[Federal Register Volume 66, Number 61 (Thursday, March 29, 2001)]
[Rules and Regulations]
[Pages 17276-17299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7692]



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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; 
Final Rule

  Federal Register / Vol. 66, No. 61 / Thursday, March 29, 2001 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 990

[Docket No. FR-4425-I-12]
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: Interim rule.

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SUMMARY: This interim rule implements an interim Operating Fund Formula 
for determining the payment of operating subsidies to public housing 
agencies (PHAs). The interim rule follows publication of a July 10, 
2000 proposed rule, and takes into consideration the public comments 
received on the proposed rule. As required by statute, the July 10, 
2000 proposed rule was developed through negotiated rulemaking 
procedures. The policies and procedures described in the interim rule 
will 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.

DATES: Effective Date: April 30, 2001. Comments Due Date: May 29, 2001.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim 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--The July 10, 2000 Proposed Rule

    On July 10, 2000 (65 FR 42488), HUD published for public comment a 
proposed rule to implement an Operating Fund Formula for determining 
the payment of operating subsidies to public housing agencies (PHAs). 
As required by statute, the July 10, 2000 proposed rule was developed 
through negotiated rulemaking procedures. The proposed rule was the 
first stage in the rulemaking process that will establish a final 
Operating Fund Formula.
    HUD currently uses a formula approach called the Performance 
Funding System (PFS) to distribute operating subsidies to PHAs. HUD's 
regulations implementing the PFS can be found at 24 CFR part 990. On 
October 21, 1998, the Congress enacted the Quality Housing and Work 
Responsibility Act of 1998 (Pub. L. 105-276) (QHWRA). Section 519 of 
QHWRA establishes an Operating Fund for the purpose of making 
assistance available to PHAs for the operation and management of public 
housing. Further, section 519 requires that the assistance to be made 
available from that fund be determined using a formula developed 
through negotiated rulemaking procedures as set forth in subchapter III 
of chapter 5 of title 5, United States Code, commonly referred to as 
the Negotiated Rulemaking Act of 1990.
    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 Committee membership included 
representatives of PHAs; the three national organizations representing 
PHAs--PHADA, CLPHA, and NAHRO; resident organizations; low-income 
housing groups; and HUD. Additionally, two representatives from the 
Federal Mediation and Conciliation Service served as facilitators.
    The July 10, 2000 proposed rule was the product of the Committee's 
successful negotiations, and reflected the consensus decisions reached 
over nearly a year's worth of deliberations. The proposed rule thus 
represented a partnership among HUD, the PHAs, public housing 
residents, and advocates of public housing.
    The July 10, 2000 proposed rule set forth several important 
modifications to the existing PFS regulations. These modifications were 
designed to address, to the extent feasible under data available to the 
public, several specific proposals considered important by members of 
the Committee. The proposed rule also contained several clarifying and 
technical changes to the PFS regulations and to remove several obsolete 
provisions.
    The most significant changes to the current PFS regulations that 
were contained in the July 10, 2000 proposed rule are described below. 
The July 10, 2000 rule proposed to:
    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, 
require that the comparison of actual and estimated utility costs be 
reported to HUD within 45 days after the end of the fiscal year, but 
then have the PHA incorporate the adjustment into the operating subsidy 
calculation for the second, rather than the first PHA fiscal year 
following the year being adjusted;
    4. In order to encourage energy efficiency, 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;
    5. 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
    6. 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 preamble to the July 10, 2000 proposed rule provides additional 
details regarding the proposed amendments to 24 CFR part 990.

II. This Interim Rule; Development of Final Rule

    This interim rule makes effective the policies and procedures 
contained in the July 10, 2000 proposed rule, and takes into 
consideration the public comments received on the proposed rule. This 
interim rule will 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.

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    Following and based upon the findings and recommendations of the 
completed cost study and QHWRA, HUD will develop the final rule 
implementing 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 purpose.

III. The Operating 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 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 entered into a cooperative agreement with Harvard 
University. The research design for the study is under development. HUD 
has directed Harvard University, 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 University will also consult with interested 
individuals and organizations in developing the cost study findings and 
recommendations. In addition, Harvard University will receive and 
consider the public comments on the July 10, 2000 proposed rule as part 
of its work on the cost study.

IV. Differences Between This Interim Rule and the July 10, 2000 
Proposed Rule

    The differences between this interim rule and the July 10, 2000 
proposed rule are described below. HUD has made three non-substantive 
changes to the proposed rule for purposes of clarity and to remove an 
obsolete reference. The proposed rule represented the consensus 
decisions reached by the members of the Negotiated Rulemaking 
Committee, including current residents of public housing, individual 
PHAs, national PHA associations, and a number of public interest 
groups. Further, this interim rule is a temporary regulatory measure 
until completion of the Congressionally mandated cost study and 
subsequent publication of the final rule. Accordingly, HUD believes it 
would not be appropriate to make substantive revisions to the proposed 
rule at this interim rule stage.
    HUD is deferring consideration of major modifications to the 
policies and procedures contained in the proposed rule until completion 
of the cost study. Harvard University will receive and consider the 
public comments on the proposed rule during development of the public 
housing operating cost study. The cost study will form the basis of 
HUD's final rule implementing the Operating Fund. The suggestions made 
by the commenters will be reevaluated at the final rule stage (along 
with the public comments submitted on this interim rule), and may be 
reflected in the substance of the final rule.
    The changes made by this interim rule are as follows:
    1. Removal of obsolete reference to the Turnkey IV program 
(Sec. 990.103(c)). The interim rule revises Sec. 990.103(c) (which 
lists several HUD programs to which the Operating Fund does not apply) 
to remove an obsolete reference to the Turnkey IV program.
    2. Clarification of applicability of Operating Fund Formula to non-
PFS PHAs (Sec. 990.103(d)(2)). This interim rule revises 
Sec. 990.103(d)(2) to clarify the applicability of the Operating Fund 
Formula to housing owned by the PHAs of the Virgin Islands, Puerto 
Rico, Guam and Alaska (the ``non-PFS PHAs''). Section 990.103(d)(1) 
lists the provisions of the 24 CFR part 990 that apply to these PHAs. 
Section 990.103(d)(2) states that, otherwise, the Operating Fund 
Formula is not applicable to the non-PFS PHAs. This interim rule 
clarifies that the provisions of 24 CFR part 990 apply to the non-PFS 
PHAS, to the extent required to give full effect to the provisions 
identified in Sec. 990.103(d)(1).
    3. Correction of typographical error regarding PHA retention of 
increased rental revenue (Sec. 990.109(b)(1)(iii)). In response to 
public comment, this interim rule corrects a typographical error at 
Sec. 990.109(b)(1)(iii), which states the method for calculating 
increases in rental revenue. The correction is necessary to clarify 
that PHAs may retain 50 percent of increased rental revenue.

V. Discussion of the Public Comments Received on the July 10, 2000 
Proposed Rule

    The public comment period for the July 10, 2000 proposed rule 
closed on August 9, 2000. By close of business on this date, HUD had 
received 19 public comments. Comments were submitted by PHAs; the three 
main organizations representing PHAs--PHADA, CLPHA, and NAHRO; resident 
organizations, advocates for low-income housing, other housing experts; 
and other organizations and individuals.
    This section of the preamble presents a summary of the significant 
issues raised by the public commenters, and HUD's responses to the 
comments. The summary of comments that follows presents the major 
issues and questions raised by the commenters. The underlined headings 
present the issue or question, and are followed by a brief description 
of the commenter's reasoning and HUD's response to the comments.

A. Comments Regarding the FHA-Based AEL (FHAEL) Adjustments for Small 
PHAs (Sec. 990.105(e))

    The July 10, 2000 proposed rule would 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. 
Small PHAs with under 250 units would use the higher of their current 
Allowable Expense level (AEL) or 85% of the FHA-Based AEL (referred to 
as the FHAEL). AELs for small PHAs with 250-500 units would be set at 
the higher of the small PHA's current AEL or 70% of the FHAEL. The cost 
of these increases would be achieved by reducing the AELs of PHAs with 
more than 500 units. The July 10, 2000 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 would use 
an AEL equivalent to 120% of the FHAEL.
    Comment: Support for FHAEL adjustments. One commenter supported the 
proposed FHAEL adjustment for small PHAs. The commenter wrote that 
these adjustments will help small PHAs to make up for backlogged 
maintenance, deal with the need for improvements in computer 
automation, and perhaps hire more staff to administer to the needs of 
their residents. The commenter, however, also wrote that many PHAs-- 
small and large alike--will not receive adequate funding under the 
proposed rule. ``This is another reason why the rule must be temporary; 
housing authorities should not be expected to perform their mission 
with a level of funding that no other housing provider (such as FHA 
insured providers) would expect or accept.''

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    HUD Response. The rule is being published as an interim rule in 
recognition that a study of public housing operating costs is needed 
before a final operating subsidy formula can be developed. HUD entered 
into a Cooperative Agreement with Harvard University in May 2000 for 
such a study.
    Comment: FHAEL adjustment factor is inadequate. One commenter wrote 
that the proposed calculation of the FHAEL is ``fair and reasonable.'' 
However, the commenter wrote that proposed FHAEL adjustments would 
continue the perceived inequities in funding for small PHAs. 
Accordingly, the commenter recommended that small PHAs with 250-500 
units be permitted to use 80% of the FHAEL (rather than the proposed 
70%). The commenter also suggested that all PHAs (small and large) who 
use less than 70% of the FHAEL should receive an additional one-time 
funding bonus in fiscal year 2001.
    HUD Response. The commenter remarks that using FHA multifamily 
operating costs appears to be fair and reasonable. While the Committee 
agreed to use the data as a reference point for having PHAs raise or 
lower their AELs, however, there was no consensus that the FHA data 
should be treated as a standard. As noted above, this interim rule is a 
temporary regulatory measure until completion of a Congressionally 
mandated cost study and subsequent publication of a final rule. The 
question of what are appropriate operating costs for public housing is 
the subject of the cost study, which is being undertaken by Harvard 
University's Graduate School of Design under a Cooperative Agreement 
with HUD. HUD has decided to defer consideration of major revisions to 
the policies and procedures contained in the proposed rule until 
completion of the cost study. Harvard University will review the public 
comments on the July 10, 2000 proposed rule during the development of 
the cost study. The suggestions made by the commenters will be 
reevaluated at the final rule stage (along with the public comments 
received on this interim rule), and may be reflected in the substance 
of the final rule.
    Comment: FHAEL adjustments should be made for all PHAs. One 
commenter recommended that, rather than limit FHAEL adjustment to small 
PHAs, HUD should make a one-time adjustment for all PHAs to raise their 
AELs to the FHAEL level.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. As noted above, this interim rule is a temporary regulatory 
measure until completion of the Congressionally mandated cost study and 
subsequent publication of the final rule. HUD believes it would not be 
appropriate to make substantive revisions to the proposed rule at this 
interim rule stage. Accordingly, HUD is deferring consideration of 
major changes to the policies and procedures contained in the proposed 
rule until completion of the cost study. Harvard University will 
receive and consider the public comments on the proposed rule during 
development of the cost study. The suggestions made by the commenters 
will be reevaluated at the final rule stage (along with the public 
comments submitted on this interim rule), and may be reflected in the 
substance of the final rule.
    Comment: Large PHAs should not be required to subsidize FHAEL 
adjustment for small PHAs. Two commenters wrote that addressing funding 
deficiencies for small PHAs should not result in reduced AEL levels for 
large PHAs. The commenters wrote that there is ``incontrovertible 
evidence that large and medium-sized PHAs are also woefully 
underfunded.''
    HUD Response. The decision to make a one-time, permanent adjustment 
of 1.36% to the AELs of PHAs with 500 or more units was achieved 
through consensus among Committee members. When all the changes 
contained in the interim rule are taken into account, however, 
including changes in the treatment of investment, dwelling rental, and 
non-rental income, all but a relatively small number of medium and 
large PHAs are expected to receive increased subsidy support. Whether 
PHAs are under- or over-funded is a question that will be addressed in 
the public housing operating cost study being undertaken by Harvard 
University.
    Comment: Proposed FHAEL adjustments are based on inadequate data. 
One commenter wrote that ``FHA data have clear limitations that should 
be noted in any discussion of how the new AELs are calculated.'' 
According to the commenter, the FHA data used by the Committee was 
insufficient for the urban markets where most large PHAs operate. 
``These discrepancies in data speak loudly to the need to conduct a 
fresh study of public housing costs.''
    HUD Response. The Committee did recognize that there were 
limitations on the use of the FHA multifamily operating cost data and 
agreed that the data would be used as a reference point and not as a 
standard.
    Comment: HUD should publish FHAEL data and formulas for each PHA. 
Three commenters suggested that HUD should publish the data and 
formulas used to calculate the FHAEL for each PHA. The commenters wrote 
that publication of this information is necessary so that PHAs can 
assess the impact of the proposed FHAEL adjustments on their 
operations.
    HUD Response. Data was presented to the Committee and later made 
available to the public housing community that modeled what the impact 
would be on individual PHAs if the changes agreed to by the Committee, 
including FHAEL adjustments, had been implemented in 1998. HUD will 
publish FHAEL factors for review and use by individual PHAs before they 
submit their subsidy calculations for their respective fiscal years 
beginning in 2001.
    Comment: How can the FHAEL be made applicable in FY 2001 using FY 
2000 data, when the year 2000 has not yet been completed or the 
necessary data compiled? One commenter posed this question.
    HUD Response. AELs for a particular year are established at the 
start of a PHA's fiscal year and normally remain unchanged for the 
entire year. For calendar year 2000, the factors needed by PHAs to 
determine their AELs for their fiscal years beginning in 2000 (i.e., 
January 1, 2000, April 1, 2000, July 1, 2000, and October 1, 2000), 
have been available since February 2000. Under this interim rule, a PHA 
will compare its current HUD-approved AEL for 2000 with its FHAEL for a 
possible adjustment upwards or downwards depending on its size. That 
adjusted AEL will then become the starting AEL for its 2001 fiscal year 
and will be further adjusted for a local inflation factor and a factor 
reflecting the aging of its housing stock.

B. Comments Regarding the Treatment of Non-Rental Income--Exclusion of 
Investment Income and Revised Definition of Other Income 
(Secs. 990.102, 990.109, and 990.110)

    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.'' The 
July 10, 2000 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

[[Page 17279]]

not be used to determine operating subsidy eligibility.
    Comment: Support for revised definition of ``other income''. Three 
commenters expressed support for these provisions. The commenters wrote 
that these changes begin to remove the disincentives faced by PHAs and 
reward activities that will ultimately benefit public housing residents 
and their communities.
    HUD Response. The changes in the treatment of investment and other 
income represent the Committee's response to QHWRA's requirement that a 
PHA that receives income from nonrental sources be able to retain and 
use such amounts without any decrease in the amounts received from the 
Operating Fund.
    Comment: Success of this provision depends on full funding for the 
Operating Fund Formula. One commenter cautioned that ``this provision 
is only beneficial to the extent that HUD requests--and Congress 
provides--sufficient funding for the'' Operating Fund Formula. The 
commenters urged HUD not to reduce its operating subsidy requests on 
the grounds that PHAs may now keep more of their investment and other 
income. According to the commenter, such an action would ``undermine 
the incentives envisioned in both the rule and the underlying 
statute.''
    HUD Response. HUD recognizes the importance of adequate funding 
levels for operating subsidies.

C. Comments Regarding the Computation of Projected Monthly Dwelling 
Rental Income (Sec. 990.109)

    The July 10, 2000 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. 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 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.
    Comment: Support for revised computation of projected monthly 
dwelling rental income. Four commenters supported the proposed changes 
to the computation of projected monthly dwelling rental income. The 
commenters wrote that the proposed revisions would prevent unusually 
high or low rental income years from drastically impacting projections 
of rental income. One of the commenters wrote that this ``incentive 
based approach is in the spirit of [QHWRA] and supports entrepreneurial 
initiatives that will ultimately improve the lives of residents.''
    HUD Response. HUD agrees with the commenters that the dwelling 
rental income approach adopted by the Committee is responsive to the 
QHWRA provision that the formula contain an incentive to encourage a 
PHA to facilitate increases in earned income by families in occupancy.
    Comment: This provision will not succeed unless the Operating Fund 
is fully funded. One commenter wrote, ``this approach will not succeed 
unless the Operating Fund is fully funded.'' The commenter wrote that 
HUD ``must accurately estimate 100% of the Operating Fund need and HUD 
must request an appropriation for full funding of operating 
subsidies.'' According to the commenter, HUD has consistently 
underestimated operating subsidy need. The commenter urged ``HUD to 
consult with its public housing partners in advance of the 
appropriations request to discuss and revise these estimates.''
    HUD Response. Budget forecasting is not an exact science and HUD 
continually tries to improve the data sources and techniques used for 
its projections. For example, HUD has agreed to review the current 
rental change factor for a possible change in FY 2002. Any changes to 
this factor will be done in consultation with HUD's public housing 
partners and will be followed by written notice and an opportunity for 
public comment.
    Comment: PHAs should be required to certify that they have complied 
with the statutory earned income disregard under 42 U.S.C. 1437a(d) and 
HUD's implementing regulation at 24 CFR 960.255. Two commenters wrote 
that the proposed provision allowing PHAs to retain 50% of increased 
rental revenues may unintentionally create a disincentive for PHAs to 
implement the statutory earned income disregard. PHAs that comply with 
the required disregard will have lower dwelling rental income than if 
they count all resident earnings in determining rental income. The 
commenters suggested that PHAs should be required to certify that they 
have fully implemented the mandatory earned income disregard. One of 
the commenters suggested that this certification should accompany the 
PHA's operating budget submission to HUD. This commenter also 
recommended that the PHA's policy regarding the mandatory earned income 
disregard and the rent certification forms used by the PHA to implement 
the mandatory disregard should be attached to the certification. The 
second commenter wrote that if HUD does not have a simple 
administrative means to verify the validity of the PHA's certification 
(through MTCS data or otherwise), the PHA should be required to submit 
data concerning the number of families receiving the benefit of the 
mandatory disregard.
    HUD Response. HUD does not believe that the treatment of dwelling 
rental income adopted by this interim rule may unintentionally create a 
disincentive for PHAs to implement the statutory earned income 
disregard. With regard to the commenters' suggestion that PHAs be 
required to certify that they have fully implemented the mandatory 
earned income disregard, HUD already requires that a PHA separately 
certify when submitting its Operating Budget and/or subsidy calculation 
that ``all regulatory and statutory requirements have been met'' and 
that ``all proposed rental charges and expenditures will be consistent

[[Page 17280]]

with the provisions of law.'' These certifications clearly encompass 
the requirement on a PHA to fully implement the earned income 
disregard. HUD has a broad range of enforcement actions from which it 
can draw, including withholding of assistance or ordering corrective 
action, in the event the certifications are violated.
    Comment: The proposed retention of increased rental revenues should 
be designed to reward PHAs that encourage and support increased 
earnings for existing public housing residents--and not to encourage 
the recruiting of new residents with higher incomes. Five commenters 
wrote that the proposed rule inappropriately fails to distinguish 
between increased rents due to admission of higher income families and 
higher rent charges resulting from the increased earnings of current 
residents. Two of the commenters wrote that section 519(e)(2)(B) of 
QHWRA (entitled ``Incentives to Increase Certain Rental Income) 
requires the Operating Fund Formula to create an incentive for PHAs to 
increase the earnings of ``families in occupancy'' (emphasis added). 
According to the commenters, the proposed rule creates an inappropriate 
financial incentive to admit the highest income applicants. ``Moreover, 
the formula places the incentive to increase the income of current 
tenants on a par with the incentive to seek out new tenants with higher 
income. Congress did not intend such a result.''
    HUD Response. HUD believes that the dwelling rental income 
methodology developed by the Committee is both appropriate and 
responsive to the Congressional directive that the formula contain an 
incentive to PHAs that would facilitate increases in earned income by 
families in occupancy. It is appropriate because the proposal was 
developed using negotiated rulemaking, as required by QHWRA, and the 
approach represented a consensus among a broad range of interests that 
included current residents of public housing, individual public housing 
agencies, national PHA associations, and a number of public interest 
groups. It is responsive because the Committee decided that the 
benefits resulting from increased income would not be used for general 
low-income purposes, as permitted by the incentive, but rather would be 
used for the provision of resident-related improvements and services, 
including the funding of optional earned income exclusions. The uses 
must be developed with front-end resident participation and be made 
part of the PHA plan submission.
    HUD supported and helped shape this compromise because of its 
relative administrative simplicity and its ability to provide resources 
that PHAs can use to help residents already in occupancy increase their 
earned incomes. Because the statute speaks specifically of an incentive 
to facilitate increases in earned income by families in occupancy, HUD 
will reexamine at the final rule stage whether there is a way to 
provide this incentive that is just as effective and not 
administratively burdensome.
    Comment: Earnings of newly admitted residents should be excluded 
from the determination of the ``current year'' and ``three year'' 
averages. Related to the preceding comment, one commenter wrote that it 
would not be administratively difficult to narrow the retained revenue 
incentive to apply only to the increased earnings of existing 
residents. The commenter suggested that the rent paid by households 
admitted to the PHA's public housing program in the ``current year'' 
should be excluded from the determination of the ``current year average 
dwelling rental charge'' under proposed Sec. 990.109(b)(1). For a fair 
comparison, rents paid by newly admitted families in each year used to 
determine the ``three year average'' would also be excluded. After the 
initial year of admission, all rents (and therefore incomes) would be 
included in the PHA's average rental charge calculations. In this way, 
increases in families' income beginning in the year after they are 
admitted to public housing would be captured to determine whether a 
PHA's average rental revenue has increased and the amount of revenue 
the PHA is permitted to retain.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. As noted above, this interim rule is a temporary regulatory 
measure until completion of the Congressionally mandated cost study and 
publication of the final rule. HUD has decided to defer consideration 
of major changes to the policies and procedures contained in the 
proposed rule until completion of the cost study. Harvard University 
will receive and consider the public comments on the proposed rule 
during development of the cost study. The suggestion made by the 
commenter will be reevaluated at the final rule stage, and may be 
reflected in the substance of the final rule.
    Comment: The interim rule should establish a base amount of income 
for every tenant and only allow the PHA to retain increases in income 
if the tenant's income increases above the base. One commenter made 
this suggestion to narrow the scope of the retained rental revenue 
incentive. The commenter wrote that PHAs must already calculate every 
tenant's income and report that income to HUD as part of the MTCS. The 
commenter suggested that the base for all current residents should be 
established on the effective date of the interim rule. The base for all 
new tenants would be determined on their date of admission to public 
housing. If a tenant's income increases above the base, PHAs would be 
allowed to retain 50% of the increased rental revenue. The commenter 
also suggested that a family's base be adjusted due to changes in 
family composition.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. As noted, HUD does not believe it would be appropriate to 
make substantive revisions to the proposed rule at this interim rule 
stage. HUD is deferring consideration of major changes to the policies 
and procedures contained in the proposed rule until completion of the 
operating cost study. The study will form the basis for HUD's final 
rule implementing the Operating Fund Formula. Harvard University will 
receive and consider the public comments on the proposed rule during 
development of the cost study. The suggestion made by the commenter 
will be reevaluated at the final rule stage, and may be reflected in 
the substance of the final rule.
    Comment: Suggested correction of typographical error. Paragraph 
(b)(1)(iii) of Sec. 990.109 prescribes the method for calculating the 
amount of increased rental revenue that may be retained. This paragraph 
provides that 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 * * * and the unit months available * * *.'' One 
commenter suggested that the phrase ``50 percent of'' should be 
inserted following the word ``multiplied'' in order to clarify that 
PHAs may retain 50 percent of increased rental revenue.
    HUD Response. HUD agrees with the commenter that the suggested 
change would improve the clarity of the rule. This interim rule 
contains the corrected language.
    Comment: Opposition to 3% adjustment factor. Four commenters 
questioned the continued use of the 3% adjustment factor. One of the 
commenters wrote that HUD should not assume that rental income would 
increase in the new budget year. According to the commenter, this is a 
false assumption that simply lowers the

[[Page 17281]]

amount of operating subsidy provided to a PHA. The commenters were 
appreciative of HUD's agreement to revise the factor to more accurately 
reflect the projection of monthly dwelling rental income in FY 2002 and 
beyond.
    HUD Response. As noted above, HUD has agreed to review the current 
rental change factor for a possible change in FY 2002. Any changes to 
this factor will be done in consultation with HUD's public housing 
partners and will be followed by written notice and an opportunity for 
public comment.

D. Comments Regarding the Use of Increases in Dwelling Rental Income 
(Sec. 990.116)

    The July 10, 2000 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. A PHA would be 
required to describe the uses of the retained income in the PHA's Plan 
submissions under 24 CFR part 903. PHAs would also be required to 
develop the uses for the retained income with front-end resident 
participation and ongoing input. The July 10, 2000 proposed rule 
provides several examples of eligible uses for the retained income, 
including, but not limited to: physical and management improvements 
that benefit residents; resident self-sufficiency services; maintenance 
operations; resident employment and training services; resident safety 
and security improvements and services; and optional earned income 
exclusions.
    Comment: PHAs should be required to use at least 20% of retained 
rental income for resident services and resident councils. One 
commenter made this suggestion.
    HUD Response. HUD has not adopted the suggestion made by this 
commenter. HUD has decided to defer consideration of major changes to 
the proposed rule until completion of the operating cost study and 
development of the final rule. Harvard University will receive and 
consider the public comments on the proposed rule during development of 
the cost study. The commenter's suggestion will be reevaluated at the 
final rule stage, and may be reflected in the substance of the final 
rule.
    Comment: Retained income provisions will impose an undue 
administrative burden. One commenter supported the use of retained 
rental revenues for resident-related improvements and services. 
However, the commenter was concerned about the monitoring and tracking 
of expenditures from the retained income. The commenter wrote that both 
HUD funding and retained income are currently placed in the PHA's 
general operating fund, and funds are used for approved budget items. 
The commenter wrote that separating retained income from the general 
operating fund would create excessive account handling and 
recordkeeping burdens.
    HUD Response. HUD agrees that separating, tracking, and monitoring 
the expenditures of the retained dwelling income would create excessive 
accounting and recordkeeping burdens. Neither the July 10, 2000 
proposed rule, nor this interim rule, would require the PHA to 
separately account for, monitor, track, or report on the retained 
income beyond the requirement to identify the proposed uses of the 
estimated amount of retained income in the Annual Plan.

E. Comments Regarding Utility Adjustments (Secs. 990.107 and 990.110)

    The July 10, 2000 proposed rule would retain the current method of 
estimating utility expenses. In addition, the proposed rule would also 
continue to require that the comparison of actual and estimated utility 
costs be reported to HUD within 45 days after the end of the fiscal 
year, but would then have the PHA incorporate the adjustment into the 
operating subsidy calculation for the second (rather than the first PHA 
fiscal year following the year being adjusted). Further, in order to 
encourage energy efficiency, the July 10, 2000 proposed rule would 
replace the current 50-50 split of savings or increases in cost due to 
changes in utilities consumption to a 75-25 split between PHAs and HUD, 
respectively.
    Comment: Support for changes in utility calculations. Two 
commenters expressed support for the proposed changes to the utility 
calculations. The commenters wrote that the proposed rule would 
encourage PHAs to conserve energy. One of the commenters also wrote 
that the proposed rule is ``balanced in its approach in that risks 
associated with increased utility costs will continue to be absorbed by 
HUD while, in return, any savings will accrue to HUD.''
    HUD Response. HUD agrees the changes will encourage PHAs to 
conserve energy.
    Comment: Required conforming change to utility rate provisions 
of Sec. 990.107. Two commenters noted that Sec. 990.107(b)(2) continues 
to 
provide that if a PHA takes certain actions to reduce utility rates, it 
``may be permitted to retain one-half the annual cost savings'' 
(emphasis added). The commenters suggested that the word ``may'' should 
be revised to ``shall,'' in order to conform to the utility adjustment 
provisions of Sec. 990.110.
    HUD Response. HUD has not adopted the suggested change. As noted, 
HUD has decided to defer consideration of major changes to the proposed 
rule until completion of the cost study and development of the final 
rule. The recommendation made by the commenter will be reevaluated at 
the final rule stage.
    Comment: Interim rule should provide clarification and/or examples 
of allowable energy conservation strategies. One commenter agreed that 
energy cost reduction and energy conservation efforts should be 
included in the Annual and Five-Year Plans, but would like 
clarification and/or examples of allowable energy conservation 
strategies.
    HUD Response. One source of the guidance requested by the commenter 
is provided in HUD's 1998 publication, ``Energy Conservation for 
Housing--A Workbook,'' which is available by calling the HUD Public and 
Indian Housing (PIH) Information and Resource Center at 1-800-955-2232. 
Another source is the 1992 joint HUD/U.S. Department of Energy 
publication, ``Energy Performance Contracting for Public and Indian 
Housing: A Guide for Participants'' available from the HUD user web 
site at http://huduser.org:80/publications/hsgfin/energy.html.
    Comment: A percentage of any utility savings realized by the PHA 
should be used for the provision of resident services. Two commenters 
made this suggestion.
    HUD Response. HUD has not adopted the changes recommended by the 
commenters. As noted, HUD has decided to defer consideration of major 
changes to the proposed rule until completion of the cost study and 
development of the final rule. Harvard University will receive and 
consider the public comments on the proposed rule during development of 
the cost study. The suggested changes will be reevaluated at the final 
rule stage, and may be reflected in the substance of the final rule.
    Comment: ``Conversion to a less costly utility source'' should be 
added to the examples of utility rate reductions eligible for the 
utility rate reduction incentive at Sec. 990.110(b)(1). One commenter 
made this suggestion.
    HUD Response. HUD has not adopted the change recommended by the 
commenter. As noted, HUD has decided to defer consideration of major 
changes to the proposed rule until completion of the cost study and 
development of the

[[Page 17282]]

final rule. Harvard University will receive and consider the public 
comments on the proposed rule during development of the cost study. The 
suggestion made by the commenter will be reevaluated at the final rule 
stage.

F. Comments Regarding Resident Participation (Sec. 990.108(e))

    The July 10, 2000 proposed rule would make several amendments 
designed to promote resident participation in the operation of public 
housing. Specifically, 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. 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.
    Comment: Support for proposed annual $25 allocation for occupied 
units. Four commenters supported the proposed annual $25 allocation for 
occupied units. According to the commenters, this provision sends a 
strong message that HUD and PHAs are committed to meaningful resident 
participation. The commenters wrote that the proposed allocation would 
remove uncertainty about funding and enable resident organizations to 
fully participate in PHA policy decision affecting their homes.
    HUD Response. HUD agrees that this change, along with other changes 
brought about by QHWRA (such as requiring that PHAs, with certain 
exceptions, include a resident on their governing board), underscores 
the importance of resident participation to the success of public 
housing.
    Comment: The proposed $25 allocation may be inadequate. One 
commenter expressed concern that the proposed allocation ``will not 
adequately fund those initiatives that are most important to * * * 
residents.'' According to the commenter, PHAs ``may have to choose 
between income exclusions and maintenance or economic development 
programs.''
    HUD Response. The $25 is for funding of resident participation 
activities and not for income exclusions and maintenance or economic 
development programs. Income retained by PHAs as a result of increases 
in dwelling rental income may be a source of funds for income 
exclusions and maintenance or economic development programs.
    Comment: The interim rule should clarify that the $25 allocation 
for occupied unit is an ``add-on'' cost to the AEL. Five commenters 
wrote that the interim rule should clarify that the $25 allocation is 
calculated as an ``add-on'' cost to the PHA's AEL.
    HUD Response. This interim rule (as did the July 10, 2000 proposed 
rule) includes the $25 per occupied unit as one of several ``other 
costs'' for which the PHA may receive additional subsidy eligibility. 
HUD believes that the interim rule language makes clear that the $25 
allocation is a calculation separate from the AEL and that the total 
subsidy eligibility for a PHA is the sum of all the component parts of 
the interim formula.
    Comment: The interim rule should provide that the annual $25 
allocation is meant to supplement any resources currently being 
invested by the PHA in resident participation activities, and is not 
meant to be in lieu of such resources. Three commenters made this 
suggestion.
    HUD Response. HUD has not adopted the changes suggested by the 
commenters. HUD has decided to defer consideration of substantive 
changes to the proposed rule until completion of the operating cost 
study and development of the final rule. However, HUD urges PHAs not to 
reduce any support now being made for resident participation 
activities. Furthermore, Harvard University will receive and consider 
the public comments on the proposed rule during development of the cost 
study. The suggested change will be reevaluated at the final rule 
stage, and may be reflected in the substance of the final rule.
    Comment: The interim rule should clarify that the annual $25 
allocation must be used for resident participation activities and not 
resident services. Two commenters wrote that while proposed 
Sec. 990.108(e) specifies that the $25 allocation is for resident 
participation activities, it also indicates that these activities would 
include those identified in 24 CFR part 964. The commenters wrote that 
part 964 uses the terms ``resident participation'' and ``resident 
services'' interchangeably. The commenters suggested that the interim 
rule should clarify that the funds must be used for resident 
participation activities and not for resident services.
    HUD Response. The language of the July 10, 2000 proposed rule and 
this interim rule make clear that the $25 is for funding of resident 
participation activities.
    Comment: Interim rule should describe the formula for pro-rating 
funding for resident participation activities. Proposed Sec. 990.108(e) 
provides that if ``in any fiscal year appropriations are not sufficient 
to meet all funding requirements under (part 990), the $25 will be 
subject to pro-ration.'' One commenter wrote that the interim rule 
should clarify that funding for resident participation activities will 
be prorated in proportion to the percentage of funding PHAs receive to 
meet their AEL. The commenter also suggested that the interim rule 
provide an example illustrating the operation of the pro-ration 
formula.
    HUD Response. The pro-rating will be of the PHA's total subsidy 
eligibility. HUD will provide examples of how pro-rating will impact 
the amount of subsidy support received for resident participation 
activities in separate guidance material that will be issued to PHAs.
    Comment: The interim rule should require PHAs to reflect both the 
calculation and allocation of the $25 requirement as a separate line 
item in all relevant budget documents. The commenter also suggested 
that the calculation and allocation should be reflected on a 
development-by-development level.
    HUD Response. The forms to be used by PHAs to reflect the 
calculation of subsidy eligibility will include a separate calculation 
of the resident participation funding. The commenter's suggestion that 
the documents also reflect the allocation of the $25 is outside the 
scope of this interim rule. The Committee reached a consensus that this 
interim rule itself would not specify what constitutes eligible 
resident participation activities or how the funds received by a PHA 
should be allocated to the PHA and/or the resident organizations. 
Instead, the Committee agreed that such issues should more 
appropriately be considered as part of future revisions to HUD's 
resident participation regulations at 24 CFR part 964.
    Comment: The interim rule should provide greater specificity 
regarding the eligible uses and apportionment of the $25 allocation. 
Several commenters recommended that the interim rule should establish 
regulatory procedures governing the eligible uses and apportionment of 
the $25 resident participation allocation. For example, three 
commenters suggested that the interim rule should specify that the $25 
allocation must be provided to the duly elected resident council or the 
jurisdiction-wide resident council (if one exists). Other commenters 
suggested that PHAs should be required to describe in their Annual Plan 
the method they will use to transfer the funding to the resident 
organization.

[[Page 17283]]

    HUD Response. As noted above, suggested revisions regarding the 
eligible uses and apportionment of the $25 resident participation 
allocation are outside the scope of this rulemaking. The Committee 
agreed that such issues should more appropriately be considered as part 
of future revisions to HUD's resident participation regulations (24 CFR 
part 964).

G. Comments Regarding the Use of Vacant Units for Resident 
Participation Purposes (Sec. 990.108(E)(2))

    Comment: Support for proposed use of vacant rental units. Two 
commenters supported the policy of providing operating subsidies for 
vacant units used for resident participation purposes. The commenters 
wrote that this policy would enhance the ability of residents to plan 
and implement programs that improve the quality of life in their 
communities.
    HUD Response. HUD agrees that the use of vacant rental units for 
resident participation activities will help promote resident 
involvement.
    Comment: Operating subsidies should also be provided to vacant 
units that are used for non-dwelling purposes to promote economic self-
sufficiency and anti-drug activities. One commenter wrote that 
providing operating subsidies for these purposes is appropriately 
limited to uses that are directed toward the benefit of residents.
    HUD Response. The interim rule makes no change to the existing 
policy that permits continued subsidy support, under certain 
circumstances, for units that are used for non-dwelling purposes to 
promote economic self-sufficiency and anti-drug activities.

H. Comments Regarding the Flood Insurance Adjustment to AEL 
(Sec. 990.105(f))

    Comment: Support for proposed adjustment. One commenter supported 
the inclusion of flood insurance costs in the calculation of the AEL 
under a one-time and permanent adjustment.
    HUD Response. HUD agrees that this change will simplify the subsidy 
calculation.

I. Comments Regarding the Treatment of Utility and Waste Management 
Savings

    The preamble to the July 10, 2000 proposed rule noted that section 
519 of QHWRA 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 preamble explained that 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. With regard to waste 
management, these costs are treated as a maintenance expense (not a 
utilities expense) under the PFS and the July 10, 2000 proposed rule. 
Accordingly, 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. (The preamble discussion is located at 65 FR 42492, first and 
middle columns.)
    Comment: Interim rule should specify that energy incentives apply 
to tenant-supplied utilities. Two commenters suggested that the interim 
rule should permit PHAs with ``tenant-supplied'' utilities to take 
advantage of the energy conservation incentives described in 
Sec. 990.107. The first commenter wrote that HUD had been addressing 
this issue through the issuance of regulatory waivers. The commenter 
wrote that the waiver process in long and arduous, and is ``necessary 
only because the regulations do not provide for the inclusion of such 
PHAs.'' The second commenter wrote that residential utility customers 
are generally at an economic disadvantage compared with larger 
commercial accounts serviced by a utility provider. The commenter was 
concerned that ongoing Federal and State utility deregulation efforts 
would only increase these cost differences. Accordingly, the commenter 
urged that HUD address this issue by extending the incentives provided 
under Sec. 990.107 to tenant-supplied utilities.
    HUD Response. As the first commenter wrote, HUD has been addressing 
this concern through the issuance of regulatory waivers. While the 
suggestion of the commenter that the policy be codified in the new 
interim rule is appreciated, HUD recognizes that this issue was not 
addressed by the Committee. HUD has decided to defer consideration of 
substantive changes to the proposed rule until completion of the 
operating cost study and development of the final rule. Accordingly, 
HUD has not adopted the requested change. Harvard University will 
receive and consider the public comments on the proposed rule during 
development of the cost study. The requested change will be reevaluated 
at the final rule stage, and may be reflected in the substance of the 
final rule.

J. Comment Regarding ``Moving to Work'' PHAs

    Comment: The proposed rule provisions regarding Moving to Work 
(MTW) PHAs has the potential to undermine the effectiveness of the 
Operating Fund formula. Proposed Sec. 990.104(d) provides that the 
calculation of operating subsidy for a PHA in the MTW 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. One commenter wrote that if HUD ``begins hand-tailoring the 
operating subsidies received by individual PHAs * * * the proposed rule 
* * * will become meaningless, since any increases for individual PHAs 
will simply come out of the pot available for other PHAs, potentially 
distorting the process and making obsolete any rule for allocating the 
available funds on a systemic basis.''
    HUD Response. HUD does not agree with the commenter's premise that 
the MTW demonstration program has the potential to distort and make 
this interim rule obsolete. The demonstration is limited in scope and 
duration, and subsidy eligibility for these PHAs is roughly what would 
have been determined regardless of MTW participation. If Congressional 
appropriations are not sufficient to meet program requirements, MTW 
agencies are subject to the same subsidy proration as other PHAs.

K. Comments Regarding Vacant Units

    Comment: The interim rule should discourage the maintenance of 
vacant units. One commenter wrote that the proposed definition of 
``unit months available'' at Sec. 990.102 allows the payment of 
operating subsidies for units vacant up to one year. The commenter 
wrote that the interim rule should discourage the maintenance of 
vacancies that are within the control of the PHA and should encourage 
PHAs to reduce the time that it takes to rent a unit. The commenter 
wrote that the time required to rent a unit vacant due to circumstances 
within a PHA's control should be less than one month. However, to 
accommodate unforeseen circumstances, the commenter suggested that the 
interim rule allow for operating subsidies to continue for a period not 
to exceed three months. The commenter wrote that reducing the time that 
vacant units are eligible for operating subsidies will encourage 
effective maintenance and management practices to minimize the number 
of units off-line, reduce turn overtime for

[[Page 17284]]

vacant units, and reduce the time to renovate units.
    HUD Response. HUD has not adopted the requested change. HUD has 
decided to defer consideration of major changes to the proposed rule 
until completion of the operating cost study and development of the 
final rule. Harvard University will receive and consider the public 
comments on the proposed rule during development of the cost study. The 
suggestion made by the commenter will be reevaluated at the final rule 
stage.
    Comment: Required documentation of occupancy status should be 
expanded. One commenter wrote that Sec. 990.117(c) requires PHAs to 
maintain documentation on the occupancy status of all units, including 
various categories of vacant units, such as long term vacancies, vacant 
units undergoing modernization and units vacant due to circumstances 
beyond the PHA's control. The commenter suggested that the information 
PHAs are required to document should be expanded. The commenter 
recommended that the interim rule should require PHAs to document the 
size of a unit by bedroom size, dates of vacancy, and the plan to 
return the unit to occupancy (including the source of any required 
funds and the planned date for re-occupancy). The commenter wrote that 
such information should be made available to the Resident Advisory 
Board and the public through the PHA Plan process.
    HUD Response. HUD has not adopted the suggested change. HUD has 
decided to defer consideration of substantive changes to the proposed 
rule until completion of the public housing operating cost study and 
development of the final rule. Harvard University will receive and 
consider the public comments on the proposed rule during development of 
the cost study. The change requested by the commenter will be 
reevaluated at the final rule stage.

L. Comments Regarding Flat Rents/Ceiling Rents

    Comment: The proposed rule fails to clarify that the difference 
between flat rents and costs will be subsidized by HUD. One commenter 
wrote that PHAs are statutorily required to adopt flat rents. According 
to the commenter, these flat rents should be based upon the rental 
value of the units and designed not to discourage employed tenants from 
staying in public housing. The commenter wrote that to achieve these 
dual objectives, it is possible that flat rents will not cover the 
operating expenses for the unit. The commenter suggested that the 
proposed rule be revised to provide that if there is a shortfall, PHAs 
will be held harmless and not be required to subsidize the difference 
between the flat rents and operating cost.
    HUD Response. The rent charged for a unit and the allowable expense 
level (AEL), which generally represents the non-utility operating 
expenses for a unit, are two distinct and separate factors in 
determining operating subsidy eligibility. If a flat rent is 
established appropriately and is less than the AEL, the PHA will be 
eligible for operating subsidy in an amount that represents the 
difference between the flat rent and the AEL.
    Comment: Proposed rule fails to acknowledge that ceiling rents will 
be subsidized for the next three years. One commenter wrote that QHWRA 
provides that PHAs may use ceiling rents to attract and keep public 
housing residents who are employed. The commenter wrote that 
Sec. 960.253(d) of HUD's Admission and Occupancy final rule (65 FR 
16727, March 29, 2000) provides that a PHA may use the ceiling rent as 
the flat rent for the next three years. According to the commenter, the 
July 10, 2000 proposed rule is deficient because it does not specify 
how ceiling rents will be handled in the next three years. ``Will the 
difference between ceiling rents and the cost of the unit be set off by 
operating subsidies?'' The commenter wrote that operating subsidy 
should be provided to cover any shortfall resulting from implementation 
of the ceiling rents. ``If operating subsidies do not cover the 
shortfall, PHAs will be subject to immense pressure to do away with 
ceiling rents immediately. This pressure will be even more substantial 
because PHAs may now retain 50% of all increases in rents.''
    HUD Response. HUD does not believe that the proposed rule was 
deficient in its treatment of ceiling rents. The definition of dwelling 
rent in Sec. 990.102 makes reference to Sec. 960.253, Choice of Rents. 
These choices include ceiling rents that were authorized and 
established before October 1, 1999. Those ceiling rents may be used for 
a period of three years from October 1, 1999.

M. Comments Regarding Optional Income Exclusions

    Comment: The definition of ``dwelling rent'' should reflect 
decreases resulting from PHA implementation of optional income 
exclusions. Two commenters made this recommendation. The proposed 
definition of ``dwelling rent'' does not reflect decreases resulting 
from the PHA's implementation of any optional earned income exclusions. 
According to the commenters, this will discourage PHAs from 
implementing such optional exclusions. The commenters suggested that 
the interim rule should provide that, for purposes of determining 
subsidy eligibility, the total dwelling rental income of the PHA will 
not be decreased more than 5% resulting from the PHA's implementation 
of any optional earned income exclusion. Further, the commenters 
suggested that HUD provide increased operating funds accordingly.
    HUD Response. HUD has not adopted the recommended change. As noted 
above, HUD has decided to defer consideration of major changes to the 
proposed rule until completion of the cost study and development of the 
final rule. Harvard University will receive and consider the public 
comments on the proposed rule during development of the cost study. The 
suggested change will be reevaluated at the final rule stage.
    Comment: The interim rule should minimize administrative burden in 
order to encourage PHAs to adopt optional income exclusions. Proposed 
Sec. 990.109(b)(2)(iii) provides that 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. One commenter wrote that HUD should make 
implementation of this requirement as simple as possible. ``PHAs should 
be encouraged in every way to adopt optional [earned income 
exclusions]. That encouragement should not be diminished by cumbersome 
administrative requirements.''
    HUD Response. HUD believes that the new formula will encourage the 
adoption of optional earned income exclusions by giving PHAs a new 
source of funds that can be used for the provision of resident-related 
services and improvements. The new source of funds is the retention of 
50% of increases in dwelling rental income.

N. Comments Regarding Family Self-Sufficiency Program

    Comment: The interim rule should treat the administrative costs of 
implementing a Family Self-Sufficiency (FSS) program as costs of 
operating public housing. One commenter wrote that the FSS statute (at 
42 U.S.C. 1437u(h)(2)) and HUD's implementing regulations (at 24 CFR 
part 984) require that the reasonable and eligible administrative costs 
incurred by PHAs in carrying out public housing FSS programs--both 
mandatory and voluntary--be included in the

[[Page 17285]]

calculation of Federal operating subsidies. Accordingly, the commenter 
suggested that proposed Sec. 990.108 (which lists the ``other costs'' 
of operating public housing'') should be revised to authorize PHAs that 
operate a FSS program to add the reasonable administrative costs of one 
or more FSS case managers, depending on program size.
    HUD Response. The interim rule makes no change to the existing 
policy that permits continued subsidy support, under certain 
circumstances, for FSS programs involving public housing residents. 
That policy is currently contained in Notice PIH 2000-4 (HA), issued 
February 3, 2000. While the suggestion of the commenter that the policy 
be codified in the new interim rule is appreciated, HUD recognizes that 
this issue was not addressed by the Committee. As noted above, HUD has 
decided to defer consideration of substantive changes to the proposed 
rule until completion of the operating cost study and development of 
the final rule. Accordingly, HUD has not adopted the suggestion made by 
the commenter. Harvard University will receive and consider the public 
comments on the proposed rule during development of the cost study. The 
commenter's suggestion will be reevaluated at the final rule stage.
    Comment: The interim rule should specify how PHAs will be 
reimbursed for allowable expenses and contributions to tenant escrow 
accounts under the FSS program. One commenter wrote that under the 
current PFS regulations PHAs can, in effect, be reimbursed for their 
contributions to tenant FSS escrow accounts. According to the 
commenter, the PHA can accomplish this by including the rent charges 
based on the tenants' incomes at the start of FSS participation in the 
determination of the projected operating income level--without 
consideration of the amounts deposited in the FSS escrow accounts. 
According to the commenter, this method will not be adequate under the 
proposed Operating Fund rule. The commenter wrote that if only the 
reduced rent charges are considered in determining dwelling rental 
income, PHAs would not receive credit for the increased earnings of FSS 
families. Absent such credit, PHAs with FSS programs would be deprived 
of the right to retain 50% of the revenue due to the increased earnings 
of such families. Accordingly, the commenter suggested that the 
proposed rule be modified as follows:
    1. HUD should revise the calculation of dwelling rental income at 
Sec. 990.109 to include the ``total tenant payment'' for families 
enrolled in FSS. According to the commenter, this amount should include 
any increase in rent attributable to increased earnings while in FSS. 
Such increased rent is the amount defined as the ``FSS credit'' under 
24 CFR 984.305(b).
    2. The interim rule should include PHA contributions of families' 
credits to FSS escrow accounts as an ``other cost'' under Sec. 990.108.
    HUD Response. HUD has not adopted the suggested changes. As noted, 
HUD has decided to defer consideration of major changes to the proposed 
rule until completion of the operating cost study and development of 
the final rule. Harvard University will receive and consider the public 
comments on the proposed rule during development of the cost study. The 
requested changes will be reevaluated at the final rule stage.

O. Comments Regarding Rulemaking Procedures

    Comment: HUD should also consider public comments on prior interim 
rule amending PFS to which HUD has not yet responded. One commenter 
suggested that HUD take the opportunity afforded by the July 10, 2000 
proposed rule to also consider the public comments received on HUD's 
September 30, 1996 (61 FR 51178) interim rule, which made several 
amendments to the PFS regulations. The commenter was particularly 
concerned by the interim rule amendments to Sec. 990.114, regarding the 
phase-down of subsidy for units approved for demolition. The commenter 
suggested that ``consideration be given not only to the comments 
received on the [September 30, 1996] interim rule but to more recent 
experience in the context not fully anticipated at the time of the 
interim rule of extensive demolition in anticipation not of agency 
downsizing but of HOPE VI or other mixed-finance redevelopment.'' The 
commenter wrote that HUD ``is well aware of the difficulties caused by 
the implementation of the current rule in this context, and 
particularly of the disproportionate and harsh impact of removing units 
from phasedown subsidy because of the issuance of relocation and 
replacement certificates or vouchers.''
    HUD Response. The suggestion made by the commenter is outside the 
scope of this rulemaking, which is exclusively concerned with 
implementation of the new Operating Fund Formula.
    Comment: Reduced 30-day public comment period was insufficient. One 
commenter wrote that PHAs that did not participate at the negotiated 
rulemaking sessions deserved adequate time to fully evaluate the 
proposed rule. The commenter wrote that the proposed changes would 
greatly affect the operation of public housing and, therefore, merited 
the customary full 60-day public comment period.
    HUD Response. HUD agrees that public comment is vital to the 
successful development of its regulations. It is the general practice 
of the Department to provide a 60-day public comment period on all 
proposed rules. However, given the extensive involvement of affected 
parties in the development of the July 10, 2000 proposed rule, HUD 
believes that good cause existed for the provision of a reduced 30-day 
comment period.
    The membership of the Negotiated Rulemaking Committee was selected 
by HUD to represent a wide range of affected interests and parties. As 
required by the Negotiated Rulemaking Act, the public was afforded an 
opportunity to comment on the proposed Committee membership, and to 
submit nominations for membership. The final membership of the 
Committee included representatives of small, medium and large PHAs; 
public housing residents; the three main national organizations 
representing PHAs; advocates for low-income housing; and other housing 
experts. The proposed rule was the result of the Committee's successful 
negotiations, and represents the consensus decisions reached by over a 
year's worth of substantive deliberations.
    In addition to the participation of the Committee members, the 
proposed rule reflected the input of many other affected parties not 
directly involved in the negotiated rulemaking process. Many of the 
Committee members (such as the national PHA organizations, the resident 
groups and others) served as representatives of larger constituencies. 
These organizations routinely consulted with their membership regarding 
the status of the negotiations and the substance of the proposed 
regulatory text. Moreover, all of the Committee meetings were announced 
through prior Federal Register notice and were open to the public. 
Members of the public were provided with the opportunity to make 
statements during the meetings, and to file written comments for the 
Committee's consideration.
    For the above reasons, HUD believes that this interim rule has been 
developed with substantive public participation, and that the reduced 
30-day period did not restrict the ability of the public to comment on 
the proposed rule. The Department also notes that public participation 
in the development

[[Page 17286]]

of the Operating Fund regulations is a continuing process. This rule 
provides the public with an additional 60-days to submit written 
comments on the interim regulatory requirements. All public comments 
will be considered in the development of the final rule. As noted, HUD 
will issue the final rule following the completion of a Congressionally 
mandated public housing cost study. HUD has directed the cost-study 
contractor to consult with interested individuals and organizations in 
the development of the study. HUD also intends to develop the final 
rule with the active participation of affected parties and using the 
procedures of the Negotiated Rulemaking Act.
    Comment: Any procedural changes required under Sec. 990.108(c) or 
Sec. 990.109(d) should be subject to notice and comment rulemaking 
procedures. Section 990.108(c) provides that:

    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.

In addition, Sec. 990.109(d) provides that:

    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.

    One commenter wrote that any such changes ``should be made through 
reasonable procedures spelled out in regulation and with input from 
experts, from PHAs and from public housing residents.'' The commenter 
wrote that this process should not be left to HUD's sole discretion. 
``It must go through normal rulemaking procedures.''
    HUD Response. The regulatory language cited by the commenter was 
agreed upon through the consensus decisionmaking of the Committee. As 
noted, HUD has decided to defer consideration of major changes to the 
proposed rule until the completion of the cost study and development of 
the final rule. Accordingly, HUD has not adopted the suggestion made by 
the commenter. The requested change will be reevaluated at the final 
rule stage.

P. Miscellaneous Comments

    Comment: When was the implicit deflator for the purchase of goods 
and services removed from the computation of the local inflation factor 
in Sec. 990.105(c)(2)? One commenter posed this question.
    HUD Response. Section 990.105(c)(2) defines the Local Government 
Wage Rate Index and was added to the PFS regulation as one of five 
factors in the Revised AEL Formula published in the Federal Register on 
February 4, 1992. The definition of Local Government Wage Rate Index 
has not changed.
    Comment: Is the differential added onto the top of the range in 
Sec. 990.105(d)(2)(ii)? One commenter posed this question.
    HUD Response. The regulation clearly states in Sec. 990.105(d)(2) 
that the amounts calculated under (d)(2)(i) and (d)(2)(ii) are added to 
the top of the range.
    Comment: Paragraphs (c)(2) and (d) of Sec. 990.107 should be 
removed. One commenter made this suggestion. These paragraphs concern 
the determination of the utilities consumption and expense levels where 
the necessary data is not available. The commenter asked whether these 
provisions were needed. ``It would seem impossible that any PHA would 
have failed to accumulate the required utility data after twenty years 
of having been required to do so.''
    HUD Response. There are some new PHAs which come in for subsidy 
each year. It is possible that they would not have the required data 
available.

VI. 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 
interim rule makes several modifications to the existing regulatory 
requirements, the rule does 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 interim 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 
was made at the proposed rule stage, 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). That Finding of No 
Significant Impact remains applicable to this interim rule and is 
available for public inspection between the hours of 7:30 a.m. and 5:30 
p.m. weekdays in the Office of the Rules Docket Clerk, Office of 
General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) has reviewed this interim 
rule under Executive Order 12866, Regulatory Planning and Review. OMB 
determined that this interim rule is a ``significant regulatory 
action'' as defined in section 3(f) of the Order (although not 
economically significant, as provided in section 3(f)(1) of the Order). 
Any changes made to this rule subsequent to its submission to OMB 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.) in 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 interim rule before publication and 
by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this interim rule will not have 
a significant economic impact on a substantial number of small 
entities. The interim rule implements 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 interim rule 
will not have a significant economic impact on small entities, HUD 
specifically invites comments regarding alternatives to this interim 
rule that would meet HUD's objectives as described in this preamble.

[[Page 17287]]

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 interim rule will not have 
federalism implications and will 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 interim 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 amends 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 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.

[[Page 17288]]

    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 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 (i.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 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

[[Page 17289]]

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, and other provisions of this part necessary to give 
full effect to 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 
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

[[Page 17290]]

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 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

[[Page 17291]]

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 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.

    (a) 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.
    (b) 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.
    (c) 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).

[[Page 17292]]

    (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 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

[[Page 17293]]

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. 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 in 
paragraphs (b)(2)(i) through (v) of this section, 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

[[Page 17294]]

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.
    (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, dividing the result by two, 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

[[Page 17295]]

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 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

[[Page 17296]]

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. 990.108(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 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.)

[[Page 17297]]

    (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 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 paragraph 
(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

[[Page 17298]]

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.


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

[[Page 17299]]

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: March 7, 2001.
Mel Martinez,
Secretary.
[FR Doc. 01-7692 Filed 3-28-01; 8:45 am]
BILLING CODE 4210-33-P