[Federal Register Volume 67, Number 51 (Friday, March 15, 2002)]
[Notices]
[Pages 11844-11848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6196]



[[Page 11843]]

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Part IV





Department of Housing and Urban Development





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Public Housing Assessment System (PHAS); Notice Adopting Interim 
Scoring Methodologies for PHAS Physical Condition and Financial 
Condition Indicators; Notice

  Federal Register / Vol. 67, No. 51 / Friday, March 15, 2002 / 
Notices  

[[Page 11844]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4710-N-05]


Public Housing Assessment Systems (PHAS); Notice Adopting Interim 
Scoring Methodologies for PHAS Physical Condition and Financial 
Condition Indicators

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

ACTION: Notice.

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SUMMARY: This notice announces to Public Housing Agencies (PHAs) and 
the public that PHAs with fiscal years ending September 30, 2001, 
through and including September 30, 2002, will be assessed under the 
PHAS in accordance with interim scoring procedures described in notices 
published in the Federal Register on November 26, 2001. This notice 
also addresses public comments received in response to a request for 
comments in the November 26, 2001, notices. The Department considered 
all comments but has decided to make no changes to the interim scoring 
procedures in response to the public comments. This notice also advises 
that if the Department determines that the effective period of the 
interim scoring processes should be extended beyond September 30, 2002, 
the Department will notify PHAs and the public by notice published in 
Federal Register.

DATES: Effective Date: March 15, 2002.

FOR FURTHER INFORMATION CONTACT: For further information contact the 
Real Estate Assessment Center of the Office of Public and Indian 
Housing, Attention: Wanda Funk, U.S. Department of Housing and Urban 
Development, 1280 Maryland Avenue, SW., Suite 800, Washington, DC 
20024, Telephone Technical Assistance Center as (888) 245-4860 (this is 
a toll free number) or Judy Wojciechowski, Director of PHAS Operations, 
U.S. Department of Housing and Urban Development, 1280 Maryland Avenue, 
SW., Suite 800, Washington, DC 20024, telephone (202) 708-4932 
extension 3464. Persons with hearing or speech impairments may access 
these telephone numbers via TTY by calling the Federal Information 
Relay Service at (800) 887-8339. Additional information is available 
from the Real Estate Assessment Center Office of Public and Indian 
Housing Web site at http://www.hud.gov/reac.

SUPPLEMENTARY INFORMATION:

I. Background

    On November 26, 2001, HUD published for public comment notices that 
proposed an interim PHAS scoring methodology that would be applicable 
to PHAs with fiscal years ending September 30, 2001, and continuing for 
up to one year to include PHAs with fiscal years ending September 30, 
2002. For this interim assessment period, the Department advised that 
it proposed to make scoring changes to two of the four PHAS assessment 
indicators: the Financial Condition Indicator and the Physical 
Condition Indicator. Detailed information about these scoring changes 
was provided in the notices published on November 26, 2001. 
Essentially, the Department proposed that for physical condition 
scoring purposes during the interim assessment period, the inspectable 
areas will be reduced from five or two. The weights assigned to the 
three unscored inspectable areas will be redistributed over the two 
remaining inspectable areas. For financial condition scoring purposes, 
the Departmental proposed to remove the use of peer groupings from two 
of the financial components. The Physical Condition Indicator Scoring 
Process notice was published in the Federal Register at 66 FR 59084, 
and the Financial Condition Indicator Scoring Process notice was 
published in the Federal Register at 66 FR 59126.
    The Department solicited public comment on the interim scoring 
procedures. Eight comments were received in response to the public 
comment solicitation. The Department carefully considered all comments 
and has decided to make no changes to the scoring methodologies as a 
result of the comments.
    Accordingly, with the publication of this notice, the Department 
advises that the PHAS is effective beginning with PHAs having a fiscal 
year end of September 30, 2001, and PHAs will receive an overall PHAS 
score based on the four PHAS indicator scores. PHAs with fiscal years 
ending September 30, 2001, through and including September 30, 2002, 
will be scored for the Physical Condition Indicator and the Financial 
Condition Indicator in accordance with the scoring procedures described 
in the notices published on November 26, 2001. If the Department 
determines that the effective period of the interim scoring processes 
should be extended beyond September 30, 2002, the Department will 
notify PHAs and the public by notice published in the Federal Register.

II. Discussion of the Public Comments

    Of the eight commenters on the November 26, 2001, notices, five of 
the commenters were PHAs and the three other commenters were 
representatives of PHAs. One PHA commenter supported the interim 
scoring methodologies and the changes to the Physical Condition and 
Financial Condition Indicators. The other commenters had comments that 
are discussed below.
    Comment. PHAS should not be implemented at this time, except on an 
advisory basis.
    One commenter stated that it is not understandable or acceptable to 
subject PHAs to scores and potential penalties using an assessment tool 
that is still under development. For the system to be credible, the 
system must not continuously redefine itself as public resources are 
being expended in PHAs' efforts to comply. HUD should continue to 
implement the PHAS on an advisory basis while HUD continues to work 
with PHAs, resident organizations and other interested parties to 
refine the system or find another one that will work. The commenter 
stated that even in advisory form, the PHAS is a valuable tool for 
identifying areas that may need improvement. This commenter also stated 
that the system was overly dependent on the subjectivity of the 
inspectors.
    Another commenter stated that the notices do not improve the PHAS 
enough to warrant issuance of official scores to PHAs, and there should 
have been an additional year of advisory scores, under which 
inspections would have continued and, more importantly, exigent health 
and safety violations would have been identified and remediated.
    Response. While HUD acknowledges that the assessment system can be 
enhanced, HUD believes that PHAS, as currently amended, is useable for 
an interim period. The Office of Inspector General (OIG) and the 
General Accounting Office (GAO) have both indicated that the Public 
Housing Management Assessment Program (PHMAP), on which the PHAS 
Management Operations Indicator is substantially based, is not a 
reliable means of assessing PHA performance. Further, both the OIG and 
GAO indicated that HUD, as required by statute, must determine the 
condition of public housing to ensure that funds provided by Congress 
are being used to provide decent, safe, and sanitary housing that is in 
good repair. This interim scoring methodology provides for technical 
reviews, database

[[Page 11845]]

adjustments, and appeals of overall scores and designation.
    Comment. In the Physical Condition Indicator, the reduction of the 
number of inspectable areas and redistribution of the weights results 
in unfairness.
    Two commenters stated that the notice shifts an inordinate amount 
of weight to Dwelling Units. One commenter stated that under the 
interim physical condition scoring procedure, all five areas will be 
inspected, scored and the inspection data captured in the system, but 
for assessment purposes, a property's score, and the PHA's overall 
Physical Condition Indicator score, will be derived only from the 
deficiencies observed in Building Systems and Dwelling Units. The 
redistribution of the area weights from Site, Building Exterior, and 
Common Areas to Building Systems and Dwelling Units and the continued 
use of a 100 point scale for property scores means heavier weights will 
be applied to Dwelling Unit items such as a missing sink stopper and 
PHA's will be ``further penalized.''
    Another commenter stated because the interim scoring process will 
base the score of the physical assessment on Dwelling Units (64%) and 
Building Systems (36%), ignoring the scores received for Site, Building 
Exterior and Common Areas, the ``adjusted'' normalized weight will 
shift most of the weight to Dwelling Units for properties that have 
limited Building Systems components. This PHA estimated that under the 
interim scoring assessment, the ``adjusted'' normalized weight for its 
family developments will shift to 73% for Dwelling Units and 27% for 
Building Systems.
    The commenter further stated that to inspect an entire property and 
have the ``official scores'' be uniformly based on only two components, 
then regardless of the physical and structural considerations of each 
property, the official score will not provide an accurate reflection of 
each property's true condition. Under the new formula, this PHA 
commenter stated that its 2001 Physical Condition Indicator score could 
be reduced by 10 points--enough so that the exact physical 
considerations currently rated ``standard'' may become ``at risk.''
    The commenter also stated that there appears to be a bias toward 
properties with building systems indicative of East Coast and Midwest 
housing. However, on the West Coast, the townhouse style properties are 
spread across acres of land and lack the expected level of building 
system components as other public housing properties. As a result, 
shifting the scoring to only Dwelling Units and Building Systems does a 
disservice to public housing in Southern California.
    One commenter stated that PHAs should have the option of being 
scored on all five physical condition criteria. By only scoring two 
areas, the notice sends the disturbing message to managers that only 
those two areas are of importance and the other areas need not be 
accorded the same level of maintenance. By not according the agency the 
option to be scored on all five areas, human nature dictates that non-
scored areas will experience a decline in attention.
    Response. Both HUD and the public housing stakeholders realized 
that compromises would be necessary in order to proceed with the 
assessment of PHAs during the interim period. Most PHAs will fare 
better with the proposed scoring changes, although some will not fare 
as well.
    During the effective period of the interim scoring process, 
inspectors will inspect all five inspectable areas and record all 
deficiencies observed. While PHAs will be provided with a complete 
inspection report reflecting all observed deficiencies, they will be 
scored only on Dwelling Units and Building Systems. This will enable 
PHAs to effectively plan short-term maintenance and long-term 
modernization needs. Accordingly, the inspection does not ignore or 
diminish the importance of any inspectable area or any deficiency. Both 
HUD and significant stakeholders believe that this compromise will best 
serve the interest of the PHAs, the residents, and HUD.
    HUD appreciates the suggestion that PHAs be given the option of 
being scored on all five areas. However, the time, effort and cost to 
the government of providing this option would not be warranted given 
the interim nature of these scoring changes.
    Comment. Certain health and safety violations should not be scored.
    Two commenters asked that the notice specifically state that health 
and safety violations found in the three areas not scored (Site, 
Building Exterior, and Common Areas) will not be part of the physical 
score under the interim assessment process.
    Response. In the November 26, 2001, Physical Condition Scoring 
Process notice (66 FR 59084), the Department stated, ``[t]he inspector 
also will record and report all health and safety deficiencies in each 
of the five inspectable areas. However, the inspection score for each 
property will be based only on the information reported by the 
inspector for the two inspectable areas, Building Systems and Dwelling 
Units, after the redistribution of the areas' weights for the three 
non-included areas.'' Consequently, HUD believes that this issue was 
addressed in the November 26, 2001, Physical Condition Scoring Process 
notice.
    Comment. Revisions should be made to the overall physical 
inspection process through confirmatory reviews of inspections, more 
use of proportionality, and rights to appeal.
    Three commenters asked for revisions in the physical inspection 
process. One commenter argued that, aside from the requirement that 
PHAs inspect their units annually, there should be a confirmatory 
inspection by an outside agency chosen by the PHA from a list of firms 
``recognized'' by HUD. Physical inspections should be limited to a set 
percentage of PHA units to validate the sample, and, when more than one 
unit is involved, should consider ``proportionality with regard to 
issues such as fencing'' (i.e., measuring the overall impact of a 
deficiency as a percentage, such as percentage of total surface area 
affected by a deficiency).
    The commenters stated that scoring systems must be flexible so they 
meet the needs of large and small PHAs. Physical inspections should 
result in numeric scores with a right of appeal, and not a pass-fail 
grade. Two other commenters agreed with the idea of a confirmatory 
inspection, stating, ``there is a definite need for a third party 
confirmation audit.'' These two commenters also stated that the 
frequency of inspections is not addressed and also not addressed are 
possible solutions for PHAs that fail inspections.
    Response. HUD declines to accept the suggestion that there should 
be an outside agency to conduct a confirmatory inspection. The 
Department has several processes in place for inspection review. HUD 
has its own Quality Assurance inspectors that review the performance of 
contract inspectors. HUD also has engineers who review the inspection 
information when it is uploaded to HUD. The PHAS regulation provides 
for technical reviews, database adjustments and appeals of the overall 
PHAS scores and designation. As a result, HUD believes that there are 
adequate procedures available to PHAs to ensure the accuracy of their 
scores. Further, due to financial constraints, confirmatory reviews are 
not feasible.
    At this time, HUD also declines to adopt the suggestion that units 
sampled should be limited to a set percentage of PHA units, and, when 
more than one unit is involved, should consider

[[Page 11846]]

proportionality with regard to issues such as fencing.
    HUD chose instead to use a statistically valid random sample method 
rather than such set percentages at the inception of the PHAS. 
Educational, scientific and private communities use this methodology 
when attempting to draw conclusions about a given subject matter. 
However, in future consultations with public housing stakeholders, HUD 
intends to consider alternative inspection methodology, which may 
include the further use of proportionality. With regard to the 
frequency of the inspections, the PHAS regulation provides for an 
annual assessment of a PHA, including the physical condition of the 
PHA's housing stock. The November 26, 2001, physical condition scoring 
notice provides that where a PHA's score is equal to or greater than 24 
points out of the total of 30 points for the Physical Condition 
Indicator, the PHA will be inspected every other year. If the PHA's 
Physical Condition Indicator score is less than 24 points, the 
inspection frequency will be annually. The PHAS regulation does not 
provide for a failing score for individual inspections. Instead, the 
regulation assesses the overall condition of all of a PHA's properties. 
The regulation establishes a threshold of less than 18 points out of a 
total of 30 points before a PHA is designated as being in substandard 
physical condition.
    It is not the intent of the Department either through its scoring 
notices or the PHAS regulation to offer possible solutions for PHAs 
that are designated to be in ``substandard physical condition.'' 
Rather, it is the purpose of PHAS to provide a measuring tool so that 
HUD and PHAs can monitor the condition of housing stock and take 
appropriate action where necessary to ensure that residents are living 
in housing that is decent, safe, sanitary, and in good repair. The 
reasons for a PHA to receive a substandard designation vary from PHA to 
PHA. Once designated to be in ``substandard physical condition,'' the 
PHA and HUD analyze the root causes for the designation and determine 
what corrective actions need to be taken which will then be embodied in 
a Memorandum of Agreement in accordance with the PHAS regulation.
    Comment. Clarify the applicable physical inspection standard.
    Three commenters stated that the notice does not adequately address 
physical inspection standards. One commenter stated that Housing 
Quality Standards (HQS) should be the minimum standard, unless there is 
a local code that has higher standards, in which case the local code 
should prevail. Two commenters stated ``[i]n spite of the proposed rule 
change, we are still in a quandary on the inspection standards--HQS, 
UPCS, local codes, the ``higher'' of HQS than local codes.''
    Response. The scoring notice change does not alter the required 
inspections standard for PHAs. The UPCS regulation (codified at 24 CFR 
part 5), and the PHAS regulation (codified at 24 CFR part 902) clearly 
establish the UPCS as the HUD physical condition standard for public 
housing. HUD has long required PHAs to comply with federal standards as 
well as applicable local code in the development and modernization of 
public housing. The standard in the industry, when there are two codes 
at variance, is to use the more stringent standard. This was the case 
under the annual unit and system inspection component of PHMAP (24 CFR 
901.30(d)), the predecessor to PHAS. HUD expects PHAs during this 
interim period to continue with this practice.
    Comment. Allow PHAs time to remediate problems.
    Two commenters ``strongly recommended'' that there should be a 
period of time for low scoring PHAs to remediate problems before HUD 
imposes consequences.
    Response. The PHAS regulation requires that overall troubled PHAs 
(and troubled-substandard in a single indicator) be referred to the 
Troubled Agency Recovery Center (TARC). The TARC will enter into a 
Memorandum of Agreement with the troubled agencies outlining corrective 
actions to be taken within specified time frames. Further, the PHAS 
regulation permits the PHA to petition for removal of the troubled 
designation. A petition for removal can occur if the conditions that 
gave rise to the troubled designation have been cured. While HUD 
believes that these procedures provide adequate opportunities for 
remediation, this issue may be further considered as HUD continues to 
work with stakeholders in determining what long-term evaluation 
methodology will be adopted.
    Comment. In the Physical Condition Indicator, certain items should 
not be scored.
    A commenter stated that only significant items that rise to the 
level of code violations should be scored. This commenter also stated 
that there should be no deductions for missing tub stoppers or non-
functional defects. Tenant-caused defects should not result in point 
loss, but should be noted for correction or treated like smoke 
detectors when the batteries have been removed.
    Three commenters stated that there should be no deductions for 
units undergoing modernization. Along similar lines, two other 
commenters stated that ``mitigating circumstances (e.g., tenant 
damages) should be taken into account.'' Yet another commenter found 
the number of deficiencies, the severity of them and the weights and 
criticalities in the units and building systems to be problematic. This 
commenter stated, ``[t]here are still too many tenant-caused damages 
and too many minor ``problems'' in units that are scored.'' As a 
result, the commenter questions whether the score is a fair and 
accurate representation of the housing stock.
    Response. The U.S. Housing Act of 1937 requires that public housing 
be decent, safe and sanitary. The Act further requires that HUD 
determine the extent to which the PHA is providing basic acceptable 
housing conditions. HUD does not believe that the Act intended for 
HUD's determination to be limited to local housing code or 
functionality. Local codes vary throughout the nation. In some cases, 
local code is nonexistent or at an extremely low level. Functionality 
is a question of whether a particular inspectable item works or not. 
HUD does not believe that functionality alone is sufficient to meet 
either the statutory requirement or to assist PHAs and HUD in managing 
the inventory of approximately 14,000 public housing developments 
around the country. Accordingly, HUD established the federal standard, 
the UPCS, to determine compliance with this statutory requirement. HUD 
acknowledges that improvements can be made and will seek to make them 
in a permanent methodology. HUD appreciates the concern regarding 
resident-caused damage. However, the statutory requirements obligate 
HUD to determine the condition of the properties and do not exempt 
various causes of the deficiencies from decent, safe and sanitary 
housing that is in good repair. Reasons for the condition of a property 
and the attendant remedial actions should be the subject of further 
review and analysis by the PHA and HUD Field Offices. The PHAS 
regulation already exempts vacant units undergoing modernization from 
the inspection. However, where units are occupied, HUD has the 
obligation to determine if the resident is living in decent, safe and 
sanitary housing that is in good repair. The PHAS regulation does 
provide for a database adjustment

[[Page 11847]]

for those elements when modernization is in progress.
    Comment. The Notices fail to address problems with the PHAS appeals 
process.
    Two commenters asked that HUD ``codify * * * in writing'' that, 
since HUD can no longer commit to confirmatory reviews as had been 
``agreed'' because of lack of manpower, instead appeals would be 
reviewed broadly and a PHA can make its case to the Assistant Secretary 
for Public and Indian Housing. One commenter stated that it was 
``disappointed'' that there would be no ``common-sense'' review, and 
suggested that was another reason the PHAS scores should remain 
advisory.
    Response. Although confirmatory reviews and ``common sense'' 
appeals were discussed during the recent meetings with stakeholders, 
HUD subsequently found it to be impractical to implement these items 
during the interim assessment period. As a result, the Department will 
continue to accept and review requests for technical reviews, database 
adjustments and score and designation appeals per the PHAS regulation. 
Prior to responding to the PHA, the Assistant Secretary for the Office 
of Public and Indian Housing will ensure that all appeals will continue 
to be given due consideration. While the interim scoring procedures are 
in effect, the Department is willing to consider improvements to the 
evaluation methodology, including the appeal process.
    Comment. Incentives for PHAs designated as high performers should 
be provided.
    Four commenters stated that there should be some form of reward for 
high performers. One commenter stated that the scores must be tied to a 
system of rewards and there should be regulatory waivers granted to 
high performers in addition to capital assistance under section 
9(j)(3)(C) of the U.S. Housing Act of 1937 (which provides for the 
reallocation of certain Capital Funds to high performing PHAs). Two 
commenters stated generally that the notice fails to address the 
concept of rewards for high performers, which they state was at the 
heart of changing the old assessment system. One commenter stated that 
the notice was silent as to whether high performer status would entitle 
PHAs to all the privileges defined by the Department, including 
additional Capital Funds, and that this entitlement should be stated in 
writing. This commenter urged that Capital Funds be distributed based 
on high performer status as soon as technically possible.
    Response. The current PHAS regulation provides incentives for high 
performers and PHAs will be afforded those incentives. Further, the 
Capital Fund Program rule provides incentives for high performers. The 
interim scoring notice does not modify or change the implementation of 
incentives to high performers. Accordingly, PHAs that are designated as 
high performers during the period when the interim scoring notices are 
in effect will receive additional capital funds as a result of their 
performance, as provided by the Capital Fund Program rule. HUD will 
notify PHAs of the schedule upon which these funds will be provided, 
which depends in part on administrative considerations. The Department 
is willing to consider the issue of additional regulatory waivers 
during the long-term review of changes to the evaluation methodology.
    Comment. The changes to the Financial Condition Indicator may 
change a PHA's designation.
    One commenter stated that the constant change to the financial 
components, specifically Current Ratio (CR) and number of Months 
Expendable Fund Balance (MEFB), ``may establish a perception that HUD 
is setting up housing authorities to fail.'' The commenter also stated 
that the changes to CR and MEFB under the interim scoring process may 
cause a PHA that was a ``high performer'' in 2001 to be designated as a 
``standard performer'' or ``troubled performer'' in 2002, regardless of 
a change in actual performance.
    Response. The Department disagrees that there have been substantial 
changes to the Financial Condition Indicator. The changes that have 
been made were either to improve the method of scoring based on 
industry discussions or update the thresholds based on current data.
    Under the interim financial scoring process, the thresholds for the 
components are lowered so that a PHA with a CR or MEFB value equal to 
or greater than 1.0 will receive the full 9.0 points available for each 
component. As a result of this change, a PHA's performance designation 
improved in most cases, and in the remaining cases, the PHA's 
performance designation stayed the same.
    Comment. Financial peer groupings should be eliminated.
    Four commenters stated that peer groupings should be eliminated 
from the financial indicators and that HUD should use a more 
constructive measure to assess financial condition. One commenter 
further stated that all groupings should be abandoned and the focus 
should be on each PHA's individual performance given the measures by 
which the management assessment is based.
    Response. HUD has conducted extensive research based on the total 
number of entity-wide units operated to validate the use of peer groups 
in assessing a PHA's financial condition. The research shows that PHAs 
of different sizes have statistically different values under the 
financial indicator components. In addition, financial rating services 
consider size and market-share as a measure of diversification, i.e., 
risk management. Based upon this information, HUD believes that it is 
appropriate to measure certain financial indicator components based on 
peer groups because it provides for a more accurate overall financial 
assessment of PHAs. However, this issue will be reconsidered as HUD 
works with stakeholders in determining what the long-term evaluation 
methodology will be.
    Comment. Financial assessments should not be ``entity-wide.''
    Three commenters stated that HUD should not assess a PHA's 
financial condition on an entity-wide basis. Two commenters stated 
``entity-wide'' assessments for some PHAs with sizeable Section 8 
programs result in a lower Occupancy Loss component score. The 
commenters went on to say ``[t]he emphasis should be on a PHA's ability 
to manage its public housing dwelling units that it has control over, 
not the housing market in its jurisdiction.'' One commenter also noted 
that, ``for these sub-indicators, there are (sic) no statutory 
authority for HUD to impose these conditions.''
    Response. HUD has considered whether a PHA should be financially 
evaluated on an entity-wide basis and has determined that the overall 
financial condition of a PHA provides a valid basis to assess its long-
term viability and financial performance. The Department is concerned 
about a PHA's ability to manage non-public housing grant and subsidy 
programs, as well as other federal and non-federal sources of funding. 
However, other options may be explored as HUD considers permanent 
changes to the assessment system.
    With reference to the statutory requirements, HUD has the authority 
to assess any factors it determines appropriate in accordance with 
section 6(j)(1)(K) of the U.S. Housing Act of 1937, as amended. The 
Single Audit Act and OMB Circular A-133 require entity-wide audits of 
the financial statements of PHAs receiving federal funds.
    Comment. The financial review should be limited to the independent 
audit.

[[Page 11848]]

    One commenter stated that the financial review should be ``limited 
to the independent audit and the data that HUD draws from the Financial 
Data Schedule.'' There should be no other requirements included in the 
financial review.
    Response. HUD understands this comment to mean that PHAs should 
only be required to submit an audited financial statement and not 
submit both an unaudited and an audited financial statement.
    As required by the Single Audit Act and OMB Circular A-133, HUD 
requires PHAs to submit audited financial statements nine months 
following the close of the PHA's fiscal year-end. However, there may be 
information in the unaudited financial statement that would assist HUD 
in monitoring a PHA's financial health. Therefore, HUD will continue to 
require both submissions.
    Comment. Business practice dictates that scores of less than one 
for CR and MEFB are unacceptable.
    One commenter stated that ``good business practice dictates that an 
authority has sufficient current assets to cover current liabilities 
and adequate reserves to operate independently of HUD, if circumstances 
should warrant.'' In addition, the commenter stated that ``it might be 
considered harsh to penalize a housing authority zero points for 
scoring less than one on either current ratio or number of months 
expendable fund balance; however, sound business principles indicate a 
score of less than one is unacceptable.''
    Response. HUD agrees that sound business principles indicate a 
value of less than one on the CR or MEFB is unacceptable. As a result, 
under the interim scoring process, a value of less than one on the CR 
component would result in a CR score of zero. The CR component measures 
the cash liquidity of a PHA by dividing current assets by current 
liabilities. This component predicts whether or not the PHA can meet 
its current obligations, therefore a PHA with a CR value of less than 
one (i.e., when current liabilities are greater than current assets) 
would pose a financial risk because it may be unable to cover its 
current obligations and thus should merit a score of zero for the CR 
component.
    Similarly, the MEFB is a viability measure of a PHA's ability to 
operate using primarily its net available, unrestricted resources 
without reliance on additional funding. This component compares the net 
available unrestricted resources to the average monthly operating 
expenses. The result of this calculation shows how many months of 
operating expenses and the repayment of operating debt principal can be 
covered with currently available, unrestricted resources. Therefore, a 
PHA with a MEFB value of less than one would pose a financial risk 
because it may be unable to cover its operating expenses using its 
reserves and thus should merit a score of zero for the MEFB component.
    Comment. Concur with changes to interim scoring for the Financial 
Condition Indicator.
    Four commenters concurred with the interim scoring changes for the 
Financial Indicator. In particular, they concurred with HUD's decision 
to use pass/fail when scoring the components CR and MEFB, rather than 
scoring these two components based on percentiles and peer grouping.
    Response. The Department appreciates the commenters' agreement with 
these changes.
    Comment. Indicate essential elements in the PHA evaluation system.
    One commenter stated that the interim assessment processes should 
indicate which elements are essential in the public housing evaluation 
system.
    Response. The Department believes that the four indicators that 
comprise the PHAS are the essential elements in an overall assessment 
of public housing. As stated in the November 26, 2001, Introduction 
Notice (66 FR 59080), these four essential elements are the: (1) 
Physical condition of properties; (2) financial condition; (3) 
management operations; and (4) resident's assessment through a survey. 
Since this information is in the current PHAS regulation, no change to 
these notices is required.
    Comment. Reduce the management reporting requirements, in 
particular the drug elimination program information.
    One commenter stated that the management assessment indicator 
should be retained but the reporting requirements lessened, and in 
particular, the information on the drug elimination program that 
Congress no longer funds.
    Response. The Department is not considering changes to the 
Management Operations Indicator for the period when the interim scoring 
notices are in effect, but has committed to continue to meet with 
public housing stakeholders during this time to further discuss 
evaluation methodologies and the scoring processes. In these meetings, 
the Department is willing to consider the drug elimination reporting 
requirements under the Management Operations Indicator.
    Comment. Modify the resident survey questions and include the 
property address with the responses.
    One commenter suggested that the Department retain the current 
questions in the Customer Service and Satisfaction Survey and allow 
PHAs to insert five to ten additional questions about local issues. The 
commenter also stated that the resident responses should indicate the 
resident's address in order for the PHA to deal with the responses.
    Response. While the Department is not making changes to the 
Resident Service and Satisfaction Indicator during the period when the 
interim scoring notices are in effect, the Department has committed to 
continue to meet with public housing stakeholders to further discuss 
the evaluation methodologies. In these meetings, changes to the 
resident survey will be discussed. In November 2001, the Department 
began reporting resident survey results to PHAs on the property level. 
This provides the PHA with the ability to more specifically respond to 
resident concerns while at the same time maintaining the residents' 
anonymity, which is important because of privacy concerns.

III. Adoption of Interim Physical Condition and Financial Condition 
Scoring Procedures Without Change

    The Department appreciates the public comments submitted on the 
November 26, 2001, notices. For the reasons discussed above in Section 
II of this notice, the Department adopts the interim physical condition 
and financial condition scoring procedures without change.

    Dated: March 8, 2002.
Michael Liu,
Assistant Secretary, Public and Indian Housing.
[FR Doc. 02-6196 Filed 3-14-02; 8:45 am]
BILLING CODE 4210-33-P