part to ``more than five units'' or ``fewer than five units'' 
shall refer to a circumstance in which five units equals or exceeds 3% 
of the number of units to which the 3% threshold is applicable.)
    Units vacant due to circumstances and actions beyond the PHA's 
control. Dwelling units that are vacant due to circumstances and 
actions that prohibit the PHA from occupying, selling, demolishing, 
rehabilitating, reconstructing, consolidating or modernizing vacant 
units and are beyond the PHA's control. For purposes of this 
definition, circumstances and actions beyond the PHA's control are 
limited to:
    (1) Litigation. The effect of court litigation such as a court 
order or settlement agreement that is legally enforceable. An example 
would be units that are being held vacant as part of a court-ordered or 
HUD-approved desegregation plan.
    (2) Laws. Federal or State laws of general applicability, or their 
implementing regulations. Units vacant

[[Page 42495]]

only because they do not meet minimum standards pertaining to 
construction or habitability under Federal, State, or local laws or 
regulations will not be considered vacant due to circumstances and 
actions beyond the PHA's control.
    (3) Changing market conditions. For example, small PHAs that are 
located in areas experiencing population loss or economic dislocations 
may face a lack of demand in the foreseeable future, even after the PHA 
has taken aggressive marketing and outreach measures.
    (4) Natural disasters.
    (5) RMC Funding. The failure of a PHA to fund an otherwise 
approvable RMC request for Federal modernization funding.
    (6) Casualty Losses. Delays in repairing damage to vacant units due 
to the time needed for settlement of insurance claims.
    Utilities. Electricity, gas, heating fuel, water and sewerage 
service.
    Utilities expense level. The per unit per month dollar amount of 
utilities expense, computed as provided in Sec. 990.107.
    Vacant unit undergoing modernization. A vacant unit in a project 
not considered to be obsolete (as determined using the indicia in 
Sec. 970.6 of this chapter), when the project is undergoing 
modernization that includes work that is necessary to reoccupy the 
vacant unit, and in which one of the following conditions is met:
    (1) The unit is under construction (.e., the construction contract 
has been awarded or force account work has started); or
    (2) The treatment of the vacant unit is included in a HUD-approved 
modernization budget (or its successor under the public housing Capital 
Fund program), but the time period for placing the vacant unit under 
construction has not yet expired. The PHA must place the vacant unit 
under construction within two Federal Fiscal Years (FFYs) after the FFY 
in which the modernization funds are approved.


Sec. 990.103  Applicability of the Operating Fund Formula.

    (a) General. The Operating Fund Formula will be used in determining 
the amounts of operating subsidy payable to PHAs.
    (b) Applicability of the Operating Fund Formula. The Operating Fund 
Formula is applicable to all PHA rental units under Annual 
Contributions Contracts. The Operating Fund Formula applies to PHAs 
that have not received operating subsidy payments previously, but are 
eligible for such payments under the Operating Fund Formula.
    (c) Inapplicability of the Operating Fund Formula. The Operating 
Fund Formula, as described in this part, is not applicable to Indian 
Housing, the Section 23 Leased Housing Program, the Section 23 Housing 
Assistance Payments Program, the Section 8 Housing Assistance Payments 
Program, the Mutual Help Program, or the Turnkey III or Turnkey IV 
Homeownership Opportunity Programs.
    (d) Applicability of the Operating Fund Formula to the PHAs of the 
Virgin Islands, Puerto Rico, Guam, and Alaska. (1) The following 
provisions of this subpart A are applicable to housing owned by the 
PHAs of the Virgin Islands, Puerto Rico, Guam, and Alaska:
    (i) The definition of ``other income'' at Sec. 990.102;
    (ii) Section 990.105 (Computation of allowable expense level). 
However, Sec. 990.105(e) (Computation of FHA-based operating expense 
level for application in FY 2001) does not apply to these PHAs;
    (iii) Section 990.105(f) (Flood insurance adjustment for FY 2001);
    (iv) Section 990.108(e) (Funding for resident participation 
activities);
    (v) Section 990.109(b) (Computation of projected average monthly 
dwelling rental income);
    (vi) Section 990.110(b) (Adjustments to utilities expense level); 
and
    (vii) Section 990.116 (Increases in dwelling rental income).
    (2) With the exception of the provisions listed in paragraph (d)(1) 
of this section, the Operating Fund Formula is not applicable to the 
PHAs of the Virgin Islands, Puerto Rico, Guam and Alaska. Operating 
subsidy payments to these PHAs are made in accordance with subpart B of 
this part.
    (e) Financial management, monitoring and reporting. The financial 
management system, monitoring and reporting on program performance and 
financial reporting will be in compliance with 24 CFR 85.20, 85.40 and 
85.41 except to the extent that HUD requirements provide for additional 
specialized procedures which are determined by HUD to be necessary for 
the proper management of the program in accordance with the 
requirements of the U.S. Housing Act of 1937 and the Annual 
Contributions Contracts between the PHAs and HUD.


Sec. 990.104  Determination of amount of operating subsidy under the 
Operating Fund Formula.

    (a) The amount of operating subsidy for which each PHA is eligible 
shall be determined as follows: The Projected Operating Income Level is 
subtracted from the total expense level (Allowable Expense Level plus 
Utilities Expense Level). These amounts are per unit per month dollar 
amounts, and must be multiplied by the Unit Months Available. 
Transition Funding, if applicable, and other costs as specified in 
Sec. 990.108 are then added to this total in order to determine the 
total amount of operating subsidy for the Requested Budget Year, 
exclusive of consideration of the cost of an independent audit. As an 
independent operating subsidy eligibility factor, a PHA may receive 
operating subsidy in an amount, approved by HUD, equal to the actual 
cost of an independent audit to be prorated to operations of the PHA-
owned rental housing. See Sec. 990.110 regarding adjustments.
    (b) In the case of a PHA development involving the acquisition of 
scattered site housing, the PHA may submit, and HUD shall review and 
approve, a revised Development Cost Budget (or its successor under the 
public housing Capital Fund program) reflecting the number of units 
that were occupied during the previous six months, and the Unit Months 
Available used in the calculation of operating subsidy eligibility 
shall be revised to include the number of months the new/acquired units 
are actually occupied.
    (c) A special phase-down of subsidy to PHAs is applicable when 
demolition of units is approved by HUD. See Sec. 990.114.
    (d) The calculation of operating subsidy for a PHA in the Moving to 
Work demonstration program shall be made in accordance with the 
applicable Moving to Work Agreement, and any amendments to such 
agreements, as may be approved by HUD.


Sec. 990.105  Computation of allowable expense level.

    The PHA shall compute its Allowable Expense Level using forms 
prescribed by HUD, as follows:
    (a) Computation of Base Year Expense Level. The Base Year Expense 
Level includes Payments in Lieu of Taxes (PILOT) required by a 
Cooperation Agreement even if PILOT is not included in the Operating 
Budget for the Base Year because of a waiver of the requirements by the 
local taxing jurisdiction(s). The Base Year Expense Level includes all 
other operating expenditures as reflected in the PHA's Operating Budget 
for the Base Year except the following:
    (1) Utilities expense;
    (2) Cost of an independent audit;
    (3) Adjustments applicable to budget years before the Base Year;
    (4) Expenditures supported by supplemental subsidy payments

[[Page 42496]]

applicable to budget years before the Base Year;
    (5) All other expenditures which are not normal fiscal year 
expenditures as to amount or as to the purpose for which expended; and
    (6) Expenditures which were funded from a nonrecurring source of 
income.
    (b) Adjustment. In compliance with the above six exclusions, the 
PHA shall adjust the AEL by excluding any of these items from the Base 
Year Expense Level if this has not already been accomplished. If such 
adjustment is made in the second or some subsequent fiscal year of 
receipt of operating subsidy under this part, the AEL shall be adjusted 
in the year in which the adjustment is made, but the adjustment shall 
not be applied retroactively. If the PHA does not make these 
adjustments, the HUD Field Office shall compute the adjustments.
    (c) Computation of Formula Expense Level. The PHA shall compute its 
Formula Expense Level in accordance with a HUD-prescribed formula that 
estimates the cost of operating an average unit in a particular PHA's 
inventory. It uses weights and a Local Inflation Factor assigned each 
year to derive a Formula Expense Level for the current year and the 
requested budget year. The formula is the sum of the following six 
numbers and the weights of the formula and the formula are subject to 
updating by HUD:
    (1) The number of pre-1940 rental units occupied by poor households 
in 1980 as a percentage of the 1980 population of the community 
multiplied by a weight of 7.954. This census-based statistic applies to 
the county of the PHA, except that, if the PHA has 80% or more of its 
units in an incorporated city of more than 10,000 persons, it uses 
city-specific data. County data will exclude data for any incorporated 
cities of more than 10,000 persons within its boundaries.
    (2) The Local Government Wage Rate multiplied by a weight of 
116.496. The wage rate used is a figure determined by the Bureau of 
Labor Statistics. It is a county-based statistic, calibrated to a unit-
weighted PHA standard of 1.0. For multi-county PHAs, the local 
government wage is unit-weighted. For this formula, the local 
government wage index for a specific county cannot be less than 85% or 
more than 115% of the average local government wage for counties of 
comparable population and metro/non-metro status, on a state-by-state 
basis. In addition, for counties of more than 150,000 population in 
1980, the local government wage cannot be less than 85% or more than 
115% of the wage index of private employment determined by the Bureau 
of Labor Statistics and the rehabilitation cost index of labor and 
materials determined by the R.S. Means Construction Cost Index.
    (3) The lesser of the current number of the PHA's two or more 
bedroom units available for occupancy, or 15,000 units, multiplied by a 
weight of .002896.
    (4) The current ratio of the number of the PHA's two or more 
bedroom units available for occupancy in high-rise family projects to 
the number of all the PHA's units available for occupancy multiplied by 
a weight of 37.294. For this indicator, a high-rise family project is 
defined as averaging 1.5 or more bedrooms per unit available for 
occupancy and averaging 35 or more units available for occupancy per 
building and containing at least one building with units available for 
occupancy that is 5 or more stories high.
    (5) The current ratio of the number of the PHA's three or more 
bedroom units available for occupancy to the number of all the PHA's 
units available for occupancy multiplied by a weight of 22.303.
    (6) An equation calibration constant of -.2344.
    (d) Computation of Allowable Expense Level (AEL). The PHA shall 
compute its Allowable Expense Level as follows:
    (1) AEL for first budget year of operating subsidy under this part 
where Base Year Expense Level does not exceed the top of the range. 
Every PHA whose Base Year Expense Level is less than the top of the 
range shall compute its AEL for the first budget year of operating 
subsidy under this part by adding the following to its Base Year 
Expense Level (before adjustments under Sec. 990.110):
    (i) Any increase approved by HUD in accordance with Sec. 990.110;
    (ii) The increase (decrease) between the Formula Expense Level for 
the Base Year and the Formula Expense Level for the first budget year 
of operating subsidy under this part; and
    (iii) The sum of the Base Year Expense Level, and any amounts 
described in paragraphs (d)(1) (i) and (ii) of this section multiplied 
by the Local Inflation Factor.
    (2) AEL for first budget year of operating subsidy under this part 
where Base Year Expense Level exceeds the top of the range. Every PHA 
whose Base Year Expense Level exceeds the top of the range shall 
compute its AEL for the first budget year of operating subsidy under 
this part by adding the following to the top of the range (not to its 
Base Year Expense Level, as in paragraph (d)(1) of this section):
    (i) The increase (decrease) between the Formula Expense Level for 
the Base Year and the Formula Expense Level for the first budget year 
of operating subsidy under this part;
    (ii) The sum of the figure equal to the top of the range and the 
increase (decrease) described in paragraph (d)(2)(i) of this section, 
multiplied by the Local Inflation Factor. (If the Base Year Expense 
Level is above the AEL, computed as provided above, the PHA may be 
eligible for Transition Funding under Sec. 990.106.)
    (3) AEL for first budget year of operating subsidy under this part 
for a new project. A new project of a new PHA or a new project of an 
existing PHA that the PHA decides to place under a separate ACC, which 
did not have a sufficient number of units available for occupancy in 
the Base Year to have a level of operations representative of a full 
fiscal year of operation is considered to be a ``new project.'' The AEL 
for the first budget year of operating subsidy under this part for a 
``new project'' will be based on the AEL for a comparable project, as 
determined by the HUD Field Office. The PHA may suggest a project or 
projects it believes to be comparable. In determining what constitutes 
a ``new project'' under this paragraph, HUD will be guided by its 
public housing development regulations at 24 CFR part 941.
    (4) Adjustment of AEL for budget years after the first budget year 
of operating subsidy under this part. HUD may adjust the AEL of budget 
years after the first year of operating subsidy under this part, in 
accordance with the provisions of Sec. 990.105(b) or Sec. 990.108(c).
    (5) Allowable Expense Level for budget years after the first budget 
year of operating subsidy under this part. For each budget year after 
the first budget year of operating subsidy under this part, the AEL 
shall be computed as follows:
    (i) The AEL shall be increased by any increase to the AEL approved 
by HUD under Sec. 990.108(c).
    (ii) The AEL for the Current Budget Year also shall be adjusted as 
follows:
    (A) Increased by one-half of one percent (.5%); and
    (B) If the PHA has experienced a change in the number of units in 
excess of 5% or 1,000 units, whichever is less, since the last 
adjustment to the AEL based on this paragraph, it shall use the 
increase (decrease) between the Formula Expense Level calculated using 
the PHA's characteristics that applied to the Requested Year when the 
last adjustment to the AEL was made based

[[Page 42497]]

on this paragraph and the Formula Expense Level calculated using the 
PHA's characteristics for the Requested Budget Year.
    (iii) The amount computed in accordance with paragraphs (d)(5)(i) 
and (ii) of this section shall be multiplied by the Local Inflation 
Factor.
    (6) Adjustment of AEL for budget years after the first budget year 
of operating subsidy under this part. HUD may adjust the AEL of budget 
years after the first year of operating subsidy under this part, in 
accordance with the provisions of Sec. 990.105(b) or Sec. 990.108(c).
    (e) Computation of FHA-based operating expense level (FHAEL) for 
application in FY 2001. (1) HUD calculation of FHAEL. For every PHA 
that is eligible to receive operating subsidy under the Operating Fund 
Formula, HUD will calculate an FHAEL (based upon FY 2000 data and for 
application in FY 2001) as follows:
    (i) Step 1: Calculation of average national operating cost. HUD 
will calculate an FHA-based national average cost of operating a two-
bedroom public housing unit, exclusive of utility costs and property 
taxes. The average national cost will be calculated using privately 
managed (FHA multifamily insured and/or assisted) rental housing 
financial data available to HUD for the most recent year of full 
reporting and adjusted to reflect a two-bedroom size by using Section 8 
Fair Market Rent (FMR) relationships (i.e., increase or decrease the 
national average cost depending on whether the average cost-weighted 
bedroom size is greater or less than 2.0 bedrooms per unit). (See 24 
CFR part 888 for additional information regarding FMRs.)
    (ii) Step 2: Adjustment of average national two-bedroom operating 
cost for local cost differences. HUD will adjust the average national 
two-bedroom operating cost for local cost differences using the 
location adjustment factors provided in the R.S. Means Residential 
Construction Costs Index.
    (iii) Step 3: Adjustment of average national operating cost for 
PHA-specific bedroom-size distribution. For each PHA, HUD will further 
adjust the average national operating cost for the bedroom size 
distribution of the PHA using Section 8 FMR cost relationships (i.e., 
increase or decrease the average national cost depending on whether the 
average cost-weighted bedroom size for the PHA's inventory is greater 
or less than 2.0 bedrooms per unit).
    (iv) Step 4: Update of PHA-specific average operating cost to 
reflect FY 2000 costs. HUD will update this PHA-specific operating cost 
to reflect increased FY 2000 operating costs by using the Public 
Housing AEL inflation factor.
    (2) Availability of FHAEL to PHA. HUD will make the following 
information available to each PHA:
    (i) FHAEL. The FHAEL for the PHA;
    (ii) PHA bedroom distribution. The PHA bedroom distribution used to 
make the PHA-specific bedroom adjustment under paragraph (e)(1)(iii) of 
this section; and
    (iii) Base average national cost. The two-bedroom base average 
national cost calculated under paragraph (e)(1)(i) of this section.
    (3) Use of FHAEL for FY 2000 for PHAs with less than 500 units 
under contract. Each PHA with less than 500 units shall review the 
FHAEL and bedroom distribution provided by HUD, and do the following:
    (i) The PHA will determine if the bedroom size distribution used by 
HUD was appropriate. (A) Mandatory recalculation. If the bedroom size 
distribution calculated by the PHA produces a weighted average bedroom 
size that differs by more than .02 from the weighted average used by 
HUD, the PHA shall recalculate its FY 2000 FHAEL using the two-bedroom 
base average national operating cost provided by HUD.
    (B) Discretionary recalculation. If the bedroom size distribution 
calculated by the PHA produces a weighted average bedroom size that 
differs by less than .02 from the weighted average used by HUD, the PHA 
may recalculate its FY 2000 FHAEL using the two-bedroom base average 
national operating cost provided by HUD.
    (ii) Comparison of FHAEL to AEL. The PHA shall compare its FHAEL 
with its approved FY 2000 AEL.
    (iii) If the PHA has less than 250 units. PHAs with less than 250 
units shall use the higher of their current AEL or 85% of the FHAEL. 
However, in no case will the PHA use an amount that exceeds 120% of its 
FHAEL for purposes of FY 2001 subsidy determinations under the 
Operating Fund Formula (see paragraph (e)(3)(v) of this section).
    (iv) If the PHA has 250-499 units. PHAs with 250-499 units shall 
use the higher of their current AEL, or 70% of FHAEL. However, in no 
case will the PHA use an amount that exceeds 120% of its FHAEL for 
purposes of FY 2001 subsidy determinations under the Operating Fund 
Formula (see paragraph (e)(3)(v) of this section).
    (v) If the PHA with less than 500 units has an AEL greater than 
120% of its FHAEL. If a PHA with less than 500 units has an FY 2000 AEL 
that is greater than 120% of its FHAEL, the PHA shall use 120% of its 
FHAEL in place of its actual FY 2000 AEL for purposes of FY 2001 
subsidy determinations under the Operating Fund Formula.
    (4) Use of FHAEL for FY 2000 for PHAs with more than 500 units 
under contract. Each PHA with more than 500 units shall review the 
FHAEL and bedroom distribution provided by HUD and do the following:
    (i) The PHA shall determine if the bedroom size distribution used 
by HUD was appropriate. (A) Mandatory recalculation. If the bedroom 
size distribution calculated by the PHA produces a weighted average 
bedroom size that differs by more than .02 from the weighted average 
used by HUD, the PHA shall recalculate its FY 2000 FHAEL using the two-
bedroom base average national operating cost provided by HUD.
    (B) Discretionary recalculation. If the bedroom size distribution 
calculated by the PHA produces a weighted average bedroom size that 
differs by less than .02 from the weighted average used by HUD, the PHA 
may recalculate its FY 2000 FHAEL using the two-bedroom base average 
national operating cost provided by HUD.
    (ii) Comparison of FHAEL to AEL. The PHA shall compare its FHAEL 
with its approved FY 2000 AEL.
    (iii) If the PHA's FY 2000 AEL is less than or equal to 85% of its 
FHAEL. If the PHA's FY 2000 AEL is less than or equal to 85% of its 
FHAEL, the PHA shall use its FY 2000 AEL for purposes of FY 2001 
subsidy determinations under the Operating Fund Formula.
    (iv) If the PHA's FY 2000 AEL is greater than 85% of its FHAEL. If 
the PHA's FY 2000 AEL is greater than 85% of its FHAEL, the PHA shall 
use 98.64% of its FY 2000 AEL for purposes of calculating its FY 2001 
subsidy determinations under the Operating Fund Formula.
    (v) Inapplicability of AEL reduction to certain PHAs. The AEL 
reduction described in paragraph (e)(4)(iv) of this section does not 
apply to the PHAs of the Virgin Islands, Puerto Rico, Guam and Alaska. 
These PHAs will use their FY 2000 AELs for purposes of FY 2001 subsidy 
determinations, regardless of whether the PHA's AEL is greater than 85% 
of its FHAEL.
    (vi) Cap on AEL value reduction. In no instance shall a PHA subject 
to an AEL reduction, reduce the FY 2000 AEL value used in calculating 
its FY 2001 AEL for purposes of operating subsidy determinations to a 
value less than 85% of its FHAEL.
    (f) Flood insurance adjustment for FY 2001. To simplify the 
calculation of

[[Page 42498]]

operating subsidy, the AEL computation for the PHA's fiscal year 
beginning in 2001 will include an additional step following the 
determination made in accordance with paragraphs (a) through (e) of 
this section: the AEL per unit month derived in accordance with those 
paragraphs is to be adjusted by adding the flood insurance charge per 
unit month, as reflected in the last HUD approved subsidy calculation 
for FY 2000. This adjustment is a one-time permanent adjustment made 
only in FY 2001. However, if the flood map is revised at a future date, 
HUD will adjust the AEL for the affected PHAs in accordance with this 
paragraph.


Sec. 990.106  Transition funding for excessively high-cost PHAs.

    (1) Eligibility. If a PHA's Base Year Expense Level exceeds its AEL 
for any budget year under the Operating Fund Formula, the PHA may be 
eligible for Transition Funding.
    (2) Amounts. Transition Funding shall be an amount not to exceed 
the difference between the Base Year Expense Level and the AEL for the 
Requested Budget Year, multiplied by the number of Unit Months 
Available.
    (3) Reduction in transition funding. HUD shall have the right to 
discontinue payment of all or part of the Transition Funding in the 
event HUD at any time determines that the PHA has not achieved a 
satisfactory level of management efficiency, or is not making efforts 
satisfactory to HUD to improve its management performance.


Sec. 990.107  Computation of utilities expense level.

    (a) Computation of the utilities expense level. The PHA's Utilities 
Expense Level for the requested Budget Year shall be computed by 
multiplying the Allowable Utilities Consumption Level (AUCL) per unit 
per month for each utility, determined as provided in paragraph (c) of 
this section, by the projected utility rate determined as provided in 
paragraph (b) of this section.
    (b) Utilities rates. (1) The current applicable rates, with 
consideration of adjustments and pass-throughs, in effect at the time 
the Operating Budget is submitted to HUD will be used as the utilities 
rates for the Requested Budget Year, except that, when the appropriate 
utility commission has, prior to the date of submission of the 
Operating Budget to HUD, approved and published rate changes to be 
applicable during the Requested Budget Year, the future approved rates 
may be used as the utilities rates for the entire Requested Budget 
Year.
    (2) If a PHA takes action, such as wellhead purchase of natural 
gas, or administrative appeals or legal action beyond normal public 
participation in rate-making proceedings to reduce the rate it pays for 
utilities (including water, fuel oil, electricity, and gas), then the 
PHA will be permitted to retain one-half of the cost savings during the 
first 12 months attributable to its actions. Upon determination that 
the action was cost-effective in the first year, the PHA may be 
permitted to retain one-half the annual cost savings, if the actions 
continue to be cost-effective. See also paragraph (e) of this section 
and Sec. 990.110(b).
    (c) Computation of Allowable Utilities Consumption Level. The 
Allowable Utilities Consumption Level used to compute the Utilities 
Expense Level of PHAs for the Requested Budget Year generally will be 
based on the availability of consumption data. For project utilities 
where consumption data are available for the entire Rolling Base 
Period, the computation will be in accordance with paragraph (c)(1) of 
this section. Where data are not available for the entire period, the 
computation will be in accordance with paragraph (c)(2) of this 
section, unless the project is a new project, in which case the 
computation will be in accordance with paragraph (c)(3) of this 
section. For a project where the PHA has taken special energy 
conservation measures that qualify for special treatment in accordance 
with paragraph (f)(1) of this section, the computation of the Allowable 
Utilities Consumption Level may be made in accordance with paragraph 
(c)(4) of this section. The AUCL for all of a PHA's projects is the sum 
of the amounts determined using all of these subparagraphs, as 
appropriate.
    (1) Rolling Base Period System. (i) For project utilities with 
consumption data for the entire Rolling Base Period, the AUCL is the 
average amount consumed per unit per month during the Rolling Base 
Period adjusted in accordance with paragraph (d) of this section. The 
PHA shall determine the average amount of each of the utilities 
consumed during the Rolling Base period (i.e., the 36-month period 
ending 12 months prior to the first day of the Requested Budget Year).
    (ii) An example of a rolling base is as follows:

------------------------------------------------------------------------
   PHA Fiscal Year (affected fiscal year)         Rolling base period
------------------------------------------------------------------------
      Beginning               Ending              Begins         Ends
------------------------------------------------------------------------
1-1-01..............  12-31-01 (1st year)...  1-1-97         12-31-99
1-1-02..............  12-31-02 (2nd year)...  1-1-98         12-31-00
------------------------------------------------------------------------

    (2) Alternative method where data is not available for the entire 
Rolling Base Period. (i) If the PHA has not maintained or cannot 
recapture consumption data regarding a particular utility from its 
records for the whole Rolling Base Period mentioned in paragraph (c)(1) 
of this section, it shall submit consumption data for that utility for 
the last 24 months of its Rolling Base Period to the HUD Field Office 
for approval. If this is not possible, it shall submit consumption data 
for the last 12 months of its Rolling Base Period. The PHA also shall 
submit a written explanation of the reasons that data for the whole 
Rolling Base Period is unavailable.
    (ii) In those cases where a PHA has not maintained or cannot 
recapture consumption data for a utility for the entire Rolling Base 
Period, comparable consumption for the greatest of either 36, 24, or 12 
months, as needed, shall be used for the utility for which the data is 
lacking. The comparable consumption shall be estimated based upon the 
consumption experienced during the Rolling Base Period of comparable 
project(s) with comparable utility delivery systems and occupancy. The 
use of actual and comparable consumption by each PHA, other than those 
PHAs defined as New Projects in paragraph (c)(3) of this section, will 
be determined by the availability of complete data for the entire 36-
month Rolling Base Period. Appropriate utility consumption records, 
satisfactory to HUD, shall be developed and maintained by all PHAs so 
that a 36-month rolling average utility consumption per unit per month 
under paragraph (c)(1) of this section can be determined.
    (iii) If a PHA cannot develop the consumption data for the Rolling 
Base Period or for 12 or 24 months of the

[[Page 42499]]

Rolling Base Period, either from its own project(s) data, or by using 
comparable consumption data the actual per unit per month (PUM) utility 
expenses stated in paragraph (d) of this section shall be used as the 
Utilities Expense Level.
    (3) Computation of Allowable Utilities Consumption Levels for New 
Projects. (i) A New Project, for the purpose of establishing the 
Rolling Base Period and the Utilities Expense Level, is defined as 
either:
    (A) A project which had not been in operation during at least 12 
months of the Rolling Base Period, or a project which enters management 
after the Rolling Base Period and prior to the end of the Requested 
Budget Year; or
    (B) A project which during or after the Rolling Base Period, has 
experienced conversion from one energy source to another; interruptable 
service; deprogrammed units; a switch from resident-purchased to PHA-
supplied utilities; or a switch from PHA-supplied to resident-purchased 
utilities.
    (ii) The actual consumption for New Projects shall be determined so 
as not to distort the Rolling Base Period in accordance with a method 
prescribed by HUD.
    (4) Freezing the Allowable Utilities Consumption Level. (i) 
Notwithstanding the provisions of paragraphs (c)(1) and (c)(2) of this 
section, if a PHA undertakes energy conservation measures that are 
approved by HUD under paragraph (f) of this section, the Allowable 
Utilities Consumption Level for the project and the utilities involved 
may be frozen during the contract period. Before the AUCL is frozen, it 
must be adjusted to reflect any energy savings resulting from the use 
of any HUD funding. The AUCL is then frozen at the level calculated for 
the year during which the conservation measures initially will be 
implemented, as determined in accordance with paragraph (f) of this 
section.
    (ii) If the AUCL is frozen during the contract period, the annual 
three-year rolling base procedures for computing the AUCL shall be 
reactivated after the PHA satisfies the conditions of the contract. The 
three years of consumption data to be used in calculating the AUCL 
after the end of the contract period will be as follows:
    (A) First year: The energy consumption during the year before the 
year in which the contract ended and the energy consumption for each of 
the two years before installation of the energy conservation 
improvements;
    (B) Second year: The energy consumption during the year the 
contract ended, energy consumption during the year before the contract 
ended, and energy consumption during the year before installation of 
the energy conservation improvements;
    (C) Third year: The energy consumption during the year after the 
contract ended, energy consumption during the year the contract ended, 
and energy consumption during the year before the contract ended.
    (d) Utilities expense level where consumption data for the full 
Rolling Base Period is unavailable. If a PHA does not obtain the 
consumption data for the entire Rolling Base Period, or for 12 or 24 
months of the Rolling Base Period, either for its own project(s) or by 
using comparable consumption data as required in paragraph (c)(2) of 
this section, it shall request HUD Field Office approval to use actual 
PUM utility expenses. These expenses shall exclude Utilities Labor and 
Other Utilities Expenses. The actual PUM utility expenses shall be 
taken from the year-end Statement of Operating Receipts and 
Expenditures, Form HUD-52599, (Office of Management and Budget approval 
number 2577-0067) prepared for the PHA fiscal year which ended 12 
months prior to the beginning of the PHA Requested Budget Year (e.g., 
for a PHA fiscal year beginning January 1, 2001, the PHA would use data 
from the fiscal year ended December 31, 1999). Subsequent adjustments 
will not be approved for a budget year for which the utility expense 
level is established based upon actual PUM utility expenses.
    (e) Adjustments. PHAs shall request adjustments of Utilities 
Expense Levels in accordance with Sec. 990.110(b), which requires an 
adjustment based upon a comparison between actual experience and 
estimates of consumption and of utility rates.
    (f) Incentives for energy conservation improvements. If a PHA 
undertakes energy conservation measures (including those covering 
water, fuel oil, electricity, and gas) that are financed by an entity 
other than the Secretary, such as physical improvements financed by a 
loan from a utility or governmental entity, management of costs under a 
performance contract, or a shared savings agreement with a private 
energy service company, the PHA may qualify for one of the two possible 
incentives under this part. For a PHA to qualify for these incentives, 
HUD approval must be obtained. Approval will be based upon a 
determination that payments under the contract can be funded from the 
reasonably anticipated energy cost savings, and the contract period 
does not exceed 12 years.
    (1) If the contract allows the PHA's payments to be dependent on 
the cost savings it realizes, the PHA must use at least 50% of the cost 
savings to pay the contractor. With this type of contract, the PHA may 
take advantage of a frozen AUCL under paragraph (c)(4) of this section, 
and it may use the full amount of the cost savings, as described in 
Sec. 990.110(b)(2)(ii).
    (2) If the contract does not allow the PHA's payments to be 
dependent on the cost savings it realizes, then the AUCL will continue 
to be calculated in accordance with paragraphs (c)(1) through (c)(3) of 
this section, as appropriate; the PHA will be able to retain part of 
the cost savings, in accordance with Sec. 990.110(b)(2)(i); and the PHA 
will qualify for additional operating subsidy eligibility (above the 
amount based on the allowable expense level) to cover the cost of 
amortizing the cost of the energy conservation measures during the term 
of the contract, in accordance with Sec. 990.110(c).


Sec. 990.108  Other costs.

    (a) Cost of independent audits. (1) Eligibility to receive 
operating subsidy for independent audits is considered separately from 
the Operating Fund Formula. However, the PHA shall not request, nor 
will HUD approve, an operating subsidy for the cost of an independent 
audit if the audit has already been funded by subsidy in a prior year.
    (2) A PHA that is required by the Single Audit Act (31 U.S.C. 7501-
7507) (see 24 CFR part 85) to conduct a regular independent audit may 
receive operating subsidy to cover the cost of the audit. The actual 
cost of an independent audit, applicable to the operations of PHA-owned 
rental housing, is not included in the Allowable Expense Level, but it 
is allowed in full in computing the amount of operating subsidy under 
Sec. 990.104, above.
    (3) A PHA that is exempt from the audit requirements under the 
Single Audit Act (24 CFR part 85) may receive operating subsidy to 
offset the actual cost of an independent audit chargeable to operations 
(after the End of the Initial Operating Period) if the PHA chooses to 
have an audit.
    (b)(1) Costs attributable to units that are approved for 
deprogramming and vacant may be eligible for inclusion, but must be 
limited to the minimum services and protection necessary to protect and 
preserve the units until the units are deprogrammed. Costs attributable 
to units temporarily unavailable for occupancy because the units are 
utilized for PHA-related activities are not eligible for inclusion.

[[Page 42500]]

In determining operating subsidy calculations under the Operating Fund 
Formula, these units shall not be included in the calculation of Unit 
Months Available. Units approved for deprogramming shall be listed by 
the PHA, and supporting documentation regarding direct costs 
attributable to such units shall be included as a part of the Operating 
Fund Formula calculation in which the PHA requests operating subsidy 
for these units. If the PHA requires assistance in this matter, the PHA 
should contact the HUD Field Office.
    (2) Units approved for nondwelling use to promote economic self-
sufficiency services and anti-drug activities are eligible for 
operating subsidy under the conditions provided in this paragraph 
(b)(2), and the costs attributable to these units are to be included in 
the operating budget. If a unit satisfies the conditions stated below, 
it will be eligible for subsidy at the rate of the AEL for the number 
of months the unit is devoted to such use. Approval will be given for a 
period of no more than 3 years. HUD may renew the approval to allow 
payments after that period only if the PHA can demonstrate that no 
other sources for paying the non-utility operating costs of the unit 
are available. The conditions the unit must satisfy are:
    (i) The unit must be used for either economic self-sufficiency 
activities directly related to maximizing the number of employed 
residents or for anti-drug programs directly related to ridding the 
development of illegal drugs and drug-related crime. The activities 
must be directed toward and for the benefit of residents of the 
development.
    (ii) The PHA must demonstrate that space for the service or program 
is not available elsewhere in the locality and that the space used is 
safe and suitable for its intended use or that the resources are 
committed to make the space safe and suitable.
    (iii) The PHA must demonstrate satisfactorily that other funding is 
not available to pay for the non-utility operating costs. All rental 
income generated as a result of the activity must be reported as income 
in the operating subsidy calculation.
    (iv) Operating subsidy may be approved for only one site (involving 
one or more contiguous units) per public housing development for 
economic self-sufficiency services or anti-drug programs, and the 
number of units involved should be the minimum necessary to support the 
service or program. Operating subsidy for any additional sites per 
development can only be approved by HUD Headquarters.
    (v) The PHA must submit a certification with its Operating Fund 
Formula Calculation that the units are being used for the purpose for 
which they were approved and that any rental income generated as a 
result of the activity is reported as income in the operating subsidy 
calculation. The PHA must maintain specific documentation of the units 
covered. Such documentation should include a listing of the units, the 
street addresses, and project/management control numbers.
    (3) Long-term vacant units that are not included in the calculation 
of Unit Months Available are eligible for operating subsidy in the 
Requested Budget Year at the rate of 20% of the AEL. Allowable utility 
costs for long term vacant units will continue to be funded in 
accordance with Sec. 990.107.
    (c) Costs attributable to changes in Federal law or regulation. In 
the event that HUD determines that enactment of a Federal law or 
revision in HUD or other Federal regulation has caused or will cause a 
significant increase in expenditures of a continuing nature above the 
Allowable Expense Level and Utilities Expense Level, HUD may in HUD's 
sole discretion decide to prescribe a procedure under which the PHA may 
apply for or may receive an increase in operating subsidy.
    (d)(1) Costs resulting from combination of two or more units. When 
a PHA redesigns or rehabilitates a project and combines two or more 
units into one larger unit and the combination of units results in a 
unit that houses at least the same number of people as were previously 
served, the AEL for the requested year shall be multiplied by the 
number of unit months not included in the requested year's unit months 
available as a result of these combinations that have occurred since 
the Base Year. The number of people served in a unit will be based on 
the formula ((2 x No. of Bedrooms) minus 1), which yields the average 
number of people that would be served. An efficiency unit will be 
counted as a one bedroom unit for purposes of this calculation.
    (2) An exception to paragraph (d)(1) of this section is made when a 
PHA combines two efficiency units into a one-bedroom unit. In these 
cases, the AEL for the requested year shall be multiplied by the number 
of unit months not included in the requested year's unit months 
available as a result of these combinations that have occurred since 
the Base Year.
    (e) Funding for resident participation activities--(1) Funding 
amount. Each PHA shall include in the operating subsidy eligibility 
calculation, $25 per occupied unit per year for resident participation 
activities, including (but not limited to) those described in part 964 
of this title. For purposes of this section, a unit may be occupied by 
a public housing resident, a PHA employee, or a police officer. If, in 
any fiscal year, appropriations are not sufficient to meet all funding 
requirements under this part, then the $25 will be subject to pro-
ration.
    (2) Use of vacant rental units. If there is no community or rental 
space available for providing resident participation activities, HUD 
may approve, at the request of the PHA, the use of one or more vacant 
rental units for resident participation purposes. A unit that satisfies 
the following conditions will be eligible for operating subsidy at the 
rate of the AEL for the number of months the unit is devoted to such 
use:
    (i) The PHA must demonstrate that safe and suitable space for the 
resident participation activities is not otherwise readily available;
    (ii) One or more contiguous units may be used for resident 
participation activities. However, the units must be located on a 
single site per public housing development. Further, the number of 
units involved must be the minimum necessary to support the resident 
participation activities;
    (iii) The PHA must submit a certification with its Operating Fund 
Formula calculation that the units are being used for the purpose for 
which they were approved and that any rental income generated as a 
result of the activity is reported as income in the operating subsidy 
calculation; and
    (iv) The PHA must maintain specific documentation of the units 
covered. Such documentation must include a listing of the units, the 
street addresses, and project/management control numbers.


Sec. 990.109  Projected operating income level.

    (a) Policy. The Operating Fund Formula determines the amount of 
operating subsidy for a particular PHA based in part upon a projection 
of the actual dwelling rental income and other income for the 
particular PHA. The projection of dwelling rental income is obtained by 
computing the average monthly dwelling rental charge per unit for the 
PHA, and applying an upward trend factor (subject to updating). This 
amount is then multiplied by the Projected Occupancy Percentage for the 
Requested Budget Year. There are special provisions for projection of 
dwelling rental income for new projects.

[[Page 42501]]

    (b) Computation of projected average monthly dwelling rental 
income--(1) General. The projected average monthly dwelling rental 
income per unit for the PHA is calculated as follows:
    (i) Step 1: Calculation of the current year and three year 
averages. The PHA calculates:
    (A) The average monthly dwelling rental charge per unit for the 
current budget year (the ``current year average'' calculated in 
accordance with paragraph (b)(2) of this section); and
    (B) The average monthly dwelling rental charge per unit for the 
current budget year and the immediate past two budget years (the 
``three year average'' calculated in accordance with paragraph (b)(3) 
of this section).
    (ii) Step 2: Adjustment for any increase in dwelling rental income. 
If the current year average is greater than the three year average, the 
PHA has increased dwelling rental income. If a PHA has increased 
dwelling rental income, it shall perform the following calculation. The 
PHA shall:
    (A) Subtract the three year average from the current year average;
    (B) Divide the result by 2; and
    (C) Add this sum to the three year average.
    (iii) Step 3: Calculating the amount of increased rental revenue 
that may be retained. PHAs shall be allowed to retain 50% of any 
increases in dwelling rental income, so long as the PHA uses the 
increased revenue for the provision of resident-related improvements 
and services as described in Sec. 990.116. The retained income will not 
be recognized in the PHA's calculation under the Operating Fund 
Formula. The annual amount of increased revenue retained by the PHA is 
calculated by subtracting the three year average from the current year 
average and multiplying the result by the projected occupancy 
percentage (see Sec. 990.109(b)(6)), and the unit months available (see 
Sec. 990.102).
    (iv) Step 4: Applying the rental income adjustment factor. The 
lower of the amount calculated under paragraph (b)(i)(A) or (b)(ii) of 
this section is then adjusted by the dwelling rental income adjustment 
factor described in paragraph (b)(5) of this section.
    (2) Average monthly dwelling rental charge per unit. (i) The 
average monthly dwelling rental charge per unit shall be computed using 
the total dwelling rental charges for all Project Units, as shown on 
the Tenant Rent Rolls which the PHA is required to maintain, for the 
first day of the month which is six months before the first day of the 
Requested Budget Year. However, if a change in the total of the Rent 
Rolls has occurred in a subsequent month which is before the beginning 
of the Requested Budget Year, and before the submission of the 
Requested Budget Year calculation of operating subsidy eligibility, the 
PHA may use the latest changed Rent Roll for the purpose of the 
computation.
    (ii) This aggregate dollar amount shall be divided by the number of 
occupied dwelling units as of the same date.
    (iii) The Rent Roll used for calculating the projected operating 
income level will not reflect decreases resulting from the PHA's 
implementation of an optional earned income exclusion authorized by the 
explanation of ``annual income'' in 24 CFR 5.609.
    (3) Three year average monthly dwelling rental charge per unit. The 
three year average monthly dwelling rental charge shall be computed by 
averaging the amounts calculated under paragraph (b)(2) of this section 
for the current budget year and the immediate past two budget years.
    (4) Changes in supply of utilities. The PHA must adjust the rent 
rolls used for purposes of the calculations described in paragraphs 
(b)(2) and (b)(3) of this section to reflect any change from PHA-paid 
utilities to resident-paid utilities, or vice versa, between the rent 
roll date and the projected budget year.
    (5) Dwelling rental income adjustment factor. An adjustment factor 
will be applied to the calculations described in paragraphs (b)(2) and 
(b)(3) of this section. In FY 2001, the inflation factor will be 3%. In 
subsequent years, the average monthly dwelling rental charge per unit 
will be increased for inflation using a HUD supplied adjustment factor 
for the requested budget year to obtain the projected average monthly 
dwelling rental charge per unit of the PHA for the Requested Budget 
Year.
    (6) Projected occupancy percentage. The PHA shall determine its 
projected percentage of occupancy for all Project Units (Projected 
Occupancy Percentage), as follows:
    (i) General. Using actual occupancy data collected before the start 
of the budget year as a beginning point, the PHA will develop estimates 
for its Requested Budget Year (RBY) of: how many units the PHA will 
have available for occupancy; how many of the available units will be 
occupied and how many will be vacant, and what the average occupancy 
percentage will be for the RBY. The conditions under which the RBY 
occupancy percentage will be used as the projected occupancy percentage 
for purposes of determining operating subsidy eligibility are described 
below.
    (ii) High Occupancy PHA--No adjustments necessary. If the PHA's RBY 
Occupancy Percentage, calculated in accordance with Sec. 990.117, is 
equal to or greater than 97%, the PHA's Projected Occupancy Percentage 
is 97%. If the PHA's RBY Occupancy Percentage is less than 97%, but the 
PHA demonstrates that it will have an average of five or fewer vacant 
units in the requested budget year, the PHA will use its RBY Occupancy 
Percentage as its projected occupancy percentage.
    (iii) Adjustments in determining occupancy. If the PHA's RBY 
Occupancy Percentage is less than 97% and the PHA has more than 5 
vacant units, the PHA will adjust its estimate of vacant units to 
exclude vacant units undergoing modernization and units that are vacant 
due to circumstances and actions beyond the PHA's control. After making 
this adjustment, the PHA will recalculate its estimated vacancy 
percentage for the RBY.
    (A) High Occupancy PHA after adjustment. If the recalculated 
vacancy percentage is 3% or less (or the PHA would have five or fewer 
vacant units), the PHA will use its RBY Occupancy Percentage as its 
projected occupancy percentage.
    (B) Low Occupancy PHA--adjustment for long-term vacancies. If the 
recalculated vacancy percentage is greater than 3% (or the PHA would 
have more than 5 vacant units), the PHA will then further adjust its 
RBY Occupancy Percentage by excluding from its calculation of Unit 
Months Available (UMAs), those unit months attributable to units that 
have been vacant for longer than 12 months that are not vacant units 
undergoing modernization or are not units vacant due to circumstances 
and actions beyond the PHA's control.
    (iv) Low Occupancy PHA after all adjustments. A PHA that has 
determined its RBY Occupancy Percentage in accordance with paragraph 
(b)(6)(iii)(B) of this section will be eligible for operating subsidy 
as follows:
    (A) Long-term vacancies removed from the calculation of UMAs will 
be eligible to receive a reduced operating subsidy calculated at 20% of 
the PHA's AEL.
    (B) If the recalculated RBY Occupancy Percentage is 97% or higher, 
the PHA will use 97%.
    (C) If the recalculated RBY Occupancy Percentage is less than 97%, 
but the vacancy rate after adjusting for vacant units undergoing 
modernization and units that are vacant due to circumstances and 
actions beyond the PHA's control is 3% or less (or the PHA has five or 
fewer vacant units), the PHA may use its recalculated RBY

[[Page 42502]]

Occupancy Percentage as its projected occupancy percentage.
    (D) If the recalculated RBY Occupancy Percentage is less than 97% 
and the vacancy percentage is greater than 3% (or the PHA has more than 
five vacant units) after adjusting for vacant units undergoing 
modernization and units that are vacant due to circumstances and 
actions beyond the PHA's control, the PHA will use 97% as its projected 
occupancy percentage, but will be allowed to adjust the 97% by the 
number of vacant units undergoing modernization and units that are 
vacant due to circumstances and actions beyond the PHA's control. For a 
small PHA using five vacant units as its occupancy objective for the 
RBY, the PHA will determine what percentage five units represents as a 
portion of its units available for occupancy and subtract that 
percentage from 100%. The result will be used as the PHA's projected 
occupancy percentage, but the PHA will be allowed to adjust the 
projected occupancy percentage by vacant units undergoing modernization 
and units that are vacant for circumstances and actions beyond the 
PHA's control.
    (c) Projected average monthly dwelling rental charge per unit for 
new Projects. The projected average monthly dwelling rental charge for 
new Projects which were not available for occupancy during the budget 
year prior to the Requested Budget Year and which will reach the End of 
the Initial Operating Period (EIOP) within the first nine months of the 
Requested Budget Year, shall be calculated as follows:
    (1) If the PHA has another Project or Projects under management 
which are comparable in terms of elderly and nonelderly resident 
composition, the PHA shall use the projected average monthly dwelling 
rental charge for such Project or Projects.
    (2) If the PHA has no other Projects which are comparable in terms 
of elderly and nonelderly resident composition, the HUD Field Office 
will provide the projected average monthly dwelling rental charge for 
such Project or Projects, based on comparable Projects located in the 
area.
    (d) Estimate of additional dwelling rental income. After 
implementation of the provisions of any legislation enacted or any HUD 
administrative action taken subsequent to the effective date of these 
regulations, which affects rents paid by residents of Projects, HUD may 
adjust the projected average monthly dwelling rental charge per unit to 
reflect such change. HUD also shall have complete discretion to reduce 
or increase the operating subsidy approved for the PHA current fiscal 
year in an amount equivalent to the change in the rental income.
    (e) PHA's estimate of other income. All PHAs shall estimate Other 
Income based on past experience and a reasonable projection for the 
Requested Budget Year, which estimate shall be subject to HUD approval. 
The estimated total amount of Other Income, as approved, shall be 
divided by the number of Unit Months Available to obtain a per unit per 
month amount.
    (f) Projected operating income level. The projected average 
dwelling rental income per unit (calculated under paragraphs (b), (c), 
and (d) of this section) shall be added to the estimated Other Income 
(calculated under paragraph (e) of this section) to obtain the 
Projected Operating Income Level. This amount shall not be subject to 
the provisions regarding program income in 24 CFR 85.25.


Sec. 990.110  Adjustments.

    Adjustment information submitted to HUD under this section must be 
accompanied by an original or revised calculation of operating subsidy 
eligibility.
    (a) Adjustment of base year expense level--(1) Eligibility. A PHA 
with projects that have been in management for at least one full fiscal 
year, for which operating subsidy is being requested under the 
Operating Fund Formula for the first time, may, during its first budget 
year under the Operating Fund Formula, request HUD to increase its Base 
Year Expense Level. Included in this category are existing PHAs 
requesting subsidy for a project or projects in operation at least one 
full fiscal year under separate ACC, for which operating subsidy has 
never been paid, except for independent audit costs. This request may 
be granted by HUD, in its discretion, only where the PHA establishes to 
HUD's satisfaction that the Base Year Expense Level computed under 
Sec. 990.105(a) will result in operating subsidy at a level 
insufficient to support a reasonable level of essential services. The 
approved increase cannot exceed the lesser of the per unit per month 
amount by which the top of the Range exceeds the Base Year Expense 
Level.
    (2) Procedure. A PHA that is eligible for an adjustment under 
paragraph (a)(1) of this section may only make a request for such 
adjustment once for projects under a particular ACC, at the time it 
submits the calculation of operating subsidy eligibility for the first 
budget year under the Operating Fund Formula. Such request shall be 
submitted to the HUD Field Office, which will review, modify as 
necessary, and approve or disapprove the request. A request under this 
paragraph must include a calculation of the amount per unit per month 
of requested increase in the Base Year Expense Level, and must show the 
requested increase as a percentage of the Base Year Expense Level.
    (b) Adjustments to Utilities Expense Level. A PHA receiving 
operating subsidy under Sec. 990.104, excluding those PHAs that receive 
operating subsidy solely for independent audit (Sec. 90.108(a)), must 
submit an adjustment regarding the Utility Expense Level approved for 
operating subsidy eligibility purposes. This adjustment, which will 
compare the actual utility expense and consumption for the PHA fiscal 
year to the estimates used for subsidy eligibility purposes, shall be 
submitted on forms prescribed by HUD. This adjustment, applicable to 
PHA fiscal years beginning on or after January 1, 1999, shall be 
submitted to the HUD Field Office within 45 days after the close of the 
PHA fiscal year that is being adjusted. Failure to submit the required 
adjustment of the Utilities Expense Level by the due date may, in the 
discretion of HUD, result in the withholding of approval of future 
obligation of operating subsidies and/or a delay in the recognition of 
the adjustment. Adjustments under this section normally will be made in 
the operating subsidy calculation for the second PHA fiscal year 
following the year being adjusted, unless a repayment plan is necessary 
as noted in paragraph (d) of this section.
    (1) Rates. A change in the Utilities Expense Level because of 
changes in utility rates-to the extent funded by the operating subsidy-
will result in an adjustment of future operating subsidy payments. 
However, where the rate reduction covering utilities, such as water, 
fuel oil, electricity, and gas, is directly attributable to action by 
the PHA, such as wellhead purchase of natural gas, or administrative 
appeals or legal action beyond normal public participation in rate-
making proceedings, then the PHA will be permitted to retain one-half 
of the cost savings attributable to its actions for the first year and, 
upon determination that the action was cost-effective in the first 
year, for as long as the actions continue to be cost-effective, and the 
other one-half of the cost savings will be deducted from operating 
subsidy otherwise payable.
    (2) Consumption. (i) Generally, 75% of any decrease in the 
Utilities Expense Level attributable to decreased consumption after 
adjustment for any utility rate change, will be retained by

[[Page 42503]]

the PHA; 25% will be offset by HUD against subsequent payment of 
operating subsidy.
    (ii) However, in the case of a PHA whose energy conservation 
measures have been approved by HUD as satisfying the requirements of 
Sec. 990.107(f)(1) (regarding non-HUD financed incentives for energy 
conservation improvements), the PHA operating fund eligibility shall 
reflect the retention of 100% of the savings from decreased consumption 
after payment of the amount due the contractor until the term of the 
financing agreement is completed. The decreased consumption is to be 
determined by adjusting for any utility rate changes and may be 
adjusted, subject to HUD approval, using a heating degree day 
adjustment for space heating utilities. The savings realized must be 
applied in the following order:
    (A) Retention of up to 50% of the total savings from decreased 
consumption to cover training of PHA employees, counseling of 
residents, PHA management of the cost reduction program and any other 
eligible costs; and
    (B) Prepayment of the amount due the contractor under the contract.
    (iii) 25% of an increase in the Utilities Expense Level 
attributable to increased consumption, after adjustment for any utility 
rate change, will be reflected in the operating subsidy eligibility for 
the second PHA fiscal year following the year being adjusted, in 
accordance with Sec. 990.111.
    (iv) PHAs are encouraged to:
    (A) Provide conservation incentives and training to residents in 
order to realize increased utility savings;
    (B) Share information with residents regarding changes in utility 
costs related to rate changes and to changes in consumption; and
    (C) Explain to residents conservation benefits and impacts of 
excess consumption on the operating budget.
    (3) Documentation. Supporting documentation substantiating the 
requested adjustments shall be retained by the PHA pending HUD audit.
    (c) Energy conservation financing. If HUD has approved an energy 
conservation contract under Sec. 990.107(f)(2), then the PHA is 
eligible for additional operating subsidy each year of the contract to 
amortize the cost of the energy conservation measures under the 
contract, subject to a maximum annual limit equal to the cost savings 
for that year and a maximum contract period of 12 years.
    (1) Each year, the energy cost savings would be determined as 
follows:
    (i) The consumption level that would have been expected if the 
energy conservation measure had not been undertaken would be adjusted 
for any change in utility rate and may be adjusted, subject to HUD 
approval, using a heating degree day adjustment for space heating 
utilities;
    (ii) The actual cost of energy (of the type affected by the energy 
conservation measure) after implementation of the energy conservation 
measure would be subtracted from the expected energy cost, to produce 
the energy cost savings for the year. (See also paragraph (b)(2)(i) of 
this section for retention of consumption savings.)
    (2) If the cost savings for any year during the contract period is 
less than the amount of operating subsidy to be made available under 
this paragraph (c) to pay for the energy conservation measure in that 
year, the deficiency will be offset against the PHA's operating subsidy 
eligibility for the PHA's next fiscal year.
    (3) If energy cost savings are less than the amount necessary to 
meet amortization payments specified in a contract, the contract term 
may be extended (up to the 12-year limit) if HUD determines that the 
shortfall is the result of changed circumstances rather than a 
miscalculation or misrepresentation of projected energy savings by the 
contractor or PHA. The contract term may only be extended to 
accommodate payment to the contractor and associated direct costs.
    (d) Additional HUD-initiated adjustments. Notwithstanding any other 
provisions of this subpart, HUD may at any time make an upward or 
downward adjustment in the amount of the PHA's operating subsidy as a 
result of data subsequently available to HUD which alters projections 
upon which the approved operating subsidy was based. If a downward 
adjustment would cause a severe financial hardship on the PHA, the HUD 
Field Office may establish a recovery schedule which represents the 
minimum number of years needed for repayment.


Sec. 990.111  Submission and approval of operating subsidy calculations 
and budgets.

    (a) Required documentation. (1) Prior to the beginning of its 
fiscal year, the PHA shall prepare an operating budget in a manner 
prescribed by HUD. The Board of Commissioners shall review and approve 
the budget by resolution. Each fiscal year, the PHA shall submit to the 
HUD Field Office, in a time and manner prescribed by HUD, the approved 
board resolution and the required operating subsidy eligibility 
calculation forms. The PHA shall submit revised calculations in support 
of any adjustments based on procedures prescribed by HUD.
    (2) HUD may direct the PHA to submit its complete operating budget 
if the PHA has failed to achieve certain specified operating standards, 
or for other reasons which in HUD's determination threaten the PHA's 
future serviceability, efficiency, economy, or stability.
    (b) HUD operating budget review. (1) The HUD Field Office will 
perform a detailed review on operating budgets that are subject to HUD 
review and approval. If the HUD Field Office finds that an operating 
budget is incomplete, includes illegal or ineligible expenditures, 
mathematical errors, errors in the application of accounting 
procedures, or is otherwise unacceptable, the HUD Field Office may at 
any time require the submission by the PHA of further information 
regarding an operating budget or operating budget revision.
    (2) When the PHA no longer is operating in a manner that threatens 
the future serviceability, efficiency, economy, or stability of the 
housing it operates, HUD will notify the PHA that it no longer is 
required to submit a complete operating budget to HUD for review and 
approval.
    (c) Compliance with environmental review requirements--(1) General. 
Operating subsidy funds made available to a PHA to support the 
operation and management of public housing are generally for activities 
that are not subject to environmental review requirements. A PHA, 
however, may use public housing program resources (including operating 
subsidy funds, rental and nonrental income, and operating reserves) to 
carry out non-routine maintenance and capital expenditure activities 
that may require an environmental review, as those activities are 
defined in HUD's prescribed Chart of Accounts.
    (2) Initial operating budget. The ACC requires that operating 
expenditures may not be incurred except pursuant to an approved 
operating budget. Before the funding of non-routine maintenance and 
capital expenditure activities may be incorporated into the PHA's 
initial operating budget, and before the PHA may commit any funds to 
such activities, the PHA must obtain either:
    (i) An environmental review from the Responsible Entity and submit 
and receive HUD approval of a Request for Release of Funds under part 
58 of this title, or, in cases where HUD has determined to do an 
environmental review under part 50 of this title, the

[[Page 42504]]

PHA must obtain an environmental approval from HUD; or
    (ii) A determination from the Responsible Entity under part 58 of 
this title that the PHA's proposed non-routine maintenance and capital 
expenditure activities are exempt from environmental review in 
accordance with Sec. 58.34(a)(12) of this title.
    (3) Revisions to operating budget. If subsequent to adoption of its 
initial operating budget, a PHA determines to undertake a new non-
routine maintenance or capital expenditure activity, the PHA must 
obtain an environmental review and release of funds, HUD environmental 
approval, or an exemption from such review, as described in paragraph 
(c)(2) of this section, before the funding of the activity may be 
incorporated into a revised operating budget and before the PHA may 
commit any funds to such activities.
    (4) Determination of exempt activities. If the Responsible Entity 
documents that a proposed non-routine maintenance or capital 
expenditure activity is an exempt activity, as described in (c)(2)(ii) 
of this section, no further action is required from the PHA and the 
activity may be incorporated into the PHA's initial or revised 
operating budget, as appropriate.


Sec. 990.112  Payments procedure for operating subsidy under the 
Operating Fund Formula.

    (a) General. Subject to the availability of funds, payments of 
operating subsidy under the Operating Fund Formula shall be made 
generally by electronic funds transfers, based on a schedule submitted 
by the PHA and approved by HUD. The schedule may provide for several 
payments per month. If a PHA has an unanticipated, immediate need for 
disbursement of approved operating subsidy, it may make an informal 
request to HUD to revise the approved schedule. (Requests by telephone 
are acceptable.)
    (b) Payments procedure. In the event that the amount of operating 
subsidy has not been determined by HUD as of the beginning of a PHA's 
budget year under this part, annual or monthly or quarterly payments of 
operating subsidy shall be made, as provided in paragraph (a) of this 
section, based upon the amount of the PHA's operating subsidy for the 
previous budget year or such other amount as HUD may determine to be 
appropriate.
    (c) Availability of funds. In the event that insufficient funds are 
available to make payments approvable under the Operating Fund Formula 
for operating subsidy payable by HUD, HUD shall have complete 
discretion to revise, on a pro rata basis or other basis established by 
HUD, the amounts of operating subsidy to be paid to PHAs.


Sec. 990.113  Payments of operating subsidy conditioned upon 
reexamination of income of families in occupancy.

    (a) Policy. The income of each family must be reexamined at least 
annually. PHAs must be in compliance with this reexamination 
requirement to be eligible to receive full operating subsidy payments.
    (b) PHAs in compliance with requirements. Each submission of the 
original calculation of operating subsidy eligibility for a fiscal year 
shall be accompanied by a certification by the PHA that it is in 
compliance with the annual income reexamination requirements and that 
rents have been or will be adjusted in accordance with current HUD 
requirements.
    (c) PHAs not in compliance with requirements. Any PHA not in 
compliance with annual income reexamination requirement at the time of 
the submission of the calculation of operating subsidy eligibility 
shall furnish to the HUD Field Office a copy of the procedure it is 
using to attain compliance and a statement of the number of families 
that have undergone reexamination during the twelve months preceding 
the date of the Operating Budget submission, or the revision thereof. 
If, on the basis of such submission, or any other information, the 
Field Office Director determines that the PHA is not substantially in 
compliance with the annual income reexamination requirement, he or she 
shall withhold payments to which the PHA might otherwise be entitled 
under this part, equal to his or her estimate of the loss of rental 
income to the PHA resulting from its failure to comply with those 
requirements.


Sec. 990.114  Phase-down of subsidy for units approved for demolition.

    (a) General. Units that have both been approved by HUD for 
demolition and been vacated in FY 1995 and after will be excluded from 
a PHA's determination of Unit Months Available when vacated, but they 
will remain eligible for subsidy in the following way:
    (1) For the first twelve months beginning with the month that a 
unit meets both conditions of being approved for demolition and vacant, 
the full AEL will be allowed for the unit.
    (2) During the second twelve-month period after meeting both 
conditions, 66% of the AEL will be allowed for the unit.
    (3) During the third twelve-month period after meeting both 
conditions, 33% of the AEL will be allowed for the unit.
    (b) Special case for long-term vacant units. Units that have been 
vacant for longer than 12 months when they are approved for demolition 
are eligible for funding equal to 20% of the AEL for a 12-month period.
    (c) Treatment of units replaced with Section 8 Certificates or 
Vouchers. Units that are replaced with Section 8 Certificates or 
Vouchers are not subject to the provisions of this section.
    (d) Treatment of units replaced with public housing units. When 
replacement conventional public housing units become eligible for 
operating subsidy, the demolished unit is no longer eligible for any 
funding under this section.
    (e) Determination of what units are ``replaced.''For purposes of 
this section, replacements are applied first against units that 
otherwise would fall in paragraph (a) of this section; any remaining 
replacements should be used to reduce the number of units qualifying 
under paragraph (b) of this section.
    (f) Treatment of units combined with other units. Units that are 
removed from the inventory as a result of being combined with other 
units are not considered to be demolished units for this purpose.


Sec. 990.116  Increases in dwelling rental income.

    (a) General. As described in Sec. 990.109(b)(1), PHAs shall be 
allowed to retain 50% of any increases in dwelling rental income, so 
long as the PHA uses the increased income for the provision of 
resident-related improvements and services. The retained income will 
not be recognized in the PHA's calculation under the Operating Fund 
Formula.
    (b) Eligible uses for increased rental revenue. The uses for the 
retained income must be developed with front end resident participation 
and ongoing input and shall be made part of the PHA plan submission. 
(See 24 CFR part 903). Examples of eligible uses for the retained 
income include, but are not limited to:
    (1) Physical and management improvements that benefit residents;
    (2) Resident self-sufficiency services;
    (3) Maintenance operations;
    (4) Resident employment and training services;
    (5) Resident safety and security improvements and services; and
    (6) Optional earned income exclusions.

[[Page 42505]]

Sec. 990.117  Determining actual and requested budget year occupancy 
percentages.

    (a) Actual occupancy percentage. When submitting Operating Fund 
Formula calculations for Requested Budget Years, the PHA shall 
determine an Actual Occupancy Percentage for all Project Units included 
in the Unit Months Available. The PHA shall have the option of basing 
this option on either:
    (1) The number of units occupied on the last day of the month that 
ends 6 months before the beginning of the Requested Budget Year; or
    (2) The average occupancy during the month ending 6 months before 
the beginning of the Requested Budget Year. If the PHA elects to use an 
average occupancy under this paragraph (a)(2), the PHA shall maintain a 
record of its computation of its Actual Occupancy Percentage.
    (b) Requested budget year occupancy percentage. The PHA will 
develop a Requested Budget Year Occupancy Percentage by taking the 
Actual Occupancy Percentage and adjusting it to reflect changes up or 
down in occupancy during the Requested Budget Year due to HUD-approved 
activities such as units undergoing modernization, new development, 
demolition, or disposition. If after the submission and approval of the 
Operating Fund Formula calculations for the Requested Budget Year, 
there are changes up or down in occupancy because of modernization, new 
development, demolition or disposition that are not reflected in the 
Requested Budget Year Occupancy Percentage, the PHA may submit a 
revision to reflect the actual change in occupancy due to these 
activities.
    (c) Documentation required to be maintained. The PHA must maintain 
and, upon HUD's request, make available to HUD specific documentation 
of the occupancy status of all units, including long-term vacancies, 
vacant units undergoing modernization, and units vacant due to 
circumstances and actions beyond the PHA's control. This documentation 
shall include a listing of the units, street addresses, and project/
management control numbers.


Sec. 990.120  Audit.

    PHAs that receive financial assistance under this part shall comply 
with the audit requirements in 24 CFR part 85.26. If a PHA has failed 
to submit an acceptable audit on a timely basis in accordance with that 
part, HUD may arrange for, and pay the costs of, the audit. In such 
circumstances, HUD may withhold, from assistance otherwise payable to 
the PHA under this part, amounts sufficient to pay for the reasonable 
costs of conducting an acceptable audit, including, when appropriate, 
the reasonable costs of accounting services necessary to place the 
PHA's books and records into auditable condition. The costs to place 
the PHA's books and records into auditable condition do not generate 
additional subsidy eligibility under this part.


Sec. 990.121  Effect of rescission.

    If there is a rescission of appropriated funds that reduces the 
level of funding under the Public Housing Capital Fund program, to the 
extent that the PHA can document that it is not possible to complete 
all the vacant unit rehabilitation in the PHA's approved Annual 
Statement, the PHA may seek and HUD may grant a waiver for 1 fiscal 
year to permit full eligibility under the Operating Fund Formula for 
those units approved but not funded. (See part 905 of this title for 
additional information regarding the Capital Fund program.)

    Dated: June 7, 2000.
Harold Lucas,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 00-17026 Filed 7-7-00; 8:45 am]
BILLING CODE 4210-33-P