[Federal Register Volume 72, Number 239 (Thursday, December 13, 2007)]
[Rules and Regulations]
[Pages 71008-71018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-24112]



[[Page 71007]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 598



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Empowerment Zones: Performance Standards for Utilization of Grant 
Funds; Final Rule

  Federal Register / Vol. 72, No. 239 / Thursday, December 13, 2007 / 
Rules and Regulations  

[[Page 71008]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 598

[Docket No. FR-4853-F-02]
RIN 2506-AC16


Empowerment Zones: Performance Standards for Utilization of Grant 
Funds

AGENCY: Office of the Assistant Secretary for Community Planning and 
Development, HUD.

ACTION: Final rule.

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SUMMARY: This final rule establishes certain planning and performance 
standards for utilization of grant funds allocated to Empowerment 
Zones, including planning and performance standards for benefit levels 
and economic development activities. The standards are designed to 
ensure that activities undertaken with HUD Empowerment Zone grant funds 
are consistent with the strategic plans of the Empowerment Zones. This 
final rule follows publication of a proposed rule, takes into 
consideration the public comments received on the proposed rule, and 
makes certain changes in response to public comment.

DATES: Effective Date: January 14, 2008.

FOR FURTHER INFORMATION CONTACT: Lorraine H. Drolet, Office of 
Community Planning and Development, Department of Housing and Urban 
Development, Room 7130, 451 Seventh Street, SW., Washington, DC 20410-
7000, telephone (202) 708-6339 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
through TTY by calling the toll-free Federal Information Relay Service 
at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--June 8, 2005 Proposed Rule

    On June 8, 2005 (70 FR 33641), HUD published a proposed rule that 
would amend its regulations at 24 CFR part 598 to add a new subpart G 
entitled ``Empowerment Zone Grants.'' New subpart G was proposed to be 
added to establish (1) the requirements for preparation and submission 
of an implementation plan for the use of funds appropriated by Congress 
and made available by HUD specifically for the Round II urban 
Empowerment Zones (EZs), and (2) performance standards that the EZs 
must meet in the use of those funds. The June 8, 2005, rule proposed to 
require an EZ to submit to HUD a plan for use of HUD EZ grant funds. 
These plans would be subject to performance and economic development 
standards in order to ensure that grant funds are expended in ways that 
are consistent with the EZ's strategic plan as well as ensure that a 
certain level of the benefits resulting from the expenditures of these 
funds accrue to persons who reside within the EZ.
    The June 8, 2005, proposed rule was prompted, in part, by numerous 
comments received by HUD on the subject of utilization of funds for the 
benefit of EZ residents following HUD's issuance of a policy statement 
on resident benefit in July 2002. Round I EZs received Social Service 
Block Grants (SSBG) from the Department of Health and Human Services 
(HHS). The HHS statute governing the use of SSBG funding, (42 U.S.C. 
1397 et seq.), states in relevant part that, ``an area shall use the 
grant for activities that benefit residents of the area for which the 
grant is made.'' Round II EZs received grant funds from HUD (HUD EZ 
grant funds) rather than SSBG funds.
    This funding distinction created a situation where there is an 
explicit statutory basis for a resident benefit standard for Round I 
EZs, but not for Round II EZs. Nevertheless, HUD determined that it was 
appropriate to establish a performance standard that strives to ensure 
a certain level of resident benefit is achieved from the use of HUD EZ 
grant funds. The establishment of such a standard is supported by and 
consistent with the fact that several of the tax incentives that are 
the primary benefits for businesses operating in EZs also provide a 
direct benefit to EZ residents.
    Therefore, to enhance achievement of the objectives of an EZ 
strategic plan and the specific objective of benefiting EZ residents, 
this rule requires each EZ to submit an implementation plan for HUD 
approval for each project or activity to be undertaken with HUD EZ 
grant funds that is proposed by the EZ after the effective date of this 
rule. The implementation plan is to describe the EZ's planned use of 
HUD EZ grant funds, and what percentage of the funds specifically will 
meet the principal benefit standard. The three performance standards 
are stated as (1) a principal benefit standard, (2) a proportional 
benefit standard, and (3) an exception criterion for determining the 
amount of HUD EZ grant funds that may be used to fund a particular 
project or activity described in an implementation plan. Each of these 
standards was discussed in detail in the preamble to the June 8, 2005, 
proposed rule, and a brief summary of each standard is provided in this 
preamble.

A. Performance Standards

1. Principal Benefit Standard
    The principal benefit standard is based on the percentage of the 
total number of persons projected to benefit from the assisted activity 
who reside within the boundaries of the EZ. This standard recognizes 
that for most projects it is not feasible to entirely limit the persons 
who benefit directly from EZ activities to those who reside within the 
EZ. The rule therefore establishes a minimum percentage of persons who 
must benefit in order to determine that EZ residents principally 
benefit from EZ activities.
    The rule provides that an EZ may use HUD EZ grant funds to assist 
any project that provides at least 51 percent of its direct benefits to 
persons who reside within the designated EZ boundaries. Moreover, in 
any case where the direct benefits to be provided by the project in 
question will be in the form of jobs, the project may be assisted if at 
least 35 percent of the jobs, on a full-time equivalent basis, are 
taken by, or made available to, EZ residents.
    The emphasis on the benefits to be received by EZ residents derives 
from HUD's determination that such an emphasis is needed to make the 
main goal of the EZ program more likely to be achieved. That goal is 
the long-term, sustainable revitalization of a highly impoverished 
area. In the case of an EZ, which by definition includes a very high 
percentage of persons in poverty, this means that many such persons 
must find a way to raise their income. HUD also recognizes that there 
may be projects that would be helpful to the overall effort to 
revitalize an EZ but which cannot meet either of the two proposed 
resident benefit tests (that is, the 51 percent or 35 percent tests), 
and therefore the rule provides two other standards to determine 
resident benefit.
2. Proportional Benefit Standard
    In the interest of providing maximum flexibility to an EZ in its 
effort to achieve the goals of its strategic plan, the June 8, 2005, 
rule also proposed to establish a proportional benefit standard to 
assist such an activity to a lesser degree. This standard provides that 
while a project that will meet either the 51 percent or 35 percent 
test, as applicable, may be fully assisted with HUD EZ grant funds, a 
project that cannot meet those tests may nevertheless be eligible for 
assistance with HUD EZ grant funds.
    The level of assistance that may be provided to such projects will 
be limited so that the percentage of assistance does not exceed the

[[Page 71009]]

percentage of EZ residents that are expected to directly benefit from 
the assisted activity. This standard embodies a practical approach that 
allows the use of the HUD EZ grant funds at a level commensurate with 
the extent to which EZ residents will benefit directly from such a 
project.
    The principal benefit standard provides an incentive to EZs to fund 
projects that will provide at least 51 percent (or 35 percent, where 
applicable) of the direct benefits to EZ residents because where these 
percentages are met, there is no limit as to the allowable percentage 
of HUD EZ grant funding in a project. However, if a project is highly 
desirable for other reasons, under the proportional benefit standard, 
the project may still be assisted, in part, using HUD EZ grant funds.
3. Exception Criterion
    In any case where a proposed project does not meet the principal 
benefit standard or the proportional benefit standard, the June 8, 
2005, proposed rule advised that HUD would consider a request for 
exception if an EZ concludes that the project would contribute to its 
strategic plan in a critical way. The proposed rule provided that where 
an EZ demonstrates, to HUD's satisfaction, other substantial benefits 
to the EZ that would result from the project, or other compelling 
reasons justifying the appropriateness of the implementation plan to 
its strategic plan, HUD may approve the project notwithstanding 
inability to meet either the principal or proportional benefit 
standards.
    The proposed rule provides that all requests for exceptions to the 
two standards must be in writing, accompanied by a statement or 
narrative that provides the factual information that justifies an 
exception.

B. Additional Issues

    In addition to the three performance standards, the preamble to the 
June 8, 2005, proposed rule also addressed the following issues, for 
which this preamble also provides a brief summary for the convenience 
of the reader.
    1. Amount of benefit. The question of how much benefit, at minimum, 
should be derived from the expenditure of HUD EZ grant funds was not 
proposed in the June 8, 2005, rule to be addressed in the regulatory 
text. The concern about quantifying in regulation the amount of benefit 
derives from the fact that the dominant use of HUD EZ grant funds is 
expected to be for assisting private businesses to establish, expand or 
remain in place in the EZ and create, increase or retain jobs that 
would otherwise not be available. In referring to grant funds assisting 
private businesses in establishing, expanding or remaining in place in 
the EZ, HUD uses the terms ``establish,'' ``expand'' or ``remain in 
place'' as they are commonly understood in everyday conversation, and 
more importantly as they are understood by EZs and EZ residents from 
the outset of the EZ program. ``Establish a business'' means the 
employer establishes additional working opportunities or makes 
investment in a new business within the EZ. The employer may be a new 
employer within the EZ or an existing employer that starts a business 
or invests in a business that is different from any that the employer 
currently operates within the EZ. ``Expand a business'' means that an 
employer, within the EZ, provides additional work opportunities or 
makes investments in an existing business. The expansion of an existing 
business results in hiring more staff, or generating more business 
activity. ``Remain in place in the EZ'' means that the business will 
not create or expand new hiring opportunities, but there will be no 
reduction of existing employment opportunities or business activities.
    Since private businesses must principally focus on their own 
profitability, the public sector needs to ensure that the number of 
jobs that are made available is commensurate with the amount of HUD EZ 
grant funds provided to such businesses. To date, HUD is not aware of 
abuses in this regard with respect to the use of HUD EZ grant funds, 
but in the June 8, 2005 proposed rule, HUD solicited public comment on 
whether establishing specific requirements in regulation would be 
desirable to prevent them from occurring.
    2. Types of benefits/service area/location of the project. Economic 
development professionals recognize other types of direct benefits 
besides creation and retention of jobs. For example, a supermarket, 
drug store, or for-profit medical clinic may provide essential services 
to support the quality of life and the business climate in the 
community. Given the type of project that may be proposed to be funded, 
the proposed rule noted that an EZ may choose which of the two 
standards, principal benefit or proportional benefit standard, best 
apply to a proposed commercial project. In addition, the location of a 
project within the EZ and the nature of the goods and services that the 
project will provide may justify a presumption that most of its goods 
and services would benefit the residents of the EZ. If a project is 
located outside the EZ, the proposed rule noted that HUD would expect 
the EZ to provide more substantial analysis of its service area and 
customer base if it claims that a majority of these kinds of benefits 
would accrue to EZ residents.
    3. Full-time equivalency. The June 8, 2005, proposed rule 
recognized that the standards to date for ensuring that sufficient 
benefit will go to EZ residents from activities assisted with HUD EZ 
grant funds measure jobs on a full-time equivalent basis. Such 
measurement standard was considered important because many of the jobs 
created or increased in an EZ could involve less than full-time 
employment. Because standards require a calculation of the 
``percentage'' of total jobs resulting from utilization of HUD EZ grant 
funds that will benefit EZ residents, HUD determined in the June 8, 
2005, proposed rule that it was important that provision be made for 
those cases where one or more of the resulting jobs will be part-time 
jobs.
    4. Making jobs ``available to'' EZ residents. The June 8, 2005, 
proposed rule provided that the standards for ensuring sufficient 
benefit to EZ residents allow for inclusion of those jobs made 
available to residents even if the residents do not accept the 
available jobs. This standard recognizes that it may not be feasible 
for a business to hold one or more jobs open indefinitely while the 
business attempts to fill its available job vacancies with EZ 
residents. If the EZ can demonstrate that the job referral resources 
and the business have a good faith plan to provide first consideration 
to employment of EZ residents who reasonably can be expected to fill 35 
percent of the jobs, it will be seen as meeting the principal benefit 
standard under this regulation. Although the proposed rule did not 
define ``good faith,'' the proposed rule and this final rule both 
provide examples that demonstrate how good faith by an EZ will be 
determined, and these examples include public notification of 
employment opportunities, job fairs that are targeted to EZ residents, 
and first source agreements. These examples are consistent with 
established practices in implementing and monitoring job creation and 
retention activities funded with HUD's Community Planning and 
Development (CPD) grants.
    The proposed rule noted that qualifying for tax exempt financing, 
increased deductions for capital equipment in accordance with section 
179 of the Internal Revenue Code (26 U.S.C. 1791), and preferential tax 
treatment for capital gains otherwise available to an EZ business 
require that

[[Page 71010]]

the business meet the tests that define an ``Enterprise Zone Business'' 
under the Internal Revenue Code, including having at least 35 percent 
of its employees residing in the EZ.

C. In Conjunction With Economic Development

    As the proposed rule noted, to date, all funds appropriated by 
Congress for Round II EZs (the HUD EZ grant funds) have generally been 
accompanied by the explicit requirement that the funds be used ``in 
conjunction with economic development activities consistent with the 
strategic plan for each EZ.'' \1\ Public Law 106-554 (the Consolidated 
Appropriations Act, 2001, approved December 21, 2000, which provided 
FY2001 appropriations for HUD), does not contain this requirement, but 
HUD has determined to apply a consistent approach to focus the use of 
all HUD funds made available to EZs.) Over the course of time that such 
funds have been made available to these EZs, questions have arisen 
about whether particular planned activities would fall within this 
statutory restriction. While each question was answered on an 
individual basis, until this rulemaking, HUD had not attempted to 
establish specific requirements for adhering to the economic 
development restriction. Through the June 8, 2005, rule, HUD proposed 
to establish specific criteria to address the economic development 
requirement. Specifically HUD proposed to amend the EZ regulations in 
24 CFR part 598 to remove references to HHS at 24 CFR 
598.215(b)(4)(i)(D) and replace these references with statements that 
HUD EZ grant funds are to be used in conjunction with economic 
development activities consistent with an EZ's strategic plan. This 
rule also provides for economic development activity standards.
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    \1\ See Public Law 105-277 (providing omnibus and consolidated 
emergency supplemental appropriations for fiscal year (FY) 1999); 
Public Law 106-74 (providing FY2000 appropriations for HUD); Public 
Law 106-377 (providing FY2001 appropriations for HUD); Public Law 
107-73 (providing FY2002 appropriations for HUD); Public Law 108-7 
(Consolidated Appropriations Resolution, 2003, providing FY2003 
appropriations for HUD, among other agencies), Public Law 108-199 
(Consolidated Appropriations Act, 2004, providing FY2004 
appropriations for HUD, among other agencies); and Public Law 108-
447 (Consolidated Appropriations Act, 2005, providing FY2005 
appropriations for HUD, among other agencies).
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    In order to ensure that the economic development standard is met, 
the rule provides that each proposed use of EZ grant funds must be 
described in an implementation plan and receive prior approval by HUD. 
In reviewing a proposed use of HUD EZ grant funds, HUD will consider 
the nature of the activity and, in addition to making a determination 
that the resident benefit standard is met, will make a decision as to 
whether the activity is in conjunction with economic development.
    While the two requirements governing use of EZ grants funds 
(resident benefit and economic development) addressed in this 
rulemaking are independent of each other, they nevertheless have to be 
considered almost simultaneously by those making decisions about how to 
spend HUD EZ grant funds. Sections 598.605 and 598.615(a)(1) of HUD's 
regulations contain reminders that the resident benefit and economic 
development requirements must be separately met for each activity 
supported with HUD EZ grant funds. HUD's decision as to whether the 
activity is in conjunction with economic development will be made in 
accordance with the following:
    1. An activity that involves assisting a business to establish or 
expand is clearly ``economic development'' (subject to the restrictions 
in Sec.  598.215(c).)
    2. An activity that assists a person to take, or remain in, a job 
also meets the economic development standard.
    3. The provision of other kinds of educational assistance meets the 
economic development standard only if the EZ's implementation plan 
demonstrates that such education will be provided to persons who cannot 
qualify for available jobs because of the lack of some specific 
knowledge that would be given them through the course(s) to be provided 
and at least 51 percent of whom are EZ residents.
    4. An activity that is clearly aimed at increasing the capacity of 
governance board members, or staff of the EZ's lead agency, to carry 
out their roles with respect to economic development projects expected 
to be assisted in support of the EZ's strategic plan meets the test as 
well.
    5. The provision of public improvements, such as construction of a 
parking structure, extension of water or sewer capacity, street 
widening, etc., meets the economic development standard only if it is 
shown that the lack of the improvements clearly is an impediment to the 
establishment, expansion or retention of one or more businesses, and 
that the provision of the proposed public improvement would be limited 
as much as feasible to assisting the business or businesses. The 
benefits provided by such businesses would need to satisfy the resident 
benefit standard.
    6. HUD may also expressly approve a project that does not fall 
within any of the previous review standards if the EZ provides evidence 
in the implementation plan that, in some other way, the project can 
reasonably be seen as meeting the economic development standard. All 
requests for such an exception must be in writing, accompanied by the 
facts that the EZ wants HUD to review and consider as justification.

D. Evaluation, Monitoring and Enforcement

    The June 8, 2005, proposed rule advised that HUD would review the 
performance of the EZ's use of HUD EZ grant funds as part of its 
regular evaluation process under 24 CFR 598.420, through on-site 
monitoring in accordance with 24 CFR 85.40(e), and by other appropriate 
means.
    Evaluation, monitoring and compliance with the provisions of the 
proposed rule, as made final by this rule, will be carried out in 
accordance with established procedures for monitoring CPD programs, as 
provided in CPD's Monitoring Guidebook. (See HUD CPD Monitoring 
Guidebook, http://www.hud.gov/offices/cpd/library/monitoring/handbook.cfm.) HUD's Performance Measurement System, which contains the 
designee's implementation plans, is designed to collect information on 
the project and actual outputs benefiting EZ residents. These 
monitoring procedures will be enhanced by the performance standards 
established by this rule.

E. Technical and Conforming Changes

    In addition to the establishment of performance standards, the June 
8, 2005, proposed rule also described several technical and conforming 
amendments that were proposed to be made to the regulations in 24 CFR 
part 598.

II. Changes Made to the Proposed Rule at the Final Rule Stage

    Changes Made at Final Rule Stage. The following highlights some of 
the key changes made at the final rule stage.
     In Sec.  598.600, HUD has revised the ``applicability'' 
language to make clear that the standards promulgated by this final 
rule apply only to projects or activities to be undertaken with HUD EZ 
grant funds that are proposed by the EZ after the effective date of 
this rule.
     In Sec.  598.610(a)(2), which addresses the job benefits 
criterion under the principal benefit standard, HUD has replaced the 
full-time equivalency standard with a new standard for documenting the 
number of jobs created and filled by EZ residents. The new standard 
requires an EZ resident to be

[[Page 71011]]

employed by the employer for at least 90 days during the year in order 
to count the job towards the 35 percent criterion of requiring jobs to 
be taken by, or made available to, EZ residents.
     In Sec.  598.610(a), HUD adds a new paragraph (3) 
(paragraph (a)(3)) to provide for a presumed benefit test. The presumed 
benefit test allows for an EZ administrator to assume that certain 
commercial revitalization activities located and undertaken in the EZ 
and that provide services to both EZ residents and non-residents (e.g. 
supermarkets, drug stores) meet the 51 percent principal benefit 
standard. The application of the presumed benefit test requires the EZ 
to maintain documentation that briefly describes the activity, its 
service area, and the rationale for presuming that the activity meets 
the 51 percent principal benefit test.
     In Sec.  598.610(c), the circumstances under which an EZ 
may utilize the exception criterion have been expanded to include 
activities outside the designated area.
     In Sec.  598.610(c) and Sec.  598.615(b), HUD provides 
that it will respond to request by an EZ for an exception no later than 
60 days from the date of the EZ's request provided that the EZ's 
request with all relevant information is considered complete no later 
than 45 days from the date of the EZ's request.
    Benefits and Costs/Burdens of this Rule. The benefits to be 
provided by this rule, as stated in this final rule and the proposed 
rule, are the establishment of standards that are designed to ensure 
that activities undertaken with remaining HUD EZ grant funds are 
consistent with the strategic plans of the EZs. The strategic plans are 
designed to benefit EZ residents through a broad range of strategies. 
The purpose of designating EZs is to generate economic development in 
distressed communities. In an effort to ensure that EZs are fulfilling 
their obligations, EZs must submit an annual report to HUD to (1) 
report the EZ's progress in generating economic growth through the 
utilization of grants and tax incentives (the federal assistance), and 
(2) describe ongoing and upcoming activities; that is the EZ's plan for 
implementing new activities through utilization of remaining funds. The 
implementation plans that are prescribed by this final rule are a 
component of the annual reporting process. The significant change to be 
made to the preparation of the current annual reports is that the 
annual reports and HUD's review of such reports will include greater 
emphasis on ensuring that the utilization of remaining funds are 
designed to benefit EZ residents.
    As this final rule and the preceding proposed rule describe, EZ 
residents benefit from EZs primarily through increased employment and 
business activities that occur within the EZ, which in turn, are 
prompted or stimulated by the grants and tax incentives provided to the 
EZs. EZs stimulate growth in communities primarily through the creation 
of work opportunities and increased business activities. The rule 
establishes performance goals of 35% percent job placement for EZ 
residents. The wage tax credits that are offered to EZs are especially 
attractive to businesses, especially those looking to grow. Businesses 
within EZs are able to hire and retain EZ residents and apply the 
credits against their federal tax liability. Employers can claim a 
federal tax credit up to $3,000, for a full or part-time employee who 
is an EZ resident. The credit is based on 20% of the first $15,000 in 
wages earned by the qualifying employee.
    The costs or burden associated with this rule are determined to be 
minimal. The existing regulations, as already noted, require an annual 
report, and the implementation plans, prescribed by this final rule, 
are a component of the on-line reporting system (known as PERMS) and 
incorporated into the annual reports. They are not an independent 
reporting requirement to be submitted in some other form or at some 
other date. Under its current Paperwork Reduction Act approval for the 
EZ annual report, HUD estimates that preparation of the report is 13 
hours per EZ at a cost of $70 an hour resulting in a cost of $910.00 
for each of the 15 Round II EZs. Although the rule will put in place a 
new component of the annual report, HUD estimates no significant change 
in burden hours to preparation of the annual report because the 
remaining funds that each EZ has to expend are slowly decreasing and 
there are fewer new activities to report in each succeeding year's 
report.

III. Issues Raised by Public Commenters and Responses to the Public 
Comments

    The public comment period on the proposed rule closed on August 8, 
2005. HUD received four public comments on the proposed rule. Comments 
were received from an empowerment zone corporation, a community 
organization, a regional development corporation, and a non-profit 
organization. The issues raised by the commenters and HUD's responses 
to these issues are provided in this section of the preamble.

Amount of Benefit

    Comment: With respect to the preamble discussion of the amount of 
benefit, a commenter stated that no minimum benefit return per funding 
spent should be established because flexibility is imperative for 
programs addressing the problems of distressed communities. The 
commenter stated that, ``Some programs require large subsidies but are 
catalytic to redevelopment of an area.'' The commenter suggested that 
the final rule should reflect a heavy reliance on the judgment of EZ 
board of directors to assess projects and the amount of support that 
the project merits.
    Commenters also expressed concern that the proposed rule failed to 
account for programs identified in strategic plans as central to the 
revitalization of the distressed area and physical development. 
Further, commenters expressed concern that the proposed rule would make 
fulfilling parts of their mission challenging because some of the 
program activities now fall under the exception criteria.
    HUD response: The statutory and regulatory provisions governing all 
three EZ rounds closely mirror each other in many respects, including 
areas of program flexibility and local decision-making, which, HUD 
agrees, are essential to the administration of local EZ programs. The 
differences among the three rounds largely relate to their funding 
source and the list of eligible activities. Round I EZs received Social 
Services Block Grants (SSBG) of $100 million from the Department of 
Health and Human Services (HHS) to support an array of eligible 
activities, such as public services, housing, public facilities and 
economic development activities.
    From 1999 to 2005, Round II EZs received annual HUD EZ grants 
ranging from $3 million to $12 million for activities carried out ``in 
conjunction with economic development.'' Round III EZs received no 
funding. The benefits for Round III EZs consist of tax incentives for 
spurring the EZ economies through business development and job creation 
and retention.
    In having to change essential elements of their strategic plans in 
response to the changes in the expected source of funds from SSBG funds 
to HUD EZ grants, Round II EZs were subject to time consuming 
inconveniences. When Round II EZs learned that their funds would be 
substantially reduced from the expected $100 million in SSBG funds to 
the annual increments of $3 million to $12 million, these EZs had to 
modify

[[Page 71012]]

their budgets and rethink the projects/ activities already identified 
in their HUD approved strategic plans. With SSBG funds, Round I EZs 
were able to carry out an array of activities from public services and 
facilities to housing. With the change in funding sources from SSBG to 
HUD Round II EZ grants, however, Round II EZ had to accommodate the 
change in funding sources by selecting projects and activities that 
would meet the statutory mandate that HUD Round II EZ grants be used 
``in conjunction with economic development activities.''
    As noted in the preamble of the June 8, 2005, proposed rule, ``* * 
* a number of questions have arisen about whether particular planned 
activities would fall within this statutory restriction. While each 
question was answered on an individual basis, HUD has not attempted to 
set forth specific requirements for adhering to the economic 
development restriction.'' (70 FR 33644) The proposed rule preamble 
also stated that ``this rule proposes for each EZ to submit an 
implementation plan for HUD approval, after this rule is issued as 
final and becomes final. The implementation plan will describe the EZ's 
planned use of HUD EZ Grant Funds, and how utilization of funds will 
meet one of three performance standards designed to promote benefit to 
residents.'' (70 FR 33642) Consistent with these statements made in the 
preamble of the proposed rule, the standards promulgated by this final 
rule apply only to projects or activities to be undertaken with HUD EZ 
grant funds that are proposed by the EZ after the effective date of 
this rule.
    Section 2007(c) entitled ``Use of Grants'' of Title XIII, 
Subchapter C, Section 13761 of Public Law 103-66 (Omnibus Budget 
Reconciliation Act of 1993) requires that SSBG funds be used for 
activities benefiting EZ residents. Conversely, there is no explicit 
statutory language requiring that HUD EZ grants benefit Round II EZ 
residents. The absence of specific statutory language is not in of 
itself a barrier in formulating resident benefit requirements. Rather, 
in developing Sec.  598.610, the statutory eligibility requirements 
that must be considered for designation and the strong participatory 
influence allowed EZ residents in the development of the EZ's strategic 
plan were a strong influence in determining the requirements of 
resident benefit. The eligibility requirements that must be met are 
poverty, high unemployment, and general distress in the nominated area.
    HUD's conclusion that EZ grant funds should benefit Round II EZ 
residents is, in part, based on statutory eligibility requirements and 
on 24 CFR 598.2, which addresses the objective and purpose of the EZ 
program. Specifically, the objective and purpose of the EZ program is 
to stimulate the creation of new jobs to empower low-income persons and 
families to become economically self-sufficient and to promote 
revitalization of economically distressed areas.
    In establishing the EZ performance standards, HUD intentionally 
avoided the establishment of a hard and fast rule requiring all of a 
designee's activities supported by a HUD EZ grant to meet a percentage 
standard without exception. Rather, HUD developed standards that 
contained viable options based on program flexibility and local 
decision-making authority, without compromising resident benefit 
requirements. HUD maintains that the final rule contains the necessary 
and appropriate restrictions on the use of the HUD EZ grant funds and 
that the rule is reasonable without unduly compromising local decision-
making authority and flexibility by providing the following three 
options.
     Option 1 allows the Zone to apply the principal 
benefit standard requiring that the majority of beneficiaries of the 
project or activity described in the implementation plan reside within 
the EZ. Where the creation of jobs is the benefit, the resident benefit 
test is met when at least 35 percent of the jobs are taken by or made 
available to EZ residents. (See Sec.  598.610(a) ``Principal benefit 
standard'' of this final rule.)
     Option 2 provides the EZ further flexibility 
through the proportional benefit standard by allowing it to carry out 
activities that are unable to meet the principal benefit standard. 
Under the proportional benefit standard, the EZ can use HUD EZ grant 
funds for an activity in proportion to the percent of all persons 
benefiting from the project or activity who are residents. (See Sec.  
598.610(b) ``Proportional benefit standard'' of this final rule.)
     Option 3 is the exception criteria that enable 
the EZ flexibility by providing the EZ with the opportunity to make its 
case for funding activities that cannot meet resident benefit either 
through principal or proportional benefit standards, but can meet 
resident benefit by applying the exception criteria. Application of 
these criteria requires the EZ to demonstrate that the proposed 
activity can provide substantial benefits to the EZ or provide other 
compelling reasons for assisting the activity with HUD EZ grant funds. 
An example of a compelling reason would be an activity that contributes 
in a critical way to the EZ's strategic plan to increase commerce 
within the EZ through the establishment of new business and expanded 
economic activity. (See Sec.  598.610(c) ``Exception criterion'' of 
this final rule.)
    HUD submits that the availability of the proportional benefit 
standard and, in particular, the exception criteria, provide additional 
flexibility and local discretion, which enable EZ governance boards and 
other local governing entities to assess projects and to determine the 
amount of support a project/activity merits, while still ensuring that 
EZ residents are the principal beneficiaries of local EZ programs. 
Consistent with the EZ program goal of flexibility and local 
decisionmaking, the exception criteria allows the locality to use EZ 
grant funds for an activity outside of the designated area if the EZ 
can demonstrate an activity contributes to its strategic plan.
    The above three options support the EZ goals of designee 
flexibility and local decisionmaking, particularly with respect to the 
EZ governing boards. In response to a comment from an EZ resident 
seeking to apply for a business grant, the final rule better ensures 
that residents are the principal beneficiaries of HUD EZ grants without 
compromising local authority and decisionmaking.
    Consequently, HUD believes that the resident benefit standards as 
proposed in the June 8, 2005, proposed rule, are needed and reasonable 
in protecting the interests of EZ residents as beneficiaries of the EZ 
program. For these reasons, HUD declined to make changes to these 
standards at this final rule stage.

Full-Time Equivalency

    Comment: With respect to the discussion of full-time equivalency in 
the preamble to the proposed rule, one commenter stated that while 
appreciative of the intent underlying the conversion of EZ jobs to a 
full-time schedule equivalent, limited EZ funding and limited staff 
make such a requirement overly burdensome to monitor. The commenter 
stated that requiring businesses to report detailed work information on 
employees and then verifying the data is a time consuming process that 
will hinder staff from pursuing other development work.
    HUD response: Among the benefits of an EZ designation are the tax 
advantages that an eligible EZ business receives from tax-exempt 
financing, increased Section 179 deductions, and capital gains 
exclusions. A business in an EZ is also eligible for a maximum $3,000 
wage credit for every EZ resident it employs. In meeting the 35 percent 
EZ

[[Page 71013]]

resident/employee test, the Internal Revenue Service (IRS) generally 
does not make a distinction between full- or part-time jobs. In this 
regard, the IRS does not have a full-time equivalency requirement. To 
meet the 35 percent test of requiring employees to live in the 
designated EZ area, the IRS provides two methods: the per-employee 
fraction and the employee actual work hour fraction. An eligible EZ 
business may use either one. The per-employee fraction is a fraction, 
the numerator of which is, during the taxable year, the number of 
employees who work at least 15 hours a week for the employer, who 
reside in the EZ, and who are employed for at least 90 days, and the 
denominator of which is, during the same taxable year, the aggregate 
number of all employees who work at least 15 hours a week for the 
employer and who are employed for at least 90 days. The employee actual 
work hour fraction is a fraction, the numerator of which is the 
aggregate total actual hours of work for the employer of employees who 
reside in the EZ during a taxable year, and the denominator of which is 
the aggregate total actual hours of work for the employer of all 
employees during the same taxable year. See 26 CFR 1.1394-1(e)(3)(ii).
    The IRS also requires that a business that takes advantage of the 
tax incentives maintain a record and/or documentation, which evidence 
that the business has met the 35 percent job requirement. The only 
documentation that a business maintains as evidence in meeting the 35 
percent resident/employee requirement is a statement from the employee, 
who under the penalty of perjury, provides his or her address as 
principal residence and an assurance that the employee will notify the 
employer of a change in the employee's principal residence. In 
addition, the IRS requires that the employer must not have actual 
knowledge that the principal residence set forth in the employee's 
certification is not the employee's principal residence. See 26 CFR 
1.1394-1(e)(1).
    HUD finds merit in the comments regarding full-time equivalency 
test requiring a business to establish records that document and verify 
the hours of part-time employees separately from the hours of full-time 
employees, and agrees that maintaining and monitoring such records is 
overly burdensome. HUD also agrees that the full-time equivalency test 
imposes an unreasonable drain on staff and funding resources of a 
business, particularly for small and start-up businesses.
    In view of the fact that the IRS does not require a full-time 
equivalency test for EZ resident jobs, HUD removed the full-time 
equivalency requirement and replaced this requirement with a new 
standard for documenting the number of jobs created and filled by EZ 
residents. The new standard only requires that an EZ resident be 
employed by the employer for at least 90 days during the year in order 
for the applicable business to count the job toward meeting the 35 
percent test.
    In removing the full-time equivalency test and substituting this 
test with the 90-day standard, HUD believes that it provides a more 
reasonable and practical approach in meeting the job benefit 
requirement of Sec.  598.610(a)(2). This section recognizes the good 
faith efforts of businesses in opening job opportunities to EZ 
residents. In order to take advantage of certain tax incentives, 
however, the business still must meet the IRS 35 percent resident/
employee test.
    Recordkeeping and evidence of the jobs taken by EZ residents would 
be limited to a statement from the EZ resident/employee showing the 
address as the employee's principal residence and the employee's 
assurance that the employer would be notified of a change in the 
employee's principal residence.

Section 598.610: Resident Benefit Standards

    Comment: One commenter recommends a presumption that the resident 
benefit test has been met for EZ-based activities consistent with 
already established strategic plans approved by the local governance 
board of the EZ. The commenter stated that such a presumption would be 
consistent with the presumption allowed under Community Development 
Block Grant (CDBG) funds with respect to qualifying jobs at businesses 
assisted within an EZ.
    HUD response: When an EZ receives CDBG funds in support of an 
economic development activity involving job creation and retention, 
Sec.  570.208(a)(4)(iv) of the CDBG regulations (24 CFR part 570) 
allows the employee to qualify as a low-or-moderate income person under 
the presumption of benefit standard if that employee resides in an EZ. 
Consequently, for the purpose of receiving CDBG funds in support of a 
job creation activity in an EZ, the presumed benefit standard set forth 
in 24 CFR 570.208 (a)(4)(iv) satisfies the CDBG criteria for national 
objectives and is one that only applies to CDBG funded job creation or 
retention activities.
    Conversely, when a job creation and retention activity is in whole 
or part supported with HUD EZ grants, the rule applicable to HUD EZ 
grants governs. Importantly, funding job creation or retention 
activities with HUD EZ grants is closely aligned with the benefits of 
the $11 billion tax incentive package available to businesses in EZs as 
well as to businesses in Renewal Communities (RCs). Tax incentives and 
HUD EZ grant funds are dual benefits exclusively for Round II EZ 
designees.
    The objective of Round II benefits is to couple the use of EZ funds 
for activities ``in conjunction with economic development'' with the 
aggressive utilization of tax incentives. HUD believes that this rule 
will help ensure the empowerment of low-income EZ residents to become 
economically self-sufficient through job creation and retention.
    HUD concludes that the presumption of benefit standard and the 
resident benefit standards of Sec.  598.610 must be applied separately 
to each of the portions of assistance provided with CDBG funds and HUD 
EZ grant funds. Therefore, HUD is not including, in this final rule, 
the CDBG presumption of benefit, referenced in 24 CFR 570.208 
(a)(4)(iv)-(v), as an option for job creation activities funded in 
whole or in part with HUD EZ grants.
    Comment: All four commenters advocated for a provision enabling 
community revitalization and other activities to meet principal benefit 
standards as a presumed benefit to EZ residents. According to the 
commenters, a presumed benefit provision would eliminate the 
administrative burden of having to document resident benefit, protect 
the ability of EZ organizations to fulfill critical parts of their 
mission without having to justify to HUD why an exception to the 
principal benefit standard is justified, and allow EZs to carry out 
activities directed at slum and blight reduction.
    The commenters objected to the application of undefined exception 
criteria, viewing it as creating uncertainty resulting in another HUD 
review of activities already identified in the HUD approved strategic 
plan. One of the commenters requested clarification of the resident 
benefit requirement as this requirement relates to place-based 
redevelopment activities and their accompanying indirect effects on 
economic development.
    HUD response: The proposed rule presented the ``presumed benefit'' 
analysis in Section D (``Additional Issues'') of the preamble, 
specifically in subsection 2 of Section D (``Types of benefits/service 
area/location of the project''), but did not address ``presumed 
benefit'' in the text of the rule. HUD believes that many of the

[[Page 71014]]

comments regarding presumed benefit have merit and, as noted earlier in 
this preamble, HUD is revising Sec.  598.610 by adding a new paragraph 
(a)(3) entitled ``presumed benefit'' to this section. The addition of a 
presumed benefit test recognizes other types of direct benefit 
activities that are located in an EZ and serve both EZ residents and 
non-residents. The test allows EZ administrators to assume that certain 
commercial revitalization activities located and undertaken in the EZ 
and that provide services to both EZ residents and non-residents (e.g. 
supermarkets, drug stores) meet the 51 percent principal benefit 
standard. The application of the presumed benefit test requires the EZ 
to maintain written documentation that briefly describes the activity, 
its service area, and the rational for presuming that the activity 
meets the 51 percent principal benefit standard. Important to this 
issue is the fact that the new paragraph does not extend to activities 
outside the designated area.
    However, HUD recognizes that there may be circumstances where HUD 
EZ grants assist activities outside the designated area that would 
benefit EZ residents. For such cases, HUD provides, through this final 
rule, for an exception criterion in Sec.  598.610(c) to cover 
activities outside of the designated area. This expansion of coverage 
of the exception criterion gives an EZ the opportunity to justify why 
an activity that, on its face, does not appear to benefit EZ residents, 
would in fact result in substantial benefits to EZ residents upon 
closer examination. An EZ that wishes to use this exception criterion 
must provide HUD with a substantial analysis of its service area and 
customer base to support its claim that the activities outside the 
designated area would result in substantial benefit to the EZ and meet 
the goals of its strategic plan. Providing EZs with the opportunity to 
apply an exception criterion in these situations does not compromise 
the purpose of the EZ program, which is to stimulate the creation of 
new jobs, empower the residents to become more economically self-
sufficient, and promote the revitalization of distressed areas.
    HUD has determined that the exception criterion is a reasonable 
option to provide EZs that wish to demonstrate that utilizing HUD EZ 
grant funds for activities outside a designated area (and because the 
activities are outside the designated area, the activities are unable 
to meet resident benefit under the principal benefit standard or 
proportional standard), do, in fact, benefit EZ residents.
    In response to the comment for clarification of the relationship of 
the resident benefit requirement to place-based redevelopment 
activities and their impact on economic development, HUD believes that 
the final rule satisfactorily explains this relationship in both the 
exception criterion described in Sec.  598.610(c) (``resident benefit 
standard'') and the new presumed benefit standard in Sec.  
598.610(a)(3).
    Comment: One commenter requested that following submission by an EZ 
of a request for an exception with accompanying documentation, HUD 
commit to a period of 30 calendar days in which HUD has to respond to 
the request.
    HUD response: There may be times when HUD will need additional 
information as part of its review of the EZ's exception request. HUD's 
concern is that to impose a 30-calendar day review period may not allow 
sufficient time for HUD to request and the EZ to provide additional 
information or respond to any questions that HUD may have about the 
proposed activity for which the EZ seeks an exception under Sec.  
598.610(c). However, HUD is also aware of the need to respond as 
promptly as possible to the EZ's request once all information has been 
provided.
    Accordingly, the final rule provides in Sec.  598.610(c) that HUD 
will notify the EZ of its response to the exception requested under 
Sec.  598.610(c) within 60 days of the receipt of the EZ request 
provided that the EZ has promptly provided any additional information 
requested by HUD and the request is considered complete no later than 
45 days from the date of the request. The final rule incorporates the 
same provision with respect to exceptions requested under Sec.  
598.615(b).

Section 598.610(a)(2): Job Benefit

    Comment: One commenter stated that the expansion of the resident 
benefit requirement to include not only jobs filled by EZ residents, 
but made available to EZ residents is a ``great'' one. The commenter 
suggested that this language be incorporated into contracts through a 
first source type agreement requiring businesses to advertise and 
recruit from organizations that train and place EZ residents.
    HUD response: HUD agrees that a first source type arrangement can 
be an effective means for an EZ to assure that an assisted business 
will make jobs available to EZ residents. Such an arrangement is one 
way for an EZ to satisfy Sec.  598.610(a)(2).

Section 598.615(a)(1)(i)(ii): In Conjunction With Economic Development

    Comment: One commenter requested that HUD clarify the relationship 
of the resident benefit requirement to place-based redevelopment 
activities and the accompanying indirect effects on economic 
development.
    HUD response: HUD believes that the manner in which place-based 
redevelopment activities may meet resident benefit standards is 
clarified by the new paragraph added at this final rule stage to Sec.  
598.610(a) on presumed benefit.
    Comment: One commenter stated that the economic development 
standards are unduly restrictive. The commenter stated that activities 
that qualify as ``in conjunction with economic development'' should not 
be limited to traditional economic development activities, but rather 
should allow for EZ activities to be tied to an economic development 
strategy that promotes a coordinated initiative. The commenter stated 
that support for this comprehensive interpretation arises from 
Congress' use of the words ``in conjunction with'' rather than 
requiring that ``funds must be used for economic development.''
    HUD response: HUD disagrees with the premise that the discussion of 
``in conjunction with economic development'' in the preamble to the 
proposed rule, and Sec.  598.615, which establishes economic 
development standards present unduly restrictive standards and are 
contrary to Congressional intent. An interpretation which allows for 
non-economic development activities to be automatically deemed as 
meeting the standard of ``in conjunction with economic development'' 
because of ties to an EZ's economic development strategy, is contrary 
to the statutory language, which mandates that HUD EZ grants be used in 
conjunction with economic development.
    The statutory language that describes the purpose and use of HUD EZ 
grants supports a view that it is the intent of Congress to limit the 
use of HUD EZ grants to clearly defined activities that primarily and 
directly promote economic development. It is HUD's view that Sec.  
598.615 captures the types of activities/projects that are most likely 
to promote economic development and business revitalization. Even 
though some of the comments suggest that these ``traditional'' type 
activities are limiting efforts for a coordinated initiative, HUD 
believes that final rule's economic development standards are in the 
best

[[Page 71015]]

interest of the EZ program in providing economic opportunity to EZs 
through the retention and creation of jobs and business revitalization.
    However, HUD recognizes the need for a provision giving EZs the 
opportunity to demonstrate that carrying out a non-economic development 
activity/project is in fact in conjunction with economic development; 
for example, the construction or rehabilitation of housing, in an area 
of great potential for economic development, but one where the economic 
development potential may not be fully realized because of a great need 
for housing and public improvements, such as water and sewer capacity. 
In such a case, Sec.  598.615(b) provides the EZ with the opportunity 
to apply for an exception request, which must be accompanied by 
documentation that the proposed non-economic development activity also 
meets the resident benefit requirement of Sec.  598.610.
    Section 598.615(b) provides for the opportunity to request an 
exception for those limited circumstances where a project/activity 
appearing to have no direct relationship to economic development may 
still be critical to the EZ's economic strategy as defined in its 
strategic plan. The exception provision allows the EZ to justify why 
certain activities that have no readily visible direct connection to 
economic development may still meet the economic standards of Sec.  
598.615. The exception provision also allows scrutiny of the proposed 
project/activity and for HUD to determine if it can reasonably meet the 
economic development requirement.
    Comment: With respect to Sec.  598.615(a)(1)(i) and (ii), one 
commenter stated that for this provision to work, the 35 percent EZ 
resident employment requirement must include a ``best effort'' clause 
so that a business can operate if no EZ residents are available.
    HUD response: HUD believes that the addition of a ``best effort'' 
clause is unnecessary. As noted earlier in this preamble, the final 
rule recognizes that a business may not be able to hold open 
indefinitely employment opportunities for EZ residents to fill. 
However, the EZ should demonstrate that EZ businesses with employment 
opportunities made a good faith effort to recruit and give first 
consideration to EZ residents. Examples of good faith efforts may 
include public notification of employment opportunities targeted to EZ 
residents and job fairs.
    Comment: With respect to Sec. Sec.  598.615(a)(3); 598.615(a)(4), 
and 598.615(a)(5), one commenter requested that the final rule modify 
these sections to: (1) Include, in Sec.  598.615(a)(3), ``soft-skill 
training'' and ``youth access'' as additional activities to be 
categorized as education resources; (2) allow, in Sec.  598.615 (a)(4), 
for employees of EZ organizations to undertake capacity building; and 
(3) include, in Sec.  598.615(a)(5), housing development in conjunction 
with the appropriate infrastructure.
    HUD response: An expectation arose during the Round II EZ 
designation process that the same funding source and stream that was 
provided to Round I EZs would eventually also be available to the 15 
Round II EZs; that is, that each of the Round II EZs would receive $100 
million in SSBG funds.
    This expectation resulted in Round II EZs developing strategic 
plans and activities and projects based on substantially larger funding 
amounts than the funding that actually became available to the Round II 
EZs. Since their time of designation, Round II EZs received HUD EZ 
grants of $25.6 million rather than the anticipated $100 million in 
SSBG funds.
    The receipt of a lower level of funding to carryout an EZ's 
strategic plan resulted in HUD limiting and restricting the type and 
range of eligible activities/projects meeting the statutory test of 
``in conjunction with economic development.'' For example, use of HUD 
EZ grant funds for public improvements is permissible ``only'' if the 
EZ can show in its implementation plan that the lack of the public 
improvements clearly presents an impediment to the establishment and or 
expansion of a business.
    Even though this same ``only if'' restriction is found in the 
educational assistance provision, it does not preclude ``training to 
youth.'' The requested modification to expand Sec.  598.615(a)(4) to 
include employees of organizations serving the EZ is considered beyond 
the scope of ensuring the most comprehensive and effective use of 
limited resources. Although HUD did not make the requested modification 
to Sec.  598.615(a)(5) to include housing development, as noted earlier 
in this preamble, an EZ may demonstrate that housing development is in 
conjunction with economic development.
    Comment: A commenter requested assurance that the final rule would 
provide that the standards established by the final rule would only be 
applied prospectively to implementation plans and activities in order 
to avoid the hardship that EZs may face in having to redesign programs 
and resubmit plans of grant-funded programs in accordance with the new 
standards.
    HUD response: Unless there is statutory authority that allows or 
directs for new regulations to be applied retroactively, all rulemaking 
is prospective. Nevertheless, HUD has revised the ``applicability'' 
language of Sec.  598.600 to make clear that the standards promulgated 
by this final rule apply only to a project or activity to be undertaken 
with HUD EZ grant funds that is proposed by the EZ after the effective 
date of this rule.

IV. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in subpart G of 
24 CFR part 598 were submitted to the Office of Management and Budget 
(OMB) for review and approval under the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-3520). This submission was reviewed and approved, and 
provided the following OMB approval number: 2506-0148. Under 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 valid control number.

Environmental Review

    A Finding of No Significant Impact with respect to the environment 
for this rule was made at the proposed rule stage in accordance with 
HUD's regulations at 24 CFR part 50, which implement section 102(2)(C) 
of the National Environmental Policy Act of 1969 (42 U.S.C. 
4332(2)(C)). The Finding of No Significant Impact remains applicable at 
this final rule stage and is available for public inspection between 8 
a.m. and 5 p.m. weekdays in the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
Seventh Street, SW., Washington, DC 20410-0500.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local, and 
tribal governments and the private sector. This rule only establishes 
program-specific requirements governing a recipient's use of Federal 
grant funds and does not impose a Federal mandate that will result in 
expenditure by State, local, or tribal governments, within the meaning 
of UMRA.

[[Page 71016]]

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The rule establishes performance standards for the use of grant funds 
made available to EZs by HUD, largely pertaining to benefit levels and 
economic-development activities. There are no anti-competitive 
discriminatory aspects of the rule with regard to small entities and 
there are not any unusual procedures that would need to be complied 
with by small entities. Accordingly, the undersigned certifies that 
this rule will not have a significant economic impact on a substantial 
number of small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (``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 rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
state and local governments or preempt state law within the meaning of 
the Executive Order.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
OMB determined that this is a ``significant regulatory action,'' as 
defined in section 3(f) of the order (although not an economically 
significant regulatory action under the Order). The docket file is 
available for public inspection in the Regulations Division, Office of 
General Counsel, Department of Housing and Urban Development, Room 
10276, 451 Seventh Street, SW., Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the docket file by calling the Regulations 
Division at (202) 708-3055 (this is not a toll-free number).

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Numbers for 24 CFR part 
598 is 14.244.

List of Subjects in 24 CFR Part 598

    Community development, Economic development, Empowerment zones, 
Housing, Indians, Intergovernmental relations, Reporting and 
recordkeeping requirements, Urban renewal.


0
Accordingly, HUD amends 24 CFR part 598 as follows:

PART 598--URBAN EMPOWERMENT ZONES: ROUND TWO AND THREE DESIGNATIONS

0
1. The authority citation for 24 CFR part 598 continues to read as 
follows:

    Authority: 26 U.S.C. 1391; 42 U.S.C. 3535(d).


Sec.  598.3  [Amended]

0
2. In Sec.  598.3, remove the definition of ``EZ/EC SSBG funds.''

0
3. In Sec.  598.210, remove paragraphs (e) and (g), redesignate 
paragraph (f) as paragraph (e), redesignate paragraph (h) as paragraph 
(f), and revise newly redesignated paragraphs (e) and (f) to read as 
follows:


Sec.  598.210  What certifications must governments make?

* * * * *
    (e) Provide that the nominating governments or corporations agree 
to make available all information requested by HUD to aid in the 
evaluation of progress in implementing the strategic plan; and
    (f) Provide assurances that the nominating governments will 
administer the Empowerment Zone program in a manner that affirmatively 
furthers fair housing on the basis of race, color, national origin, 
religion, sex, disability, and familial status (presence of children).


Sec.  598.215  [Amended]

0
4. In Sec.  598.215, remove the last sentence of paragraph 
(b)(4)(i)(D).

0
5. Revise Sec.  598.405 to read as follows:


Sec.  598.405  Environmental review.

    Where any EZ's strategic plan or any revision thereof proposes the 
use of HUD EZ Grant Funds for activities that are not excluded from 
environmental review under 24 CFR 50.19(b), the EZ shall supply HUD 
with all available, relevant information necessary for HUD to perform 
any environmental review required by 24 CFR part 50.

0
6. Add a new subpart G to read as follows:

Subpart G--Empowerment Zone Grants

Sec.
598.600 Applicability.
598.605 Implementation plan.
598.610 Resident benefit standards.
598.615 Economic development standards.
598.620 Evaluation, monitoring, and enforcement.


Sec.  598.600  Applicability.

    This subpart applies to a project or activity proposed by an 
Empowerment Zone after January 14, 2008 to be undertaken with funds 
appropriated by Congress and made available by HUD specifically for use 
by the EZ. These funds are referred to as ``HUD EZ Grant Funds.''


Sec.  598.605  Implementation plan.

    (a) Implementation plan content. An EZ must submit an 
implementation plan for HUD approval that addresses each project or 
activity proposed to be undertaken by the EZ with HUD EZ Grant Funds. 
The implementation plan must:
    (1) Describe the project or activity;
    (2) Identify the completion date or duration of the project or 
activity;
    (3) Provide the total cost of the project or activity;
    (4) Identify the amount of HUD EZ Grant Funds to be used for the 
project or activity; and
    (5) Include a narrative description of how the project or activity 
meets the resident benefit and economic development standards of this 
subpart.
    (b) Proposed funded project or activity. The project or activity 
proposed in the implementation plan is subject to the following 
requirements:
    (1) The Federal requirements listed in 24 CFR 5.105;
    (2) The governmentwide, Uniform Administrative Requirements for 
Grants and Cooperative Agreements to State, Local and Federally 
Recognized Indian Tribal Governments at 24 CFR part 85;
    (3) The requirements of the Uniform Relocation Assistance and Real 
Property Acquisition Policies Act of 1970 (URA) (42 U.S.C. 4601 et 
seq.);
    (4) The environmental review and approval requirements of 24 CFR 
part 50;
    (5) The provisions of the Memorandum of Agreement (MOA) setting 
forth the obligations and requirements that the state and local 
governments, as Empowerment Zone designees, have agreed to meet as 
signatories of the agreement.
    (6) Recipients of the HUD EZ Grant Funds also must adhere to the 
requirements set forth in the provisions of the grant agreement for HUD 
EZ Grant Funds.

[[Page 71017]]

Sec.  598.610  Resident benefit standards.

    The project or activity described in an implementation plan 
submitted for HUD approval by an EZ to describe the planned use of HUD 
EZ Grant Funds must meet one of the following three standards of 
resident benefit for determining the amount of HUD EZ Grant Funds that 
may be used to fund a particular project or activity:
    (a) Principal benefit standard--(1) Benefits other than jobs. If a 
majority (51 percent) of the direct beneficiaries of the project or 
activity described in the implementation plan reside within the EZ, the 
project or activity may be fully assisted with HUD EZ Grant Funds.
    (2) Jobs benefit. In any case where the direct benefits to be 
provided by a project or activity described in an implementation plan 
will be in the form of jobs, the project may be fully assisted with HUD 
EZ Grant Funds if at least 35 percent of the jobs are taken by, or made 
available to, EZ residents. A job satisfies this 35 percent requirement 
if the EZ resident is employed by the employer for at least 90 days 
during the year. For purposes of this 35 percent requirement, an 
employer may rely on a certification by the employee that provides to 
the employer the address of the employee's principal residence, and 
requires the employee to notify the employer of a change of the 
employee's principal residence.
    (3) Presumed benefit. Certain commercial revitalization activities 
that are located and undertaken in an EZ and that provide services to 
both EZ residents and non-residents (e.g., supermarkets, drug stores) 
will presume to meet the 51 percent principal benefit standard in 
paragraph (a)(1) of this section, provided that the EZ maintains 
written documentation that briefly describes the activity, its service 
area, and the rationale for presuming that the activity meets the 51 
percent principal benefit standard.
    (b) Proportional benefit standard. If a project or activity 
described in an implementation plan cannot meet the principal benefit 
standard of paragraph (a) of this section, the percent of the cost of 
the project or activity that may be assisted with HUD EZ Grant Funds 
may not be greater than the percent of all persons benefiting directly 
from the project or activity who reside within the EZ.
    (c) Exception criterion. In any case where a proposed project or 
activity, including activities outside of the designated area, would 
not meet the standards of paragraph (a) or paragraph (b) of this 
section, HUD EZ Grant Funds may be used where HUD determines that an 
implementation plan, accompanied by the facts that the EZ requests HUD 
to review and consider as justifying the exception, demonstrates 
substantial benefits to the EZ that would result from the project or 
other compelling reasons justifying the appropriateness of the 
implementation plan to the EZ's strategic plan. A request by an EZ for 
an exception under paragraph (c) of this section will receive a 
response by HUD no later than 60 days from the date of the EZ's request 
provided that the EZ's request with all relevant information is 
considered complete no later than 45 days from the date of the EZ's 
request.


Sec.  598.615  Economic development standards.

    (a) Economic development standards. The project or activity in an 
implementation plan submitted for HUD approval by an EZ to describe the 
planned use of HUD EZ Grant Funds must meet one of the following 
economic development standards:
    (1) Business development assistance. An activity that involves 
assisting a business in the EZ meets the standard, whether or not the 
business will create any new jobs. Any such activity must also meet the 
standards for benefiting a sufficient portion of EZ residents as 
required under Sec.  598.610. Qualifying activities include the use of 
HUD EZ Grant Funds to:
    (i) Assist in establishing a business;
    (ii) Expand a business, including efforts to stimulate the 
development or expansion of microenterprises; and
    (iii) Assisting businesses that provide goods or services within 
the EZ to remain within the EZ.
    (2) Employment training and assistance. An activity that assists a 
person to take, or remain in, a job, subject to meeting the standards 
for benefiting a sufficient proportion of EZ residents as required 
under Sec.  598.610, including:
    (i) Job training;
    (ii) Provision of child care;
    (iii) Transportation to or from the place of employment or the 
place where job training is taking place; or
    (iv) Counseling persons on job-related skills, such as how to 
interview successfully for a job, and dress and act appropriately in 
the conduct of a job.
    (3) Educational assistance. The provision of educational assistance 
meets the economic development standard only if the EZ's implementation 
plan demonstrates that such education will be provided to persons who 
cannot qualify for available jobs because of the lack of some specific 
knowledge that would be given them through the course(s) to be 
provided. Any educational assistance provided must also meet the 
standard for benefiting a sufficient portion of EZ residents as 
required under Sec.  598.610.
    (4) EZ administrative capacity. An activity that increases the 
capacity of governance board members or staff of the EZ's lead agency 
to carry out their roles with respect to economic development projects 
expected to be assisted in support of the EZ's strategic plan is 
eligible. This includes the cost of attending a conference on economic 
development. The use of HUD EZ Grant Funds for capacity building under 
this paragraph is deemed to provide adequate benefit to EZ residents.
    (5) Public improvements. The provision of public improvements, such 
as extension of water or sewer capacity, or street widening, meets the 
economic development standard only if it is shown in the implementation 
plan that the lack of the improvements clearly is an impediment to the 
establishment, expansion or retention of one or more businesses in the 
EZ, and that the provision of the proposed public improvement would be 
limited as much as feasible to assisting the business or businesses. 
Any public improvements must also meet the standard for benefiting a 
sufficient portion of EZ residents as required under Sec.  598.610.
    (b) Exception request. HUD may approve a project or activity that 
does not fall within any of the previous review standards of this 
section if the EZ provides evidence that, in some way, the project or 
activity can reasonably be seen as meeting the economic development 
standard. Such a project or activity must also meet the standards for 
benefiting a sufficient portion of EZ residents as required under Sec.  
598.610. All requests for such an exception must be in writing, 
accompanied by the facts that the EZ wants HUD to review and consider 
as justification. A request by an EZ for an exception under this 
paragraph (b) will receive a response by HUD no later than 60 days from 
the date of the EZ's request provided that the EZ's request with all 
relevant information is considered complete no later than 45 days from 
the date of the EZ's request.


Sec.  598.620  Evaluation, monitoring, and enforcement.

    (a) Progress, evaluation, and monitoring. HUD will review the 
performance of an EZ's use of HUD EZ Grant Funds for compliance with 
this subpart as part of its regular evaluation process under 24 CFR 
598.420, through on-site monitoring under 24 CFR 85.40(e), and by other 
appropriate means.

[[Page 71018]]

    (b) Warning letter. If HUD has reason to believe that an EZ is not 
carrying out its funded activities in accordance with any applicable 
requirements, including the resident benefit and economic development 
standards of this subpart, HUD may forward a warning letter to the EZ 
informing it of a potential violation and recommending action to avoid 
a violation. A warning letter is not a prerequisite for any other 
action HUD may take.
    (c) Notice of violation. If HUD determines that there appears to be 
a violation in the use of HUD EZ Grant Funds, it will notify the EZ of 
the alleged violation and the action HUD proposes to take under 24 CFR 
85.43 or its successor regulation or if appropriate, 24 CFR 598.430.
    (d) Response to notice. A notice sent to an EZ under paragraph (c) 
of this section will provide the EZ with at least 30 calendar days from 
the time HUD sends the notice to respond with any information to rebut 
or mitigate the alleged violation.
    (e) Final action. If the EZ does not respond within the period 
specified pursuant to paragraph (d) of this section, HUD will make a 
final determination of the violation and may proceed to take the action 
proposed in the notice. If the EZ responds, HUD will consider the 
information received from the EZ and may request additional 
information. After considering the information received from the EZ, 
HUD will notify the EZ of HUD's final determination and action, 
affirming, modifying, or repealing HUD's initial determination of an 
alleged violation and proposed action.

    Dated: November 13, 2007.
Roy A. Bernardi,
Deputy Secretary.
[FR Doc. E7-24112 Filed 12-12-07; 8:45 am]
BILLING CODE 4210-67-P