[Federal Register Volume 65, Number 246 (Thursday, December 21, 2000)]
[Notices]
[Pages 80686-80695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32380]
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Part V
Department of Housing and Urban Development
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Public Housing Assessment System; Financial Condition Scoring Process;
Notice
Federal Register / Vol. 65, No. 246 / Thursday, December 21, 2000 /
Notices
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4509-N-17]
Public Housing Assessment System; Financial Condition Scoring
Process
AGENCY: Office of the Assistant Secretary for Public and Indian
Housing, and Office of the Director of the Real Estate Assessment
Center, HUD.
ACTION: Notice.
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SUMMARY: This notice provides additional information to Public Housing
Agencies (PHAs) and members of the public about HUD's process for
issuing scores under the Financial Condition Indicator of the Public
Housing Assessment System (PHAS). This notice includes generally
accepted accounting principles (GAAP)-based threshold values and
associated scores for each Financial Condition Indicator component and
peer group based on all available data as of October 15, 2000. This
notice also provides additional clarification to the two audit flag and
tier classification charts.
DATES: December 21, 2000.
FOR FURTHER INFORMATION CONTACT: For further information contact the
Real Estate Assessment Center (REAC), Attention: Wanda Funk, U. S.
Department of Housing and Urban Development, 1280 Maryland Avenue, SW,
Suite 800, Washington, DC 20024; telephone Technical Assistance Center,
1-888-245-4860 (this is a toll free number). Persons with hearing or
speech impairments may access that number via TTY by calling the
Federal Information Relay Service at (800) 877-8339. Additional
information is available from the REAC Internet Site at http://www.hud.gov/reac.
SUPPLEMENTARY INFORMATION:
I. Background
HUD published the first Public Housing Assessment System; Financial
Condition Scoring Process Notice in the Federal Register (64 FR 26222)
on May 13, 1999. On June 23, 1999, HUD republished the notice (64 FR
33700) to coincide with the June 22, 1999, publication of the Public
Housing Assessment System proposed rule. Subsequently, HUD further
revised the notice (65 FR 40008) to reflect additional changes to the
financial scoring process on June 28, 2000. This notice is an update of
the Financial Condition Scoring Process notice that was published on
June 28, 2000. In the June 28, 2000, notice, HUD stated that any
changes to the scoring process and any modifications to the thresholds
would be communicated through a subsequent Federal Register notice.
Accordingly, this notice updates the June 28, 2000, notice, and
provides information on the revision made to the Financial Condition
Scoring Process Notice. By this notice, HUD is revising the thresholds
based on a full year's worth of unaudited and available audited GAAP
data.
This change has been made in accordance with the threshold
reevaluation schedule set forth in the June 28, 2000, notice. The
original thresholds were based on a sample of PHAs reporting under GAAP
prior to September 30, 1999, and were used for all unaudited and
audited financial submissions for fiscal year ends through June 30,
2000. As of September 30, 2000, the thresholds were to be reevaluated
based on a full year's worth of unaudited and available audited GAAP
data. This notice provides the revised thresholds based on data
collected as of September 30, 2000, which includes unaudited and
audited submissions received during an entire fiscal year. Hereafter,
the REAC plans to keep the reevaluated thresholds constant for a three
year period, unless there is a need for revision. Please refer to
Appendix 2 for the revised thresholds.
II. Financial Condition Indicator
The chart below shows the six components that constitute the
Financial Condition Indicator and their assigned points.
Financial Condition Indicator
------------------------------------------------------------------------
Scoring Components Measurement Points
------------------------------------------------------------------------
Current Ratio (CR)................ Liquidity................ 9.0
Number of Months Expendable Fund Adequacy of reserves..... 9.0
Balance (MEFB).
Tenant Receivables Outstanding Ability to collect 4.5
(TRO). payments of tenant
receivables.
Occupancy Loss (OL)............... Ability to lease up units 4.5
and maximize rental
income.
Expense Management/Utility Ability to maintain 1.5
Consumption (EM/UC). expense ratios at a
reasonable relative
level to peers (adjusted
for size and region).
Net Income or Loss as a Percentage Effect of current year 1.5
of Expendable Fund Balance (NI). operations on existing
reserves.
------------------------------------------------------------------------
The values of the six components of the Financial Condition
Indicator calculated from the financial data comprise the overall
financial assessment of the PHA. The components and their relative
importance to the total financial score are the result of studies of
PHA financial performance and of industry portfolio management
techniques to identify the most appropriate financial measures to gauge
a PHA's financial position. These components represent measures that
are appropriate benchmarks in any residential real estate environment.
The score assigned to each component is based on the distributions of
that component's values and the relative relationship between the
components and the PHA's overall financial performance.
Financial Assessment Focus
The PHAS financial assessment is based on the entity-wide
operations of a PHA, which includes financial information on Section 8,
Community Development Block Grants, and other HUD funding in its
calculations, as well as funds from non-HUD sources. GAAP-based scores
as of September 30, 2000, are enforceable and will be based on an
entity-wide assessment.
Scoring Approach
Under PHAS, the components of the PHAS Financial Condition
Indicator were developed to both fairly and accurately assess a PHA's
financial performance and financial management. As part of the
development, the components were tested to establish the correlation
between PHA performance under each component and the fiscal health of a
PHA. PHAs were evaluated and assigned scores based on a PHA's
performance relative to its peers. In other words, all PHAs as a group
determine the mean score and each PHA is then ranked accordingly. This
peer assessment approach, which was
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formulated following extensive economic and financial analysis,
examination of well-accepted business principles, and discussions with
PHA industry representatives and PHA staff, provides an equitable means
of measuring the financial performance of PHAs.
Comparable Scoring Systems
The peer assessment process is not unique to the REAC. Companies in
the mortgage housing and securities industries, and other Federal
agencies utilize similar systems in assessing their constituents.
Fannie Mae, the mortgage housing industry leader, developed an
assessment system with financial indicators similar to those contained
in HUD's financial assessment of PHAs. These indicators include
vacancy, reserve balances, and net income. Like HUD, Fannie Mae uses
these indicators to rank properties and identify those which require
further attention. In the securities area, Standard & Poor's conducts
peer assessment of a company's operational capabilities and cash flows
relative to their peers. Among Federal agencies, the Department of
Health and Human Services (HHS) contracts with state and local entities
to perform financial audits of nursing homes and hospitals
participating in the Federal Medicare program. Based on these financial
audits, HHS determines the continued eligibility of these health
service providers in the Medicare program.
III. GAAP Scoring Processes
GAAP-based scores are produced using data contained in the
Financial Data Schedule (FDS). The GAAP-based financial data is first
used to calculate the six financial ratios that measure various aspects
of financial health, such as short term liquidity, EM/UC, and
collection of tenant receivables. Ratios are then translated into
scores based on its component value relative to its peers. Peer
groupings are established according to the size of the PHA, based on
the total number of units operated by the PHA for all programs and
activities. For the expense management component only, low-rent only
information plus the geographic location in which it falls is utilized.
The current size peer groupings are as follows:
Very Small (0-49 units)
Small (50-249 units)
Low Medium (250-499 units)
High Medium (500-1,249 units)
Large (1,250-9,999 units)
Extra-Large (10,000+ units)
In order to have a more equitable assessment of a PHA's expenses
relative to its peers, the REAC developed regional peer groupings for
the EM/UC component, to supplement the size-based peer groups. Thus, a
PHA is scored on EM/UC against a threshold that is calculated from all
expense data in that PHA's similar size group and region. The regions
are based on the first number of the PHA's zip code, and are divided as
follows:
------------------------------------------------------------------------
Region States
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0......................................... CT, MA, ME, NH, NJ, RI, VT.
1......................................... DE, NY, PA.
2......................................... DC, MD, NC, SC, VA, WV.
3......................................... AL, FL, GA, MS, TN, RQ, VQ.
4......................................... IN, KY, MI, OH.
5......................................... IA, MN, MT, ND, SD, WI.
6......................................... IL, KS, MO, NE.
7......................................... AR, LA, OK, TX.
8......................................... AZ, CO, ID, NM, NV, UT, WY.
9......................................... AK, CA, HI, OR, WA, GQ.
------------------------------------------------------------------------
For the EM/UC component, the size-based peer groups were combined
into three groups (small, medium and large) for analysis purposes
because there is not sufficient statistical observations to
differentiate all six size-based peer groups.
The minimum number of points (zero) and the maximum number of
points (thirty) can each be achieved over a range of values. For
example, on the Current Ratio, large PHAs receive zero points for a
ratio that is less than one, while they receive nine points for a ratio
between 1.8 and 3.9. Therefore, PHAs can target one range of values
that they want to avoid and target one range that they should strive to
achieve. Aside from these ranges, points are assigned to component
values along a continuous line. This means that each component value
will receive a different number of points.
This system (``continuous scoring'') ensures that points are
awarded equitably to PHAs along the distribution of component values
because, in most cases, small differences in component values result in
only small differences in the scores of the individual components.
Therefore, two PHAs of a similar size whose values for their financial
condition components are in close proximity will receive only slightly
different scores to capture their performance relative to each other.
For example, a large PHA with a Current Ratio of 1.1 would receive 5.4
points, while a PHA of the same size with a ratio of 1.2 would receive
5.9 points.
The number of points assigned to each component value or range of
values is based on where the thresholds for that component are set. The
thresholds separate distinct ranges of scores along the distribution of
component values. The thresholds and their associated scores are
estimated based on well-accepted business principles and statistical
distributions of values within the peer groupings of the PHAs.
Business Principles
Scoring of certain components follow generally recognized business
principles. These principles indicate that there are certain absolute
thresholds below which component values are clearly financially
unacceptable and component values below that point should result in a
score of zero. These principles are used in scoring the Current Ratio
and Number of Months Expendable Fund Balance components. For both of
these components, a value of less than one is financially unacceptable,
regardless of PHA size, and therefore merits a score of zero.
Statistical Distributions
The thresholds are estimated by examining the distributions of
component values by peer group. For the four most significant
components (Current Ratio, Number of Months Expendable Fund Balance,
Tenant Receivables Outstanding, and Occupancy Loss), thresholds are set
such that approximately 50 percent of the distribution receives the
maximum number of points, as long as 50 percent of the distribution
have acceptable values for the component. Thus, the highest number of
points is awarded to the PHAs whose financial measures are most
reasonable both relative to their peers and in an absolute business
sense. The specific percentiles that make this 50 percent of PHAs are
established by identifying natural break points along the
distributions. For example, for the Current Ratio and Number of Months
Expendable Fund Balance, these break points fall at approximately the
30th and 80th percentiles. The remaining two components (Expense
Management and Net Income as a Percentage of Fund Balance) assign zero
points to PHAs that fall only in the extreme outer ranges of the
distribution of values, and award 1.5 points to the remaining PHAs. The
scoring functions and thresholds derived from these distributions can
be found in Appendices 1 and 2.
IV. Audit Adjustments
Pursuant to 902.63(b)(2), the REAC calculates a revised FASS score
once audited financial information is received. The revised FASS score,
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which is based on the audited information, can either increase or
decrease the initial score that was based on the unaudited financial
information. There are two types of adjustments to the audited score
that relate to financial audit information. The first type deals with
the audit flags and reports that result from the audit itself.
Reportable conditions and material weaknesses are considered to be
audit flags, alerting the REAC to an internal control weakness or an
instance of noncompliance with Federal laws and regulations. The second
adjustment deals with significant differences between the unaudited and
audited financial information reported to HUD pursuant to 902.63(b)(1).
Audit Opinion and Flags
As part of the analysis of the financial health of a PHA including
assessment of the potential or actual waste, fraud or abuse at a PHA,
HUD will look to the Audit Report to provide an additional basis for
accepting or adjusting financial component scores (See 63 FR 46607,
September 1, 1998). The information collected from the annual audit
report pertains to the type of audit opinion, details of the audit
opinion, and the presence of reportable conditions and material
weaknesses.
If the auditor's opinion is anything other than unqualified, points
will be deducted from the PHA's audited financial score. The REAC will
review audit flags to determine their significance as it directly
pertains to the assessment of the PHA's financial condition. If the
flag has no effect on the financial components or the overall financial
condition of the PHA as it relates to the PHAS assessment, the audited
score will not be adjusted. However, if the flags have an impact on the
PHAS assessment, the PHA's audited score will be adjusted, in
accordance with the seriousness of the reported finding.
These flags are collected by using the OMB A-133 Data Collection
Form. The PHA completes this form for both the unaudited and audited
submissions. At the time of the unaudited submission the form is used
as a self-assessment tool and should reflect the PHA's knowledge of
their financial and internal control condition and should acknowledge
their understanding of what the auditor will report.
If the OMB A-133 Data Collection Form indicates that the auditor's
opinion will be anything other than unqualified, points will be
deducted from the PHAS score. The points have been established by the
REAC using a three-tier system. The tiers are meant to give
consideration to the seriousness of the audit qualification and to
limit the deducted points to a reasonable portion of the PHA's total,
actual score. The tiers, as established by the REAC, are defined below.
Audit Flag Tiers
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Tier PHAS Points Deducted
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Tier 1....................... 100 percent of the PHA's total unadjusted
FASS score.
Tier 2....................... 10 percent of the PHA's adjusted FASS
score.
Tier 3....................... Maximum of 5 percent of the PHA's
adjusted FASS score. This maximum is
cumulative and not to be assessed for
each Tier 3 audit or internal control
flag.
------------------------------------------------------------------------
Each tier is assessed sequentially beginning with Tier 1;
subsequent tier deductions are based on the initial score less any
preceding tier deductions. Tier 3 audit flags are divided into levels
which reflect the seriousness of the audit qualification and result in
scoring adjustments based on the following criteria:
Level 1--0.15 points per occurrence not to exceed three occurrences
(.45 maximum point deduction).
Level 2--0.15 points per occurrence not to exceed four occurrences
(.6 maximum point deduction).
Level 3--0.075 points per occurrence not to exceed six occurrences
(.45 maximum point deduction).
Please refer to the table at the end of this section, titled
``Audit Flags and Tier Classifications,'' that lists audit flags and
associated tier classifications.
Review of Audited Versus Unaudited Submission
The purpose of a comparison of the ratios and scores resulting from
the current year's unaudited Financial Data Schedule submission to the
ratios and scores resulting from the current year's audited submission
is to:
1. Identify significant changes in ratio calculation results and/or
scores from the unaudited submission to the audited submission;
2. Identify PHAs that consistently provide significantly different
data from their unaudited submission to their audited submission;
3. Assess or alleviate penalties associated with the inability to
provide reasonably accurate unaudited data within the required time
period.
This review process will only be performed for the audited
submission.
Materiality and Penalty Assessment
The REAC views the transmission of significantly inaccurate
unaudited financial data as a serious condition. Therefore, PHAs are
encouraged to assure financial data is as reliable as possible for
their unaudited submissions.
A significant change penalty will be assessed for significant
differences between the unaudited and audited submissions. A
significant difference is considered to be an overall FASS score
decrease of three or more points from the unaudited to the audited
submission. The PHAS system automatically deducts the significant
change penalty from the audited score and this reduction triggers the
REAC analyst's review.
The REAC may waive the materiality penalty if the PHA provides
reasonable documentation of the material difference in its submission.
A materiality penalty is considered a Tier 3, level 2 audit flag, and
will result in a reduction of points as associated with all other Tier
3 audit flags.
The table, below, summarizes the audit flags and associated tier
classifications.
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Audit Flags and Tier Classifications
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Audit flag Tier classification
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Unqualified opinion........................ None
No audit opinion........................... Tier 1
Adverse opinion............................ Tier 1
Disclaimer of opinion...................... Tier 1
Qualified opinion:
1. GAAP qualifications:
A. Change in accounting principle...... Tier 3, Level 1
B. Change in accounting estimate....... Tier 3, Level 1
C. Change in accounting method......... Tier 3, Level 1
D. Departure from GAAP................. Tier 2
(1) Financial statements using Tier 1
basis other than GAAP.
(2) Exclusion of alternate Tier 2
accounting for an account or group
of accounts.
(3) Inconsistently applied GAAP
(4) Omissions/Inadequate disclosure Tier 2
2. GASS--Scope limitations................. Tier 2
A. Imposed by management............... Tier 2
B. Imposed by circumstance............. Tier 2
C. Year 2000 (add back)................ Tier 3, Level 1
3. Report on major program compliance...... Tier 3, Level 1
4. Report on internal control.............. Tier 3, Level 1
Tier 3, Level 1
Accounting principles used caused the Tier 2
financial statements to be materially
misstated.
Inadequate records......................... Tier 2
Going concern.............................. Tier 1
Material noncompliance disclosed........... Tier 2
1. Internal control weakness........... Tier 3, Level 2
2. Compliance.......................... Tier 3, Level 2
3. Opinion on supplemental schedules... Tier 3, Level 2
Reportable condition:
1. Internal control.................... Tier 3, Level 3
2. Compliance.......................... Tier 3, Level 3
Significant change penalty................. Tier 3, Level 2
------------------------------------------------------------------------
V. Appendices
The graphs shown in Appendix 1 depict the approximate GAAP-based
scoring functions used for each of the six components of the Financial
Indicator. Appendix 2 provides revised GAAP-based threshold values and
associated scores for each component and peer group, based on the GAAP
data pool as of September 30, 2000. These thresholds, which are based
on a full year of unaudited and available audited GAAP data, will
remain in effect for all unaudited and audited PHA financial
submissions for PHAs with fiscal year ends on or after September 30,
2000, for a three year period, unless the REAC finds a need for
revisions. Any revisions to the thresholds will be communicated through
a Notice.
Dated: December 13, 2000.
Harold Lucas,
Assistant Secretary for Public and Indian Housing.
Donald J. LaVoy,
Director, Real Estate Assessment Center.
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[FR Doc. 00-32380 Filed 12-20-00; 8:45 am]
BILLING CODE 4210-33-P