[Federal Register Volume 66, Number 227 (Monday, November 26, 2001)]
[Notices]
[Pages 59126-59134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29267]



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Part V





Department of Housing and Urban Development





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Public Housing Assessment System (PHAS); Financial Condition Scoring 
Process Interim Assessments; Notice

  Federal Register / Vol. 66, No. 227 / Monday, November 26, 2001 / 
Notices  

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Department of Housing and Urban Development

[Docket No. FR 4710-N-03]


Public Housing Assessment System (PHAS); Financial Condition 
Scoring Process Interim Assessments

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

ACTION: Notice.

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SUMMARY: This notice is an update of the Financial Condition Indicator 
scoring notice that was published on December 21, 2000, and takes into 
consideration public comment received from PHAs, public housing 
industry and resident groups, and other interested Federal and 
Congressionally-chartered agencies. This notice describes an interim 
scoring process for public housing agencies (PHAs) on the Financial 
Condition Indicator of PHAS. This interim process is effective for PHAs 
with fiscal year ends (FYEs) of September 30, 2001, December 31, 2001, 
March 31, 2002, June 30, 2002, and September 30, 2002. After the 
interim period, the Department will use the scoring process described 
in the Financial Condition Scoring notice published December 21, 2000 
to determine a PHA's PHAS Financial Condition Indicator score.
    The changes made to the Financial Condition scoring process for 
PHAs with fiscal years ending on or after September 30, 2001, are 
discussed in the Supplementary Information section of this notice.

DATES: Comments Due Date: December 26, 2001.

FOR FURTHER INFORMATION CONTACT: For further information contact the 
Real Estate Assessment Center (REAC), Attention: Wanda Funk, U.S. 
Department of Housing and Urban Development, 1280 Maryland Avenue, SW, 
Suite 800, Washington, DC 20024: telephone REAC's Customer Service 
Center at (888) 245-4860 (this is a toll free number). Persons with 
hearing or speech impairments may access this number via TTY by calling 
the Federal Information Relay Service at (800) 877-8339. Additional 
information is available from the REAC web site at http://www.hud.gov/reac/.

SUPPLEMENTARY INFORMATION:

1. Purpose of this Notice

    The purpose of this notice is to provide additional information 
about the scoring process for PHAS Indicator #2, Financial Condition, 
during the interim assessment period commencing with PHAs for FYEs of 
September 30, 2001. This notice specifically addresses changes to the 
scoring methodology for two components of the PHAS Financial Indicator: 
component #1, Current Ratio, and component #2, Number of Months 
Expendable Fund Balance. The objective of the Financial Condition 
Indicator is to measure the financial condition of a PHA for the 
purpose of evaluating whether it has sufficient financial resources and 
is capable of managing those financial resources effectively to support 
the provision of housing that is decent, safe, sanitary and in good 
repair.
    The majority of the information provided in this notice was 
published on May 13, 1999 (64 FR 26222), and republished on June 23, 
1999 (64 FR 33700), June 28, 2000 (65 FR 40008), and December 21, 2000 
(65 FR 80686). This Financial Condition Scoring Process notice has been 
revised to reflect the public comments received on the previous notices 
and takes into consideration public comments received from PHAs, public 
housing industry groups, resident groups, and other interested Federal 
and Congressionally-chartered agencies as a result of meetings held 
with these entities.
    This notice also provides the basis for scoring PHAs based on the 
values of the financial condition components, as well as audit and 
internal control flags as provided in the PHAS final rule published 
January 11, 2000 (65 FR 1712), and the technical corrections made on 
June 6, 2000 (65 FR 36042), as codified in 24 CFR part 902.
    This Financial Condition Scoring notice is applicable only to PHAs 
with FYEs of September 30, 2001, December 31, 2001, March 31, 2002, 
June 30, 2002, and September 30, 2002.

2. Current Financial Indicator Scoring Process

    The current Financial Condition Indicator consists of scoring six 
major financial components. The chart below shows the six components 
that constitute the Financial Condition Indicator and their assigned 
points.

                      Financial Condition Indicator
------------------------------------------------------------------------
        Scoring components                Measurement           Points
------------------------------------------------------------------------
Current Ratio (CR)...............  Liquidity...............          9.0
Number of Months Expendable Fund   Adequacy of Reserves....          9.0
 Balance (MEFB).
Tenant Receivables Outstanding     Ability to collect                4.5
 (TRO).                             payments of tenant
                                    receivables.
Occupancy Loss (OL)..............  Ability to maximize               4.5
                                    rental income.
Expense Management/Utility         Ability to maintain               1.5
 Consumption (EM/UC).               expense ratios at a
                                    reasonable level
                                    relative to peers
                                    (adjusted for size and
                                    region).
Net Income or Loss as a            Effect of current year            1.5
 percentage of Expendable Fund      operations on PHA's
 Balance (NI).                      viability.
------------------------------------------------------------------------

    The values of the six components of the Financial Condition 
Indicator calculated from the financial data comprise the overall 
financial assessment of the PHA. The components and their relative 
importance to the total financial score are the result of studies of 
PHA financial performance and of industry portfolio management 
techniques to identify the most appropriate financial measures to gauge 
a PHA's financial position. These components represent measures that 
are appropriate benchmarks in any residential real estate environment. 
The score assigned to each component is based on the distribution of 
that component's values and the relative relationship between the 
components and the PHA's overall financial performance.

Financial Assessment Focus

    The PHAS financial assessment is based on the entity-wide 
operations of a PHA, which includes, in addition to public housing, 
financial information on Section 8, Community Development Block Grants, 
and other HUD funding in its calculations, as well as funds from non-
HUD sources.

Scoring Approach

    Under PHAS, the components of the PHAS Financial Condition 
Indicator were developed to both fairly and accurately assess a PHA's 
financial performance and financial management. As part of the 
development, the

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components were tested to establish the correlation between a PHA's 
performance under each component and the fiscal health of a PHA. PHAs 
were evaluated and assigned scores based on a PHA's performance 
relative to its peers. In other words, all PHAs as a group determine 
the mean score and each PHA is then ranked accordingly.

3. Current Scoring Process

A. GAAP-Based Data

    PHAs are required to submit financial reports electronically via 
the Financial Data Schedule (FDS) using generally accepted accounting 
principles (GAAP). PHAs were informed of the conversion to GAAP with 
the issuance of the PHAS proposed rule on June 30, 1998, and the PHAS 
final rule published on September 1, 1998, codified at 24 CFR part 902.
    GAAP-based scores are produced using data contained in the FDS. The 
GAAP-based financial data is first used to calculate the six financial 
ratios that measure various aspects of financial health, such as short-
term liquidity, Expense Management/Utility Consumption (EM/UC), and 
collection of tenant receivables. The six financial ratios are 
calculated into component values. Each component value is converted 
into a score based on the value relative to the PHA's peers.

B. Statistical Distributions/Thresholds

    The PHA is evaluated and assigned a score based on its financial 
performance on an entity-wide basis and relative to its peers. In other 
words, all PHAs as a group determine the mean score and each PHA is 
then ranked accordingly. Scoring thresholds were developed to make the 
peer grouping assessment possible. The thresholds are estimated by 
examining the distributions of component values by peer group. For the 
four most significant components (Current Ratio, Number of Months 
Expendable Fund Balance, Tenant Receivables Outstanding, and Occupancy 
Loss), thresholds are set such that approximately 50 percent of the 
distribution receives the maximum number of points, as long as 50 
percent of the distribution has acceptable values for the component. 
Thus, the highest number of points is awarded to the PHAs whose 
financial measures are most reasonable both relative to their peers and 
in an absolute business sense. The specific percentiles that make this 
50 percent of PHAs are established by identifying natural break points 
along the distributions. The remaining two components (Expense 
Management and Net Income as a Percentage of Fund Balance) assign zero 
points to PHAs that fall only in the extreme outer ranges of the 
distribution of values, and award 1.5 points to the remaining PHAs. 
Thresholds identify a point below which component values are clearly 
financially unacceptable; thus component values beyond these thresholds 
result in a score of zero. For component values within the acceptable 
range, a PHA would receive a score based on its performance relative to 
its peers. This is determined by its position in the distribution of 
values for each component and peer group represented by percentiles. 
For those components on a 4.5 point scale, the cutpoints are set at the 
50th and 95th percentiles. For those components on a 9.0 point scale, 
the cutpoints are set at the 30th, 80th, and 95th percentiles. For 
example, on the Current Ratio component, a large PHA (i.e., a PHA 
administering 1,250 to 9,999 Federally-funded units) would receive zero 
points for a ratio that is less than one, while it would receive 9.0 
points for a ratio between 1.8 and 3.9. If a large PHA's Current Ratio 
component value is between 1.0 and 1.8, a component score is developed 
based on the component value that was assigned to the PHA. Therefore, 
the PHA receives a score between 1.0 and 9.0 points. The current 
threshold for each component is described in the PHAS Financial 
Condition Scoring notice dated December 21, 2000.
    In addition, there is a penalty of up to 1.5 points for PHAs with 
excess liquidity or excess reserves, defined as a Current Ratio or 
Months Expendable Fund Balance value beyond the 80th percentile. 
However, no points are deducted under the Current Ratio or Months 
Expendable Fund Balance components for a PHA that has excess liquidity 
or excess reserves if the PHA has achieved at least 90 percent of the 
points available under the Physical Condition Indicator, and is not 
required to prepare a follow-up survey plan under the Resident Service 
and Satisfaction Indicator.

C. Business Principles

    Scoring of certain components follows generally recognized business 
principles. These principles indicate that there are certain absolute 
thresholds below which component values are clearly financially 
unacceptable and component values below that point should result in a 
score of zero. These principles are used in scoring the Current Ratio 
and Number of Months Expendable Fund Balance components. For both of 
these components, a value of less than one is financially unacceptable, 
regardless of PHA size, and therefore merits a score of zero.

D. Size-Based Peer Grouping

    Peer groupings are established according to the size of the PHA, 
based on the total number of units operated by the PHA for all programs 
and activities. The current size peer groupings are as follows:
Very Small (0-49 units)
Small (50-249 units)
Low Medium (250-499 units)
High Medium (500-1,249 units)
Large (1,250-9,999 units)
Extra-Large (10,000+ units)

E. Region-Based Peer Grouping

    The EM/UC component score is based on public housing low-rent 
information only, whereas the other five FASS components are based on 
entity-wide information. In addition, in order to have a more equitable 
assessment of a PHA's expenses relative to its peers, the REAC 
developed regional peer groupings for the EM/UC component, to 
supplement the size-based peer groups. Thus, a PHA is scored on EM/UC 
against a threshold that is calculated from all expense data in that 
PHA's similar size group and region. The regions are based on the first 
number of the PHA's zip code, and are divided as follows:

------------------------------------------------------------------------
              Region                               States
------------------------------------------------------------------------
0................................  CT, MA, ME, NH, NJ, RI, VT.
1................................  DE, NY, PA.
2................................  DC, MD, NC, SC, VA, WV.
3................................  AL, FL, GA, MS, TN, RQ, VQ.
4................................  IN, KY, MI, OH.
5................................  IA, MN, MT, ND, SD, WI.
6................................  IL, KS, MO, NE.
7................................  AR, LA, OK, TX.
8................................  AZ, CO, ID, NM, NV, UT, WY.
9................................  AK, CA, HI, OR, WA, GQ.
------------------------------------------------------------------------

    For the EM/UC component, the size-based peer groups were combined 
into three groups (small, medium and large) for analysis purposes 
because there are not sufficient statistical observations to 
differentiate all six size-based peer groups.
4. Interim Financial Indicator Scoring Process
    As a result of the recent meeting held with PHAs, public housing 
industry, resident groups, and other interested Federal and 
Congressional-chartered agencies, the Financial Condition scoring 
process during the interim period will remain the same except for 
component #1, Current Ratio, and component #2, Number of Months 
Expendable Fund Balance. Under the interim scoring process, the score 
for Current Ratio and Number of Months

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Expendable Fund Balance will not be based on peer groups but only based 
on business principles. PHAs with a Current Ratio or Months Expendable 
Fund Balance value of less than one will receive zero points for these 
two components. If the values for Current Ratio and Months Expendable 
Fund Balance are equal to or greater than one, then PHAs, regardless of 
size, will receive the full nine points. This means that for Current 
Ratio, a value equal to or greater than one indicates current resources 
must be equal to current obligations to receive the full nine points. 
For the Months Expendable Fund Balance, a value equal to or greater 
than one indicates that at least one month of reserves is sufficient to 
receive the full nine points. There will be no scores other than zero 
or nine for Current Ratio and Months Expendable Fund Balance under the 
interim scoring process. The interim scoring process is illustrated in 
the table below.

               Interim Financial Indicator Scoring Process
------------------------------------------------------------------------
                                                       Value 
            Components                   Value 1               1
------------------------------------------------------------------------
Current Ratio....................  0 points..........  9 points.
Months Expendable Fund...........  0 points..........  9 points.
Balance..........................  ..................  .................
------------------------------------------------------------------------

5. Audit Adjustments

    Pursuant to 902.63(b), the REAC calculates a revised FASS score 
after audited financial information is received. The revised FASS 
score, which is based on the audited information, can either increase 
or decrease the initial score that was based on the unaudited financial 
information. There are two types of adjustments to the audited score 
that relate to financial audit information. The first type deals with 
the audit flags and reports that result from the audit itself. 
Reportable conditions and material weaknesses are considered to be 
audit flags, alerting the REAC to an internal control weakness or an 
instance of noncompliance with Federal laws and regulations. The second 
adjustment deals with significant differences between the unaudited and 
audited financial information reported to HUD pursuant to 902.63(b).

Audit Opinion and Flags

    As part of the analysis of the financial health of a PHA, including 
assessment of the potential or actual waste, fraud or abuse at a PHA, 
HUD will look to the Audit Report to provide an additional basis for 
accepting or adjusting financial component scores. The information 
collected from the annual audit report pertains to the type of audit 
opinion, details of the audit opinion, and the presence of reportable 
conditions and material weaknesses.
    If the auditor's opinion is anything other than unqualified, points 
will be deducted from the PHA's audited financial score. The REAC will 
review audit flags to determine their significance as it directly 
pertains to the assessment of the PHA's financial condition. If the 
flag has no effect on the financial components or the overall financial 
condition of the PHA as it relates to the PHAS assessment, the audited 
score will not be adjusted. However, if the flags have an impact on the 
PHAS assessment, the PHA's audited score will be adjusted, in 
accordance with the seriousness of the reported finding.
    These flags are collected by using the OMB A-133 Data Collection 
Form. The PHA completes this form for both the unaudited and audited 
submissions. At the time of the unaudited submission the form is used 
as a self-assessment tool and should reflect the PHA's knowledge of 
their financial and internal control condition and should acknowledge 
their understanding of what the auditor will report.
    If the OMB A-133 Data Collection Form indicates that the auditor's 
opinion will be anything other than unqualified, points will be 
deducted from the PHAS score. The points have been established by the 
REAC using a three-tier system. The tiers are meant to give 
consideration to the seriousness of the audit qualification and to 
limit the deducted points to a reasonable portion of the PHA's total, 
actual score. The tiers, as established by the REAC, are defined below.

                            Audit Flag Tiers
------------------------------------------------------------------------
               Tier                         PHAS points deducted
------------------------------------------------------------------------
Tier 1............................  100 percent of the PHA's total
                                     unadjusted FASS score.
Tier 2............................  10 percent of the PHA's adjusted
                                     FASS score.
Tier 3............................  Maximum of 5 percent of the PHA's
                                     adjusted FASS score. This maximum
                                     is cumulative and not to be
                                     assessed for each Tier 3 audit or
                                     internal control flag.
------------------------------------------------------------------------

    Each tier is applied sequentially beginning with Tier 1; subsequent 
tier deductions are based on the initial score less any preceding tier 
deductions. Tier 3 audit flags are divided into levels that reflect the 
seriousness of the audit qualification and result in scoring 
adjustments based on the following criteria:
     Level 1--0.15 points per occurrence not to exceed three 
occurrences (.45 maximum point deduction).
     Level 2--0.15 points per occurrence not to exceed four 
occurrences (.6 maximum point deduction).
     Level 3--0.075 points per occurrence not to exceed six 
occurrences (.45 maximum point deduction).
    Please refer to the table at the end of this section, titled 
``Audited Flags and Tier Classification,'' that lists audit flags and 
associated tier classifications.

Review of Audited Versus Unaudited Submission

    The purpose of a comparison of the ratios and scores resulting from 
the current year's unaudited Financial Data Schedule submission to the 
ratios and scores resulting from the current year's audited submission 
is to:
    1. Identify significant changes in ratio calculation results and/or 
scores from the unaudited submission to the audited submission;
    2. Identify PHAs that consistently provide significantly different 
data from their unaudited submission to their audited submission;
    3. Assess or alleviate penalties associated with the inability to 
provide reasonably accurate unaudited data within the required time 
period.
    This review process will only be performed for the audited 
submission.

Materiality and Penalty Assessment

    The REAC views the transmission of significantly inaccurate 
unaudited financial data as a serious condition. Therefore, PHAs are 
encouraged to assure financial data is as reliable as possible for 
their unaudited submissions.
    A significant change penalty will be assessed for significant 
differences between the unaudited and audited submissions. A 
significant difference is considered to be an overall FASS score 
decrease of three or more points from the unaudited to audited 
submission. The PHAS system automatically deducts the significant 
change penalty from the audited score and this reduction triggers the 
REAC analyst's review.
    REAC may waive the significant change penalty if the PHA provides 
reasonable documentation explaining the significant difference in its 
submission. A significant change penalty is considered a Tier 3, level 
2 audit flag, and will result in a reduction of points as associated 
with all other Tier 3 audit flags.

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    The table below summarizes the audit flags and associated tier 
classifications.

                                      Audit Flags and Tier Classifications
----------------------------------------------------------------------------------------------------------------
                         Audit flag                                           Tier classification
----------------------------------------------------------------------------------------------------------------
Unqualified opinion.........................................  None.
No audit opinion............................................  Tier 1.
Adverse opinion.............................................  Tier 1.
Disclaimer of opinion.......................................  Tier 1.
Qualified opinion:
    1. GAAP qualifications:
        A. Change in accounting principle...................  Tier 3, Level 1.
        B. Change in accounting estimate....................  Tier 3, Level 1.
        C. Change in accounting method......................  Tier 3, Level 1.
        D. Departures from GAAP.............................  Tier 2.
            (1) Financial statements using basis other than   Tier 1.
             GAAP.
            (2) Exclusion of alternate accounting for an      Tier 2.
             account or group of accounts.
            (3) Inconsistently applied GAAP.................  Tier 2.
            (4) Omissions/Inadequate Disclosure.............  Tier 2.
    2. GASS--Scope Limitations..............................  Tier 2.
        A. Imposed by management............................  Tier 2.
        B. Imposed by circumstance..........................  Tier 3, Level 1.
        C. Year 2000 (add back).............................  Tier 3, Level 1.
    3. Report on major program compliance...................  Tier 3, Level 1.
    4. Report on internal control...........................  Tier 3, Level 1.
Accounting principles used caused the financial statements    Tier 2.
 to be materially misstated.
Inadequate records..........................................  Tier 2.
Going concern...............................................  Tier 1.
Material noncompliance disclosed............................  Tier 2.
    1. Internal control weakness............................  Tier 3, Level 2.
    2. Compliance...........................................  Tier 3, Level 2.
    3. Opinion on Supplemental schedules....................  Tier 3, Level 2.
Reportable condition:
    1. Internal control.....................................  Tier 3, Level 3.
    2. Compliance...........................................  Tier 3, Level 3.
Material Change Penalty.....................................  Tier 3, Level 2.
----------------------------------------------------------------------------------------------------------------

Appendices

    The graphs shown in Appendix 1 depict the approximate scoring 
functions used for each of the six components of the Financial 
Indicator for the Interim Financial Indicator Scoring Process. 
Appendix 2 provides threshold values and associated scores for the 
Tenant Receivables Outstanding, Occupancy Loss, and Expense 
Management/Utility Consumption components and peer group, based on 
the GAAP data pool as of October 15, 2000.

    Dated: November 19, 2001.
Michael Liu,
Assistant Secretary for Public and Indian Housing.

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[FR Doc. 01-29267 Filed 11-23-01; 8:45 am]
BILLING CODE 4210-33-C