[Federal Register Volume 73, Number 163 (Thursday, August 21, 2008)]
[Proposed Rules]
[Pages 49544-49587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18753]



[[Page 49543]]

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Part II





Department of Housing and Urban Development





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24 CFR Parts 901, 902, and 907



Public Housing Evaluation and Oversight: Changes to the Public Housing 
Assessment System (PHAS) and Determining and Remedying Substantial 
Default; Asset Management Transition Year Information and Uniform 
Financial Reporting Standards (UFRS) Information; Proposed Rule and 
Notice

  Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 901, 902 and 907

[Docket No. FR-5094-P-01]
RIN 2577-AC68


Public Housing Evaluation and Oversight: Changes to the Public 
Housing Assessment System (PHAS) and Determining and Remedying 
Substantial Default

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would make two sets of amendments to 
improve evaluation and oversight of public housing agencies (PHAs). 
First, this proposed rule would amend HUD's Public Housing Assessment 
System (PHAS) regulations for the purposes of: Consolidating the 
regulations governing assessment of a PHA's program in one part of the 
Code of Federal Regulations (CFR); revising certain PHAS regulations 
based on the Department's experience with PHAS since it was established 
as the new system for evaluating a PHA in 1998; and updating certain 
PHAS procedures to reflect recent changes in public housing operations 
from conversion by PHAs to asset management, including updating and 
revising the PHAS scoring. PHAS is designed to improve the delivery of 
services in public housing and to enhance trust in the public housing 
system among PHAs, public housing residents, and the general public, by 
providing a management tool for effectively and fairly measuring the 
performance of a PHA in essential housing operations of its projects, 
based on standards that are uniform and verifiable. The changes 
proposed by this rule are intended to enhance the efficiency and 
utility of PHAS.
    Second, the proposed rule would establish, in a separate part of 
the CFR, the regulations that would specify the actions or inactions by 
which a PHA would be determined to be in substantial default, the 
procedures for a PHA to respond to such a determination or finding, and 
the sanctions available to HUD to address and remedy substantial 
default by a PHA. To date, such regulations have been included in the 
PHAS regulations, but the actions or inactions that constitute 
substantial default are not limited to failure to comply with PHAS 
regulations. Accordingly, the proposed regulations applicable to 
substantial default are more appropriately codified in a separate CFR 
part.
    This proposed rule is also publishing the scoring processes for 
each of the PHAS scoring categories as appendices to part 902. Although 
these scoring processes are proposed as appendices, it is also possible 
that, at the final rule stage, they will be published as separate 
notices as has been HUD's practice to this point.

DATES: Comment Due Date: October 20, 2008.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 10276, Washington, DC 20410-0500. Communications must 
refer to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 Seventh Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-402-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the Federal Information Relay 
Service, toll-free, at 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Contact Wanda Funk, Senior Advisor, 
Department of Housing and Urban Development, Office of Public and 
Indian Housing, Real Estate Assessment Center (REAC), 550 12th Street, 
SW., Suite 100, Washington, DC 20410; or the REAC Technical Assistance 
Center at 888-245-4860 (this is a toll-free number). Persons with 
hearing or speech impairments may access this number through TTY by 
calling the toll-free Federal Information Relay Service at 800-877-
8339. Additional information is available from the REAC Internet site 
at http://www.hud.gov/offices/reac/.

SUPPLEMENTARY INFORMATION:

I. Changes to the PHAS

A. Background on PHAS

    PHAS was established by a final rule published on September 1, 1998 
(63 FR 46596). Prior to 1998, a PHA was evaluated by HUD with respect 
only to its management operations. PHAS expanded assessment of a PHA to 
four key areas of a PHA's operations: (1) The physical condition of the 
PHA's properties; (2) the PHA's financial condition; (3) the PHA's 
management operations; and (4) the residents' service and satisfaction 
assessment (through a resident survey). On the basis of these four 
indicators, a PHA receives a composite score that represents a single 
score for a PHA's entire operation and a corresponding performance 
designation. PHAs that are designated high performers receive public 
recognition and relief from some HUD requirements. PHAs that are 
designated standard performers may be required to take corrective 
action to remedy identified deficiencies. PHAs that are designated 
substandard performers are required to take corrective action to remedy 
identified deficiencies. PHAs that are designated troubled performers 
are subject to remedial action.
    By final rule published on January 11, 2000 (65 FR 1712), HUD 
amended the PHAS regulations to, among other things, elaborate on some 
PHAS procedures; revise the mechanism for obtaining technical review of 
physical inspections results and resident survey

[[Page 49545]]

results, and for appealing PHAS scores; and implement statutory changes 
resulting from enactment of the Quality Housing and Work Responsibility 
Act of 1998 (Pub. L. 105-276, October 21, 1998).

B. Public Housing Operating Fund Program

    The regulations governing the Public Housing Operating Fund program 
are of key relevance to the proper operation of PHAs and, consequently, 
to PHAS. Operating funds are made available to a PHA for the operation 
and management of public housing; therefore, the regulations applicable 
to a PHA's operation and management of public housing must be 
considered in any changes proposed to PHAS. The regulations for the 
Public Housing Operating Fund program are found at 24 CFR part 990; 
were published on September 19, 2005 (70 FR 54983), which was followed 
by a correction published on October 24, 2005 (70 FR 61366); and became 
effective on November 18, 2005.
    Subpart H of the part 990 regulations (Sec. Sec.  990.255 to 
990.290), as revised by the September 2005 rule, establishes the 
requirements regarding asset management. Under Sec.  990.260(a), PHAs 
that own and operate 250 or more dwelling rental units must operate 
using an asset management model consistent with the subpart H 
regulations. PHAs with fewer than 250 dwelling rental units may elect 
to transition to asset management, but are not required to do so. HUD's 
Fiscal Year (FY) 2008 appropriations, provided in Title IV of Division 
K of the Consolidated Appropriations Act, 2008 (Pub. L. 110-161, 
approved December 26, 2007), state, in administrative provision section 
225, that PHAs that own or operate 400 or fewer public housing units 
may elect to be exempt from any asset management requirement imposed by 
HUD in connection with HUD's operating fund rule, with one exception: A 
PHA seeking discontinuance of a reduction of subsidy under the 
operating fund formula shall not be exempt from asset management 
requirements. Since requirements in appropriations acts, unless 
otherwise indicated, apply only to the fiscal year to which the 
appropriations act is directed, HUD's proposed rule to revise PHAS does 
not reflect this one-year provision. PHAs are required to implement 
project-based management, project-based budgeting, and project-based 
accounting, which are all defined in the regulations of 24 CFR part 
990, subpart H, and are essential components of asset management.

C. Proposed Amendments to PHAS

    The proposed amendments to PHAS retain the basic structure of the 
existing regulations. PHAs will continue to be scored based on 
evaluation in four indicators: Physical condition, financial condition, 
management operations, and the PHA's management of its Capital Fund 
program. PHAS would continue to rely on information that is verifiable 
by a third party, wherever possible.
Overview of Proposed Changes to PHAS
    This proposed rule modifies PHAS primarily to conform to the new 
regulations on the Public Housing Operating Fund program and the 
conversion by PHAs to asset management, including project-based 
budgeting, project-based accounting, and project-based performance 
evaluation. Highlights of some of the major changes proposed to each of 
the four current PHAS indicators are as follows:
    Physical. The physical inspection indicator would remain largely 
unchanged. Independent physical inspections would continue to be 
conducted on each public housing project, although the frequency of 
inspections would depend on the scores of individual projects, not the 
score for the entire PHA. For example, if a specific project scored 
below 80 points, it would be inspected the following year, regardless 
of whether the overall physical score for the PHA, based on all 
projects, was 80 points or higher (as is the case in the currently 
codified PHAS regulations). If a PHA's overall physical score is less 
than 80 points, and one or more projects score 80 points or above, 
those projects that score 80 points or above would be inspected every 
other year.
    Financial. The financial assessment system would be modified to 
include an assessment of the financial condition of each project. A PHA 
would continue to submit an annual Financial Data Schedule (FDS) to HUD 
that contains financial information on all major programs and business 
activities. However, for purposes of PHAS, the PHA would be scored on 
the financial condition of each project, and these scores would be the 
basis for a program-wide score.
    Subindicators that are currently available through financial 
reports but are more appropriately measures of management performance 
(e.g., bad debt, tenant accounts receivables, and occupancy loss) would 
be removed from this indicator and moved to the management operations 
indicator. HUD considered the option of allowing these items to remain 
as part of the financial condition indicator. HUD now has 10 years of 
experience with PHAS, and, based on that experience, believes that bad 
debt, accounts receivables, and occupancy loss are more properly 
measures of management operations, as is currently the prevailing view 
in the multifamily industry. Even after these items were moved from 
their original location as part of the management operations 
assessment, they were tracked in both the financial condition and 
management operations indicators. The fact that these items continued 
to be tracked as management operations-related even after they were 
moved to the financial condition indicator demonstrates that they are, 
in fact, closely related to management operations. The U.S. Housing Act 
of 1937 (1937 Act) itself, in section 6(j), 42 U.S.C. 1437d(6)(j), 
associates items in these categories with management operations (see 42 
U.S.C. 1437d(j)(1)(A)) (vacancy rate, that is, occupancy loss) and 
(j)(1)(C) (percentage of rents collected, related to tenant accounts 
receivable and bad debt), both of which are referred to by the statute 
as examples of ``indicators to assess the management performance.'' For 
these reasons, HUD has decided to move these factors to management 
operations, where HUD, based on multifamily industry practice and its 
own experience, believes they belong.
    Management. The current management operations assessment system 
relies on PHA submission of a range of information that is self-
certified. Under the proposed rule, this current system would be 
replaced with management reviews conducted of each project by HUD staff 
(or, where applicable, HUD's agents). Preferably, such reviews would be 
conducted annually, consistent with the standards for HUD's subsidized 
housing programs. As part of this project management review process, 
HUD would examine a PHA's performance in the area of resident programs 
and participation, thereby eliminating a separate resident satisfaction 
survey.
    Resident Satisfaction Surveys. A PHA's performance in the area of 
resident programs and participation would be evaluated as part of the 
project management review, thus eliminating the need for a separate 
indicator on resident satisfaction and, therefore, a separate 
satisfaction survey. The project management review would include a 
subindicator that would measure efforts to coordinate, promote, or 
provide effective programs and activities to promote economic self-
sufficiency of residents, and measure the extent to

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which residents are provided with opportunities for involvement in the 
administration of the public housing. This subindicator would include 
all of the elements regarding economic self-sufficiency and resident 
participation that are included in section 6(j) of the 1937 Act (42 
U.S.C. 1437d(j)). Separately, HUD may perform resident surveys at 
different frequencies that would be used as diagnostic tools that would 
assess residents' satisfaction with their living conditions and not be 
made part of a PHA's score.
    The current survey instrument has been in place since 1999. In 
evaluating the results of the survey, HUD has found strong indications 
that the survey is not useful. Even some of the more troubled projects 
have received high resident satisfaction scores. As the table below 
shows, the average satisfaction rate is 82.57 percent. For the period 
from FY 2002 through FY 2006, the satisfaction rate has varied by no 
greater than 1.88 percent for the entire 5-year period. The services 
survey area has consistently been in the 90th percentile, while the 
lowest-scoring survey area, communication, has an average satisfaction 
rate of 75.68 percent. Given the actual condition of some of the 
projects surveyed, it is highly unlikely that these results are 
accurately reflecting resident satisfaction.

                                                                  Resident Satisfaction
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Survey area                           FY 2002 %       FY 2003 %       FY 2004 %       FY 2005 %       FY 2006 %       Average %
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Maintenance & Repair....................................           89.25           89.11           85.16           86.62           88.50           87.73
Communication...........................................           76.35           76.31           74.80           75.61           75.35           75.68
Safety..................................................           74.40           82.31           80.69           81.24           80.13           79.75
Services................................................           92.32           92.24           91.90           91.78           91.99           92.05
Appearance..............................................           77.12           78.63           76.66           78.29           77.39           77.62
                                                         -----------------------------------------------------------------------------------------------
    Average.............................................           81.89           83.72           81.84           82.71           82.67           82.57
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The response rate for the survey has also remained relatively 
static, as the following table shows.

                                         Resident Survey Response Rates
----------------------------------------------------------------------------------------------------------------
      FY 2002 %              FY 2003 %              FY 2004 %              FY 2005 %              FY 2006 %
----------------------------------------------------------------------------------------------------------------
            40.33                  37.12                  39.15                  42.40                  39.06
----------------------------------------------------------------------------------------------------------------
                                          Average Response Rate: 39.61
----------------------------------------------------------------------------------------------------------------

    At some of the smaller PHAs, residents have complained that they 
are answering the same questions year after year. Industry groups have 
also indicated that they believe the survey instrument needs to be 
revised.
    As an alternative to the resident survey, the new management review 
format for public housing projects includes two areas that take into 
consideration resident participation: Economic self-sufficiency and 
resident involvement in project administration. These two areas assess 
the percentage of adults with some form of employment income, the 
percentage of adults participating in self-sufficiency, the number of 
self-sufficiency opportunities offered at the project, and the number 
of resident involvement opportunities offered by a project. In 
addition, as much as possible, the management operations subindicators 
focus on residents. For example, the work order subindicator measures 
tenant-generated work orders rather than emergency and nonemergency 
work orders. The advantage of these management subindicators is that 
they measure objective results rather than subjective satisfaction, and 
also that they are not dependent on voluntary participation but rather 
are determined by actual reviews and site visits.
    HUD invites comments on whether the survey should be retained in 
some form, how it might be improved, and whether HUD's proposed 
solution is sufficient to gather resident feedback on resident 
satisfaction.
    Capital Fund. HUD proposes to establish a new indicator, which 
previously was part of the management operations indicator, that 
measures a PHA's performance with respect to the obligation and 
expenditure of Capital Fund program grants. This Capital Fund program 
indicator is statutory, required by section 6(j) of the 1937 Act (42 
U.S.C. 1437d(j)(1)(B)), and can be measured only at the agency level.
    In addition to the changes in the four indicators, discussed above, 
the rule would modify the score adjustment for physical condition and 
neighborhood environment. This adjustment would be applied to the 
management operations indicator on a project-by-project basis rather 
than to the physical condition indicator. The statutory language states 
that HUD should reflect in the weights assigned to the various 
indicators the differences in the difficulty in managing individual 
projects that result from their physical condition and neighborhood 
environment. The application of the adjustment to the management 
operations indicator would specifically address the difficulty in 
managing individual projects, and would also result in a true physical 
condition score without any adjustments outside of the physical 
condition inspection results.
    HUD believes the changes proposed to the PHAS regulations by this 
rule offer the following advantages:
     HUD and PHAs would be better able to identify and measure 
the performance of individual projects, which is necessary for asset 
management.
     The new system conforms to HUD's performance monitoring 
protocols and regulations in the area of multifamily housing.
     The new system would be much simpler for PHAs and HUD to

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administer. PHAs would only be required to submit their FDS schedule 
and would no longer need to submit a management certification. 
Moreover, PHAs would have greater flexibility in developing internal 
monitoring systems.
     The new system would focus more on performance than 
process. Additional changes to PHAS proposed by this rule include:
     Corrective Action Plans are proposed to replace current 
Improvement Plans.
     References to the Troubled Agency Recovery Center (TARC), 
an area center to which troubled PHAs were referred for oversight, 
monitoring, or other remedial action, have been removed since the TARCs 
no longer exist. The duties and responsibilities of the TARCs were 
transferred to and assumed by HUD's field offices.

D. Section-by-Section Overview of PHAS Amendments

    The following section-by-section overview does not describe each 
and every change made to the PHAS regulation, but provides an overview 
of some of the key changes proposed by this rule.
1. Part 901, Public Housing Management Assessment Program (PHMAP)
    This proposed rule would remove part 901, which contains the PHMAP 
regulations. When HUD issued the final PHAS rule in September 1998, the 
preamble to the final rule noted that the PHMAP regulations in part 901 
would be retained because PHAS would not be implemented until October 
1999, one year after the September 1998 rule became effective. The 
preamble advised PHAs that they would continue to comply with the PHMAP 
regulations until the implementation of PHAS in October 1999. This 
proposed rule will consolidate all public housing assessment 
regulations in the PHAS regulations in part 902, and part 901 will be 
removed.
2. Part 902, PHAS
Subpart A--General Provisions
    Section 902.1 (Purpose, scope, and general matters). Proposed Sec.  
902.1 would consolidate the purpose, scope, and applicability sections 
into a single introductory section to better capture the overall 
objectives of PHAS in one regulatory location.
    Proposed Sec.  902.1(a) is unchanged from the purpose paragraph of 
the currently codified regulations.
    Proposed Sec.  902.1(b) remains similar to currently codified Sec.  
902.3.
    Proposed Sec.  902.1(c) briefly describes PHAS indicators.
    Proposed Sec.  902.1(d) would be revised to include the project 
assessment approach, which is now the relevant assessment as PHAs 
convert to asset management. With the proposed removal of the resident 
survey, to be discussed more fully later in this preamble, a reference 
to gathering data from residents would be removed. Material concerning 
HUD data systems would be added.
    Currently codified Sec.  902.1(e) pertaining to changes in a PHA's 
fiscal year end would be moved to a revised Sec.  902.60(a). New 
proposed Sec.  902.1(e) would provide for a PHA with fewer than 250 
units that does not convert to asset management to be considered a 
single project.
    Proposed Sec.  902.1(f) would revise currently codified Sec.  
902.1(b) to reflect that REAC is now part of HUD's Office of Public and 
Indian Housing (PIH).
    Section 902.3 (Definitions). Currently codified Sec.  902.3 would 
be revised to include the definitions of additional important terms 
used in the regulations. In the currently codified regulations, the 
definitions are found in both 24 CFR 902.7 and 24 CFR 902.24, where 
definitions used in the physical condition indicator are presented. HUD 
proposes to place all definitions in one section for greater 
convenience.
    Currently codified Sec.  902.3 would be revised to remove the 
following definitions that are no longer applicable or are not 
referenced in the regulations: average number of days non-emergency 
work orders were active; improvement plan; occupancy loss; property; 
reduced actual vacancy rate within the previous 3 years; reduced 
average time nonemergency work orders were active; tenant receivables 
outstanding; unit months available; unit months leased; and work orders 
deferred to the Capital Fund program.
    The following definitions would be added to this section: Assistant 
Secretary; Corrective Action Plan; decent, safe, sanitary and in good 
repair (DSS/GR); memorandum of agreement (MOA); Alternative Management 
Entity (AME); Resident Management Corporation (RMC); Direct Funding 
RMC; and unit-weighted average. In addition, the following definitions 
from currently codified Sec.  902.24 are proposed to be added to this 
section: criticality; deficiencies; dictionary of deficiency 
definitions; inspectable areas; inspectable item; item weights and 
criticality levels document; normalized weight; score; severity; and 
subarea.
    Section 902.5 (Applicability). To allow sufficient time for PHAs to 
adjust to PHAS, as proposed to be revised by this rule, proposed Sec.  
902.5(b)(1) would change applicability to commence with PHAs with 
fiscal years ending on and after June 30, 2009. The information in 
currently codified Sec.  902.5(b), pertaining to the issuance of PHAS 
advisory scores, would be removed because it is no longer applicable.
    Proposed Sec.  902.5(b)(2) would address transition scores and the 
fiscal-year-end dates for transition scores.
    Section 902.9 (PHAS scoring). This proposed section would address 
the PHAS scoring system. (Those parts of currently codified Sec.  902.9 
that address the frequency of PHAS scoring would be incorporated into 
proposed Sec.  902.13.)
    Proposed Sec.  902.9(a) would briefly describe the PHAS indicators, 
which would include the new Capital Fund program indicator that 
replaces the current resident service and satisfaction indicator.
    Proposed Sec.  902.9(b) would provide information about the weights 
of the four indicators.
    Proposed Sec.  902.9(c) would provide for PHAS scores to be 
calculated in accordance with appendices A-D. Accordingly, repetitive 
information about scoring is removed from the regulations governing 
individual indicators. No further changes to any of the scoring 
processes will be implemented until after they are published for public 
comment in the Federal Register. The currently codified PHAS 
regulations provide for this notice and comment process, and HUD does 
not propose to change that process by this rule.
    The proposed scoring documents that correspond to this proposed 
rule are published as appendices to this proposed rule.
    Section 902.11 (PHAS performance designation). Proposed Sec.  
902.11 would address PHAS performance designation information. The 
performance designations would be high performer, standard performer, 
substandard performer, and troubled performer (except for the new 
``substandard'' designation, these are the designations provided in 
currently codified Sec.  902.67).
    Proposed Sec. Sec.  902.11(a) and (b) would amend the performance 
requirements for PHAS designations that are currently codified in 
Sec. Sec.  902.67(a) and (b). Proposed Sec.  902.11(a) would state that 
a high performer must achieve an overall PHAS score of 90 percent, in 
contrast to currently codified Sec.  902.67(a), which requires at least 
a 60 percent score in each PHAS indicator.
    Proposed Sec.  902.11(a)(2) would provide that a PHA would not be 
designated a high performer if more than 10 percent of the PHA's total 
units are in projects that fail the physical

[[Page 49548]]

condition, financial, or management operations indicators. Proposed 
Sec.  902.11(c) would explain the new substandard designation. 
Generally, a PHA's overall PHAS score determines its designation.
    The ``substandard'' designation, however, would be calculated 
differently. A substandard designation would be based on a PHA 
achieving a PHAS score of at least 60 percent and a score of less than 
60 percent under one or more of the physical condition, financial, or 
management operations indicators. In the proposed rule, to avoid 
confusion, ``substandard'' would not be used to mean a subcategory of 
troubled performer.
    Section 902.13 (Frequency of PHAS assessments). Proposed Sec.  
902.13 would be added to address the revised frequency of PHAS 
assessments, and would incorporate, in Sec.  902.13(a), the information 
in currently codified Sec.  902.9, with the exception that a small PHA 
with fewer than 250 units would not be able to elect an annual 
assessment. As the PHAS regulations are proposed to be revised by this 
rule, the frequency of physical condition assessments would be based on 
the size of the PHA and the performance of the PHA under the physical 
condition indicator.
    Proposed Sec.  902.13(b) would provide that a project that scores 
80 points or higher for the physical condition indicator would be 
inspected every other year.
    Proposed Sec.  902.13(c) would require a PHA to submit the 
unaudited and audited financial information to HUD every year, whether 
or not the PHA receives a PHAS assessment.
Subpart B--Physical Condition Indicator
    Section 902.20 (Physical condition assessment). Proposed Sec.  
902.20 would address the basic components of the physical condition 
assessment. Proposed Sec.  902.20(b) would provide for independent 
physical inspections in accordance with HUD's physical condition 
standards for decent, safe, and sanitary housing as codified at 24 CFR 
5.703-5.705.
    Section 902.21 (Physical condition standards for public housing). 
Proposed Sec.  902.21 would be similar to currently codified Sec.  
902.23, and summarizes the standards that the five major inspectable 
areas are required to meet. The five major inspectable areas are site, 
building exterior, building systems, dwelling units, and common areas. 
The main difference between this proposed rule and the currently 
codified regulations is that where the currently codified section 
incorporates provisions directly from HUD's physical conditions 
standards at 24 CFR 5.703, the proposed section would cross-reference 
to Sec.  5.703 where necessary, resulting in a more concise and 
streamlined regulatory provision.
    Section 902.22 (Physical inspection of PHA projects). The 
information in proposed Sec.  902.22(a) would be similar to currently 
codified Sec.  902.24(a), but it would add a specific reference to 
HUD's standards for decent, safe, and sanitary housing. Proposed new 
Sec.  902.22(b)(1) would address how HUD would achieve the objectives 
of paragraph (a) and provides for an inspection of a ``statistically 
valid'' sample of units.
    Proposed Sec.  902.22(d) would clarify the differences between 
health and safety deficiencies and exigent health and safety 
deficiencies. Proposed Sec.  902.22(d)(1) would contain the information 
in currently codified Sec.  902.24(a)(2), but would add that the 
project or PHA should correct exigent health and safety deficiencies 
within 24 hours, and that the PHA must certify the correction to HUD 
within 3 business days.
    Section 902.23 (Adjustment for physical condition and neighborhood 
environment). HUD proposes to remove this section because physical 
condition and neighborhood environment would be assessed under the 
management operations indicator in the proposed rule. See new proposed 
Sec.  902.44.
    Section 902.24 (Database adjustment). Proposed Sec.  902.24 would 
contain the information currently codified in Sec.  902.25(c) and would 
be designated as a separate section for the purpose of greater clarity. 
The section would be revised to be consistent with project-based 
assessment.
    Section 902.25 (Physical condition scoring and thresholds). 
Proposed Sec.  902.25(a) revises currently codified Sec.  902.25(a) to 
reflect the project-based approach to administration of public housing, 
and to remove material regarding scoring, which would be consolidated 
in proposed Sec.  902.9(c) rather than being restated as to each 
indicator.
    Proposed new Sec.  902.25(b) provides similar information as found 
in currently codified Sec.  902.25(d), but with further explanation of 
how the weighted scores are calculated.
    Proposed new Sec.  902.25(c) would include new information 
regarding the conversion of a project score from a 100-point scale to a 
30-point scale for the overall PHAS physical condition indicator, and 
provide the number of points required for a passing score and the score 
at which a PHA would be considered a substandard performer.
    Section 902.26 (Physical inspection report). Currently codified 
Sec. Sec.  902.26(a) and (a)(3) would be slightly revised by this 
proposed rule to be consistent with project-based assessment. Sections 
902.26(a)(2) and (a)(5) would be revised to make the deadline for a 
request for reinspection 30 days after a PHA's receipt of the physical 
inspection report.
    Current Sec.  902.27 (Physical condition portion of total PHAS 
points). HUD proposes to remove this section and instead provide for 
the number of points assigned to each indicator in Sec.  902.9(b).
Subpart C--Financial Condition Indicator
    Section 902.30 (Financial condition assessment). Proposed Sec.  
902.30 is similar to currently codified Sec.  902.30. The section would 
be revised to reflect individual project assessment.
    Section 902.33 (Financial reporting requirements). Proposed Sec.  
902.33(b) pertains to unaudited financial information and contains the 
same information in currently codified Sec.  902.33(b). As proposed to 
be revised, this section removes a reference to the Uniform Financial 
Reporting Standards in 24 CFR part 5, subpart H, and removes reference 
to the information regarding an automatic 1-month extension, which no 
longer applies.
    Proposed Sec.  902.33(b) also includes the same unaudited reporting 
deadlines included in currently codified Sec.  902.33(c).
    Proposed Sec.  902.33(c) contains information related to audited 
financial statements that is contained in currently codified Sec.  
902.33(c).
    Section 902.35 (Financial condition scoring and thresholds). 
Proposed Sec.  902.35(a)(1) would be similar to currently codified 
Sec.  902.35(a), but would remove the repetitive information about 
scoring that, in the codified regulations, is provided in each section 
addressing a PHAS indicator. This section also would provide a 
reference to individual projects.
    Proposed Sec.  902.35(a)(2) contains information regarding the 
basis for the financial condition score. Currently codified Sec.  
902.35(a)(2) would be removed because the information regarding 
advisory scores and high liquidity would no longer be applicable.
    Proposed Sec.  902.35(b) lists the new financial condition 
subindicators under asset management and replaces the financial 
management components listed in the current Sec.  902.35(b).
    Proposed Sec.  902.35(c) would explain how the overall financial 
condition score is calculated. This score would be

[[Page 49549]]

a unit-weighted average of the individual project scores on this 
indicator.
    Proposed Sec.  902.35(d) would address the maximum points and 
scoring thresholds, similar in function to currently codified Sec.  
902.35(c).
    Current Sec.  902.37 (Financial condition portion of total PHAS 
points). HUD proposes to remove this section and instead provide for 
the number of points assigned to each indicator in Sec.  902.9(b).
Subpart D--Management Operations Indicator
    Section 902.40 (Management operations assessment). Proposed Sec.  
902.40(a) would be revised to more comprehensively address the 
management operations assessment of projects, given the removal of 24 
CFR part 901.
    Section 902.43 (Management operations performance standards). 
Proposed Sec.  902.43(a) would list the statutory subindicators that 
must be utilized in this assessment. This section, as proposed, would 
also reference the asset management review form that would be used to 
assess a PHA's management operations and a PHA's individual project 
management operations, and the subindicators are included in appendix 
C. Specifically, new proposed Sec. Sec.  902.43(a)(1) through (a)(6) 
would list the statutory subindicators that are not addressed elsewhere 
in PHAS, and would replace the currently codified Sec. Sec.  
902.43(a)(1) through (a)(6). Paragraphs (a)(7) through (a)(9) of Sec.  
902.43 would address the following subindicators, respectively: 
security, economic self-sufficiency, and resident involvement in 
project management.
    Proposed Sec.  902.43(b) would provide that a project management 
review be used to assess this indicator, supported by other data 
available to HUD. Currently codified Sec. Sec.  902.43(b)(1) and (b)(2) 
would be removed because PHAs would no longer certify to the management 
operations information and because manual submissions are no longer 
necessary.
    Section 902.44 (Adjustment for physical condition and neighborhood 
environment). A proposed Sec.  902.44 would be added and the adjustment 
for physical condition and neighborhood environment would apply to the 
management operations indicator. Proposed Sec.  902.44(a) would include 
the new definitions for physical condition and neighborhood 
environment, and Sec.  902.44(b) would describe the application of the 
adjustment.
    Section 902.45 (Management operations scoring and thresholds). 
Proposed Sec.  902.45(a) would be similar to currently codified Sec.  
902.45(a), except that projects, as well as PHAs, would receive a 
management operations score.
    Proposed Sec.  902.45(b) would provide information regarding the 
overall indicator score.
    Proposed Sec.  902.45(c) would be similar to currently codified 
Sec.  902.45(b), and would provide information regarding the maximum 
points for this indicator and scoring thresholds. The section removes a 
reference to sanctions under section 6(j)(4) of the 1937 Act (42 U.S.C. 
1437d(j)(4)).
    Current Sec.  902.47 (Management operations portion of total PHAS 
points). HUD proposes to remove this section and instead provide for 
the number of points assigned to each indicator in Sec.  902.9(b).
Subpart E--Capital Fund Program Indicator
    Proposed new subpart E addresses the Capital Fund program 
indicator, and would replace the current subpart E, resident services 
and satisfaction indicator. HUD is removing the resident services and 
satisfaction indicator because, after almost 10 years of experience, 
this indicator has not yielded the degree of feedback that HUD hoped to 
obtain from this indicator. HUD has determined that PHAs expend 
considerable effort to obtain resident input on the PHA's performance, 
but with little change in the response rate over the past 5 years. HUD 
will examine alternatives to obtain resident feedback, possibly through 
funding for Resident Opportunities and Supportive Services (ROSS) 
provided annually through its notice of funding availability (NOFA). 
HUD specifically welcomes comment on proposals to improve resident 
feedback on a PHA's performance and to measure resident satisfaction.
    Section 902.50 (Capital Fund program assessment). Proposed Sec.  
902.50(a) would provide for assessment of a PHA's Capital Funds that 
remain unexpended after 4 years and unobligated after 2 years.
    Proposed Sec.  902.50(b) would provide that this indicator would 
not apply to PHAs that choose not to participate in the Capital Fund 
program, and would only be applicable on a PHA-wide basis, rather than 
a project basis. Section 9(j) of the 1937 Act (42 U.S.C. 1437g(9)(j)(1) 
and (5)) makes the obligation to expend funds in a timely manner 
applicable to PHAs.
    Proposed Sec.  902.50(c) would provide that information for this 
indicator would be derived through an analysis of HUD's electronic Line 
of Credit Control System (e-LOCCS) (or its successor system). Proposed 
Sec. Sec.  902.50(c)(1) and (c)(2) would address a PHA's responsibility 
to submit Capital Fund program information in a timely manner and 
appeal restrictions, respectively.
    Section 902.53 (Capital Fund program scoring and thresholds). This 
proposed section would explain the scoring and thresholds for this 
indicator, overall points, and passing score.
Subpart F--PHAS Scoring
    Section 902.60 (Data collection). This proposed section would 
completely revise currently codified Sec.  902.60. Currently codified 
Sec.  902.60(a), pertaining to fiscal year reporting periods, would be 
revised to provide that a PHA would not be permitted to change its 
fiscal year for the first 3 full fiscal years following June 30, 2009, 
unless such change is approved by HUD for good cause. The moratorium on 
changing fiscal years is consistent with the currently codified PHAS 
regulations, which provide for a halt to fiscal year changes commencing 
with the year new HUD regulations are to be implemented. Proposed Sec.  
902.60(b) would address extensions for submitting unaudited financial 
information. The information in currently codified Sec.  902.60(c), 
pertaining to the submissions of financial information, would be 
revised to include information about weighting and applicability of the 
Single Audit Act (codified at 31 U.S.C. 7501 et seq.) and be moved to 
proposed Sec. Sec.  902.9(b) and 902.33.
    Proposed Sec.  902.60(c) would address waivers of the due date for 
submitting audited financial information to HUD.
    Proposed Sec.  902.60(d) would address rejection and resubmission 
of a PHA's unaudited year-end financial information submission. The 
requirement in currently codified Sec.  902.60(d)(2) pertaining to the 
retention of documentation would be incorporated in proposed Sec.  
902.3(b).
    Information in currently codified Sec.  902.60(e)(2) and (f) would 
be moved to proposed Sec.  902.62, with some revisions. Certifications 
referenced in currently codified Sec. Sec.  902.60(e)(2) and (f), and 
material regarding the performance designation of a PHA as ``troubled'' 
in currently codified Sec.  902.60(e)(2) would no longer be included.
    Section 902.62 (Failure to submit data). Proposed Sec.  902.62 
addresses penalties for failing to submit required information. Much of 
this material is similar to that in currently codified Sec.  902.60(e).
    Section 902.64 (PHAS scoring and audit reviews). Proposed Sec.  
902.64(a) would be similar to currently codified Sec.  902.63(b).

[[Page 49550]]

    Proposed Sec.  902.64(b) would be similar to currently codified 
Sec.  902.63(c), except that references to certifications would be 
removed.
    Proposed Sec.  902.64(c) would include the material on the review 
of audits in currently codified Sec.  902.63(d), along with certain 
revisions. The revised material includes standards and procedures for 
determining if an audit is deficient.
    Section 902.66 (Withholding, denying, and rescinding designation). 
Proposed Sec.  902.66 would provide that, in limited circumstances, HUD 
may deny or rescind a high or standard performer designation. Denial or 
rescission may occur in cases of fraud or misconduct, litigation cases 
that bear directly on the performance of the PHA, where the PHA is 
operating under a court order, or where the PHA demonstrates 
substantial evidence of noncompliance with applicable laws or 
regulations. HUD action taken in accordance with this section may be 
appealed under Sec.  902.69(d).
    Section 902.68 (Technical review of results of PHAS physical 
condition indicator). Proposed Sec.  902.68 largely retains the 
information regarding physical inspection technical reviews as provided 
in currently codified Sec.  902.68, and removes reference to technical 
reviews for the resident survey and satisfaction indicator, which will 
no longer be an indicator. Proposed Sec.  902.68(b)(7) would be 
included to provide that HUD's decision on a technical review is final 
agency action.
    Section 902.69 (PHA right of petition and appeal). Proposed Sec.  
902.69 has been revised to elaborate on the rights of appeal, petition, 
and the appeal of any refusal of a petition to remove a troubled 
performer designation. Proposed Sec.  902.69(a) would revise the 
current section to provide for four categories of appeals and one type 
of petition.
    Currently codified Sec.  902.69(b) would be designated Sec.  
902.69(b)(1) in this proposed rule, and revised to take into account 
the new designation of ``substandard performer.'' Proposed Sec.  
902.69(b)(2) would provide that a PHA may not appeal its physical 
condition score based on the subsequent correction of deficiencies 
identified as the result of a physical inspection or technical review 
items for which a decision has been previously rendered through the 
technical review process. Proposed Sec.  902.69(b)(3) would specify 
procedures for appealing the score for the Capital Fund program 
indicator.
    Proposed Sec.  902.69(c)(1) would be revised to address only the 
appeal and petition procedures in currently codified Sec.  
902.69(c)(1). As proposed to be revised, Sec.  902.69(c)(2) would 
specify the procedures for the appeal of the refusal of a petition to 
remove troubled performer designation, which is addressed in currently 
codified Sec.  902.69(c)(1). Proposed Sec.  902.69(c)(3) would provide 
that an appeal or petition must be submitted in writing to the Real 
Estate Assessment Center, Attention: Technical Review. The address is: 
Real Estate Assessment Center, 550 12th Street, SW., Suite 100, 
Washington, DC 20024-2135. Proposed Sec.  902.69(c)(4) would include 
information in currently codified Sec. Sec.  902.69(c)(1) and (c)(2) 
that requires the inclusion of appropriate supporting information.
    Proposed Sec.  902.69(d) would establish an appeal process for 
cases of denial, withholding, or rescission of a PHAS performance 
designation. Upon receipt of a request for reinstatement, the evidence 
submitted by the PHA will be reviewed to determine whether a 
reinstatement of the designation is warranted.
    Proposed Sec.  902.69(e) would establish a process for 
consideration of an appeal of an overall PHAS score, a troubled 
performer designation, or a petition to remove a troubled performer 
designation. HUD would evaluate the appeal and determine whether a 
reassessment of the PHA is warranted. There would no longer be a Board 
of Review as in the currently codified regulation.
    Proposed Sec.  902.69(e)(2) addresses the appeal of refusal to 
remove a troubled performer designation and provides that the decision-
making officials would be different individuals than those that 
evaluated the petition to remove a troubled performer designation.
    Proposed Sec.  902.69(f) would provide for final appeal decisions 
similar to the provisions in currently codified Sec.  902.69(e), but 
with some differences. Proposed Sec.  902.69(f) would specify the 
remedies available to HUD if HUD grants an appeal, including 
undertaking a new inspection, arranging for audit services, or other 
reexamination of the results of assessment of a PHA's financial, 
management, or Capital Fund program performance, as appropriate. 
Following such reassessment, HUD will issue a new score and performance 
designation. The proposed rule would remove the option available to HUD 
to extend the deadline for HUD's decision to an additional 30 days. 
Finally, the rule would provide that HUD's decision is final agency 
action.
Subpart G--PHAS Incentives and Remedies
    Section 902.71 (Incentives for high performers). Proposed Sec.  
902.71 would be largely the same as currently codified Sec.  902.71. 
The proposed rule would remove the material in Sec.  902.71(a)(1)(ii) 
concerning the frequency of physical inspection, because the remainder 
of the rule provides sufficient flexibility to relieve high-performing 
PHAs of monitoring requirements.
    Section 902.73 (PHAs with deficiencies). The heading of this 
section would be changed from the section heading for currently 
codified Sec.  902.73 to more accurately reflect the content in this 
section. This proposed section would remove the concept of the 
Improvement Plan and replace it with the concept of the Corrective 
Action Plan. This concept is consistent with the Corrective Action Plan 
terminology that is used in other program areas. If the PHA, under a 
Corrective Action Plan, fails to correct its deficiencies within the 
time period specified, HUD may take additional action, including, but 
not limited to, the remedies for substantial default.
    Section 902.75 (Troubled performers). The heading of this section 
would be changed from the section heading for currently codified Sec.  
902.75 (Referral to a Troubled Agency Recovery Center (TARC)). Proposed 
Sec.  902.75(a) removes the references to 24 CFR part 901 and the 
TARCs, because this proposed rule and accompanying proposed scoring 
documents will replace part 901, and because the TARCs, as noted 
previously, no longer exist. Their duties and responsibilities were 
transferred and assumed by HUD field offices in 2003.
    Proposed Sec. Sec.  902.75(b) and (c) cover the same subjects as 
currently codified Sec. Sec.  902.75(b) and (c); that is, remedial 
measures for troubled performers--albeit with revisions. Proposed Sec.  
902.75(b) would specify that a memorandum of agreement (MOA) is 
required for a troubled performer. Proposed Sec.  902.75(b)(3) would 
require identification of the party responsible for meeting each 
target. Proposed Sec.  902.75(b)(7) would: (1) Eliminate a reference to 
the Departmental Enforcement Center, which is now part of HUD's Office 
of General Counsel; and (2) add cross-references to HUD's statutory and 
regulatory remedial authority in place of the current summary.
    Proposed Sec. Sec.  902.75(d)(1) and (d)(2) would clarify the time 
frames in currently codified Sec. Sec.  902.75(d)(1) and (d)(2) by 
providing that the first- and second-year recovery periods are at least

[[Page 49551]]

12 months after issuance of the initial notice of troubled performer 
designation, and at least 24 months after issuance of the initial 
notice of troubled performer designation, respectively.
    Proposed Sec. Sec.  902.75(e) and (f) would largely be the same as 
the currently codified Sec. Sec.  902.75(e) and (f). However, proposed 
Sec.  902.75(e) would remove the reference in Sec.  902.75(e)(3) to the 
Director of the area TARC, which would be replaced by reference to the 
regional or field office Public Housing Director.
    Proposed Sec. Sec.  902.75(g) and (h) would be largely the same as 
the current Sec. Sec.  902.75(g) and (h), with the exception of 
proposed revisions to the example in Sec.  902.75(g)(3), to be 
consistent with the proposed definitions of the one- and two-year 
recovery periods in proposed Sec.  902.75(d). Proposed paragraph (i) 
would remove the reference to the TARCs.
    Section 902.79 (Verification and records). Proposed Sec.  902.79 
would provide for the document retention and verification requirements 
applicable to PHAs. The section would provide for penalties for failure 
to maintain the required documentation for the required time period.
    Section 902.81 (Resident petitions for remedial actions). Proposed 
Sec.  902.81 is based on currently codified Sec.  902.85 and would 
specify that residents of a PHA designated as troubled may petition HUD 
in writing for remedial action. The section would retain the 
requirement that 20 percent of the residents must support the petition, 
as is required in currently codified Sec.  902.85. The section would 
retain the reference to HUD's discretion over the determination as to 
whether a substantial default has occurred, and provide for HUD to 
respond in writing to a petition. The response would include the 
planned course of action and, where the action differs from that 
proposed by the residents, the reasons for the difference.
    Section 902.83 (Sanctions for troubled performer PHAs). Proposed 
Sec.  902.83 would provide for differing sanctions for small and large 
PHAs. If a PHA that is designated as troubled and has less than 1,250 
units fails to make substantial improvement within the recovery periods 
specified in proposed Sec.  902.75(d), HUD has the option of 
petitioning for the appointment of a receiver or taking possession of 
all or a portion of the PHA or a PHA project. In the case of a PHA with 
1,250 or more units that similarly fails, HUD shall petition for the 
appointment of a receiver. If a troubled performer PHA fails to execute 
the required MOA under Sec.  902.75, or fails to meet the requirements 
of the MOA, the PHA may be declared to be in substantial default. In 
this case, all the remedies under this rule and the 1937 Act are 
available. Failure to execute the MOA, however, is not the only basis 
for a finding of substantial default. A violation of the law, 
regulations, or the annual contributions contract (ACC) can also be a 
predicate for such a finding, in which case all available remedies 
would equally be available. The procedures applicable to a finding of 
substantial default are now provided in new part 907.
    Current Sec.  902.85 (Resident petitions for remedial action). This 
section is redesignated as Sec.  902.81, with only minor wording 
changes made.

II. New Part 907--Substantial Default by a Public Housing Agency

    This proposed rule would establish, in new part 907, the 
regulations governing the determination of, and remedies for, 
substantial default. The regulations applicable to substantial default 
are currently codified in HUD's PHAS regulations. However, a 
determination of substantial default is not limited to troubled 
performance or violation of PHAS requirements. Therefore, it is more 
appropriate for substantial default regulations to be codified in a 
separate CFR part. The following provides a section-by-section overview 
of new part 907.
    Section 907.1 (Purposed and scope). Proposed Sec.  907.1 would 
provide that the purpose of this part is to establish the regulations 
for determination of, and remedies for, substantial default. This 
section would clarify that nothing in this part limits the discretion 
of HUD to take any action available under section 6(j)(3)(A) of the 
1937 Act (42 U.S.C. 1437d(j)(3)(A)) to remedy a substantial default. 
HUD has flexible discretion both to determine substantial default and 
to apply the available remedies in any combination or order.
    Section 907.3 (Bases for substantial default). Proposed Sec.  907.3 
would describe the violations of laws and agreements, and the failures 
to act on the part of the PHA that may result in a declaration of 
substantial default.
    Section 907.5 (Procedures for declaring substantial default). 
Proposed Sec.  907.5(a) would describe the process for notification of 
substantial default.
    Section 907.5(b) would describe the opportunity of a PHA to respond 
or cure the default, except in cases of fraud, criminality, or an 
emergency posing an imminent threat to life and health.
    Proposed Sec.  907.5(c) would provide for a PHA to waive written 
notification of substantial default by HUD.
    Proposed Sec.  907.5(d) (Emergency situations) would describe the 
situations in which HUD may proceed to issue a default determination 
without giving the PHA an opportunity to respond.
    Section 907.7 (Remedies for substantial default). Proposed Sec.  
907.7 would list the actions that may be taken by HUD against a PHA 
upon a determination of substantial default.

III. Cost and Benefits of This Proposed Rule

    This proposed rule would significantly streamline PHAS by 
eliminating several PHA submissions, data collection requirements, and 
related processes. Through such streamlining, this proposed rule would 
reduce costs incurred by PHAs in compiling and submitting this 
information to HUD. In addition, the systems put in place to substitute 
for the data compilation and submissions would improve the assessment 
process, which would benefit PHAs, public housing residents, and 
taxpayers overall. The proposed rule would eliminate the requirement 
for PHAs to submit a management operation certification and to 
undertake resident satisfaction surveys, including pre- and post-survey 
administrative requirements. HUD is replacing these submission 
requirements with a system of on-site management reviews. Rather than 
requiring a PHA to prepare a detailed submission of various management 
indicators (inspections, work orders, security, etc.), HUD will assess 
conditions through an on-site review, consistent with the process 
utilized by HUD for its multifamily housing programs. Similarly, 
information obtained from the on-site reviews will better gauge the 
effectiveness of PHA efforts in the area of resident self-sufficiency 
and participation. Moreover, the current system of PHA self-
certification requires HUD to conduct certification reviews. The 
proposed rule would eliminate the need for these certification reviews. 
Additionally, the new system of on-site management reviews are intended 
to consolidate into one assessment tool what today are multiple 
reviews. Through these measures, the proposed rule reduces 
administrative costs associated with PHAS, while improving the accuracy 
of PHAS assessments.
    In seeking comment on this proposed rule, the Department would like 
to highlight the following:
    Vacancy rates. The Department believes that one of the primary 
responsibilities of a PHA is to provide housing opportunities by 
maintaining high occupancy levels. As a result, a

[[Page 49552]]

high weight is assigned in the management review to a project's non-
approved vacancy rate (the lower the rate, the higher the score). The 
Department seeks comment on the adequacy of the weight assigned to a 
project's vacancy rate. The Department also seeks comment on whether 
the measure should be improved or another measure added to encompass 
all vacancies, both approved and non-approved. Presently, the non-
approved vacancies are less than 4 percent, but all vacancies are 
around 9 percent. A measure of all vacancies could provide a broader 
focus for efforts to maximize the number of decent, safe, and sanitary 
units available for tenants. The ``approved'' vacancies are defined 
under 24 CFR 990.145.
    Resident satisfaction surveys. As indicated, the Department 
believes that the on-site management review is a better vehicle than 
the current resident survey to measure both project performance and 
resident satisfaction, consistent with the norms in HUD's own 
multifamily housing programs. However, the Department is particularly 
interested in views on practical methods for providing feedback to the 
PHA and assessing resident satisfaction, through surveys or other 
means.
    Unrestricted program balances and reserves. Presently, PHAs have on 
the order of $2.7 billion in public housing program reserves (also 
known as ``unrestricted current net assets''). The Department is 
concerned with high program balances in light of industry concerns over 
the backlog of capital and maintenance needs. On the other hand, the 
Department wants adequate cash balances at PHAs to cope with potential 
unexpected events, such as a downturn in tenant rental payments. The 
Department has decided to make this trade-off in favor of high cash 
balances. For example, the Department proposes a very conservative 
quick ratio standard of $1 of cash/cash equivalents for $1 of current 
liabilities. The Department seeks comment as to whether the PHAS 
scoring system should encourage the use of these reserves and suggested 
ways to do that.
    Capital Fund Indicator. As previously indicated, the proposed rule 
only includes scoring on Capital Fund obligations and expenditures. It 
does not include scoring related to other areas of Capital Fund program 
management, e.g., quality of contract administration or effective 
capital planning. The Department believes that such issues are best 
addressed through on-site program assessments. The Department, however, 
seeks comment as to whether other items should be added to the Capital 
Fund indicator.
    Verification of Tenant Income. The Department is strongly committed 
to the proper reporting of tenant income for eligibility and rent 
determinations and has developed various tools to assist PHAs in this 
process. The Department has chosen not to include any scoring related 
to the income verification process. Although important, income 
verification would be one of many ``compliance'' areas to which PHAs 
are subject. As with other similar areas, the Department has chosen not 
to score, for PHAS purposes, areas of compliance. Instead, performance 
is measured on more traditional real estate management indicators. 
Compliance items are considered separately and could be a source of 
corrective action; however, they are not scored. The Department seeks 
comment on this approach, specifically, to income verifications and, 
more broadly, on matters of compliance.

IV. Findings and Certifications

Information Collection Requirements

    The information collection requirements contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In 
accordance with the Paperwork Reduction Act, an agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information, unless the collection displays a currently valid OMB 
control number.
    The burden of the information collections in this proposed rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                     Number of     average time      Estimated
                Section reference                    Number of     responses per        for        annual burden
                                                    respondents     respondent      requirement     (in hours)
                                                                                    (in hours)
----------------------------------------------------------------------------------------------------------------
24 CFR 902.24 Database adjustment...............             125               1             5.2             650
24 CFR 902.68 Technical review..................             167               1             5.2             868
24 CFR 902.69 Appeals...........................              53               1             5.2             276
                                                 ---------------------------------------------------------------
    Totals......................................             345  ..............  ..............           1,794
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond; including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Comments must refer 
to the proposal by name and docket number (FR-5094-P-01) and must be 
sent to:

HUD Desk Officer, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503, Fax number: 202-395-6947,

 and

Mary Schulhof, Reports Liaison Officer, Office of Public and Indian 
Housing, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 4116, Washington, DC 20410-8000.

Regulatory Planning and Review

    OMB reviewed this rule under Executive Order 12866, Regulatory

[[Page 49553]]

Planning and Review. OMB determined that this rule 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, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-
0500. Due to security measures at the HUD Headquarters building, an 
advance appointment to review the public comments must be scheduled by 
calling the Regulations Division at 202-402-3055 (this is not a toll-
free number).

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (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 will not impose any federal mandates on 
any state, local, or tribal governments or the private sector within 
the meaning of UMRA.

Environmental Review

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The Finding is available for public inspection 
during regular business hours in the Regulations Division, Office of 
General Counsel, Department of Housing and Urban Development, 451 
Seventh Street, SW., Room 10276, Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the Finding by calling the Regulations Division 
at 202-402-3055 (this is not a toll-free number).

Impact on Small Entities

    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. 
This rule revises HUD's existing PHAS regulations for the assessment of 
public housing at 24 CFR part 902, to revise the PHAS regulations to 
elaborate upon certain procedures, to conform the PHAS regulations to 
current public housing operations, and to conform to certain statutory 
changes. These revisions impose no significant economic impact on a 
substantial number of small entities. Therefore, the undersigned 
certifies that this rule will not have a significant impact on a 
substantial number of small entities.
    Notwithstanding HUD's belief that this rule will not have a 
significant effect on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments nor preempt state law 
within the meaning of the Executive Order.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for Public 
Housing is 14.850.

List of Subjects

24 CFR Part 901

    Administrative practice and procedures, Public housing, Reporting 
and recordkeeping requirements.

24 CFR Part 902

    Administrative practice and procedures, Public housing, Reporting 
and recordkeeping requirements.

24 CFR Part 907

    Administrative practice and procedures, Public housing, Reporting 
and recordkeeping requirements.
    Accordingly, under the authority of 42 U.S.C. 3535d, HUD proposes 
to remove 24 CFR part 901, revise part 902, and add a new part 907, as 
follows:

PART 901--[REMOVED]

    1. Remove and reserve 24 CFR part 901.
    2. Revise 24 CFR part 902 to read as follows:

PART 902--PUBLIC HOUSING ASSESSMENT SYSTEM

Subpart A--General Provisions
Sec.
902.1 Purpose, scope, and general matters.
902.3 Definitions.
902.5 Applicability.
902.9 PHAS scoring.
902.11 PHAS performance designation.
902.13 Frequency of PHAS assessments.
Subpart B--Physical Condition Indicator
902.20 Physical condition assessment.
902.21 Physical condition standards for public housing--decent, 
safe, and sanitary housing in good repair (DSS/GR).
902.22 Physical inspection of PHA projects.
902.24 Database adjustment.
902.25 Physical condition scoring and thresholds.
902.26 Physical Inspection Report.
Subpart C--Financial Condition Indicator
902.30 Financial condition assessment.
902.33 Financial reporting requirements.
902.35 Financial condition scoring and thresholds.
Subpart D--Management Operations Indicator
902.40 Management operations assessment.
902.43 Management operations performance standards.
902.44 Adjustment for physical condition and neighborhood 
environment.
902.45 Management operations scoring and thresholds.
Subpart E--Capital Fund Program Indicator
902.50 Capital Fund program assessment.
902.53 Capital Fund program scoring and thresholds.
Subpart F--PHAS Scoring
902.60 Data collection.
902.62 Failure to submit data.
902.64 PHAS scoring and audit reviews.
902.66 Withholding, denying and rescinding designation.
902.68 Technical review of results of PHAS physical condition 
indicator.
902.69 PHA right of petition and appeal.
Subpart G--PHAS Incentives and Remedies
902.71 Incentives for high performers.
902.73 PHAs with deficiencies.
902.75 Troubled performers.
902.79 Verification and records.
902.81 Resident petitions for remedial action.
902.83 Sanctions for troubled performer PHAs.

Appendix A to Part 902--Physical Condition Scoring.

Appendix B to Part 902--Financial Condition Scoring.

Appendix C to Part 902--Management Operations Scoring.

Appendix D to Part 902--Capital Fund Scoring.

    Authority: 42 U.S.C. 1437d(j), 42 U.S.C. 3535(d).

Subpart A--General Provisions


Sec.  902.1  Purpose, scope, and general matters.

    (a) Purpose. The purpose of the Public Housing Assessment System 
(PHAS) is

[[Page 49554]]

to improve the delivery of services in public housing and enhance trust 
in the public housing system among public housing agencies (PHAs), 
public housing residents, and the general public, by providing a 
management tool for effectively and fairly measuring the performance of 
a PHA in essential housing operations of projects, on a program-wide 
basis and individual project basis, and providing rewards for high 
performers and remedial requirements for poor performers.
    (b) Scope. PHAS is a strategic measure of the essential housing 
operations of projects and PHAs. PHAS does not evaluate the compliance 
of a project or PHA with every HUD-wide or program-specific requirement 
or objective. Although not specifically evaluated through PHAS, PHAs 
remain responsible for complying with such requirements as fair housing 
and equal opportunity requirements, requirements under section 504 of 
the Rehabilitation Act of 1973 (29 U.S.C. 794), and requirements of 
other federal programs under which the PHA is receiving assistance. A 
PHA's adherence to these requirements will be monitored in accordance 
with the applicable program regulations and the PHA's Annual 
Contributions Contract (ACC).
    (c) PHAS indicators. HUD will assess and score the performance of 
projects and PHAs based on the indicators, which are more fully 
addressed in Sec.  902.9: Physical condition, financial condition, 
management operations, and Capital Fund.
    (d) Assessment tools. HUD will make use of uniform and objective 
criteria for the physical inspection of projects and PHAs and the 
financial assessment of projects and PHAs, and will use data from 
appropriate agency data systems and project management reviews to 
assess management operations. For the Capital Fund program indicator, 
HUD will use information provided in the electronic Line of Credit 
Control System (e-LOCCS) (or its successor) system. On the basis of 
this data, HUD will assess and score the results, advise PHAs of their 
scores, and identify low-scoring and poor-performing projects and PHAs 
so that these projects and PHAs will receive the appropriate attention 
and assistance.
    (e) Small PHAs. A PHA with fewer than 250 units that does not 
convert to asset management will be considered as one project by HUD.


Sec.  902.3  Definitions.

    As used in this part:
    Act means the U.S. Housing Act of 1937 (42 U.S.C. 1437 et seq.)
    Alternative management entity (AME) is a receiver, private 
contractor, private manager, or any other entity that is under contract 
with a PHA, under a management agreement with a PHA, or that is 
otherwise duly appointed or contracted (for example, by court order or 
agency action), to manage all or part of a PHA's operations.
    Assessed fiscal year is the PHA fiscal year that has been assessed 
under PHAS, the most recent assessment of record, or the period of 
time, as defined in each management operations subindicator or 
component.
    Assistant Secretary means the Assistant Secretary for Public and 
Indian Housing.
    Corrective Action Plan means a plan, as provided in Sec.  
902.73(a), that is developed by a PHA that specifies the actions to be 
taken, including timetables, that shall be required to correct 
deficiencies identified under any of the PHAS subindicators, and 
identified as a result of a PHAS assessment, when a memorandum of 
agreement (MOA) is not required.
    Criticality means one of five levels that reflect the relative 
importance of the deficiencies for an inspectable item.
    (1) Based on the importance of the deficiency, reflected in its 
criticality value, points are deducted from the score for an 
inspectable area.

------------------------------------------------------------------------
                       Criticality                             Level
------------------------------------------------------------------------
Critical................................................               5
Very Important..........................................               4
Important...............................................               3
Contributes.............................................               2
Slight Contribution.....................................               1
------------------------------------------------------------------------

    (2) The Item Weights and Criticality Levels document lists all 
deficiencies with their designated levels, which vary from 1 to 5, with 
5 as the most critical, and the point values assigned to them.
    Days mean calendar days, unless otherwise specified.
    Decent, safe, sanitary housing and in good repair (DSS/GR) is HUD's 
standard for acceptable basic housing conditions and the level to which 
a PHA is required to maintain its public housing.
    Deficiency means any finding or determination that requires 
corrective action, or any score below 60 percent of the available 
points in any indicator or subindicator. In the context of physical 
condition and physical inspection in subpart B of this part, 
``deficiency'' means a specific problem, as described in the Dictionary 
of Deficiency Definitions, such as a hole in a wall or a damaged 
refrigerator in the kitchen that can be recorded for inspectable items.
    Dictionary of Deficiency Definitions means the Dictionary of 
Deficiency Definitions document that contains specific definitions of 
each severity level for deficiencies under this subpart. The Dictionary 
of Deficiency Definitions that is currently in effect can be found at 
HUD's Web site at http://www.hud.gov/offices/reac/pdf/pass_dict2.3.pdf 
or a hard copy may be obtained from HUD by calling 888-245-4860 (this 
is a toll-free number).
    Direct Funded RMC means a Resident Management Corporation to which 
HUD directly provides operating and capital assistance under the 
provisions of 24 CFR 964.225(h).
    Inspectable areas (or area) mean any of the five major components 
of public housing that are inspected, which are: Site, building 
exteriors, building systems, dwelling units, and common areas.
    Inspectable item means the individual parts, such as walls, 
kitchens, bathrooms, and other things, to be inspected in an 
inspectable area. The number of inspectable items varies for each area. 
Weights are assigned to each item as shown in the Item Weights and 
Criticality Levels document.
    Item Weights and Criticality Levels document means the Item Weights 
and Criticality Levels document that contains a listing of the 
inspectable items, item weights, observable deficiencies, criticality 
levels and values, and severity levels and values that apply to this 
subpart. The Item Weights and Criticality Levels document that is 
currently in effect can be found at HUD's Web site at http://www.hud.gov/offices/reac/library/documents/fr-notice20011126.pdf or a 
hard copy may be obtained from HUD by calling 888-245-4860 (this is a 
toll-free number).
    Memorandum of Agreement (MOA) is defined in Sec.  902.75(b) of this 
part.
    Normalized weights mean weights adjusted to reflect the inspectable 
items or areas that are present to be inspected.
    Resident Management Corporation (RMC) is defined in 24 CFR 964.7.
    Score for a project means a number on a scale of 0 to 100 that 
reflects the physical condition of a project, inspectable area, or 
subarea. To record a health or safety deficiency, a specific 
designation (such as a letter--a, b, or c) is added to the project 
score that highlights that a health or safety deficiency (or 
deficiencies) exists. If smoke detectors are noted as inoperable or 
missing, another designation (such as an asterisk (*)) is added to the 
project score. Although inoperable or missing smoke detectors do not 
reduce the score, they are fire safety hazards and are

[[Page 49555]]

included in the Notification of Exigent and Fire Safety Hazards 
Observed Deficiency list that the inspector gives the PHA's project 
representative.
    Severity means one of three levels, level 1 (minor), level 2 
(major), and level 3 (severe), that reflect the extent of the damage or 
problem associated with each deficiency. The Item Weights and 
Criticality Levels document shows the severity levels for each 
deficiency. Based on the severity of each deficiency, the score is 
reduced. Points deducted are calculated as the product of the item 
weight and the values for criticality and severity. Specific 
definitions of each severity level are found in the Dictionary of 
Deficiency Definitions.
    Subarea means an inspectable area for one building. For example, if 
a project has more than one building, each inspectable area for each 
building in the project is treated as a subarea.
    Unit-weighted average means the average of the PHA's individual 
indicator scores, weighted by the number of units in each project, 
divided by the total number of units in all of the projects of the PHA. 
In order to compute a unit-weighted average, an individual project 
score for a particular indicator is multiplied by the number of units 
in each project to determine a ``weighted value.'' For example, for a 
PHA with two projects, one with 200 units and a score of 90, and the 
other with 100 units and a score of 60, the unit-weighted average score 
for the indicator would be (200 x 90 + 100 x 60)/300 = 80.


Sec.  902.5  Applicability.

    (a) PHAs, RMCs, AMEs. This part applies to PHAs, Resident 
Management Corporations (RMCs), and AMEs. This part is also applicable 
to RMCs that receive direct funding (DF-RMCs) from HUD in accordance 
with section 20 of the Act.
    (1) Scoring of RMCs and AMEs. (i) RMCs and DF-RMCs will be assessed 
and issued their own numeric scores under PHAS based on the public 
housing or portions of public housing that they manage and the 
responsibilities they assume that can be scored under PHAS. References 
in this part to PHAs include RMCs, unless stated otherwise. References 
in this part to RMCs include DF-RMCs, unless stated otherwise.
    (ii) AMEs are not issued PHAS scores. The performance of the AME 
contributes to the PHAS score of the project(s)/PHA(s) for which they 
assumed management responsibilities.
    (2) ACC. The ACC makes a PHA legally responsible for all public 
housing operations, except where DF-RMC assumes management operations.
    (i) Because the PHA and not the RMC or AME is ultimately 
responsible to HUD under the ACC, the PHAS score of a PHA will be based 
on all of the projects covered by the ACC, including those with 
management operations assumed by an RMC or AME (including a court-
ordered or administrative receivership agreement, if applicable).
    (ii) A PHA's PHAS score will not be based on projects managed by a 
DF-RMC.
    (3) This rule does not apply to Moving-to-Work (MTW) agencies that 
are specifically exempted in their grant agreement.
    (b) Implementation of PHAS. The regulations in this part are 
applicable to PHAs with fiscal years ending on and after June 30, 2009.


Sec.  902.9  PHAS scoring.

    (a) Indicators and subindicators. Each PHA will receive an overall 
PHAS score, rounded to the nearest whole number, based on the four 
indicators: physical condition, financial condition, management 
operations, and Capital Fund program. Each of these indicators contains 
subindicators, and the scores for the subindicators are used to 
determine a single score for each of these PHAS indicators. Individual 
project scores are used to determine a single score for the physical 
condition, financial condition, and management operations indicators. 
The Capital Fund program indicator score is entity-wide.
    (b) Overall PHAS score and indicators. The overall PHAS score is 
derived from a weighted average of score values for the four 
indicators, as follows:
    (1) The physical condition indicator is weighted 30 percent (30 
points) of the overall PHAS score. The score for this indicator is 
obtained as indicated in subpart B of this part.
    (2) The financial condition indicator is weighted 20 percent (20 
points) of the overall PHAS score. The score for this indicator is 
obtained as indicated in subpart C of this part.
    (3) The management operations indicator is weighted 40 percent (40 
points) of the overall PHAS score. The score for this indicator is 
obtained as indicated in subpart D of this part.
    (4) The Capital Fund program indicator is weighted 10 percent (10 
points) of the overall PHAS score for all Capital Fund program grants 
for which fund balances remain during the assessed fiscal year. The 
score for this indicator is obtained as indicated in subpart E of this 
part.
    (c) Scoring procedures. (1) The scores for each PHAS indicator will 
be calculated in accordance with the scoring procedures described in 
appendices A-D.
    (2) HUD will publish for public comment any significant proposed 
amendments to these scoring procedures. After comments have been 
considered, HUD will publish final documents.


Sec.  902.11  PHAS performance designation.

    All PHAs that receive a PHAS assessment shall receive a performance 
designation. The performance designation is based on the overall PHAS 
score and the four indicator scores, as set forth below.
    (a) High performer. (1) A PHA that achieves an overall PHAS score 
of 90 percent or greater shall be designated a high performer, except 
that such a PHA shall not be designated a high performer if more than 
10 percent of its total units are in projects that fail the physical, 
financial, or management operations indicator.
    (2) High performers will be afforded incentives that include relief 
from reporting and other requirements, as described in Sec.  902.71 of 
this part.
    (b) Standard performer. (1) A PHA that is not a high performer 
shall be designated a standard performer if the PHA achieves an overall 
PHAS score of at least 60 percent and at least 60 percent under each of 
the four PHAS indicators.
    (2) At HUD's discretion, a standard performer may be required by 
the regional/field office to submit and operate under a Corrective 
Action Plan.
    (c) Substandard performer. A PHA will be designated a substandard 
performer if a PHA achieves a total PHAS score of at least 60 percent 
and achieves a score of less than 60 percent under one or more of the 
physical condition, financial condition, or management operations 
indicators. The PHA will be designated as substandard physical, 
substandard financial, or substandard management, respectively. The HUD 
office with jurisdiction over the PHA may require a Corrective Action 
Plan if the deficiencies have not already been addressed in a current 
Corrective Action Plan.
    (d) Troubled performer. (1) A PHA that achieves an overall PHAS 
score of less than 60 percent shall be designated as a troubled 
performer.
    (2) In accordance with section 6(j)(2)(A)(i) of the Act (42 U.S.C. 
1437d(j)(2)(A)(i)), a PHA that receives less than 60 percent under the 
Capital Fund program indicator under subpart E of this part will be 
designated as a troubled performer and subject to the sanctions 
provided in section 6(j)(4) of the Act (42 U.S.C. 1437(d)(j)(4)).

[[Page 49556]]

Sec.  902.13  Frequency of PHAS assessments.

    The frequency of a PHA's PHAS assessments is determined by the size 
of the PHA's Low-Rent program and its PHAS designation.
    (a) Small PHAs. HUD will assess and score the performance of a PHA 
with fewer than 250 public housing units every other PHA fiscal year, 
unless the PHA is designated as troubled, in accordance with Sec.  
902.75 of this part.
    (b) Frequency of scoring for PHAs with 250 units or more.
    (1) All PHAs, other than stated in paragraph (a) of this section, 
may be assessed on an annual basis.
    (2) The physical condition score for each project will determine 
the frequency of inspections of each project. For projects with a 
physical condition score of 80 points or higher, physical inspections 
will be conducted every 2 years at the project. The physical condition 
score of 80 points or higher will be carried over to the next 
assessment year and averaged with the other project physical condition 
score(s) for the next assessment year for an overall PHAS physical 
condition indicator score. For projects whose physical condition score 
for a project is less than 80 points, physical inspections will be 
conducted annually at the project.
    (c) Financial submissions. HUD shall not issue a PHAS score for the 
unaudited and audited financial information in the years that a PHA is 
not being assessed under PHAS. Although HUD shall not issue a PHAS 
score under such circumstances, a PHA shall comply with the 
requirements for submission of annual unaudited and audited financial 
statements in accordance with subpart C of this part and 24 CFR 5.801.

Subpart B--Physical Condition Indicator


Sec.  902.20  Physical condition assessment.

    (a) Objective. The objective of the physical condition indicator is 
to determine whether a PHA is meeting the standard of decent, safe, 
sanitary housing in good repair (DSS/GR), as this standard is defined 
in 24 CFR 5.703.
    (b) Method of assessment. The physical condition assessment is 
based on an independent physical inspection of a PHA's projects 
provided by HUD and performed by contract inspectors, and conducted 
using HUD's Uniform Physical Condition Standards (UPCS) under 24 CFR 
part 5, subpart G.
    (c) Method of transmission. After the inspection is completed, the 
inspector transmits the results to HUD, where the results are verified 
for accuracy and then scored in accordance with the procedures in this 
subpart B.
    (d) PHA physical inspection requirements. The physical inspections 
conducted under this part do not relieve the PHA of the responsibility 
to inspect public housing units, as provided in section 6(f)(3) of the 
Act (42 U.S.C. 1437d(f)(3)).
    (e) Compliance with state and local codes. The physical condition 
standards in this part do not supersede or preempt state and local 
building and maintenance codes with which the PHA's public housing must 
comply. PHAs must continue to adhere to these codes.
    (f) HUD access to PHA projects. All PHAs are required by the ACC to 
provide HUD or its representative with full and free access to all 
facilities in its projects. All PHAs are required to provide HUD or its 
representative with access to its projects and to all units and 
appurtenances in order to permit physical inspections, monitoring 
reviews, and quality assurance reviews under this part. Access to the 
units shall be provided whether or not the resident is home or has 
installed additional locks for which the PHA did not obtain keys. In 
the event that the PHA fails to provide access as required by HUD or 
its representative, the PHA shall be given a physical condition score 
of zero for the project or projects involved. This score of zero shall 
be used to calculate the physical condition indicator score and the 
overall PHAS score.


Sec.  902.21  Physical condition standards for public housing--decent, 
safe, and sanitary housing in good repair (DSS/GR).

    (a) General. Public housing must be maintained in a manner that 
meets the physical condition standards set forth in this part in order 
to be considered DSS/GR (standards that constitute acceptable basic 
housing conditions). These standards address the major physical areas 
of public housing: Site, building exterior, building systems, dwelling 
units, and common areas (see paragraph (b) of this section). These 
standards also identify health and safety considerations (see paragraph 
(c) of this section). These standards address acceptable basic housing 
conditions, not the adornment, d[eacute]cor, or other cosmetic 
appearance of the housing.
    (b) Major inspectable areas. (1) Site. The site includes the 
components and must meet the requirements of 24 CFR 5.703(a).
    (2) Building exterior. The building exterior includes the 
components and must meet the standards stated in 24 CFR 5.703(b).
    (3) Building systems. The building's systems include components 
such as domestic water, electrical system, elevators, emergency power, 
fire protection, heating/ventilation/air conditioning (HVAC), and 
sanitary system. Each building's systems must meet the standards of 24 
CFR 5.703(c).
    (4) Dwelling units. Each dwelling unit within a building must meet 
the standards of 24 CFR 5.703(d).
    (5) Common areas. Each common area must meet the standards of 24 
CFR 5.703(e).
    (c) Health and safety concerns. All areas and components of the 
housing must be free of health and safety hazards, as provided in 24 
CFR 5.703(f).


Sec.  902.22  Physical inspection of PHA projects.

    (a) The inspection, generally. The PHA's score for the physical 
condition indicator is based on an independent physical inspection of a 
PHA's project(s) provided by HUD and using HUD's UPCS inspection 
protocols to ensure projects meet DSS/GR standards that constitute 
acceptable basic housing conditions.
    (b) Physical inspection under the PHAS physical condition 
indicator. (1) To achieve the objective of paragraph (a) of this 
section, HUD will provide for an independent physical inspection of a 
PHA's project(s) that includes, at a minimum, a statistically valid 
sample of the units in the PHA's projects to determine the extent of 
compliance with the DSS/GR standard.
    (2) Only occupied units will be inspected as dwelling units (except 
units approved by HUD for nondwelling purposes, e.g., daycare or 
meeting rooms, which are inspected as common areas). Vacant units that 
are not under lease at the time of the physical inspection will not be 
inspected, but vacant units are assessed under the management 
operations indicator. The categories of vacant units not under lease 
that are exempted from physical inspection are as follows:
    (i) Units undergoing vacant unit turnaround--vacant units that are 
in the routine process of turnover; i.e., the period between which one 
resident has vacated a unit and a new lease takes effect;
    (ii) Units undergoing rehabilitation--vacant units that have 
substantial rehabilitation needs already identified, and there is an 
approved implementation plan to address the identified rehabilitation 
needs and the plan is fully funded;
    (iii) Off-line units--vacant units that have repair requirements 
such that the units cannot be occupied in a normal

[[Page 49557]]

period of time (considered to be between 5 and 7 days) and which are 
not included under an approved rehabilitation plan.
    (c) Observed deficiencies. During the physical inspection of a 
project, an inspector looks for deficiencies for each inspectable item 
within the inspectable areas, such as holes (deficiencies) in the walls 
(item) of a dwelling unit (area). The dwelling units inspected in a 
project are a randomly selected, statistically valid sample of the 
units in the project, excluding vacant units not under lease at the 
time of the physical inspection, as provided in paragraph (b)(2) of 
this section.
    (d) Exigent health and safety (EHS) deficiencies and health and 
safety (H&S) deficiencies--(1) EHS deficiencies. To ensure prompt 
correction of EHS deficiencies, before leaving the site the inspector 
gives the project representative a Notification of Exigent and Fire 
Safety Hazards Observed Deficiency form that calls for immediate 
attention or remedy. The project representative acknowledges receipt of 
the deficiency report by signature. The project or PHA shall correct or 
remedy all EHS deficiencies cited in the deficiency report within 24 
contiguous hours of the project representative's receipt of the 
Notification of Exigent and Fire Safety Hazards Observed Deficiency 
form. In addition, the project or PHA must certify to HUD within 3 
business days of the project representative's receipt of the 
Notification of Exigent and Fire Safety Hazards Observed Deficiency 
form, that all EHS deficiencies were corrected or remedied within 24 
contiguous hours.
    (2) H&S deficiencies. The project or the PHA, or both, as 
appropriate, is required to correct all H&S deficiencies within 72 
contiguous hours of the project representative's receipt of the 
Notification of Exigent and Fire Safety Hazards Observed Deficiency 
form.
    (e) Compliance with civil rights/nondiscrimination requirements. 
Elements related to accessibility will be reviewed during the physical 
inspection to determine possible indications of noncompliance with the 
Fair Housing Act (42 U.S.C. 3601-19) and section 504 of the 
Rehabilitation Act of 1973 (29 U.S.C. 794). A PHA will not be scored on 
those elements. Any indication of possible noncompliance will be 
referred to HUD's Office of Fair Housing and Equal Opportunity.


Sec.  902.24  Database adjustment.

    (a) Adjustments for factors not reflected or inappropriately 
reflected in physical condition score. Under circumstances described in 
this section, HUD may determine it is appropriate to review the results 
of a project's physical inspection that are unusual or incorrect due to 
facts and circumstances affecting the PHA's project that are not 
reflected in the inspection or that are reflected inappropriately in 
the inspection.
    (1) The circumstances described in this section are not the 
circumstances that may be addressed by the technical review process 
described in Sec.  902.68 of this part. The circumstances addressed in 
this paragraph (a)(1) may include inconsistencies between local code 
requirements and the HUD physical inspection protocol; conditions that 
are permitted by local variance or license or which are preexisting 
physical features that do not conform to, or are inconsistent with, 
HUD's physical condition protocol; or the project or PHA having been 
scored for elements (e.g., roads, sidewalks, mail boxes, resident-owned 
appliances, etc.) that it does not own and is not responsible for 
maintaining. To qualify for an adjustment on this basis, the project or 
PHA must have notified the proper authorities regarding the deficient 
element.
    (2) An adjustment due to these circumstances may be initiated by a 
project or PHA's notification to the applicable HUD regional or field 
office, and such notification shall include appropriate proof of the 
reasons for the unusual or incorrect result. Projects and PHAs may 
submit the request for this adjustment either prior to or after the 
physical inspection has been concluded. If the request is made after 
the conclusion of the physical inspection, the request must be made 
within 30 days of issuance of the project's or PHA's physical condition 
score. Based on the recommendation of the applicable HUD office 
following its review of the project evidence or documentation submitted 
by the project or PHA, HUD may determine that a reinspection and 
rescoring of the project or PHA is necessary.
    (b) Adjustments for adverse conditions beyond the control of the 
PHA. Under certain circumstances, HUD may determine that certain 
deficiencies that adversely and significantly affect the physical 
condition score of the project were caused by circumstances beyond the 
control of the PHA. The correction of these conditions, however, 
remains the responsibility of the PHA.
    (1) The circumstances addressed by this paragraph (b)(1) may 
include, but are not limited to, damage caused by third parties (such 
as a private entity or public entity undertaking work near a public 
housing project that results in damage to the project) or natural 
disasters. (The circumstances addressed in paragraph (b)(1) are not 
those addressed by the technical review process in Sec.  902.68.)
    (2) To adjust a physical condition score based on circumstances 
addressed in this paragraph, the PHA must submit a request to the 
applicable HUD regional/field office requesting a reinspection of the 
PHA's project(s). The request must be submitted within 30 days of the 
issuance of the physical condition score to the PHA and must be 
accompanied by a certification that all deficiencies identified in the 
original report have been corrected. Based on the recommendation of the 
applicable HUD office following its review of the project's or PHA's 
evidence or documentation, HUD may determine that a reinspection and 
rescoring of the PHA's project(s) is necessary.
    (c) Adjustments for modernization work in progress. HUD may 
determine that an occupied dwelling unit or other areas of a PHA's 
project, subject to physical inspection under this subpart, and are 
undergoing modernization work, requires an adjustment to the physical 
condition score.
    (1) An occupied dwelling unit or other areas of a PHA's project 
undergoing modernization are subject to physical inspection; the 
unit(s) and other areas of the PHA's project are not exempt from 
physical inspection. All elements of the unit or of the other areas of 
the PHA's project that are subject to inspection and are not undergoing 
modernization at the time of the inspection (even if modernization is 
planned) will be subject to HUD's physical inspection protocol without 
adjustment. For those elements of the unit or of the project that are 
undergoing modernization, deficiencies will be noted in accordance with 
HUD's physical inspection protocol, but the project or PHA may request 
adjustment of the physical condition score as a result of modernization 
work in progress.
    (2) An adjustment due to modernization work in progress may be 
initiated by a project's or PHA's notification to the applicable HUD 
office, and the notification shall include supporting documentation of 
the modernization work under way at the time of the physical 
inspection. A project or PHA may submit the request for this adjustment 
either prior to or after the physical inspection has been concluded. If 
the request is made after the conclusion of the physical inspection, 
the request must be made within 30 days of issuance of the

[[Page 49558]]

physical condition score. Based on the recommendation of the applicable 
HUD office, HUD may determine that a reinspection and rescoring of the 
PHA's project(s) are necessary.


Sec.  902.25  Physical condition scoring and thresholds.

    (a) Scoring. Under the physical condition indicator, a score will 
be calculated for the overall condition of a PHA's public housing 
portfolio, as well as for individual projects, following the procedures 
described in the separate scoring document.
    (b) Overall PHA physical condition indicator score. The overall 
physical condition indicator score is a unit-weighted average of 
project scores. The sum of the unit-weighted values is divided by the 
total number of units in the PHA's portfolio to derive the overall 
physical condition indicator score.
    (c) Thresholds. (1) The project(s) 100-point physical condition 
score is converted to a 30-point basis for the overall physical 
condition indicator score. The project scores on the 100-point basis 
are multiplied by 30 in order to derive a 30-point equivalent score to 
compute the overall physical condition score and overall PHAS score.
    (2) In order to receive a passing score under the physical 
condition indicator, the PHA must achieve a score of at least 18 
points, or 60 percent.
    (3) A PHA that receives fewer than 18 points will be categorized as 
a substandard physical condition agency.


Sec.  902.26  Physical Inspection Report.

    (a) Following the physical inspection of each project and the 
computation of the score(s) under this subpart, the PHA receives a 
Physical Inspection Report. The Physical Inspection Report allows the 
PHA to see the magnitude of the points lost by inspectable area, and 
the impact on the score of the H&S and EHS deficiencies.
    (1) If EHS items are identified in the report and were not 
corrected under the provisions of Sec.  902.22(d), the PHA shall 
correct all EHS deficiencies within 24 contiguous hours and may request 
a reinspection.
    (2) The request for reinspection must be made within 30 days of the 
PHA's receipt of the Physical Inspection Report. The request for 
reinspection must be accompanied by the PHA's identification of the EHS 
deficiencies that have been corrected, and by the PHA's certification 
that all such deficiencies identified in the report have been 
corrected.
    (3) If HUD determines that a reinspection is appropriate, it will 
arrange for a complete reinspection of the project(s) in question, not 
just the deficiencies previously identified. The reinspection will 
constitute the final physical inspection for the project, and HUD will 
issue a new inspection report (the final inspection report).
    (4) If any of the previously identified EHS deficiencies that the 
PHA certified were corrected are found during the reinspection not to 
have been corrected, the score in the final inspection report will 
reflect a point deduction of triple the value of the original 
deduction, up to the maximum possible points for the unit or area, and 
the PHA must reimburse HUD for the cost of the reinspection.
    (5) If a request for reinspection is not made within 30 days after 
the date that the PHA receives the Physical Inspection Report, the 
Physical Inspection Report issued to the PHA will be the final Physical 
Inspection Report.
    (b) A Physical Inspection Report includes the following items:
    (1) Normalized weights as the ``possible points'' by area;
    (2) The area scores, taking into account the points deducted for 
observed deficiencies;
    (3) The H&S (nonlife threatening) and EHS (life threatening) 
deductions for each of the five inspectable areas; a listing of all 
observed smoke detector deficiencies; and a projection of the total 
number of H&S and EHS problems that the inspector potentially would see 
in an inspection of all buildings and all units; and
    (4) The overall project score.

Subpart C--Financial Condition Indicator


Sec.  902.30  Financial condition assessment.

    (a) Objective. The objective of the financial condition indicator 
is to measure the financial condition of each public housing project 
within a PHA's public housing portfolio for the purpose of evaluating 
whether there are sufficient financial resources to support the 
provision of housing that is DSS/GR. Individual project scores for 
financial condition, as well as overall financial condition scores, 
will be issued.
    (b) Financial reporting standards. A PHA's financial condition will 
be assessed under this indicator by measuring the combined performance 
of all public housing projects in each of the subindicators listed in 
Sec.  902.35, on the basis of the annual financial report provided in 
accordance with Sec.  902.33.


Sec.  902.33  Financial reporting requirements.

    (a) Annual financial report. All PHAs must submit their unaudited 
and audited financial data to HUD on an annual basis. The financial 
information must be:
    (1) Prepared in accordance with Generally Accepted Accounting 
Principles (GAAP), as further defined by HUD in supplementary guidance; 
and
    (2) Submitted electronically in the format prescribed by HUD using 
the Financial Data Schedule (FDS).
    (b) Annual unaudited financial information report filing dates. The 
unaudited financial information to be submitted to HUD in accordance 
with paragraph (a) of this section must be submitted to HUD annually, 
no later than 2 months after the PHA's fiscal year end, with no penalty 
applying until the 16th day of the 3rd month after the PHA's fiscal 
year end, in accordance with Sec.  902.62.
    (c) Annual audited financial information compliance dates. Audited 
financial statements will be required no later than 9 months after the 
PHA's fiscal year end, in accordance with the Single Audit Act and OMB 
Circular A-133 (see 24 CFR 85.26).
    (d) Year-end audited financial information. All PHAs that meet the 
federal assistance threshold stated in the Single Audit Act and OMB 
Circular A-133 must also submit year-end audited financial information.
    (e) Submission of information. In addition to the submission of 
information required by paragraph (a) of this section, a PHA shall 
provide one copy of the completed audit report package and the 
Management Letter issued by the Independent Auditor to the local HUD 
regional/field office having jurisdiction over the PHA.


Sec.  902.35  Financial condition scoring and thresholds.

    (a) Scoring. (1) Under the financial condition indicator, a score 
will be calculated for each project based on the values of financial 
condition subindicators and an overall financial condition score, as 
well as audit and internal control flags. Each financial condition 
subindicator has several levels of performance, with different point 
values for each level.
    (2) The financial condition score for projects and PHAs will be 
based on the Low-Rent and Capital Fund program information, consistent 
with Sec.  990.280(a) of the Public Housing Operating Fund program 
regulation.
    (3) Under the financial condition indicator, a score will be 
calculated following the procedures described in appendix B.
    (b) Subindicators of the financial condition indicator. The 
subindicators of financial condition indicator are:

[[Page 49559]]

    (1) Quick Ratio (QR). The QR compares quick assets to current 
liabilities. Quick assets are cash and assets that are easily 
convertible to cash and do not include inventory. Current liabilities 
are those liabilities that are due within the next 12 months. A QR of 
less than one indicates that the project's ability to make payments on 
a timely basis may be at risk.
    (2) Months Expendable Net Assets Ratio (MENAR). The MENAR measures 
a project's ability to operate using its net available, unrestricted 
resources without relying on additional funding. In particular, this 
ratio compares the net available unrestricted resources to the average 
monthly operating expenses. The result of this calculation shows how 
many months of operating expenses can be covered with currently 
available, unrestricted resources.
    (3) Debt Service Coverage Ratio (DSCR). The DSCR is a measure of 
net operating income available to make debt payments to the amount of 
the debt payments. This subindicator is used if the PHA has taken on 
long-term obligations. A DSCR of less than one would indicate that the 
project would have difficulty generating sufficient cash flow to cover 
both its expenses and its debt obligations.
    (c) Overall PHA financial condition indicator score. The overall 
financial condition indicator score is a unit-weighted average of 
project scores. The sum of the weighted values is then divided by the 
total number of units in the PHA's portfolio to derive the overall 
financial condition indicator score.
    (d) Thresholds. (1) The PHA's financial condition score is based on 
a maximum of 20 points.
    (2) In order for a PHA to receive a passing score under the 
financial condition indicator, the PHA must achieve a score of at least 
12 points, or 60 percent of the available points under this indicator.
    (3) A PHA that receives fewer than 12 points available under this 
indicator will be categorized as a substandard financial condition 
agency.

Subpart D--Management Operations Indicator


Sec.  902.40  Management operations assessment.

    (a) Objective. The objective of the management operations indicator 
is to measure the PHA's performance of management operations through 
the management performance of each project.
    (b) Management assessment. The management operations indicator 
incorporates the majority of the statutory indicators of section 6(j) 
of the Act (42 U.S.C. 1437d(j)). (The remaining statutory indicators 
are addressed under the other PHAS indicators.)


Sec.  902.43  Management operations performance standards.

    (a) Management operations component. The following statutory 
subindicators listed in this section, as well as the project management 
review, will be used to assess the management operations of projects 
and PHAs, consistent with section 6(j)(1) of the Act (42 U.S.C. 
1437d(j)(1)). Individual project scores for management operations, as 
well as overall PHA management operations scores, will be issued. The 
components and scoring for each subindicator and the project management 
review are in appendix C.
    (1) Vacancy rate and percentage. This component measures the 
adjusted vacancy rate and the progress that a project has made within 
the previous 3 fiscal years to reduce such vacancies. Implicit in this 
component is that the project has an adequate system for tracking 
vacancy days.
    (2) Rent collection. This component measures the percentage of rent 
collected by a project against the rent charged.
    Implicit in this component is that a project has an adequate system 
to track and document total rents charged and total rents collected.
    (3) Utility consumption. This component examines a project's energy 
conservation/utility consumption.
    (4) Turnaround time. This component examines the amount of time it 
takes a project to turn around the units that were released within the 
assessment period. Implicit in this component is that the project has 
an adequate system for tracking vacant unit turnaround time.
    (5) Work orders. This component measures the average number of days 
that tenant-generated work orders are outstanding, and any progress a 
project has made during the preceding 3 fiscal years to reduce the 
period of time tenant-generated work orders are outstanding. Implicit 
in this component is the adequacy of the project's system for tracking 
work orders and ensuring the thoroughness and quality of the project's 
needed repairs.
    (6) Unit inspection. This component measures the percentage of 
units that a project inspected during the assessment period. Projects 
are required to inspect their property in accordance with the HUD-
prescribed physical inspection procedures as set forth in 24 CFR part 
5, subpart G.
    (i) Adequacy of inspection program. This component requires that 
projects adequately track inspections, ensuring the thoroughness and 
quality of the project's inspections.
    (ii) Units to be inspected. All occupied units and units available 
for occupancy are required to be inspected annually, consistent with 
section 6(f)(3) of the Act (42 U.S.C. 1437d(f)(3)). This includes units 
used for nondwelling purposes, those occupied by an employee, and those 
used for resident services.
    (7) Security. This component evaluates a project's performance in 
tracking crime-related problems in the project; the adoption and 
implementation of applicant screening and resident eviction policies 
and procedures, and other anticrime strategies; and coordination with 
local government officials and residents in the project and PHA on 
implementation of such strategies.
    (8) Economic self-sufficiency. This component evaluates the self-
sufficiency opportunities provided for adult residents.
    (9) Resident involvement in project administration. This component 
evaluates the opportunities for resident involvement in project 
administration.
    (b) Assessment under the management operations indicator. Projects 
will be assessed under this indicator through management operations 
information that is electronically submitted to HUD, such management 
data as is available through the FDS, project management reviews 
conducted by HUD, and other HUD data systems, such as the Subsidy and 
Grant Information System.


Sec.  902.44  Adjustment for physical condition and neighborhood 
environment.

    (a) General. In accordance with section 6(j)(1)(I)(2) of the Act 
(42 U.S.C. 1437d(j)(1)(I)(2)), the overall management operations score 
for a project will be adjusted upward to the extent that negative 
conditions are caused by situations outside the control of the project. 
These situations are related to the poor physical condition of the 
project or the overall depressed condition of the major census tract in 
which a project is located. The intent of this adjustment is to avoid 
penalizing such projects, through appropriate application of the 
adjustment.
    (b) Definitions. Definitions and application of physical condition 
and neighborhood environment factors are:
    (1) Physical condition adjustment applies to projects at least 28 
years old, based on the unit-weighted average Date of Full Availability 
(DOFA) date.

[[Page 49560]]

    (2) Neighborhood environment adjustment applies to projects located 
in census tracts where at least 40 percent of the families have an 
income below the poverty rate, as documented by the most recent census 
data. If a project is located in more than one census tract, the census 
data for the census tract where the majority of the project's units are 
located shall be used.
    (c) Adjustment for physical condition and neighborhood environment. 
HUD will adjust the management operations score of a project subject to 
one or both of the physical condition and neighborhood environment 
conditions. The adjustments will be made to the overall management 
operations score for each project so as to reflect the difficulty in 
managing the projects. In each instance where the actual management 
operations score is rated below the maximum score of 40 points, one 
point each will be added for physical condition and neighborhood 
environment, but not to exceed the maximum number of 40 points 
available for the management operations indicator.
    (d) Application of adjustment. The adjustment for physical 
condition and neighborhood environment will be calculated by HUD and 
applied to all eligible projects.


Sec.  902.45  Management operations scoring and thresholds.

    (a) Scoring. Under the management operations indicator, a score 
will be calculated for each project, as well as for the overall 
management operations of a PHA, that reflects weights based on the 
relative importance of the individual management subindicators. Under 
the management operations indicator, HUD will calculate a score 
following the procedures described in the separate PHAS Management 
Operations Scoring document.
    (b) Overall PHA management operations indicator score. The overall 
management operations indicator score is a unit-weighted average of 
project scores. The sum of the weighted values is divided by the total 
number of units in the PHA's portfolio to derive the overall management 
operations indicator score.
    (c) Thresholds. (1) The PHA's management operations score is based 
on a maximum of 40 points.
    (2) In order to receive a passing score under the management 
operations indicator, a PHA must achieve a score of at least 24 points 
or 60 percent.
    (3) A PHA that receives fewer than 24 points will be categorized as 
a substandard management operations agency.

Subpart E--Capital Fund Program Indicator


Sec.  902.50  Capital Fund program assessment.

    (a) Objective. The Capital Fund program indicator examines the 
period of time taken by a PHA to obligate funds and expend funds in 
relation to statutory deadlines for obligation and expenditure for all 
Capital Fund program grants for which fund balances remain during the 
assessed fiscal year. Funds from the Capital Fund program under section 
9(d) of the Act (42 U.S.C. 1437g(d)) do not include HOPE VI program 
funds.
    (b) Applicability. This indicator is applicable on a PHA-wide 
basis, and not to individual projects. This indicator is not applicable 
to PHAs that choose not to participate in the Capital Fund program 
under section 9(d) of the Act.
    (c) Method of assessment. The assessment required under the Capital 
Fund program indicator will be performed through analysis of obligated 
and expended amounts in HUD's e-LOCCS (or its successor) for all 
Capital Fund program grants that were open during the assessed fiscal 
year. This indicator measures the statutory requirements for the 
Capital Fund program. Other aspects of the Capital Fund program will be 
monitored by HUD through other types of reviews.
    (1) PHAs are responsible to ensure that their Capital Fund program 
information is submitted to e-LOCCS by the submission due date.
    (2) A PHA may not appeal its PHAS score, Capital Fund program 
score, or both, based on the fact that it did not submit its Capital 
Fund program information to e-LOCCS by the submission due date.


Sec.  902.53  Capital Fund program scoring and thresholds.

    (a) Scoring. The Capital Fund program indicator score provides an 
assessment of a PHA's ability to obligate and expend Capital Fund 
program grants in a timely manner. Under the Capital Fund program 
indicator, a score will be calculated following the procedures 
described in the separate PHAS Capital Fund program Scoring document.
    (b) Thresholds. (1) The PHA's Capital Fund program score is based 
on a maximum of 10 points.
    (2) In order to receive a passing score under the Capital Fund 
program indicator, a PHA must achieve a score of at least 6 points, or 
60 percent.

Subpart F--PHAS Scoring


Sec.  902.60  Data collection.

    (a) Fiscal year reporting period--limitation on changes after PHAS 
effective date. To allow for a period of consistent assessments to 
refine and make necessary adjustments to PHAS, a PHA is not permitted 
to change its fiscal year for the first 3 full fiscal years following 
June 30, 2009, unless such change is approved by HUD for good cause.
    (b) Request for extension of time to submit unaudited financial 
information. In the event of extenuating circumstances, a PHA may 
request extensions of time to submit its unaudited financial 
information. To receive an extension, a PHA must ensure that HUD 
receives the extension request electronically 15 days before the 
submission due date. The PHA's electronic extension request must 
include an objectively verifiable justification as to why the PHA 
cannot submit the information by the submission due date. PHAs shall 
submit their requests for extensions of time for the submission of 
unaudited financial information through the FASS Secure Systems Web 
site. HUD shall forward its determination electronically to the 
requesting PHA.
    (c) Request for waiver of due date for PHA submission of audited 
financial information. (1) HUD, for good cause, may grant PHAs a waiver 
of the due date of the submission of audited financial information to 
HUD. HUD shall consider written requests from PHAs for a waiver of the 
report submission due date (established by OMB as no later than 9 
months after the end of the fiscal year). The PHA's written request for 
a waiver of the due date of the submission of audited financial 
information must include an objectively verifiable justification as to 
why the PHA cannot submit the information by the submission due date. A 
PHA shall submit its written request for such a waiver, 30 days prior 
to the submission due date, to the Assistant Secretary for Public and 
Indian Housing, Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410-2135. HUD shall forward its 
written determination of the waiver request to the PHA and, if 
appropriate, establish a new submission due date for the audited 
financial information.
    (2) A waiver of the due date for the submission of audited 
financial information to HUD does not relieve a PHA of its 
responsibility to submit its audited information to the Federal Audit 
Clearinghouse, as established by

[[Page 49561]]

OMB no later than 9 months after the end of its fiscal year.
    (d) Rejected unaudited financial submissions. When HUD rejects a 
PHA's year-end unaudited financial information after the due date, a 
PHA shall have 15 days from the date of the rejection to resubmit the 
information without a penalty being applied, in accordance with Sec.  
902.62.


Sec.  902.62  Failure to submit data.

    (a) Failure to submit data by due date. (1) If a PHA without a 
finding of good cause by HUD does not submit its year-end financial 
information, required by this part, or submits its unaudited year-end 
financial information more than 15 days past the due date, appropriate 
sanctions may be imposed, including a reduction of one point in the 
total PHAS score for each 15-day period past the due date.
    (2) If the unaudited year-end financial information is not received 
within 3 months past the due date, or extended due date, the PHA will 
receive a presumptive rating of failure for its unaudited information 
and shall receive zero points for its unaudited financial information 
and the final financial condition indicator score. The subsequent 
timely submission of audited information does not negate the score of 
zero received for the unaudited year-end financial information 
submission.
    (3) The PHA's audited financial statement must be received no later 
than 9 months after the PHA's fiscal year-end, in accordance with OMB 
Circular A-133 (see Sec.  902.33(c)). If the audited financial 
statement is not received by that date, the PHA will receive a 
presumptive rating of failure for the financial condition indicator.
    (b) Verification of information submitted. (1) A PHA's year-end 
financial information and any supporting documentation are subject to 
review by an independent auditor, as authorized by section 6(j)(6) of 
the Act (42 U.S.C. 1437(d)(j)(6)). Appropriate sanctions for 
intentional false certification will be imposed, including civil 
penalties, suspension or debarment of the signatories, the loss of high 
performer designation, a lower score under the financial condition 
indicator, and a lower overall PHAS score.
    (2) A PHA that cannot provide justifying documentation to HUD for 
the assessment under any indicator(s), subindicator(s), or component(s) 
shall receive a score of zero for the relevant indicator(s), 
subindicator(s), or component(s), and its overall PHAS score shall be 
lowered accordingly.


Sec.  902.64  PHAS scoring and audit reviews.

    (a) Adjustments to PHAS score. (1) Adjustments to the score may be 
made after a PHA's audit report for the year being assessed is 
transmitted to HUD. If significant differences (as defined in GAAP 
guidance materials provided to PHAs) are noted between unaudited and 
audited results, a PHA's PHAS score will be adjusted (e.g., reduced in 
points) in accordance with the audited results.
    (2) A PHA's PHAS score under individual indicators, subindicators, 
or components, or its overall PHAS score, may be changed by HUD in 
accordance with data included in the audit report, or obtained through 
such sources as HUD project management and other reviews, 
investigations by HUD's Office of Fair Housing and Equal Opportunity, 
investigations or audits by HUD's Office of Inspector General, or 
reinspection by HUD, as applicable.
    (b) Issuance of a score by HUD. An overall PHAS score will be 
issued for each PHA after the later of one month after the submission 
due date for financial data or one month after submission by the PHA of 
its financial data. The overall PHAS score becomes the PHA's final PHAS 
score after any adjustments requested by the PHA and determined 
necessary under the processes provided in Sec. Sec.  902.25(d), 
902.35(a), and 902.68; any adjustments resulting from the appeal 
process provided in Sec.  902.69; and any adjustments determined 
necessary as a result of the independent public accountant (IPA) audit.
    (c) Review of audit--(1) Quality control review. HUD may undertake 
a quality control review of the audit work papers or as part of the 
Department's ongoing quality assurance process.
    (2) Determination of deficiency. If HUD determines that the PHA's 
financial statements, electronic financial submission, or audit are 
deficient, it shall notify the PHA of such determination in writing. 
The PHA will have 30 days in which to respond to the notice of 
deficiency and to establish that the determination is erroneous. 
Following consideration of any PHA response, HUD will issue a final 
determination in writing to the PHA.
    (i) Deficient financial statements. Deficient financial statements 
are statements that are not presented, in some material respect, in 
accordance with accounting principles generally accepted in the United 
States, as set forth by the Government Accounting Standards Board, or 
if applicable, the Financial Accounting Standards Board.
    (ii) Deficient electronic submission. A deficient electronic 
financial submission is a filing that was not made, in some material 
respect, in accordance with HUD requirements or attested to in 
accordance with the Standards for Attestation Engagements issued by the 
American Institute of Certified Public Accountants or Generally 
Accepted Government Auditing Standards.
    (iii) Deficient audit. A deficient audit is one that was not 
performed, in some material respect, in compliance with Generally 
Accepted Government Auditing Standards; Generally Accepted Auditing 
Standards; OMB Circular A-133, when applicable; or HUD requirements.
    (3) HUD actions. If HUD determines that the financial statements, 
electronic financial submission, or audit are deficient, HUD may adjust 
the financial indicator score to zero and/or reduce the overall PHAS 
score in accordance with the provisions of this section. Additionally, 
if HUD determines that the audit is deficient, HUD may, at its 
discretion, elect to serve as the audit committee for the PHA for the 
next fiscal year and select the audit firm that will perform the audit 
in question.


Sec.  902.66  Withholding, denying, and rescinding designation.

    (a) Withholding designation. In exceptional circumstances, even 
though a PHA has satisfied all of the PHAS indicators for high 
performer or standard performer designation, HUD may conduct any review 
as it may determine necessary, and may deny or rescind incentives or 
high performer designation or standard performer designation, in the 
case of a PHA that:
    (1) Is operating under a special agreement with HUD (e.g., a civil 
rights compliance agreement);
    (2) Is involved in litigation that bears directly upon the 
physical, financial, or management performance of a PHA;
    (3) Is operating under a court order;
    (4) Demonstrates substantial evidence of fraud or misconduct, 
including evidence that the PHA's certifications, submitted in 
accordance with this part, are not supported by the facts, as evidenced 
by such sources as a HUD review, routine reports, an Office of 
Inspector General investigation/audit, an independent auditor's audit, 
or an investigation by any appropriate legal authority; or
    (5) Demonstrates substantial noncompliance in one or more areas of 
a PHA's required compliance with applicable laws and regulations, 
including areas not assessed under PHAS. Areas of substantial 
noncompliance include, but are not limited to, noncompliance with civil 
rights, nondiscrimination and fair

[[Page 49562]]

housing laws and regulations, or the ACC. Substantial noncompliance 
casts doubt on the capacity of a PHA to preserve and protect its public 
housing projects and operate them consistent with federal laws and 
regulations.
    (b) High performer designation. If a high performer designation is 
denied or rescinded, the PHA shall be designated either a standard 
performer, substandard performer, or troubled performer, depending on 
the nature and seriousness of the matter or matters constituting the 
basis for HUD's action. If a standard performer designation is denied 
or rescinded, the PHA shall be designated as a substandard performer or 
troubled performer.
    (c) Effect on score. The denial or rescission of a designation of 
high performer or standard performer shall not affect the PHA's 
numerical PHAS score, except where the denial or rescission is under 
paragraph (a)(4) of this section.


Sec.  902.68  Technical review of PHAS physical condition indicator.

    (a) Request for technical reviews. This section describes the 
process for requesting and granting technical reviews of physical 
inspection results.
    (1) For these reviews, the burden of proof is on the PHA to show 
that an error occurred.
    (2) A request for technical review must be submitted in writing to 
the Real Estate Assessment Center, Attention: Technical Review, and 
must be received by HUD no later than 30 days following the issuance of 
the applicable results to the PHA.
    (b) Technical review of results of physical inspection results. (1) 
For each project inspected, the results of the physical inspection and 
a score for that project will be provided to the PHA. If the PHA 
believes that an objectively verifiable and material error(s) occurred 
in the inspection of an individual project, the PHA may request a 
technical review of the inspection results for that project. Material 
errors are the only grounds for technical review of physical inspection 
results.
    (2) A PHA's request for a technical review must be accompanied by 
the PHA's evidence that an objectively verifiable and material error(s) 
has occurred. The documentation submitted by the PHA may be 
photographic evidence; written material from an objective source, such 
as a local fire marshal or building code official; or other similar 
evidence. The evidence must be more than a disagreement with the 
inspector's observations, or the inspector's finding regarding the 
severity of the deficiency.
    (3) A technical review of a project's physical inspection will not 
be conducted based on conditions that were corrected subsequent to the 
inspection, nor will a request for a technical review be considered if 
the request is based on a challenge to the inspector's findings as to 
the severity of the deficiency (i.e., minor, major, or severe).
    (4) Upon receipt of a PHA's request for technical review of a 
project's inspection results, the PHA's file will be reviewed, 
including any objectively verifiable evidence produced by the PHA. If 
HUD's review determines that an objectively verifiable and material 
error(s) has been documented, then one or a combination of the 
following actions may be taken by HUD:
    (i) Undertake a new inspection;
    (ii) Correct the physical inspection report;
    (iii) Issue a corrected physical condition score; and
    (iv) Issue a corrected PHAS score.
    (5) In determining whether a new inspection of the project is 
warranted and a new PHAS score must be issued, the PHA's file will be 
reviewed, including any evidence submitted, to determine whether the 
evidence supports that there may have been a material contractor error 
in the inspection that results in a significant change from the 
project's original physical condition score and the PHAS designation 
assigned to the PHA (i.e., high performer, standard performer, 
substandard performer, or troubled performer). If HUD determines that a 
new inspection is warranted, and the new inspection results in a 
significant change from the original physical condition score, and from 
the PHA's PHAS score and PHAS designation, the PHA shall be issued a 
new PHAS score.
    (6) Material errors are those that exhibit specific characteristics 
and meet specific thresholds. The three types of material errors are:
    (i) Building data error. A building data error occurs if the 
inspection includes the wrong building or a building that was not owned 
by the PHA, including common or site areas that were not a part of the 
project. Incorrect building data that does not affect the score, such 
as the address, building name, year built, etc., would not be 
considered material, but will nonetheless be corrected upon notice to 
HUD.
    (ii) Unit count error. A unit count error occurs if the total 
number of public housing units considered in scoring is incorrect. 
Since scoring uses total public housing units, HUD will examine 
instances where the participant can provide evidence that the total 
units used is incorrect.
    (iii) Nonexistent deficiency error. A nonexistent deficiency error 
occurs if the inspection cites a deficiency that does not exist.
    (7) HUD's decision on a request for technical review is final and 
may not be further appealed under the administrative process in Sec.  
902.69.


Sec.  902.69  PHA right of petition and appeal.

    (a) Appeal of troubled performer designation and petition for 
removal of troubled performer designation. A PHA may take any of the 
following actions:
    (1) Appeal its troubled performer designation (including Capital 
Fund program troubled performer designation);
    (2) Appeal its final overall PHAS score;
    (3) Petition for removal of troubled performer designation;
    (4) Appeal any refusal of a petition to remove troubled performer 
designation; and
    (5) Appeal actions under Sec.  902.66.
    (b) Appeal of PHAS score. (1) If a PHA believes that an objectively 
verifiable and material error(s) exists in any of the scores for its 
PHAS indicators, which, if corrected, will result in a significant 
change in the PHA's PHAS score and its designation (i.e., as troubled 
performer, substandard performer, standard performer, or high 
performer), the PHA may appeal its PHAS score in accordance with the 
procedures of paragraphs (c), (d), and (e) of this section. A 
significant change in a PHAS score is a change that would cause the 
PHA's PHAS score to increase, resulting in a higher PHAS designation 
for the PHA (i.e., from troubled performer to substandard performer or 
standard performer, or from standard performer to high performer).
    (2) A PHA may not appeal its PHAS score, physical condition score, 
or both, based on the subsequent correction of deficiencies identified 
as a result of a project's physical inspection or the denial of a 
technical review request.
    (3) A PHA may not appeal its PHAS score, Capital Fund program 
score, or both, based on the fact that it did not submit its Capital 
Fund program information to e-LOCCS by the submission due date.
    (c) Appeal and petition procedures. (1) To appeal a troubled 
performer designation or a final overall PHAS score, a PHA must submit 
a request in writing to the Deputy Assistant Secretary of the Real 
Estate Assessment Center, which must be received by HUD no later than 
30 days following the issuance of the overall PHAS score to

[[Page 49563]]

the PHA. To petition the removal of a troubled performer designation, a 
PHA must submit its request in writing to the Deputy Assistant 
Secretary of the Real Estate Assessment Center.
    (2) To appeal the denial of a petition to remove a troubled 
performer designation, a PHA must submit a written request to the 
Deputy Assistant Secretary of the Real Estate Assessment Center, which 
must be received by HUD no later than 30 days after HUD's decision to 
refuse to remove the PHA's troubled performer designation.
    (3) To appeal the petition for the removal of a troubled performer 
designation, or appeal the denial of a petition to remove a troubled 
performer designation, a PHA shall submit its request in writing to the 
Deputy Assistant Secretary of the Real Estate Assessment Center.
    (4) An appeal of a troubled performer designation, the petition for 
removal of a troubled performer designation, or the appeal of a refusal 
of a petition to remove a troubled performer designation must include 
the PHA's supporting documentation and reasons for the appeal or 
petition. An appeal of a PHAS score must be accompanied by the PHA's 
evidence that a material error occurred. An appeal or petition 
submitted to HUD without supporting documentation will not be 
considered and will be returned to the PHA.
    (d) Denial, withholding, or rescission. A PHA that disagrees with 
the basis for denial, withholding, or rescission of its designation 
under Sec.  902.66 may make a written request for reinstatement within 
30 days of notification by HUD of the denial or rescission of the 
designation to the Assistant Secretary, and the request shall include 
reasons for the reinstatement.
    (e) Consideration of petitions and appeals. (1) Consideration of a 
petition or the appeal of a final overall PHAS score, of a troubled 
performer designation, or of a petition to remove troubled performer 
designation. Upon receipt of such an appeal or a petition from a PHA, 
HUD will evaluate the appeal and its merits for purposes of determining 
whether a reassessment of the PHA is warranted. HUD will review the 
PHA's file and the evidence submitted by the PHA to determine whether 
an error occurred.
    (2) Consideration of an appeal of refusal to remove a troubled 
performer designation. Upon receipt of an appeal of refusal to remove a 
troubled performer designation, HUD will evaluate the appeal and its 
merits for the purposes of determining whether a reassessment of the 
PHA is warranted. The officials evaluating an appeal of refusal to 
remove a troubled performer designation will not be the same officials 
who evaluated the PHA's petition to remove the troubled performer 
designation.
    (f) Notice and finality of decisions. (1) If HUD determines that 
one or more objectively verifiable and material error has occurred, HUD 
will undertake a new inspection of the project, arrange for audit 
services, adjust the PHA's score, or perform other reexamination of the 
financial, management, or Capital Fund program information, as 
appropriate in light of the nature of the error that occurred. A new 
score will be issued and an appropriate performance designation made by 
HUD. HUD's decision on appeal of a PHAS score, issuance of a troubled 
performer designation, or refusal to remove a troubled performer 
designation will be final agency action. No reconsideration will be 
given by HUD of such decisions.
    (2) HUD will issue a written decision on all appeals and petitions 
made under this section.

Subpart G--PHAS Incentives and Remedies


Sec.  902.71  Incentives for high performers.

    (a) Incentives for high performer PHAs. A PHA that is designated a 
high performer will be eligible for the following incentives, and such 
other incentives that HUD may determine appropriate and permissible 
under program statutes or regulations.
    (1) Relief from specific HUD requirements. A PHA that is designated 
a high performer will be relieved of specific HUD requirements (e.g., 
will receive fewer reviews and less monitoring), effective upon 
notification of a high performer designation.
    (2) Public recognition. High performer PHAs and RMCs that receive a 
score of at least 60 percent of the points available under each of the 
four PHAS Indicators and achieve an overall PHAS score of 90 percent, 
and no more than 10 percent of the total units are in projects that 
fail any physical, financial, or management indicator, will receive a 
Certificate of Commendation from HUD, as well as special public 
recognition, as provided by the regional/field office.
    (3) Bonus points in funding competitions. A high performer PHA may 
be eligible for bonus points in HUD's funding competitions, where such 
bonus points are not restricted by statute or regulation governing the 
funding program and are provided in the relevant notice of funding 
availability.
    (b) Compliance with applicable federal laws and regulations. Relief 
from any standard procedural requirement that may be provided under 
this section does not mean that a PHA is relieved from compliance with 
the provisions of federal law and regulations or other handbook 
requirements. For example, although a high performer or standard 
performer may be relieved of requirements for prior HUD approval for 
certain types of contracts for services, the PHA must still comply with 
all other federal and state requirements that remain in effect, such as 
those for competitive bidding or competitive negotiation (see 24 CFR 
85.36).
    (c) Audits and reviews not relieved by designation. A PHA 
designated as a high performer or standard performer remains subject 
to:
    (1) Regular independent auditor audits;
    (2) Office of Inspector General audits or investigations as 
circumstances may warrant; and
    (3) Reviews identified by the regional or field office in its 
current Risk Assessment of PHAs and projects.


Sec.  902.73  PHAs with deficiencies.

    (a) Oversight and action. Standard and substandard performers will 
be referred to the regional/field office for appropriate oversight and 
action.
    (1) A standard performer that receives a total score of at least 60 
percent shall be required to correct the deficiencies in performance 
within the time period for correction, as stated in Sec.  902.73(c). If 
the PHA fails to correct the deficiencies, HUD may either require the 
PHA to enter into a Corrective Action Plan, or HUD may take other 
action, as appropriate.
    (2) A substandard performer, i.e., a PHA that achieves a score of 
less than 60 percent of the total points available under one or more of 
the physical condition, management, or financial condition PHAS 
indicators, shall be required to correct the deficiencies in 
performance within the time period for correction. If the PHA fails to 
correct the deficiencies, HUD may require the PHA to enter into a 
Corrective Action Plan, or take other action, as appropriate.
    (3) A PHA with a project(s) that receives less than 60 percent of 
the points available for any indicator or subindicator shall be 
required to correct the deficiencies in performance within the time 
period for correction, as stated in Sec.  902.73(b). If the PHA fails 
to correct the deficiencies within the time period allowed, HUD may 
either require the PHA to enter into a Corrective Action Plan, or take 
other action, as appropriate.
    (b) Correction of deficiencies--(1) Time period for correction. 
After a

[[Page 49564]]

PHA's (or DF-RMC's) receipt of its final overall PHAS score and 
designation as: A standard performer, within the range described in 
Sec.  902.73(a)(1); or substandard performer, within the range 
described in Sec.  902.73(a)(2), or, in the case of an RMC, after 
notification of its score from a PHA, a PHA or RMC shall correct any 
deficiency indicated in its assessment within 90 days, or within such 
period as provided in the HUD-executed Corrective Action Plan, if 
required.
    (2) Notification and report to regional or field office. A PHA 
shall notify the regional or field office of its action to correct a 
deficiency. A PHA shall also forward to the regional or field office an 
RMC's report of its action to correct a deficiency. A DF-RMC shall 
forward directly to the regional or field office its report of its 
action to correct a deficiency.
    (c) Failure to correct deficiencies. (1) If a PHA (or DF-RMC or 
RMC) fails to correct deficiencies within the time period noted in 
paragraph (b) of this section, or to correct deficiencies within the 
time specified in a Corrective Action Plan, or within such extensions 
as may be granted by HUD, the regional/field office will notify the PHA 
of its noncompliance.
    (2) The PHA (or DF-RMC or RMC) will provide the regional/field 
office with its reasons for lack of progress in negotiating, executing, 
or carrying out the Corrective Action Plan, within 30 days of the PHA's 
receipt of the noncompliance notification. HUD will advise the PHA as 
to the acceptability of its reasons for lack of progress.
    (3) If HUD finds the PHA's (or DF-RMC or RMC) reasons for lack of 
progress unacceptable, HUD will notify the PHA (or DF-RMC or RMC) that 
it will take such actions as it may determine appropriate in accordance 
with the provisions of the 1937 Act and other statutes, the ACC, this 
part, and other HUD regulations, including, but not limited to, the 
remedies available for substantial default.


Sec.  902.75  Troubled performers.

    (a) General. Upon a PHA's designation as a troubled performer, in 
accordance with the requirements of section 6(j)(2)(B) of the Act (42 
U.S.C. 1437d(j)(2)(B) and in accordance with this part, HUD must notify 
the PHA and shall refer each troubled performer PHA to the PHA's 
regional/field office, or other designated office(s) at HUD, for 
remedial action, oversight, and monitoring. The actions to be taken by 
HUD and the PHA will include actions statutorily required, and such 
other actions as may be determined appropriate by HUD.
    (b) Memorandum of agreement (MOA). Within 30 days of notification 
of a PHA's designation as a troubled performer, HUD will initiate 
activities to negotiate and develop an MOA. An MOA is required for a 
troubled performer. The final MOA is a binding contractual agreement 
between HUD and a PHA. The scope of the MOA may vary depending upon the 
extent of the problems present in the PHA. It shall include, but not be 
limited to:
    (1) Baseline data, which should be data without adjustments or 
weighting but may be the PHA's score in each of the PHAS indicators, 
subindicators, components identified as a deficiency;
    (2) Performance targets for such periods specified by HUD (e.g., 
annual, semiannual, quarterly, monthly), which may be the attainment of 
a higher score within an indicator, subindicator, or component that is 
a problem, or the description of a goal to be achieved;
    (3) Strategies to be used by the PHA in achieving the performance 
targets within the time period of the MOA, including the identification 
of the party responsible for the completion of each task and for 
reporting progress;
    (4) Technical assistance to the PHA provided or facilitated by HUD; 
for example, the training of PHA employees in specific management areas 
or assistance in the resolution of outstanding HUD monitoring findings;
    (5) The PHA's commitment to take all actions within its control to 
achieve the targets;
    (6) Incentives for meeting such targets, such as the removal of a 
troubled performer designation or troubled with respect to the program 
for assistance from the Capital Fund program under section 9(d) of the 
Act (42 U.S.C. 1437g(d)) and HUD recognition for the most-improved 
PHAs;
    (7) The consequences of failing to meet the targets, which include, 
but are not limited to, the interventions stated in 24 CFR part 907 and 
in section 6(j)(3) of the Act (42 U.S.C. 1437d(j)(3)); and
    (8) A description of the involvement of local public and private 
entities, including PHA resident leaders, in carrying out the agreement 
and rectifying the PHA's problems. A PHA shall have primary 
responsibility for obtaining active local public and private entity 
participation, including the involvement of public housing resident 
leaders, in assisting PHA improvement efforts. Local public and private 
entity participation should be premised upon the participant's 
knowledge of the PHA, ability to contribute technical expertise with 
regard to the PHA's specific problem areas, and authority to make 
preliminary commitments of support, financial or otherwise.
    (c) PHA review of MOA. The PHA will have 10 days to review the MOA. 
During this 10-day period, the PHA shall resolve any claimed 
discrepancies in the MOA with HUD, and discuss any recommended changes 
and target dates for improvement to be incorporated in the final MOA. 
Unless the time period is extended by HUD, the MOA is to be executed 15 
days following issuance of the draft MOA.
    (d) Maximum recovery period--(1) Expiration of the first-year 
improvement period. Upon the expiration of the one-year period that 
started on the date on which the PHA receives initial notice of a 
troubled performer designation, the PHA shall, by the next PHAS 
assessment that is at least 12 months after the initial notice of the 
troubled performer designation, improve its performance by at least 50 
percent of the difference between the initial PHAS assessment score 
that led to the troubled performer status and the score necessary to 
remove the PHA's designation as a troubled performer.
    (2) Expiration of 2-year recovery period. Upon the expiration of 
the 2-year period that started on the date on which the PHA received 
the initial notice of a troubled performer designation, the PHA shall, 
by the next PHAS assessment that is at least 24 months after the 
initial notice of the troubled performer designation, improve its 
performance and achieve an overall PHAS score of at least 60 percent of 
the total points available.
    (e) Parties to the MOA. An MOA shall be executed by:
    (1) The PHA Board Chairperson (supported by a Board resolution), or 
a receiver (pursuant to a court-ordered receivership agreement, if 
applicable) or other AME acting in lieu of the PHA Board;
    (2) The PHA Executive Director, or a designated receiver (pursuant 
to a court-ordered receivership agreement, if applicable), or other 
AME-designated Chief Executive Officer;
    (3) The regional or field office Public Housing Director; and
    (4) The appointing authorities of the Board of Commissioners, if 
required by the regional/field office Public Housing Director.
    (f) Involvement of resident leadership in the MOA. HUD encourages 
the inclusion of the resident leadership in the execution of the MOA.
    (g) Failure to execute MOA or make substantial improvement under 
MOA. (1) If a troubled performer PHA fails or

[[Page 49565]]

refuses to execute an MOA within the period provided in paragraph (c) 
of this section, or a troubled performer PHA operating under an 
executed MOA does not show a substantial improvement, as provided in 
paragraph (d) of this section, toward a passing PHAS score following 
the issuance of the failing PHAS score by HUD, the regional/field 
office Public Housing Director shall refer the PHA to the Assistant 
Secretary to determine such remedial actions, consistent with the 
provisions of the ACC and other HUD regulations, including, but not 
limited to, remedies available for substantial default.
    (2) For purposes of paragraph (g) of this section, substantial 
improvement is defined as the improvement required by paragraph (d) of 
this section. The maximum period of time for remaining in troubled 
performer status before being referred to the Assistant Secretary is 2 
years after the initial notification of the troubled performer 
designation. Therefore, the PHA must make substantial improvement in 
each year of this 2-year period.
    (3) The following example illustrates the provisions of paragraph 
(g)(1) of this section:

    Example: A PHA receives a score of 50 points; 60 points is a 
passing score. Upon the expiration of the one-year period that 
started on the date on which the PHA received the initial 
notification of the troubled performer designation, the PHA must 
achieve at least 55 points (50 percent of the 10 points necessary to 
achieve a passing score of 60 points) to continue recovery efforts. 
In the second year, the PHA must achieve a minimum score of 60 
points (a passing score). If, in the first year that started on the 
date on which the PHA received the initial notification of the 
troubled designation, the PHA fails to achieve the 5-point increase, 
or if the PHA achieves the 5-point increase within the first year 
that started on the date on which the PHA received the initial 
notification of the troubled designation, but fails to achieve the 
minimum passing score of 60 points after the second year after the 
initial notification, HUD will notify the PHA that it will take such 
actions as it may determine appropriate in accordance with the 
provisions of the ACC and other HUD regulations, including, but not 
limited to, the remedies available for substantial default.

    (h) Audit review. For a PHA designated as a troubled performer, HUD 
may perform an audit review and may, at its discretion, select the 
audit firm that will perform the audit of the PHA; and HUD may, at its 
discretion, serve as the audit committee for the audit in question.
    (i) Continuation of services to residents. To the extent feasible, 
while a PHA is in a troubled performer status, all services to 
residents will continue uninterrupted.


Sec.  902.79  Verification and records.

    All project and PHA certifications, year-end financial information, 
and supporting documentation are subject to HUD verification at any 
time, including review by an independent auditor. All PHAs must retain 
supporting documents for any certifications and for asset management 
reviews for at least 3 years. Failure to maintain and provide 
supporting documentation for a period of 3 years for any indicator(s), 
subindicator(s), or other methods used to assess performance shall 
result in a score of zero for the indicator(s) or subindicator(s), and 
a lower overall PHAS score for the applicable assessment period.


Sec.  902.81  Resident petitions for remedial action.

    Residents of a PHA designated as troubled pursuant to section 
6(j)(2)(A) of the Act (42 U.S.C. 1437d(j)(2)(A)), may petition HUD in 
writing to take one or more of the actions referred to in section 
6(j)(3)(A) of the Act (42 U.S.C. 1437d(j)(3)(A)). HUD will consider any 
petition from a group of residents totaling at least 20 percent of the 
PHA's residents, or from an organization or organizations of residents 
whose membership equals at least 20 percent of the PHA's residents. HUD 
shall respond to such petitions in a timely manner with a written 
description of the actions, if any, HUD plans to take and, where 
applicable, the reasons why such actions differ from the course 
proposed by the residents. Nothing in this section shall limit HUD's 
discretion to determine whether a substantial default has occurred or 
to select the appropriate intervention upon such determination.


Sec.  902.83  Sanctions for troubled performer PHAs.

    (a) If a troubled performer PHA fails to make substantial 
improvement, as set forth in Sec.  902.75(d), HUD shall:
    (1) In the case of a troubled performer PHA with 1,250 or more 
units, declare substantial default in accordance with Sec.  907.3(b)(3) 
and petition for the appointment of a receiver pursuant to section 
6(j)(3)(A)(ii) of the Act (42 U.S.C. 1437d(j)(3)(A)(ii)); or
    (2) In the case of a troubled performer PHA with fewer than 1,250 
units, declare substantial default in accordance with Sec.  907.3(b)(3) 
and either petition for the appointment of a receiver pursuant to 
section 6(j)(3)(A)(ii) of the Act (42 U.S.C. 1437d(j)(3)(A)(ii)), or 
take possession of the PHA (including all or part of any project or 
program of the PHA) pursuant to section 6(j)(3)(A)(iv) of the Act (42 
U.S.C. 1437d(j)(3)(A)(iv)), and appoint, on a competitive or 
noncompetitive basis, an individual or entity as an administrative 
receiver to assume the responsibilities of HUD for the administration 
of all or part of the PHA (including all or part of any project or 
program of the PHA).
    (3) In the case of substantial default by a troubled performer PHA, 
nothing in this section shall be construed to limit the courses of 
action available to HUD under this part, 24 CFR part 907, or section 
6(j)(3)(A) of the Act (42 U.S.C. 1437d(j)(3)(A)) for any other 
substantial default by a PHA.
    (b) If a troubled performer PHA fails to execute or meet the 
requirements of an MOA in accordance with Sec.  902.75, other than as 
specified in paragraph (a) of this section, the PHA may be deemed to be 
in substantial default by HUD and any remedy available therefore may be 
invoked in the discretion of HUD.

Appendix A to Part 902--Physical Condition Scoring

I. Purpose of This Appendix

    This appendix describes the physical condition scoring process 
under the proposed revisions to the PHAS regulation and prescribes 
the frequency of individual project inspections.

II. Purpose of the PHAS Physical Condition Assessment

    The purpose of the PHAS physical condition assessment is to 
ensure that public housing units are decent, safe, sanitary and in 
good repair, as determined by an inspection conducted in accordance 
with HUD's Uniform Physical Condition Standards (UPCS) codified at 
24 CFR part 5, subpart G. The physical condition assessment under 
the PHAS utilizes uniform physical inspection procedures to 
determine compliance with uniform standards and is an important 
indicator of performance for a project and a PHA. All projects will 
be assessed under the Physical Condition Indicator, even if a PHA 
has not converted to asset management.
    The Physical Condition Indicator score is based on a maximum of 
30 points. In order to receive a passing score under this indicator, 
a project must achieve at least 18 points or 60 percent of the 
points available under this indicator. Under the PHAS Physical 
Condition Indicator, REAC will calculate a score for each project, 
as well as for the overall physical condition of a PHA. The physical 
condition score, based on a 30-point scale, is included in each 
PHA's aggregate PHAS score.

III. Transition to Asset Management and Frequency of Inspections

    The number of units in a PHA's Low-Rent program and the PHAS 
designation for small PHAs will determine the frequency of physical 
inspections during and after the transition to asset management. 
Deregulation of small PHAs provides that PHAs with less than 250 
public housing units are assessed and scored every other year, 
unless

[[Page 49566]]

designated a PHAS troubled performer. PHAs with less than 250 units 
that are designed troubled will be assessed every year. The score of 
a project in a PHA with less than 250 units will not affect the 
frequency of inspections for either that project or the associated 
PHA, unless the PHA has a single project resulting in the project 
score equating to the overall physical inspection indicator score. 
The frequency of physical inspections for small PHAs will be 
determined based upon the PHAS designation.
    For PHAs with 250 or more units of any PHAS designation, the 
inspection score of each project (not the overall physical indicator 
score) will determine the frequency of inspections for that project. 
Projects that score 80 points or higher based on a possible 100-
point project score will be inspected every other year. Projects 
that score less than 80 points based on the possible 100-point 
project score will be inspected annually. The performance incentive, 
to be inspected every other year, will change from PHA-based to 
project-based. A troubled physical PHAS designation will not affect 
the frequency of project inspections for such PHAs. Project 
inspections for PHAs with 250 or more units will be based on the 
project's prior year inspection score.
    Projects of overall troubled PHAs with 250 or more units that 
score 80 points or higher based on a possible 100-point project 
score will be inspected every other year. Projects that score less 
than 80 points based on the possible 100-point project score will 
then be inspected annually. PHAs with 249 or less units, inspected 
and designated as troubled, will be inspected again the next year. 
PHAs of 250 units or more with unit-weighted project scores from 2 
different years will have all their prior year scores of 80 and 
above (and current year scores for each project that was inspected), 
multiplied by 30 percent, totaled together, and rounded to produce 
an overall physical indicator score.

IV. Item Weights and Criticality Levels and Dictionary of Deficiency 
Definitions

    The Item Weights and Criticality Levels tables and the 
Dictionary of Deficiency Definitions currently in use are available 
in HUD's REAC Physical Inspection Library Internet site at: http://www.hud.gov/offices/reac/library/lib_phyi.cfm#FEDERAL.

V. Validity and Reliability of the Physical Inspection Protocols

    The Conference Report (H.R. Conf. Rep. 106-988; October 18, 
2000) accompanying HUD's FY 2001 Appropriations Act (Pub. L. 106-
377, approved October 27, 2000) directed HUD to continue to assess 
the accuracy and effectiveness of the PHAS system, in particular the 
physical condition inspection protocol. HUD was also directed to 
perform a statistically valid test of PHAS, conduct a thorough 
analysis of the results, and have the methodology and results 
reviewed by an independent expert before taking any adverse action 
against a PHA based solely on its PHAS score. HUD retained the Louis 
Berger Group (the contractor) to conduct the review of the 
methodology and results of the statistically valid test.
    The findings of the contractor's study concluded that the 
physical condition inspection protocol is repeatable and reliable. A 
report addressing the issues raised in the Conference Report, 
entitled the Review and Assessment of the REAC Study of the Physical 
Assessment Sub-System (PASS) Process, was provided to the House and 
Senate Committees on Appropriations on March 1, 2001.

VI. The Physical Inspection Scoring Process

    The PHAS physical inspection generates comprehensive results, 
including physical inspection scores reported at the project level, 
area level scores for each of the five physical inspection areas, as 
applicable, and observations of deficiencies recorded electronically 
by the inspector at the time of the inspection.

1. Definitions

    The following are the definitions of the terms used in the 
physical condition scoring process:
    Criticality means one of five levels that reflect the relative 
importance of the deficiencies for an inspectable item. Appendix 1 
lists all deficiencies with their designated criticality levels, 
which vary from 1 to 5, with 5 being the most critical. Based on the 
criticality level, each deficiency has an assigned value that is 
used in scoring. Those values are as follows:

------------------------------------------------------------------------
                      Criticality                        Level    Value
------------------------------------------------------------------------
Critical..............................................        5     5.00
Very Important........................................        4     3.00
Important.............................................        3     2.25
Contributes...........................................        2     1.25
Slight Contribution...................................        1     0.50
------------------------------------------------------------------------

    Based on the importance of the deficiency as reflected by its 
criticality value, points are deducted from the project score. For 
example, a clogged drain in the kitchen is more critical than a 
damaged surface on a counter top. Therefore, more points will be 
deducted for a clogged drain than for a damaged surface.
    Deficiencies refer to specific problems that are recorded for 
inspectable items, such as a hole in a wall or a damaged 
refrigerator in the kitchen.
    Inspectable area means any of the five major components of the 
project: Site, building exteriors, building systems, common areas, 
and dwelling units.
    Inspectable items refer to walls, kitchens, bathrooms, and other 
features that are inspected in an inspectable area. The number of 
inspectable items varies for each inspectable area from 8 to 17. 
Weights are assigned to each item to reflect their relative 
importance and are shown in the Item Weights and Criticality Levels 
tables. The tables refer to the weight of each item as the nominal 
item weight, which is also known as the amenity weight.
    Normalized area weight represents weights used with area scores 
to calculate project-level scores. The weights are adjusted to 
reflect the inspectable items actually present at the time of the 
inspection. These weights are proportional, as follows:
     For dwelling units, the area score is the weighted 
average of sub-area scores for each unit, weighted by the total of 
item weights present for inspection in each unit, which is referred 
to as the amenity weight.
     For common areas, the area score is the weighted 
average of sub-area common area scores weighted by the total weights 
for items available for inspection (or amenity weight) in each 
residential building common area or common building. Common 
buildings refer to any inspectable building that contains no 
dwelling units. All common buildings are inspected.
     For building exteriors or building systems, the area 
scores are weighted averages of sub-area scores.
     For sites, the area score is calculated as follows: (1) 
The amenity weights found on a site, (2) minus deductions for 
deficiencies, and (3) normalized to a 100-point scale.
    Normalized sub-area weight means the weight used with sub-area 
scores to compute an inspectable area score. These weights are 
proportional:
     For dwelling units, the item weight of amenities 
available in the unit at the time of inspection is the amenity 
weight.
     For common areas, the common area amenity weight is 
divided by a building's probability of being selected for 
inspection. All residential buildings with common areas may not be 
selected for inspection; however, all buildings with common areas 
are selected to determine the amenity weight.
     For building exterior and building systems, the 
building exterior or building system amenity weight is multiplied by 
the building's size (number of units) and then divided by its 
probability of being selected for inspection.
     For the site, there is no sub-area score. For each 
project, there is a single site.
    Note that dividing by a building's probability of being selected 
for inspection is the same as multiplying by the probability weight, 
since the probability weight is 1 divided by the probability of 
being selected for inspection.
    Project is used synonymously with the term ``property.''
    Severity means one of three levels that reflect the extent of 
damage associated with each deficiency, with values assigned as 
follows:

------------------------------------------------------------------------
                         Severity level                           Value
------------------------------------------------------------------------
3..............................................................     1.00
2..............................................................     0.50
1..............................................................     0.25
------------------------------------------------------------------------

    The Item Weights and Criticality Levels tables show the severity 
levels that are possible for each deficiency. Based on the severity 
of each deficiency, the score is reduced. Points deducted are 
calculated by multiplying the item weight by the values for 
criticality and severity, as described below. For specific 
definitions of each severity level, see the Dictionary of Deficiency 
Definitions, which is available from REAC's Physical Inspection 
Library Internet site at: http://www.hud.gov/offices/reac/library/lib_phyi.cfm#FEDERAL.
    Score means a number between 0 and one hundred (100) that 
reflects the physical

[[Page 49567]]

condition of a project, inspectable area, dwelling area, or sub-
area. A property score includes both an alphabetical and a numerical 
component. The number represents an overall score for the basic 
physical condition of a property, including points deducted for 
health and safety deficiencies other than those associated with 
smoke detectors. The letter code specifically indicates whether 
health and safety deficiencies were detected, as shown in the chart 
below:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Health and safety deficiencies
                                                                                     -------------------------------------------------------------------
                                                                      No health and                          Life                  Fire safety
            Physical inspection score alphanumeric codes                  safety          Non-life       threatening   ---------------------------------
                                                                       deficiencies     threatening      (LT)/exigent       No smoke
                                                                                           (NLT)          health and        detector      Smoke detector
                                                                                                         safety (EHS)       problems         problems
--------------------------------------------------------------------------------------------------------------------------------------------------------
a..................................................................               X   ...............  ...............               X   ...............
a*.................................................................               X   ...............  ...............  ...............               X
b..................................................................  ...............               X   ...............               X   ...............
b*.................................................................  ...............               X   ...............  ...............               X
c..................................................................  ...............  ...............               X                X   ...............
c*.................................................................  ...............  ...............               X   ...............               X
--------------------------------------------------------------------------------------------------------------------------------------------------------

    To record a health or safety problem, a letter is added to the 
project score (a, b, or c); and to note that one or more smoke 
detectors are inoperable or missing, an asterisk (*) is added to the 
project score.
    Sub-area means an area that will be inspected for all 
inspectable areas except the site. For example, the building 
exterior for building ``2'' is a sub-area of the building exterior 
area. Likewise, unit ``5'' would be a sub-area of the dwelling units 
area. Each inspectable area for each building in a property is 
treated as a sub-area.

2. Scoring Protocol

    To generate accurate scores, the inspection protocol includes a 
determination of the appropriate relative weights of the various 
components of the inspection; that is, which components are the most 
important, the next most important, and so on. For example, in the 
building exterior area, a blocked or damaged fire escape is more 
important than a cracked window, which is more important than a 
broken light fixture. The Item Weights and Criticality Levels tables 
provide the nominal weight of observable deficiencies by inspectable 
item for each area/sub-area. The Dictionary of Deficiency 
Definitions provides a definition for the severity of each 
deficiency in each area/sub-area.

3. Equity Principles

    In addition to determining the appropriate relative weights, 
consideration is also given to several issues concerning equity 
between properties so that scores fairly assess all types of 
properties:
    Proportionality. The scoring methodology includes an important 
control that does not allow any sub-area scores to be negative. If a 
sub-area, such as the building exterior for a given building, has so 
many deficiencies that the sub-area score would be negative, the 
score is set to zero. This control mechanism ensures that no single 
building or dwelling unit can affect the overall score more than its 
proportionate share of the whole.
    Configuration of project. The scoring methodology takes into 
account different numbers of units in buildings. To fairly score 
projects with different numbers of units in buildings, the area 
scores are calculated for building exteriors and systems by using 
weighted averages of the sub-area scores, where the weights are 
based on the number of units in each building and on the building's 
probability of being selected for inspection. In addition, the 
calculation for common areas includes the amenities existing in the 
residential common areas and common buildings at the time of 
inspection.
    Differences between projects. The scoring methodology also takes 
into account that projects have different features and amenities. To 
ensure that the overall score reflects only items that are present 
to be inspected, weights to calculate area and project scores are 
adjusted depending on how many items are actually there to be 
inspected.

4. Deficiency Definitions

    During a physical inspection of a project, the inspector looks 
for deficiencies for each inspectable item within the inspectable 
areas, such as the walls (the inspectable item) of a dwelling unit 
(the inspectable area). Based on the observed condition, the 
Dictionary of Deficiency Definitions defines up to the three levels 
of severity for each deficiency: Level 1 (minor), Level 2 (major), 
and Level 3 (severe). The associated values were shown earlier in 
the first chart of Section VI. A specific criticality level, with 
associated values as shown in that chart, is also assigned to each 
deficiency. The criticality level reflects the importance of the 
deficiency relative to all other possible observable deficiencies 
for the inspectable area.

5. Health and Safety Deficiencies

    The UPCS physical inspection emphasizes health and safety (H&S) 
deficiencies because of their crucial impact on the well-being of 
residents. A subset of H&S deficiencies is exigent health and safety 
(EHS) deficiencies. These are life threatening (LT) and require 
immediate action or remedy. EHS deficiencies can substantially 
reduce the overall project score. As noted in the definition for the 
word ``score'' in the Definitions section, all H&S deficiencies are 
highlighted by the addition of a letter to the numeric score. The 
Item Weights and Criticality Levels tables list all H&S deficiencies 
with an LT designation for those that are EHS deficiencies and an 
NLT designation for those that are non-life threatening. The LT and 
NLT designations apply only to severity level 3 deficiencies.
    To ensure prompt correction of H&S deficiencies, the inspector 
gives the project representative a deficiency report identifying 
every observed EHS deficiency before the inspector leaves the site. 
The project representative acknowledges receipt of the deficiency 
report by signature. The inspector also transmits the deficiency 
report to HUD no later than the morning of the first business day 
after completing the inspection. HUD makes available to all PHAs an 
inspection report that includes information about all of the H&S 
deficiencies recorded by the inspector. The report shows:
     The number of H&S deficiencies (EHS and NLT) that the 
inspector observed;
     All observed smoke detector deficiencies; and
     A projection of the total number of H&S problems that 
the inspector potentially would see in an inspection of all 
buildings and all units.
    Problems with smoke detectors do not currently affect the 
overall score. When there is an asterisk indicating that the project 
has at least one smoke detector deficiency, that part of the score 
may be identified as ``risk;'' for example, ``93a, risk'' for 93a*, 
and ``71c, risk'' for 71c*. There are six distinct letter grade 
combinations based on the H&S deficiencies and smoke detector 
deficiencies observed: a, a*, b, b*, c, and c*. For example:
     A score of 90c* means that the project contains at 
least one EHS deficiency to be corrected, including at least one 
smoke detector deficiency, but is otherwise in excellent condition.
     A score of 40b* means the project is in poor condition, 
has at least one non-life threatening deficiency, and has at least 
one missing or inoperable smoke detector.
     A score of 55a means that the project is in poor 
condition, even though there are no H&S deficiencies.
     A project in excellent physical condition with no H&S 
deficiencies would have a score of 90a to 100a.

6. Scoring Process Elements

    The physical condition scoring process is based on three 
elements within each project: (1) Five inspectable areas (site, 
exterior, systems, common areas, and dwelling units); (2) 
inspectable items in each inspectable area; and (3) observed 
deficiencies. In broad

[[Page 49568]]

terms, the score for a property is the weighted average of the five 
inspectable area scores, where area weights are adjusted to account 
for all of the inspectable items that are actually present to be 
inspected. In turn, area scores are calculated by using weighted 
averages of sub-area scores (e.g., building area scores for a single 
building or unit scores for a single unit) for all sub-areas within 
an area.

7. Scoring Using Weighted Averages

    For all areas except the site, normalized sub-area weights are 
determined using the size of sub-areas, the items available for 
inspection, and the sub-area's probability of selection for 
inspection. Sub-area scores are determined by deducting points for 
deficiencies based on the importance (weight) of the item, the 
criticality of the deficiency, and the severity of the deficiency. 
The maximum deduction for a single deficiency will not calculate a 
score of less than zero. Points will be deducted only for one 
deficiency of the same kind within a sub-area. For example, if 
multiple deficiencies for broken windows are recorded, only the most 
severe deficiency observed (or one of the most severe, if there are 
multiple deficiencies with the same level of severity) will result 
in a point deduction.

8. Essential Weights and Levels

    The process of scoring a project's physical condition depends on 
the weights, levels, and associated values of the following 
quantities:
     Weights for the 5 inspectable areas (site, building 
exteriors, building systems, common areas, and dwelling units).
     Weights for inspectable items within inspectable areas 
(8 to 17 per area).
     Criticality levels (critical, very important, 
important, contributes, and slight contribution) plus their 
associated values for deficiencies within areas inspected.
     Severity levels (3, 2, and 1) and their associated 
values for deficiencies.
     Health and safety deductions (exigent/fire safety and 
non-life threatening for all inspectable areas).

9. Area Weights

    Area weights are used to obtain a weighted average of area 
scores. A project's overall physical condition score is a weighted 
average of all inspectable area scores. The approximate relative 
weights are:

------------------------------------------------------------------------
                                                                 Weight
                       Inspectable area                        (percent)
------------------------------------------------------------------------
Site.........................................................         15
Building Exterior............................................         15
Building Systems.............................................         20
Common Areas.................................................         15
Dwelling Units...............................................         35
------------------------------------------------------------------------

    These weights are assigned for all inspections when all 
inspectable items are present for each area and for each building 
and unit. All of the inspectable items may not be present in every 
inspectable area. When items are missing in an area, the area 
weights are modified to reflect the missing items so that within 
that area they will add up to 100 percent. Area weights are 
recalculated when some inspectable items are missing in one or more 
area(s).
    Although rare, it is possible that an inspectable area could 
have no inspectable items available; for example, there could be no 
common areas in the inspected residential buildings and no common 
buildings. In this case, the weight of the ``common areas'' would be 
0 percent and its original 15 percent weight would be equitably 
redistributed to the other inspectable areas, as shown in the 
example below:

----------------------------------------------------------------------------------------------------------------
                                                       Missing common                                Adjusted
           Inspectable area             Normal weight       areas              Adjustment             weight
                                          (percent)       (percent)                                  (percent)
----------------------------------------------------------------------------------------------------------------
Site.................................              15              15  .15/.85 =................              18
Building Exterior....................              15              15  .15/.85 =................              18
Building Systems.....................              20              20  .20/.85 =................              23
Common Areas.........................              15               0  .........................               0
Dwelling Units.......................              35              35  .35/.85 =................              41
                                      --------------------------------------------------------------------------
    Total............................             100              85  .........................             100
----------------------------------------------------------------------------------------------------------------

The original 15 percent weight for the common areas is redistributed 
by totaling the weights of other inspectable areas (100 percent 
minus 15 percent = 85 percent) and dividing the weights of each 
other area by that amount (0.85). The modified weights would then be 
18 percent for site, 18 percent for building exterior, 23 percent 
for building systems, 0 percent for common areas, 41 percent for 
dwelling units, and again be equal to (be normalized to) 100 
percent.

10. Area and Sub-Area Scores

    For inspectable areas with sub-areas (all areas except sites), 
the inspectable area score is a weighted average of the sub-area 
scores within that area. The scoring protocol determines the amenity 
weight for the site and each sub-area as noted in Section VI.1 under 
the definition for normalized sub-area weight. For example, a 
property with no fencing or gates in the inspectable area of the 
site would have an amenity weight of 90 percent or 0.9 (100 percent 
minus 10 percent for lack of fencing and gates), and a single 
dwelling unit with all items available for inspection except a call-
for-aid would have an amenity weight of 0.98 or 98 percent (100 
percent minus 2 percent for lack of call-for-aid).
    The amenity weight excludes all health and safety items. Each 
deficiency as weighted and normalized are subtracted from the sub-
area or site-weighted amenity score. Sub-area and site area scores 
are further reduced for any observed health and safety deficiencies. 
These deductions are taken at the site, building, or unit level. At 
this point, a control is applied to prevent a negative site, 
building, or unit score. The control ensures that no single building 
or unit can affect an area score more than its weighted share.

11. Overall Project Score

    The overall project score is the weighted average of the five 
inspectable area scores, with the five areas weighted by their 
normalized weights. Normalized area weights reflect both the initial 
weights and the relative weights between areas of inspectable items 
actually present. For reporting purposes, the number of possible 
points is the normalized area weight adjusted by multiplying by 100 
so that the possible points for the five areas add up to 100. In the 
Physical Inspection Report for each project that is sent to the PHA, 
the following items are listed:
     Normalized weights as the ``possible points'' by area;
     The area scores, taking into account the points 
deducted for observed deficiencies;
     The deductions for H&S for each inspectable area; and
     The overall project score.
    The Physical Inspection Report allows the PHA and the project 
manager to see the magnitude of the points lost by inspectable area 
and the impact on the score of the H&S deficiencies.

12. Examples of Physical Condition Score Calculations

    The physical inspection scoring is deficiency based. All 
projects start with 100 points. Each deficiency observed reduces the 
score by an amount dependent on the importance and severity of the 
deficiency, the number of buildings and units inspected, the 
inspectable items actually present to be inspected, and the relative 
weights between inspectable items and inspectable areas.
    The calculation of a physical condition score is illustrated in 
the examples below. The examples go through a number of interim 
stages in calculating the score, illustrating how sub-area scores 
are calculated for a single project, how the sub-area scores are 
rolled up into area scores, and how area scores are combined to 
calculate the overall project score. One particular

[[Page 49569]]

deficiency is carried through the examples showing the end result.
    As will be seen, the deduction starts out as a percent of the 
sub-area. Then the area score is considerably decreased in the final 
overall project score because the deduction is averaged across other 
sub-areas and then averaged across the five inspectable areas. 
Although interim results in the examples are rounded, only the final 
results are rounded for actual calculations.
    To illustrate how physical condition scores are calculated, 
three examples are provided below. Following this section, another 
example is given specifically for public housing projects to show 
how project scores are rolled up into the PHAS physical indicator 
score for the PHA as a whole.
    Example #1 illustrates how the score for a sub-area of building 
systems is calculated. Consider a 10-unit residential building in 
which the five inspectable areas are present. During the inspection, 
damaged vents in the roof are observed. This deficiency reflected a 
severity level of 1, which has a severity weight of 0.25; a 
criticality level of 4, which has a criticality weight of 3; and an 
item weight of 16.0. The amount of the points deducted is the item 
weight, multiplied by the criticality weight multiplied by the 
severity value. This is illustrated in the table below.
    Area: Building Exterior.
    Item: Roof.
    Deficiency: Damaged Vents.
    Criticality Level: 4, Severity Level: 1.

------------------------------------------------------------------------
             Element                          Associated value
------------------------------------------------------------------------
Item Weight......................  16
Criticality Weight...............  3.0
Severity Weight..................  0.25
Calculation of Points Deducted     16 x 3 x 0.25 = 12
 for Deficiency.
------------------------------------------------------------------------

    If this building exterior has all inspectable items except for a 
fire escape, the amenity weight for the first building exterior adds 
up to 84 percent (100 percent starting point minus 16 percent for 
the lack of a fire escape, excluding H&S items). If the damaged roof 
vents were the only deficiency observed, then the initial 
proportionate score for this sub-area (Building Exterior 1) 
would be the amenity score minus the deficiency points and then 
normalized to a 100-point basis, as shown below. Additional 
deficiencies or H&S deficiencies (calculated in the same manner) 
would further decrease the sub-area score, and if the score dropped 
below zero, it would be set to zero.

------------------------------------------------------------------------
             Element                          Associated value
------------------------------------------------------------------------
Amenity Score....................  84
Deficiency Points................  12
Calculation for the Initial        84 - 12 = 72
 Proportionate Score.
Normalizing Factor...............  100
Calculation for the Initial Sub-   (72/84) x 100 = 85.7
 Area Score.
Building Exterior 1.....
------------------------------------------------------------------------

    Example #2 illustrates how the area score is calculated. 
Consider a property with two buildings with the following 
characteristics:
     Building 1 (from Example 1, above):

--10 units
--84 percent amenity weight for items that are present to be 
inspected in the building exterior
--Building exterior score is 85.7 points

     Building 2:

--20 units
--100 percent amenity weight for items that are present to be 
inspected in the building exterior
--Building exterior score is 69.1 points

    The building exterior score for the building exterior area is 
the weighted average of the individual scores for each building 
exterior. Each building exterior score is weighted by the number of 
units and the percent of the weight for items present to be 
inspected in the building exterior.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Unit          Sum of the          Initial            Building
                     Building                        Number of    x    Amenity     =    weighted    /    building    x   proportionate    =    exterior
                                                       units            weight          average          weights             score            area score
--------------------------------------------------------------------------------------------------------------------------------------------------------
1........................................           10  ..         0.84  ..         08.4  ..         28.4  ..             85.7  ..         25.3
2........................................           20  ..         1.00  ..         20.0  ..         28.4  ..             69.1  ..         48.7
                                                   -----------------------------------------------------------------------------------------------------
    Total.........................................           30  ..  ...........  ..         28.4  ..  ...........  ..  ...............  ..         74.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Example #3 illustrates how the overall weighted average for the 
building exterior area amenity weight is calculated. The separate 
amenity weights for buildings 1 and 2, above, are 
used in conjunction with the total units to calculate the building 
exterior area amenity weight. Each building amenity weight is 
multiplied by the number of units in that building and then divided 
by the total number of units for all buildings, as shown below. For 
purposes of the next example, the Overall Building Exterior Area 
Amenity Weight of 94.7 was rounded to 95.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Overall
                                                                                                                                             building
                                                   Number of         Amenity            Unit                           Normalized to       exterior area
                Building exterior                    units      x     weight     =    weighted    /  Total units   x    a 100 point    =     weighted
                                                                                      average                              basis              average
                                                                                                                                          amenity weight
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................           10  ..         0.84  ..         08.4  ..           30  ..             100  ..            28.0
2......................................           20  ..         1.00  ..         20.0  ..           30  ..             100  ..            66.7
                                                 -------------------------------------------------------------------------------------------------------

[[Page 49570]]

 
    Total.......................................           30  ..  ...........  ..         28.4  ..  ...........  ..  ..............  ..            94.7
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Example #4 illustrates how the score for a property is 
calculated. Consider a property with the following characteristics:
     Site:

--Score: 90 points
--100 percent amenity weight
--Nominal weight: 15 percent

     Building Exteriors (from example 2 and 
3, above):

--Score: 74 points
--95 percent weighted average amenity weight
--Nominal weight: 15 percent

     Building Systems:

--Score: 70 points
--80 percent weighted average amenity weight
--Nominal weight: 20 percent

     Common Areas:

--Score: 60 points
--30 percent weighted average amenity weight
--Nominal weight: 15 percent

     Dwelling Units:

--Score: 80 points
--90 percent weighted average amenity weight
--Nominal weight: 35 percent

    To continue the scoring protocol, the adjusted area weights for 
all five inspectable areas are determined. For purposes of this 
example, the adjusted weights and maximum possible points for each 
of the five inspectable areas are shown in the table below. All of 
the values in this table, except for the values for building 
exteriors, are presumed. The values for building exteriors were 
calculated as part of this ongoing example.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Amenity           Total          Normalized to          Maximum
                Inspectable area                  Area weight   x    Amenity     =    weighted    /    adjusted    x     100 point     =     possible
                                                                      weight          average           weight             scale              points
--------------------------------------------------------------------------------------------------------------------------------------------------------
Site............................................           15  ..         1.00  ..         15.0  ..         81.2  ..             100  ..            18.5
Building Exterior...............................           15  ..         0.95  ..         14.2  ..         81.2  ..             100  ..            17.5
Building Systems................................           20  ..         0.80  ..         16.0  ..         81.2  ..             100  ..            19.7
Common Areas....................................           15  ..         0.30  ..         04.5  ..         81.2  ..             100  ..            05.5
Dwelling Units..................................           35  ..         0.90  ..         31.5  ..         81.2  ..             100  ..            38.8
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................  ...........  ..  ...........  ..         81.2  ..  ...........  ..  ..............  ..           100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The nominal possible points for each inspectable area is 
multiplied by the amenity weight, divided by the total adjusted 
amenity weight, and normalized to a 100-point basis to produce the 
possible points for the inspectable area. The property score is the 
sum of all weighted area scores for that property. The sample shown 
below reflects how the deficiency from example 1 in the 
building exterior area impacts the overall property score. The 
property score of 77.8 is rounded to 78 for the final example.

----------------------------------------------------------------------------------------------------------------
                                                                                                  Project 1 weighted
          Inspectable area              Area points    x    Area score     /    a 100 point    =    area scores
                                                                                   scale
----------------------------------------------------------------------------------------------------------------
Site................................            18.5  ..              90  ..             100  ..            16.7
Building Exterior...................            17.5  ..              74  ..             100  ..            13.0
Building Systems....................            19.7  ..              70  ..             100  ..            13.8
Common Areas........................            05.5  ..              60  ..             100  ..            03.3
Dwelling Units......................            38.8  ..              80  ..             100  ..            31.0
                                     ---------------------------------------------------------------------------
    Total...........................           100.0  ..  ..............  ..  ..............  ..            77.8
----------------------------------------------------------------------------------------------------------------

13. Computing the PHAS Physical Inspection Score

    The overall physical inspection score for the PHAS for a PHA is 
the weighted average of the PHA's individual project physical 
inspection scores, where the weights are the number of units in each 
project divided by the total number of units in all projects for the 
PHA. For example, the project described in Example 1 from 
above has a score of 78 with 30 units. Using another project with a 
score of 92 and 650 units with project from Example 1 would 
calculate to an overall physical inspection score of 91. Note the 
impact on the overall physical inspection of a single property with 
a large number of units.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Weighted                                 Number of
                                                                   average         Rescaling                 units in        Total PHA         Project
                            Project                                property    x   to the 30-     =     x      the       /     units      =    weighted
                                                                    score         point basis                property                         area score
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.....................................................           78  ..           .3    23.4  ..           30  ..          680  ..          1.0
2.....................................................           92  ..           .3    27.6  ..          650  ..          680  ..         26.4
                                                                ----------------------------------------------------------------------------------------
    Total......................................................          100  ..  ...........  ......  ..  ...........  ..  ...........  ..         27.4
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 49571]]

    The physical subsystem indicator score for this PHA provided to 
HUD's centralized scoring system would be 27.4, rounded to a score 
of 27. Weighted-average property scores are scaled to a 30-point 
basis by multiplying by 0.3. The total is then multiplied by the 
number of units within the property and divided by the total number 
of PHA units, to produce a unit-weighted average. All of the 
project's weighted area scores are totaled and rounded using a 
rounding policy of rounding up to the nearest whole number a score 
ending in 0.5 and above, and rounding down a score ending in 0.4 and 
below.

14. Examples of Sampling Weights for Buildings

    As shown above, buildings with the most dwelling units have the 
greatest impact on the project's overall physical score. Buildings 
with the most dwelling units also have the greatest likelihood of 
being selected for inspection. The determination of which buildings 
will be inspected is a two-phase process. In Phase 1 of the process, 
all buildings that contain dwelling units are sorted by size and 
then the units are randomly sorted within each building. A computer 
program selects a random sample of units to be inspected.
    All buildings in a project may not be selected in the building 
sample during Phase 1 sampling, because a building may have so few 
units such as a sole scattered-site single family unit. A Phase 2 
sampling is used to increase the size of the number of buildings 
selected. In Phase 2, the additional buildings that are included in 
the sample are selected with equal probability so that the 
residential building sample size is the lesser of either the 
dwelling unit sample size or the number of all residential 
buildings. All common buildings are selected for inspection. To 
illustrate the process for sampling buildings, two examples are 
provided below:
    Example #1. This first example uses a project with two buildings 
where both buildings are selected for inspection. Building A has 10 
dwelling units and building B has 20 dwelling units, for a total of 
30 dwelling units. The target dwelling unit sample size for a 
project with 30 dwelling units is 15 units. The sampling ratio for 
this project is two and is calculated by dividing the 15 target 
units by the total number of units (30/15=2). In this illustration, 
every second dwelling unit will be selected from the random sort of 
the units within each building. Since both buildings have at least 2 
dwelling units, both buildings are certain to be selected for 
inspection in Phase 1. Since all buildings were selected in Phase 1 
of sampling, Phase 2 is not required. Both buildings in this example 
have a selection probability of 1.00 and a sampling weight of 1.00.
    Example #2. This example uses a project where only some of the 
buildings within the project are selected for inspection in Phase 1, 
so a Phase 2 sampling is required. For this example, a project is 
comprised of 22 residential buildings. Two buildings each have 10 
dwelling units and 20 buildings are scattered-site single family 
dwelling units. The project has 40 total dwelling units (two 
buildings with 10 units each added to 20 single units (20+20)). The 
target sample size for a project with 40 dwelling units is 16 units, 
and the sampling ratio would be 2.5 (40 total dwelling units divided 
by 16 target dwelling units). Since the target sample size is the 
lesser of either the dwelling unit sample size (16) or the number of 
all residential buildings (22), 16 residential buildings would be 
inspected for this project.
    In Phase 1 of sampling, the 2 buildings with 10 dwelling units 
are selected with certainty since they both have more than 2.5 
dwelling units. Each of the scattered-site single family buildings 
then have a 40 percent probability of selection (100 percent or 1 
divided by the 2.5 sampling ratio equals 0.40). Assume that both 
large buildings and 8 of the single family buildings (10 buildings 
in all) were selected in Phase 1. This leaves 12 single family 
buildings available for selection during Phase 2. Since 16 
residential buildings need to be inspected, the sample of 10 
buildings selected in Phase 1 falls 6 buildings short of a full 
sample. Therefore, the system will select 6 of the 12 previously 
unselected buildings during Phase 2 sampling. The chance of any 
single building, of the 12 remaining buildings, being selected 
during Phase 2 is 0.50 or 50 percent (6 target buildings divided by 
12 previously unselected buildings). The overall probability of any 
one of the 20 single family units being selected during either Phase 
1 or Phase 2 is calculated as follows:

----------------------------------------------------------------------------------------------------------------
               Element                            Protocol                            Calculation
----------------------------------------------------------------------------------------------------------------
Phase 1 Single Family Unit Building    8 of 20 buildings............  8/20 = .40
 Selection.
Phase 2 Single Family Unit Building    6 of 12 buildings............  6/12 = .50
 Selection.
Overall Possibility of Single Family   100% minus the 40% already     (1.00-.40) x .50 = .30s
 Unit Building Selection During Phase   selected during Phase 1 and
 2.                                     multiplied by the 50% chance
                                        of being selected during
                                        Phase 2.
Overall Probability of a Single        Probability from Phase 1       .40 + .30 = .70
 Family Unit Building Selection.        added to probability from
                                        Phase 2.
Verification--Overall Single Family    14 of 20 buildings...........  14/20 = .70
 Unit Building Selection.
Probability Weight* of Selection for   1 divided by the overall       1.00/.70 = 1.43
 Single Family Unit Building            probability of Single Family
 Selection.                             Unit Building Selection.
----------------------------------------------------------------------------------------------------------------
*See the note in Section VI.1 under the definition for normalized sub-area weight.

15. Accessibility Questions

    HUD reviews particular elements during the physical inspection 
to determine possible indications of noncompliance with the Fair 
Housing Act (42 U.S.C. 3601-3619) and section 504 of the 
Rehabilitation Act of 1973 (29 U.S.C. 794). More specifically, 
during the physical inspection, the inspector will record if: (1) 
There is a wheelchair-accessible route to and from the main ground 
floor entrance of the buildings inspected; (2) the main entrance for 
every building inspected is at least 32 inches wide, measured 
between the door and the opposite door jamb; (3) there is an 
accessible route to all exterior common areas; and (4) for multi-
story buildings that are inspected, the interior hallways to all 
inspected units and common areas are at least 36 inches wide. These 
items are recorded, but do not affect the score.

Appendix B to Part 902--Financial Condition Scoring

I. Purpose of This Appendix

    This appendix provides information about the scoring process for 
PHAS Indicator 2, Financial Condition. The purpose of the 
Financial Condition Indicator is limited to measuring the financial 
condition of the Low-Rent and Capital Fund programs of the 
project(s) and PHA.

II. Background

A. Financial Condition Indicator Regulatory Background

    To reflect a shift from a PHA-wide based assessment to one that 
is property based, HUD is revising the Financial Assessment Sub-
System for public housing (FASS-PH) Financial Data Schedule (FDS) 
and financial condition scoring process. Project-based management is 
defined in 24 CFR 990.115 as ``the provision of property management 
services that is tailored to the unique needs of each property.'' 
PHAs must also implement project-based budgeting and project-based 
accounting, which are essential components of asset management. 
Project-based accounting is critical to a property-based assessment 
of financial condition, because it mandates the submission of 
property-level financial data. Accordingly, PHAs will now be scored 
at a property level, using the already designated projects as the 
basis for assessment.
    The condition of the Low-Rent program and Capital Fund program 
will be evaluated at the project level, producing individual project 
scores within the PHA. Project performance will be scored and 
averaged across the PHA, weighted according to unit count. The 
projects within a PHA will be

[[Page 49572]]

evaluated and scored based on the project's performance relative to 
industry standards.

B. Comparable Scoring Systems

    The financial condition subindicators are not unique to public 
housing. The subindicators included in the Financial Condition 
Indicator scoring process are common measurements used throughout 
the multifamily industry to rank properties and identify the 
properties that require further attention.

III. Subindicators

A. Subindicators of the Financial Condition Indicator

    There are three subindicators that examine the financial 
condition of each project. The values of the three subindicators, 
calculated from the project level data, comprise the overall 
financial assessment of a project. The three subindicators of the 
Financial Condition Indicator are:
     Quick Ratio (QR);
     Months Expendable Net Assets Ratio (MENAR); and
     Debt Service Coverage Ratio (DSCR).

B. Description of the Financial Condition Subindicators

    The subindicators are described as follows:
    Subindicator #1, QR. This subindicator is a liquidity measure of 
the project's ability to cover current liabilities. It is measured 
by dividing adjusted unrestricted current assets by current 
liabilities. The purpose of this ratio is to indicate whether a 
project could meet all current liabilities if they became 
immediately due and payable. A project should have available current 
resources equal to or greater than its current liabilities in order 
to be considered financially liquid. The QR is a commonly used 
liquidity measure across the industry. Maintaining sufficient 
liquidity is essential for the financial health of an individual 
project.
    Subindicator #2, MENAR. This subindicator measures a project's 
ability to operate using net available, unrestricted resources 
without relying on additional funding. In particular, it is computed 
as the ratio of net available unrestricted resources to average 
monthly operating expenses. The result of this calculation shows how 
many months of operating expenses can be covered with currently 
available, unrestricted resources.
    Subindicator #3, DSCR. This subindicator is a measure of a 
project's ability to meet regular debt obligations. This 
subindicator is calculated by dividing adjusted operating income by 
a project's annual debt service. It indicates whether the project 
has generated enough income from operations to meet annual interest 
and principal payment on long-term debt service obligations.

IV. GAAP-Based Scoring Process and Elements of Scoring

A. Points and Threshold

    The Financial Condition Indicator is based on a maximum of 20 
points. In order to receive a passing score under this indicator, a 
project must achieve at least 12 points, or 60 percent of the 
available points under this indicator.

B. Scoring Elements

    The Financial Condition Indicator score provides an assessment 
of a project's financial condition. Under the PHAS Financial 
Condition Indicator, HUD will calculate a score for each project, as 
well as for the PHA overall financial condition, that reflects 
weights based on the relative importance of the individual financial 
subindicators. The overall Financial Condition Indicator score for a 
PHA is a unit-weighted average of the PHA's individual project 
financial condition scores. In order to compute an overall financial 
condition score, an individual project financial condition score is 
multiplied by the number of units in each project to determine a 
``weighted value.'' The sum of the weighted values is then divided 
by the total number of units in a PHA's portfolio to derive the 
overall PHAS Financial Condition Indicator score. The three 
subindicator scores are produced using GAAP-based financial data 
contained in the FDS. The minimum number of points (zero) and the 
maximum number of points (twenty) can be achieved over a range of 
values.

------------------------------------------------------------------------
           Subindicators               Measurement of         Points
------------------------------------------------------------------------
QR................................  Liquidity...........             9.0
MENAR.............................  Adequacy of reserves             9.0
DSCR..............................  Capacity to cover                2.0
                                     debt.
                                                         ---------------
    Total.........................  ....................            20.0
------------------------------------------------------------------------

QR

    A project will receive zero points when its QR is less than 1.0. 
If its QR equals 1.0, it will receive 5.4 points. If its QR is 
between 1.0 and 2.0, it will receive a score of between 5.4 and 9.0 
points, on a proportional basis. A project will receive the maximum 
of 9.0 points when its QR is equal to or greater than 2.0.

------------------------------------------------------------------------
                 QR value                              Points
------------------------------------------------------------------------
<1.0......................................  0.0.
1.0.......................................  5.4.
>=1.0 but >=2.0...........................  >5.4 to <9.0.
>=2.0.....................................  9.0.
------------------------------------------------------------------------

    The following graph depicts the relationship between the QR and 
scores.

[[Page 49573]]

[GRAPHIC] [TIFF OMITTED] TP21AU08.000

MENAR

    A project will receive zero points when its MENAR is less than 
1.0. If its MENAR equals 1.0, it will receive 5.4 points. If its 
MENAR is between 1.0 and 4.0, it will receive a score of between 5.4 
and 9.0 points, on a proportional basis. A project will receive the 
maximum of 9 points when its MENAR is equal to or greater than 4.0.

------------------------------------------------------------------------
                MENAR value                            Points
------------------------------------------------------------------------
<1.0......................................  0.0
1.0.......................................  5.4
>=1.0 but <4.0............................  >5.4 to <9.0
>=4.0.....................................  9.0
------------------------------------------------------------------------

    The following graph depicts the relationship between the MENAR 
and scores.
[GRAPHIC] [TIFF OMITTED] TP21AU08.001

DSCR

    A project will receive zero points when its DSCR ratio is less 
than 1.0. If its DSCR equals at least 1.0 but less than 2.0, it will 
receive 1 point. A project will receive the maximum of 2.0 points if 
its DSCR is equal to or greater than 2.0 or if it has no debt at 
all.

------------------------------------------------------------------------
                DSCR value                             Points
------------------------------------------------------------------------
<1.0......................................  0.0
>=1.0 but <2.0............................  1.0
>=2.0.....................................  2.0
No Debt Service...........................  2.0
------------------------------------------------------------------------

    The following graph depicts the relationship between the DSCR 
and scores.

[[Page 49574]]

[GRAPHIC] [TIFF OMITTED] TP21AU08.002

V. Audit Adjustment

    Pursuant to 24 CFR 902.30, HUD calculates a revised financial 
condition score after it receives audited financial information. The 
revised financial condition score, which is based on the audited 
information, can increase or decrease the initial PHA-wide score 
that was based on the unaudited financial information. The audited 
score reflects two types of adjustments. The first type is based on 
audit flags and reports that result from the audit itself. 
Significant deficiencies and material weaknesses are considered to 
be audit flags, alerting the REAC to an internal control deficiency 
or an instance of noncompliance with laws and regulations. The 
second adjustment type addresses significant differences between the 
unaudited and audited financial information reported to HUD pursuant 
to Sec.  902.30.

Audit Opinion and Flags

    As part of the analysis of the financial health of a PHA, 
including assessment of the potential or actual waste, fraud, or 
abuse at a PHA, HUD will look to the Audit Report to provide an 
additional basis for accepting or adjusting the financial component 
scores. The information collected from the annual Audit Report 
pertains to the type of audit opinion; details of the audit opinion; 
and the presence of significant deficiencies, material weaknesses, 
and noncompliance.
    If the auditor's opinions on the financial statements and major 
federal programs are anything other than unqualified, points could 
be deducted from the PHA's audited financial score. The REAC will 
review audit flags to determine their significance as it directly 
pertains to the assessment of the PHA's financial condition. If the 
flags have no effect on the financial components or the overall 
financial condition of the PHA as it relates to the PHAS assessment, 
the audited score will not be adjusted. However, if the flags have 
an impact on the PHA's financial condition, the PHA's audited score 
will be adjusted according to the seriousness of the reported 
finding.
    These flags are collected on the Data Collection Form (OMB 
approval number 2535-0107). The PHA completes this form for audited 
submissions. If the Data Collection Form indicates that the 
auditor's opinion will be anything other than unqualified, points 
can be deducted from the financial condition score. The point 
deductions have been established using a three-tier system. The 
tiers give consideration to the seriousness of the audit 
qualification and limit the deducted points to a reasonable portion 
of the PHA's total score.

Audit Flag Tiers

    Audit flags are assigned tiers, as stated in the following 
chart.

                                      Audit Flags and Tier Classifications
----------------------------------------------------------------------------------------------------------------
                    Audit flags                          Tier classification                 Comments
----------------------------------------------------------------------------------------------------------------
Financial Statement Audit Opinion(s):
  1. Unqualified opinion(s)........................  None.                       ...............................
  2. Qualified opinion(s)..........................
     Departures from GAAP not significant    Tier 2....................  Deduction only if the departure
     enough to cause an adverse opinion(s).                                       includes the Low Rent or
     Limitations on the scope of the audit                                Capital Fund programs.
     (regardless of cause) not significant enough
     to cause a disclaimer of opinion..
  3. Adverse opinion(s) regardless of reason(s)....  Tier 1.                     ...............................
  4. Disclaimer of opinion(s) regardless of          Tier 1.                     ...............................
   reason(s).
Opinion(s) on Supplemental Information (Statement
 of Auditing Standard (SAS) 29 ``in relation to''
 type of opinion):
  1. Fairly stated.................................  None......................   Applies to the FDS.
  2. Fairly stated except for:.....................  Tier 2.                     ...............................
  3. No opinion....................................  Tier 1.                     ...............................
  4. Incomplete or missing.........................  Tier 1.                     ...............................
Report on Internal Control and Compliance and Other
 Matters Noted in an Audit of the Financial
 Statement performed in accordance with Government
 Auditing Standards (GAS) (Yellow Book):
  1. Control deficiencies..........................  Tier 3.                     ...............................
     Significant deficiencies;
     Material weakness;

[[Page 49575]]

 
  2. Material noncompliance........................  Tier 3....................  Deduction applies only if the
  3. Fraud.........................................  Tier 3....................   internal control deficiency
  4. Illegal acts..................................  Tier 3....................   and/or noncompliance relates
  5. Abuse.........................................  Tier 3....................   to the Low Rent or Capital
                                                                                  Fund programs.
Report on Compliance with Requirements Applicable
 to Major Federal Programs and Internal Control
 over Compliance with OMB Circular A-133--
Opinion on compliance with each major federal
 program requirements:
  1. Unqualified opinion(s) on compliance with Low   None.                       ...............................
   Rent program and Capital Fund program major
   federal requirements.
  2. Qualified opinion(s) on compliance with Low     Tier 2.                     ...............................
   Rent Program program and Capital Fund program
   major federal requirements (regardless of cause).
  3. Adverse opinion(s) on compliance with Low Rent  Tier 1.                     ...............................
   program and Capital Fund program major federal
   requirements (regardless of cause).
  4. Disclaimer of opinion(s) on compliance with     Tier 1.                     ...............................
   Low Rent Program and Capital Fund program major
   federal requirements (regardless of cause).
Internal Controls and Compliance:
  1. Control Deficiencies:.........................  Tier 3.                     ...............................
     Significant deficiencies in internal
     controls over compliance with Low Rent program
     and Capital Fund program requirements.
     Material weakness in internal controls
     over compliance with Low Rent program and
     Capital Fund program requirements.
  2. Material noncompliance with Low Rent program    Tier 3.                     ...............................
   and Capital Fund program requirements.
Other Consideration:
  1. Significant change penalty deduction applies    Tier 2.                     ...............................
   only if the significant change(s) relate to the
   Low Rent or Capital Fund programs.
  2. Ongoing concerns..............................  Tier 1.                     ...............................
  3. Management Discussion and Analysis and other    Tier 2.                     ...............................
   supplemental information omitted.
  4. Financial statements using basis other than     Tier 1.                     ...............................
   GAAP.
----------------------------------------------------------------------------------------------------------------

    Each tier assesses point deductions of varying severity. The 
following chart illustrates the point schedule:

------------------------------------------------------------------------
             Tier                         PHAS points deducted
------------------------------------------------------------------------
Tier 1.......................  Any Tier 1 finding assesses a 100 percent
                                deduction of the PHA's financial
                                condition indicator score.
Tier 2.......................  Any Tier 2 finding assesses a point
                                deduction equal to 10 percent of the
                                unadjusted financial condition indicator
                                score.
Tier 3.......................  Each Tier 3 finding assesses a 0.5 point
                                deduction per occurrence, to a maximum
                                of 4 points of the financial condition
                                indicator score.
------------------------------------------------------------------------

Review of Audited Versus Unaudited Submission

    The purposes of comparing the ratios and scores from the 
unaudited FDS submission to the ratios and scores from the audited 
submission are to:
     Identify significant changes in ratio calculation 
results and/or scores from the unaudited submission to the audited 
submission;
     Identify PHAs that consistently provide significantly 
different data from their unaudited submission in their audited 
submission; and
     Assess or alleviate penalties associated with the 
inability to provide reasonably accurate unaudited data within the 
required time frame.

This review process will be performed only for the audited 
submissions.

Significant Change Penalty

    HUD views the transmission of significantly inaccurate unaudited 
financial data as a serious condition. Therefore, projects are 
encouraged to assure that financial data is as reliable as possible 
for their unaudited submissions.
    A significant change penalty will be assessed for significant 
differences between the unaudited and audited submissions. A 
significant difference is considered to be an overall financial 
condition score decrease of three or more points from the unaudited 
to the audited submission. A significant change penalty is 
considered a tier 2 flag and will result in a reduction of 10 
percent of the total audited financial condition score.
    For example: A PHA scores 30 points on its unaudited submission. 
The audited submission score is 26 points. Because the 10 percent 
reduction is 2.6 points, 2.6 is rounded to the next whole number, 
3.0 points. Therefore, the PHA audited score is 23 points (26 points 
minus 3 points equals 23 points).
    The PHAS system automatically deducts the significant change 
penalty from the audited score, and this reduction triggers the REAC 
analyst's review. REAC may waive the significant change penalty if 
the project provides reasonable documentation of the significant 
difference in its submission.

Appendix C to Part 902--Management Operations Scoring

I. Purpose of This Appendix

    This appendix provides additional information about the scoring 
process for the PHAS Management Operations Indicator. The purpose of 
the management operations assessment is to assess the project's and 
PHA's management operations capabilities. All projects will be 
assessed under the Management Operations Indicator, even if a PHA 
has not converted to asset management.
    This PHAS Management Operations Scoring document has been 
revised to reflect research HUD conducted through informal meetings 
with representatives of PHAs, residents, projects, and public 
housing industry groups, and to provide the basis for scoring 
projects on the management operations. This management operations 
scoring document is applicable to PHAs with fiscal years ending on 
and after June 30, 2009.

[[Page 49576]]

II. Definitions

    As used in this appendix:
    Adjusted vacancy rate is a project's vacancy rate excluding all 
exemptions. If a project qualifies for this adjustment, it shall 
retain justifying documentation for HUD review.
    Assessment period is the 12-calendar-month period as of the end 
of the calendar month before the management review of public housing 
projects begins, or the period of time as defined in each component.
    Average number of days tenant-generated work orders were open 
during the assessment period is the total number of days tenant-
generated work orders were open divided by the total number of 
tenant-generated work orders.
    Changing market conditions are when projects are in communities 
that are undergoing dramatic population loss or economic 
dislocations. Projects should maintain documentation of the specific 
condition, i.e., population loss, business relocations, etc., along 
with evidence of the marketing and outreach approaches utilized by 
projects. Projects must demonstrate:
    (1) Exhaustive marketing efforts;
    (2) Efforts to modernize the units to make the units more 
closely match market demand in terms of size, type, or amenities; 
and
    (3) Consideration given to deprogramming if the market does not 
respond to marketing or modernization efforts.
    Invoices in dispute are invoices challenged by the project and 
the project has sent documentation to the vendor that explains why 
the invoices are challenged.
    Management Review Form (Review Form), form HUD-5834, Management 
Review for Public Housing Projects, is the review form used by HUD 
when conducting a management review of public housing projects.
    Preventive maintenance plan is a planned course of action for 
scheduled maintenance procedures that are systematically performed 
at regular intervals to prevent premature deterioration of buildings 
and systems. A preventive maintenance plan should include:
    (1) The identification of:
    (a) Critical systems, such as heating, ventilation and air 
conditioning (HVAC), and fire safety;
    (b) Building elements, such as roofs and exterior walls; and
    (c) Grounds care, such as parking lots and fencing.
    (2) Appropriate strategies and protocols for performing 
preventive maintenance on each system and building element, and for 
grounds care; and
    (3) A schedule for conducting preventive maintenance appropriate 
to each system and building element, and for grounds care.
    Reduced average number of days tenant-generated work orders were 
open during the previous 3 years is a comparison of the average time 
tenant-generated work orders were open in the current assessment 
period to the average number of days tenant-generated work orders 
were open in the single calendar month that is 3 years prior to the 
current assessment period. It is calculated by subtracting the 
average number of days tenant work orders were open in the current 
assessment period from the average number of days tenant-generated 
work orders were open in the earlier assessment period. In order to 
receive credit for a reduction in the average time tenant-generated 
work orders were active during the previous 3 years, the project 
shall retain justifying documentation for HUD review.
    Reduced vacancy rate during the previous 3 years is a comparison 
of the adjusted vacancy rate in the current assessment period to the 
adjusted vacancy rate in the single calendar month that is 3 years 
prior to the current assessment period. It is calculated by 
subtracting the adjusted vacancy rate in the current assessment 
period from the adjusted vacancy rate in the earlier assessment 
period.
    Vacancy days associated with a vacant unit receiving section 
9(d) funds in accordance with 24 CFR 990.145. Neither vacancy days 
associated with a vacant unit prior to that unit meeting the 
condition of being a unit receiving section 9(d) fund nor vacancy 
days associated with a vacant unit after construction work has been 
completed or after the time frame for placing the vacant unit under 
construction has expired shall be exempted. The following apply when 
computing time frames for a vacant unit receiving section 9(d) 
funds:
    (1) The calculation of turnaround time for newly modernized 
units starts when the unit is turned over to the PHA from the 
contractor and ends when the lease goes into effect for the new or 
returning resident. The total vacancy time would be the sum of the 
pre-modernization vacancy time (vacancy days that had accumulated 
prior to the unit being included in the section 9(d) budget), and 
the post-modernization vacancy time (from the time the unit is 
turned over to the PHA from the contractor).
    (2) Unit-by-unit documentation, showing the date a vacant unit 
was included in a HUD-approved section 9(d) budget, the date it was 
released to the PHA by the contractor, and the date a new lease is 
effective for the new or returning resident, or the date the time 
period for placing the vacant unit under construction expired.

III. Subindicators

A. Subindicators of Management Assessment Indicator

    The criteria (subindicators and components) of the management 
review of projects are included in form HUD-5834, Management Review 
for Public Housing Projects. The Management Operations Indicator 
consists of 5 management subindicators and 12 components that are 
scored. The remaining 2 subindicators and 9 components are 
compliance areas and are not scored. Table 1 lists the subindicators 
and components.

                 Table 1--Management Operations Indicator
------------------------------------------------------------------------
              Subindicator                          Component
------------------------------------------------------------------------
1. General Appearance and Security.....   1.1 Appearance and Market
                                          Appeal.
                                         1.2 Security.
 2. Follow-Up and Monitoring of Project   2.1 Exigent Health and Safety
 Inspections (Not Scored).                (EHS) Deficiencies (Not
                                          Scored).
                                         2.2 Lead-Based Paint (LBP)
                                          Inspection Deficiencies (Not
                                          Scored).
 3. Maintenance and Modernization......   3.1 Unit Inspections.
                                         3.2 Work Orders.
                                         3.3 Preventive Maintenance.
                                         3.4 Energy Conservation/Utility
                                          Consumption.
                                         3.5 Modernization (Not Scored).
 4. Financial Management...............  4.1 Percentage of Accounts
                                          Payable.
                                         4.2 Rent Collection.
                                         4.3 Budget Management (Not
                                          Scored).
                                         4.4 Procurement (Not Scored).
 5. Leasing and Occupancy..............  5.1 Vacancy Rate.
                                         5.2 Turnaround Time.
                                         5.3 Occupancy Review (Not
                                          Scored).
 6. Tenant/Management Relations........  6.1 Economic Self-Sufficiency.
                                         6.2 Resident Involvement in
                                          Project Administration.
 7. General Management Practices (Not    7.1 Management Review Findings
 Scored).                                 (Not Scored).
                                         7.2 Other Prior Review Findings
                                          (Not Scored).
                                         7.3 Insurance (Not Scored).
------------------------------------------------------------------------


[[Page 49577]]

    The areas that are not scored are included in the management 
review of public housing projects, because the information they 
provide is integral to supporting good management operations.

B. Grades for Management Assessment Subindicators and Components

    Subindicator #1, General Appearance and Security. This 
subindicator evaluates the appearance of a project, and the level of 
security, including level of crime, screening of applicants, 
eviction of residents for crime and crime-related activities, and 
coordination with local officials and residents to implement anti-
crime strategies.
    Component #1.1, Appearance and Market Appeal. This component 
evaluates, at the time of the review, the appearance of a project's 
exterior and common areas, including the degree to which the project 
is attractive, appealing, and clean, and that it demonstrates market 
appeal. The project's evaluation will be based on either 
``Superior,'' ``Satisfactory,'' or ``Unsatisfactory'' ratings in 12 
areas. If any area does not apply to the project, the area's points 
will not be included in the total points for this component, to 
avoid penalizing a project. The 12 areas are as follows:
    Superior Performance:
    (1) Attractive project entrance with appropriate signage and 
plantings.
    (2) Attractive, well-maintained landscaping--trees, shrubs, 
grass not overgrown.
    (3) Building exteriors including paint, siding, and masonry are 
in good repair.
    (4) No graffiti.
    (5) Paved surfaces--parking lots, streets, and walks are in good 
repair.
    (6) Public spaces and amenities are well maintained.
    (7) Fencing, railing, porches, overhangs, and ramps are in good 
condition and enhance project appearance.
    (8) Windows have no torn or damaged window treatments, and 
blankets, bed sheets, or other materials not designed to be window 
treatments are not used for window coverings.
    (9) Overall project appearance is not institutional (i.e., 
building looks like an institution, dull, uniform, unimaginative) 
and exceeds the standards in the surrounding neighborhood.
    (10) Project is clean and free of debris, trash, clutter, and/or 
abandoned vehicles.
    (11) Dumpsters and trash cans are clean and properly enclosed.
    (12) No evidence of damaged and/or boarded-up units.

Satisfactory Performance:
    (1) Moderately attractive project entrance with signage and 
plantings.
    (2) Landscaping is average--trees, shrubs, grass not overgrown.
    (3) Building exteriors including paint, siding, and masonry are 
at least in fair repair.
    (4) Limited graffiti in no more than 5 places.
    (5) Paved surfaces--parking lots, streets, and walks are at 
least in moderate repair.
    (6) Public spaces and amenities are at least moderately 
maintained.
    (7) Fencing, railing, porches, overhangs, and ramps are at least 
in moderate condition and do not detract from project appearance.
    (8) Windows have no more than 5 torn or damaged window 
treatments and blankets, bed sheets, or other materials not designed 
to be window treatments are not used for window coverings.
    (9) Overall project appearance is somewhat institutional and is 
at least equivalent to surrounding neighborhood.
    (10) Project is at least moderately clean, with minimal debris, 
trash, clutter, and/or abandoned vehicles.
    (11) Dumpsters and trash cans are at least moderately clean and 
usually enclosed.
    (12) No more than 5 damaged and/or boarded-up units.

    Unsatisfactory Performance:

    (1) Project entrance is not attractive, with no signage and 
limited plantings.
    (2) Landscaping is below average--trees, shrubs and/or grass are 
overgrown.
    (3) Building exteriors including paint, siding, and masonry are 
in poor repair.
    (4) Excessive graffiti in 6 or more places.
    (5) Paved surfaces--parking lots, streets, and walks are in poor 
repair.
    (6) Public spaces and amenities are not maintained.
    (7) Fencing, railing, porches, overhangs, and ramps are in poor 
condition and detract from project appearance.
    (8) Windows have 6 or more torn or damaged window treatments and 
blankets, bed sheets, or other materials not designed to be window 
treatments are used for curtains.
    (9) Overall project appearance is institutional and is worse 
than the surrounding neighborhood.
    (10) Project is not clean because of significant debris, trash, 
clutter and/or abandoned vehicles.
    (11) Dumpsters and/or trash cans are not clean and generally 
unenclosed.
    (12) Six or more damaged and/or boarded-up units.
    Grade A: The project:
    (1) Achieves 80 percent or greater of the points possible for 
all of the criteria for which the project is assessed; and
    (2) Has zero unsatisfactory ratings.
    Grade C: The project achieves less than 80 percent but greater 
than or equal to 50 percent of the points possible for all of the 
criteria for which the project is assessed.
    Grade F: The project achieves less than 50 percent of the points 
possible for all of the criteria for which the project is assessed.
    Component #1.2, Security. This component evaluates, at the time 
of the review, a project's performance in tracking crime-related 
problems on project property, the adoption and implementation, 
consistent with section 9 of the Housing Opportunity Program 
Extension Act of 1996 (42 U.S.C. 1437d(r)) and the Quality Housing 
and Work Responsibility Act of 1998 (Pub. L. 105-276, October 21, 
1998), of applicant screening and resident eviction policies and 
procedures, and the coordination with local officials and residents 
to implement anti-crime strategies.
    Grade A: The project can meet the criteria for the three 
following items:
    (1) There is no evidence of a crime problem at the project or 
the crime rate at the project is equal to or less than the crime 
rate for the surrounding neighborhood;
    (2) The project has formally adopted effective applicant 
screening policies and procedures that deny admissions to applicants 
on the basis of the following, as stated in 24 CFR 960.204:
     The applicant was evicted because of drug-related 
activity from assisted housing within the last 3 years, unless the 
applicant has successfully completed a rehabilitation program 
approved by the project;
     The project has reason to believe the applicant is 
illegally using a controlled substance, or engages in any drug-
related activity on or off the project;
     The project has reason to believe the applicant is 
abusing alcohol, which interferes with the health, safety, or right 
to peaceful enjoyment of the premises by other residents;
     The applicant or any household member of the applicant 
has been convicted of drug-related criminal activity for the 
manufacture or production of methamphetamine on the premises of 
federally assisted housing; or
     The applicant or any member of the applicant's 
household is subject to a lifetime registration requirement under a 
state sex offender registration program.
    (3) The project has formally adopted effective policies and 
procedures to evict residents who the project has reasonable cause 
to believe, as follows:
     Engage in criminal activity that threaten the health, 
safety, or right to peaceful enjoyment of the premises by other 
residents or project personnel;
     Engage in any drug-related criminal activity on or off 
the project premises; or
     Abuse alcohol in a way that interferes with the health, 
safety, and peaceful enjoyment of the premises by other residents or 
project personnel.
    Grade C: The project:
    (1) Can meet the criteria for items (2) and (3) in grade A of 
this component; and
    (2) Cannot meet the criteria in item (1) in grade A of this 
component; and
    (3) Has formally adopted an effective security plan developed in 
coordination with local police officials and residents to implement 
anti-crime strategies.
    Grade F: The project:
    (1) Cannot meet the criteria for items (2) and (3) in grade A, 
above; or
    (2) Cannot meet the criteria in item (1) in grade A of this 
component; and
    (3) Has not formally adopted an effective security plan 
developed in coordination with local police officials and residents 
to implement anti-crime strategies.
    Subindicator #2, Follow-Up and Monitoring of Project 
Inspections. This subindicator examines a project's performance, at 
the time of the review, in correcting or abating exigent health and 
safety (EHS) deficiencies and lead-based paint (LBP) abatement. This 
subindicator is not scored.
    Component #2.1, Exigent Health and Safety (EHS) Deficiencies. 
This component examines a project's performance, at the time of the 
review, in correcting or abating EHS deficiencies identified during 
its most recent HUD physical condition inspection. This component is 
not scored.

[[Page 49578]]

    Component #2.2, Lead-Based Paint (LBP) Inspection Deficiencies. 
This component examines a project's performance, at the time of the 
review, in maintaining current LBP certifications for projects built 
before 1978, and performing risk assessments and hazard reduction, 
if necessary, for reported elevated intervention blood lead levels 
(EIBLLs). This component is not scored.
    Subindicator #3, Maintenance and Modernization. This 
subindicator measures a project's performance in conducting unit 
inspections, responding to tenant-generated work orders, performing 
preventive maintenance, managing utility consumption/energy 
conservation, and managing modernization activities.
    Component #3.1, Unit Inspections. This component measures the 
percentage of units that a project inspected for the 12-calendar-
month period as of the end of the calendar month before the 
management review of public housing projects begins in order to 
determine short-term maintenance needs and long-term modernization 
needs. The project is required to conduct unit inspections using the 
HUD inspection protocol that is based on the Uniform Physical 
Condition Standards (UPCS) set forth in 24 CFR part 5, subpart G. 
HUD will consider the following:
     Adequacy of the inspection program. The project must 
have an adequate inspection program in terms of tracking 
inspections, and in ensuring the thoroughness and quality of the 
project's inspections.
     Units to be inspected. All occupied units and/or units 
available for occupancy are required to be inspected. This includes 
units used for non-dwelling purposes, those occupied by employees, 
and those used for resident services.
     Units exempted. Units in the following categories are 
exempted and not included in the calculation of the total number of 
units, and the percentage of units inspected for the assessed 
period.
    (1) Occupied units for which a project has documented two 
attempts to inspect the unit during the assessment period, but only 
if the project can document that appropriate legal action (up to and 
including eviction of the legal or illegal occupant(s)) has been 
taken under the lease to ensure that the unit can be subsequently 
inspected.
    (2) Units vacant during the assessment period for the following 
reasons:
    (a) Vacant units that are receiving section 9(d) Capital Funds; 
or
    (b) Vacant units that are documented to be uninhabitable for 
reasons beyond a project's control due to:
    (i) High/unsafe levels of hazardous/toxic materials;
    (ii) An order of the local health department or state agency or 
a directive of the Environmental Protection Agency;
    (iii) Natural disasters; or
    (iv) Units that are kept vacant because they are structurally 
unsound.
     Supporting documentation for vacant units that are 
uninhabitable for reasons beyond project's control. A project shall 
maintain information to support its determination of vacant units 
that are uninhabitable due to circumstances and actions beyond the 
project's control. This supporting information is subject to review 
and may be requested for verification purposes at any time by HUD. 
The project shall, at a minimum, maintain:
    (1) The date on which the unit met the conditions of being a 
vacant unit that is uninhabitable due to circumstances and actions 
beyond a project's control;
    (2) Documentation identifying the specific conditions that 
distinguish the unit as a unit vacant due to circumstances and 
actions beyond a project's control;
    (3) A description or list of the actions taken by a project to 
eliminate or mitigate these conditions; and
    (4) The date on which the unit ceased to meet such conditions 
and became an available unit.
    Grade A: The project:
    (1) Scores 90 percent or more on a 100-point scale on HUD's 
physical condition inspection; or
    (2) Inspects 99 percent or more of the units; and
    (3) Has an adequate system for tracking unit inspections.
    Grade C: The project:
    (1) Inspects at least 95 percent but less than 99 percent of the 
units; and
    (2) Has an adequate system for tracking dwelling unit 
inspections.
    Grade F: The project:
    (1) Inspects less than 95 percent of the units; or
    (2) Does not have an adequate system for tracking dwelling unit 
inspections.
    Component #3.2, Work Orders. This component measures the average 
number of days that tenant-generated maintenance work orders are 
outstanding. A project may choose either to be assessed: (1) for the 
most recent one-month period where the required information is 
available; or (2) for the 12-calendar-month period as of the end of 
the calendar month before the management review of public housing 
projects begins. For grade C(3), the assessment comparison is the 
completion performance in the single calendar month that is 3 years 
prior to the single calendar month being used in the assessment. The 
assessment of this component includes only those work orders that 
were closed during the period of time being assessed, even if the 
work order was opened prior to the period of time being assessed. It 
does not assess those work orders that were not closed during the 
period of time being assessed.
     Adequacy of the system to track work orders. It is 
implicit in this component that the project has an adequate system 
for tracking work orders, and ensuring the thoroughness and quality 
of the project's needed repairs.
    Grade A: The project has:
    (1) Scored 90 percent or more on a 100-point scale on HUD's 
physical condition inspection; or
    (2) Completed tenant-generated work orders in less than an 
average of 3 days; and
    (3) An adequate system for tracking work orders.
    Grade C: The project has:
    (1) Completed tenant-generated work orders in an average of at 
least 3 days but less than 10 days; and
    (2) An adequate system for tracking work orders; or
    (3) Completed tenant-generated work orders within an average of 
between 10 and 20 days; and
    (a) Reduced the average time it takes to complete tenant-
generated work orders by at least 10 days during the past 3 years; 
and
    (b) An adequate system for tracking work orders.
    Grade F: The project:
    (1) Completed all tenant-generated work orders in an average of 
10 or more days; or
    (2) Does not have an adequate system for tracking work orders.
    Component #3.3, Preventive Maintenance. This component evaluates 
a project's implementation of a written preventive maintenance plan, 
including but not limited to the identification of critical systems, 
building elements, grounds care and equipment, appropriate 
strategies and protocols for performing preventive maintenance on 
all plan items, and a schedule for conducting preventive maintenance 
for each item in the plan.
    Grade A: The project:
    (1) Conducts annual inspections of buildings, grounds, common 
areas, non-dwelling space, and major systems; and
    (2) Has a sufficient preventive maintenance plan; and
    (3) All of the elements in the project's preventive maintenance 
plan have been implemented.
    Grade C: The project:
    (1) Conducts annual inspections of buildings, grounds, common 
areas, non-dwelling space, and major systems; and
    (2) Has a sufficient preventive maintenance plan; and
    (3) At least 70 percent of the elements in the project's 
preventive maintenance plan have been implemented.
    Grade F: The project:
    (1) Does not conduct annual inspections of buildings, grounds, 
common areas, non-dwelling space, and major systems; or
    (2) Does not have a sufficient preventive maintenance plan; or
    (3) Less than 70 percent of the elements in the project's 
preventive maintenance plan have not been implemented.
    Component #3.4, Energy Conservation/Utility Consumption. This 
component examines a project's energy conservation/utility 
consumption measures for projects that have had an energy audit 
within the past 5 years.
    Grade A: The project:
    (1) Has completed or updated its energy audit within the past 5 
years and the project has implemented all of the recommendations 
that were cost-effective; or
    (2) Is doing the maximum feasible to reduce energy consumption 
such that no energy audit conducted within the past 5 years has made 
cost-effective recommendations.
    Grade C: The project:
    (1) Has completed or updated its energy audit within the past 5 
years and the energy audit is less than one-year old; or
    (2) Has completed or updated its energy audit within the past 5 
years, the energy audit is as least one-year old, and the project

[[Page 49579]]

has developed an implementation plan for all cost-effective 
recommendations and is on schedule with the implementation plan, 
based on available funds. The implementation plan identifies, at a 
minimum, the cost-effective items from the audit, the estimated 
cost, the planned funding source, and the anticipated date of 
completion for each item.
    Grade F: The project did not complete or update its energy audit 
within the past 5 years, or the project has not developed an 
implementation plan for all cost-effective recommendations, or is 
not on schedule with its implementation plan based on available 
funds, or has not implemented all of the recommendations that were 
cost-effective.
    Component #3.5, Modernization. This component examines the 
project's management of modernization and non-routine maintenance 
through the physical needs assessment, and examines project plans 
and budgets for modernization activities. This component is not 
scored.
    Subindicator #4, Financial Management. This subindicator 
examines a project's timeliness in paying invoices that are not in 
dispute, the percentage of rents collected, the adequacy of a 
project's budget management, and the project's ability to plan and 
implement procurement actions.
    Component #4.1, Percentage of Accounts Payable. This component 
examines, at the end of the most recent one-month period where the 
required information is available, a project's timeliness in paying 
invoices that are not in dispute.
     Adequacy of the system to track accounts payable. It is 
implicit in this component that the project has an adequate system 
for tracking accounts payable.
    Grade A:
    (1) All of the invoices that are not in dispute are 30 days or 
less outstanding; and
    (2) The project has an adequate system for tracking accounts 
payable.
    Grade C:
    (1) One or more of the invoices that are not in dispute are 
greater than 30 days but no more than 60 days outstanding; and
    (2) The project has an adequate system for tracking accounts 
payable.
    Grade F:
    (1) One or more of the invoices that are not in dispute are 
greater than 60 days outstanding; or
    (2) The project does not have an adequate system for tracking 
accounts payable.
    Component #4.2, Rent Collection. This component measures the 
percentage of rents collected, which is determined by dividing the 
total rents collected by the total rents charged to tenants. A 
project may choose to be assessed for either: (1) the most recent 
one-month period for which the required information is available, or 
(2) the 12-calendar-month period as of the end of the most recent 
calendar month where the required information is available. Rents 
include rental charges only and would not include other charges to 
tenants, such as court costs, maintenance costs, etc.
     Adequacy of the system to track rents collected. 
Implicit in this component is that the project has an adequate 
system to track and document total rents charged and total rents 
collected.
    Grade A:
    (1) The percentage of rents collected is at least 97 percent of 
the total rent to be collected; and
    (2) The project has an adequate system to track and document 
total rents charged and total rents collected.
    Grade C:
    (1) The percentage of rents collected is at least 93 percent but 
less than 97 percent of the total rent to be collected; and
    (2) The project has an adequate system to track and document 
total rents charged and total rents collected.
    Grade F:
    (1) The percentage of rents collected is less than 93 percent of 
the total rent to be collected; or
    (2) The project does not have an adequate system to track and 
document total rents charged and total rents collected.
    Component #4.3, Budget Management. This component examines the 
project's budgeting revenue and expenditure performance, as well as 
actual year-to-date revenue and expenditure performance, for the 
current fiscal year (or the prior fiscal year if the management 
review of public housing projects is conducted within the first 
quarter of the project's current fiscal year). This component is not 
scored.
    Component #4.4, Procurement. This component examines a project's 
ability to plan for and implement procurement actions for the 
project in accordance with 24 CFR 85.36 and all other applicable 
laws and regulations. This component is not scored.
    Subindicator #5, Leasing and Occupancy. This subindicator 
measures the average adjusted vacancy rate and unit turnaround time. 
The following categories of units that are not considered available 
for occupancy are exempted from the computation of adjusted vacancy 
rate and unit turnaround time.
    (1) Units approved for special use. Units approved for special 
use that are exempt during the assessment period are HUD-approved 
units used to promote self-sufficiency and anti-drug and anti-crime 
activities, or for non-dwelling purposes, including but not limited 
to resident services, resident organization offices, police 
substations, day care centers, public safety activities, or resident 
job training.
    (2) Employee occupied units. Employee occupied units that are 
exempt during the assessment period are units occupied by employees 
whose occupancy is contingent upon their continued employment by a 
project. However, units that are occupied by residents who meet the 
project's eligibility criteria and are also employed by the project 
shall not be exempted from the computation of adjusted vacancy rate 
and unit turnaround time.
    (3) Vacant units approved for deprogramming. Vacant units 
approved for deprogramming that are exempt during the assessment 
period are HUD-approved units for demolition and/or disposition, 
vacant units that have been approved for conversion/reprogramming, 
or units vacated for vacancy consolidation.
    (4) Vacancy days associated with vacant units receiving section 
9(d) Capital Funds during the assessment period. Vacancies resulting 
from project modernization or unit modernization, provided that one 
of the following conditions are met:
    (a) The unit is undergoing modernization (i.e., the 
modernization contract has been awarded or force account work has 
started) and must be vacant to perform the work, and the 
construction is on schedule according to a HUD-approved PHA Annual 
Plan; or
    (b) The unit must be vacated to perform the work and the 
treatment of the vacant unit is included in a HUD-approved PHA 
Annual Plan, but the time period for placing the vacant unit under 
construction has not yet expired. The PHA shall place the vacant 
unit under construction within 2 federal fiscal years (FFYs) after 
the FFY in which the capital funds are approved.
    (c) Vacancy days associated with a vacant unit prior to the time 
the unit meets the conditions of being a unit receiving section 9(d) 
Capital Funds, and vacancy days associated with a vacant unit after 
construction work has been completed or after the time period for 
placing the vacant unit under construction has expired, shall not be 
exempted from the computation of adjusted vacancy rate and unit 
turnaround time.
    (5) Vacancy days associated with units vacant during the 
assessment period due to circumstances and actions beyond a 
project's control. Circumstances and actions beyond a project's 
control may include, but are not limited to:
    (a) Litigation. Units that are vacant due to litigation, such as 
a court order or settlement agreement that is legally enforceable; 
units that are vacant in order to meet regulatory and statutory 
requirements to avoid potential litigation (as covered in a HUD-
approved PHA Annual Plan); and units under voluntary compliance 
agreements with HUD or other voluntary agreements acceptable to HUD 
(e.g., units that are being held vacant as part of a court-order, 
HUD-approved desegregation plan, or as part of a voluntary 
compliance agreement requiring modifications to the units to make 
them accessible pursuant to 24 CFR part 8);
    (b) Changing market conditions;
    (c) Disasters. Units that are vacant due to a federally 
declared, state-declared, or other declared disaster; or
    (d) Casualty losses. Damaged units that have sustained casualty 
damage and remain vacant due to delays in settling insurance claims, 
but only until the insurance claims are settled.
     Supporting documentation for section 9 Capital Fund 
program units. A project shall maintain information to support its 
determination of vacancy days associated with a vacant unit that 
meets the conditions of being a unit receiving section 9(d) Capital 
Funds under paragraph (4) of this section. The project shall, at a 
minimum, maintain:
    (1) The date on which the unit met the conditions of being a 
vacant unit receiving section 9(d) Capital Funds; and
    (2) The date on which construction work was completed or the 
time period for placing the vacant unit under construction expired.
     Supporting documents for vacancies beyond a project's 
control. A project shall

[[Page 49580]]

maintain information to support its determination of vacancy days 
associated with units vacant due to circumstances and actions beyond 
the project's control. This supporting information is subject to 
review and may be requested for verification purposes at any time by 
HUD. The project shall, at a minimum, maintain:
    (1) The date on which the unit met the conditions of being a 
unit vacant due to circumstances and actions beyond a project's 
control;
    (2) Documentation identifying the specific conditions that 
distinguish the unit as a unit vacant due to circumstances and 
actions beyond a project's control;
    (3) A description or list of the actions taken by a project to 
eliminate or mitigate these conditions; and
    (4) The date on which the unit ceased to meet such conditions 
and became an available unit.
    Component #5.1, Vacancy Rate. This component measures the 
average adjusted vacancy rate for the 12-calendar-month period as of 
the end of the calendar month before the management review of public 
housing projects begins (except as noted in grades C(3) and D(3)), 
and the project's progress in reducing vacancies.
     Adequacy of the system to track vacancy rate. It is 
implicit in this component that the project has an adequate system 
for tracking vacancy rate.
    Grade A: The project has:
    (1) An adjusted vacancy rate of 2 percent or less; or
    (2) For a project with fewer than 100 units, not more than the 
number of unit days for 2 units vacant for the entire year; and
    (3) An adequate system for tracking vacancy days.
    Grade B: The project has:
    (1) An adjusted vacancy rate of greater than 2 percent and less 
than or equal to 4 percent; and
    (2) An adequate system for tracking vacancy days.
    Grade C: The project:
    (1) Has an adjusted vacancy rate of greater than 4 percent and 
less than or equal to 6 percent; and
    (2) Has an adequate system for tracking vacancy days; or
    (3) Has:
    (A) An adjusted vacancy rate of greater than 6 percent and less 
than or equal to 10 percent; and
    (B) For the same calendar month 3 years prior, the adjusted 
vacancy rate was 16 percent or greater; and
    (C) An adequate system for tracking vacancy days.
    Grade D: The project:
    (1) Has an adjusted vacancy rate of greater than 6 percent and 
less than or equal to 10 percent; and
    (2) Has an adequate system for tracking vacancy days; or
    (3) Has:
    (A) An adjusted vacancy rate of greater than 10 percent and less 
than or equal to 14 percent;
    (B) An adjusted vacancy rate of 20 percent or greater for the 
same calendar month 3 years prior; and
    (C) An adequate system for tracking vacancy days.
    Grade F: The project:
    (1) Has an adjusted vacancy rate greater than 10 percent; or
    (2) Does not have an adequate system for tracking vacancy days.
    Component #5.2, Turnaround Time. This component examines the 
amount of time it takes a project to turn around units that were 
leased within the 12-calendar-month period as of the end of the 
calendar month before the management review of public housing 
projects begins.
     Adequacy of the system to track vacant unit turnaround 
time. It is implicit in this component that the project has an 
adequate system for tracking vacant unit turnaround time.
    Grade A: The project has:
    (1) Achieved a grade of A under component 5.1, vacancy rate; or
    (2) Turned around vacant units in an average of less than 15 
calendar days; and
    (3) An adequate system for tracking vacant unit turnaround days.
    Grade B: The project has:
    (1) Turned around vacant units in an average of at least 15 
calendar days but less than 20 calendar days; and
    (2) An adequate system for tracking vacant unit turnaround days.
    Grade C: The project has:
    (1) Turned around vacant units in an average of at least 20 
calendar days but less than 25 calendar days; and
    (2) An adequate system for tracking vacant unit turnaround days.
    Grade D: The project has:
    (1) Turned around vacant units in an average of at least 25 
calendar days but less than 30 calendar days; and
    (2) An adequate system for tracking vacant unit turnaround days.
    Grade F: The project:
    (1) Has turned around vacant units in an average of 30 calendar 
days or more; or
    (2) Does not have an adequate system for tracking vacant unit 
turnaround days.
    Component #5.3, Occupancy Review. This component addresses all 
of the activities and procedures necessary to house and retain 
occupancy eligible low-income families, including accepting and 
processing applications, selecting families for assistance, 
minimizing vacancies and unit turnaround time in public housing, 
ensuring that public housing families comply with program 
requirements, and properly computing income and rent. This component 
is not scored.
    Subindicator #6, Tenant/Management Relations. This subindicator 
evaluates the economic self-sufficiency opportunities provided for 
residents and the degree of resident involvement in the project's 
administration.
    Component #6.1, Economic Self-Sufficiency. This component 
evaluates--for the calendar month ending before the management 
review of public housing projects begins--employment, self-
sufficiency participation, and self-sufficiency opportunities 
provided for adult residents.
    This component excludes any adult who:
    (1) Is 62 years or older;
    (2)(i) Is a blind or disabled individual, as defined under 
216(i)(1) or 1614 of the Social Security Act (42 U.S.C. 416(i)(1); 
1382c), or
    (ii) Is a primary caretaker of such an individual;
    (3) Meets the requirements for being exempted from having to 
engage in a work activity under the state program funded under part 
A of title IV of the Social Security Act (42 U.S.C. 601 et seq.) or 
under any other welfare program of the state in which the PHA is 
located, including a state-administered welfare-to-work program; or
    (4) Is a member of a family receiving assistance, benefits, or 
services under a state program funded under part A of title IV of 
the Social Security Act (42 U.S.C. 601 et seq.) or under any other 
welfare program of the state in which the PHA is located, including 
a state administered welfare-to-work program, and has not been found 
by the state or other administering entity to be in noncompliance 
with such a program.
    Grade A: The project has: (1) At least 85 percent of its 
households with a head, spouse, or sole member that is an elderly 
person or a disabled person; or
    (2) At least 50 percent of its adult residents employed either 
full or part-time; or
    (3) At least 10 percent of its adult residents participating in 
a self-sufficiency program.
    Grade C: The project offers or coordinates with an outside 
agency to make available at least one economic self-sufficiency 
activity.
    Grade F: The project does not offer or coordinate with an 
outside agency to make available at least one economic self-
sufficiency activity.
    Component #6.2, Resident Involvement in Project Administration. 
This component evaluates, for the calendar month ending before the 
management review of public housing projects begins, the 
opportunities for resident involvement in project administration.
    Grade A: The project offers at least one opportunity for tenants 
to be involved in the administration of the project.
    Grade F: The project does not offer at least one opportunity for 
tenants to be involved in the administration of the project.
    Subindicator #7, General Management Practices. This subindicator 
tracks a project's ability to take appropriate actions to provide 
the information needed to close all findings resulting from any 
review of public housing projects. This subindicator is not scored.
    An asterisk (*) will be used to indicate that a project has an 
outstanding finding(s) from a prior management review or from the 
current management review. An asterisk (*) will also be used to 
indicate that a PHA has an outstanding finding(s) under the 
Management Operations Indicator from any prior review or from the 
current management review.
    Component #7.1, Management Review Findings. This component 
tracks a project's ability to take appropriate actions to provide 
the information needed to close all findings resulting from any 
prior HUD management review of public housing projects, by the due 
dates, and any finding(s) resulting from the current management 
review. For prior HUD management reviews, this component applies to 
reports with findings issued more than 75

[[Page 49581]]

days prior to the management review of public housing projects. This 
component is not scored.
    Component #7.2, Other Prior Review Findings. This component 
tracks a project's ability to take appropriate actions to provide 
the information needed to close all findings resulting from any 
review, including, but not limited to independent public accountant 
audits; Government Accountability Office reviews; HUD Inspector 
General reviews; and reviews based on the Guidance for the On-Site 
Limited Monitoring Review of Civil Rights Related Program 
Requirements (CRRPR) for Low-Rent Public Housing (LR) Program and 
Housing Choice Voucher (HCV) Program and based on the On-Site 
Limited Monitoring Review--Section 504 (OMB approval number 2577-
0251, expires May 31, 2010), by the due dates for closing the 
findings. This information will be used for civil rights and fair 
housing purposes to determine compliance with 24 CFR 5.105(a) and 24 
CFR 903.7(p). This component applies to reports with findings issued 
more than 75 days prior to the management review of public housing 
projects. This component is not scored.
    Component #7.3, Insurance. This component assesses whether a 
project has sufficient insurance coverage as applicable to the 
project. This component is not scored.

Elements of Scoring

A. Points and Threshold

    The Management Operations Indicator score is based on a maximum 
of 40 points. In order to receive a passing score under this 
indicator, a project must achieve at least 24 points or 60 percent 
of the available points available under this indicator.

B. Scoring Elements

    The Management Operations Indicator score provides an assessment 
of a project's management effectiveness. Under the PHAS Management 
Operations Indicator, HUD will calculate a score for each project, 
as well as for the overall management operations of a PHA, that 
reflects weights based on the relative importance of the individual 
management subindicators and components. The overall Management 
Operations Indicator score for a PHA is a unit-weighted average of 
the PHA's individual project management operations scores. In order 
to compute the score, an individual project management operations 
score is multiplied by the number of units in each project to 
determine a ``weighted value.'' The sum of the weighted values is 
then divided by the total number of units in a PHA's portfolio to 
derive the overall PHAS Management Operations Indicator score.
    The computation of the score under this PHAS indicator utilizes 
data obtained through a management review of public housing projects 
by HUD and requires four main calculations for the subindicators and 
components, which are:
     Scores are first calculated for each component, where 
applicable.
     Scores are then calculated for each subindicator, where 
applicable.
     A score is calculated for form HUD-5834, Management 
Review for Public Housing Projects, which is the project score.
     A score is calculated for the overall indicator score, 
which is a unit-weighted average of the individual project 
management operations scores.
    The calculations are performed on the basis of the following:
     The point value and/or grades of the subindicators and 
components that are listed in Table 2; and
     The point equivalent to the grades assigned for each 
component that are listed in Table 3.

                Table 2--Management Operations Indicator
------------------------------------------------------------------------
     Subindicator/component                 Grades               Points
------------------------------------------------------------------------
1, General Appearance   ............................        6.0
 and Security.
    1.1 Appearance and Market    A, C, F.....................        5.0
     Appeal.
    1.2 Security...............  A, C, F.....................        1.0
2, Follow-Up and        Not Scored..................  .........
 Monitoring of Project
 Inspections.
    2.1 Exigent Health and       Not Scored..................        N/S
     Safety (EHS) Deficiencies.
    2.2 Lead-Based Paint (LBP)   Not Scored..................        N/S
     Inspection Deficiencies.
3, Maintenance and      ............................        6.0
 Modernization.
    3.1 Unit Inspections.......  A, C, F.....................        1.0
    3.2 Work Orders............  A, C, F.....................        3.0
    3.3 Preventive Maintenance.  A, C, F.....................        1.0
    3.4 Energy Conservation/     A, C, F.....................        1.0
     Utility Consumption.
    3.5 Modernization..........  Not Scored..................        N/S
4, Financial            ............................        8.0
 Management.
    4.1 Percentage of Accounts   A, C, F.....................        4.0
     Payable.
    4.2 Rent Collection........  A, C, F.....................        4.0
    4.3 Budget Management......  Not Scored..................        N/S
    4.4 Procurement............  Not Scored..................        N/S
5, Leasing and          ............................       18.0
 Occupancy.
    5.1 Vacancy Rate...........  A, B, C, D, F...............       16.0
    5.2 Turnaround Time........  A, B, C, D, F...............        2.0
    5.3 Occupancy Review.......  Not Scored..................        N/S
6, Tenant/Management    ............................        2.0
 Relations.
    6.1 Economic Self-           A, C, F.....................        1.0
     Sufficiency.
    6.2 Resident Involvement in  A, F........................        1.0
     Project Administration.
7, General Management   Not Scored..................        N/S
 Practices.
    7.1 Management Review        Not Scored..................        N/S
     Findings.
    7.2 Other Prior Review       Not Scored..................        N/S
     Findings.
    7.3 Insurance..............  Not Scored..................        N/S
                                                              ----------
        Total..................  ............................       40.0
------------------------------------------------------------------------

    The grades for each component are assigned values to indicate 
the percentage of the component points that will be awarded in the 
calculation. The assigned values for the grades, which are listed in 
Table 3, are the same for each component. For example, a project 
with a grade of C for vacancy rate will receive 70 percent of the 
component points of 16, for a score of 11.20 for the component.

                        Table 3--Possible Grades
------------------------------------------------------------------------
                            Grade                                Points
------------------------------------------------------------------------
A............................................................       1.00
B............................................................       0.85
C............................................................       0.70
D............................................................       0.50

[[Page 49582]]

 
F............................................................       0.00
------------------------------------------------------------------------

C. Scoring of Component 1.1, Appearance and Market Appeal

    The scoring for component 1.1 has a base calculation 
different from the other components. The project is assessed in the 
following 12 categories:
    (1) Project entrance;
    (2) Landscaping;
    (3) Building exterior;
    (4) Graffiti;
    (5) Paved surfaces;
    (6) Public spaces and amenities;
    (7) Fencing, railing, porches, overhangs, and ramps;
    (8) Windows;
    (9) Overall project appearance;
    (10) Debris;
    (11) Trash receptacles; and
    (12) Units.
    A Superior Performance in a category is valued at two points; a 
Satisfactory Performance in a category is valued at one point; and 
an Unsatisfactory Performance in a category is valued at zero 
points.
    A project's score in appearance and market appeal may be a 
single project-wide assessment, or may be a compilation of multiple 
assessments of one or more of the individual sites that comprise the 
project.
    Project-wide assessment: For a project-wide assessment, the 
project as a whole receives a single assessment in each of the 12 
categories listed above. For any given assessment, one or more of 
these categories may be excluded if they do not apply to a 
particular project. The total points earned for all of the 
categories for which a PHA is assessed is divided by the maximum 
points possible to determine the grade equivalent for this 
component. The maximum points possible are determined by identifying 
the total number of criteria that were not excluded and multiplying 
that number by two points.
    Example 1: A project is assessed in all 12 categories for a 
maximum of 24 possible points. If the project achieves a total of 22 
points, the 22 points are divided by 24 points, which equals 91.67 
percent, or a grade of A.
    Example 2: A project is not assessed under public spaces and 
amenities for a total of 11 categories and a maximum of 22 possible 
points. If the project achieves a total of 15 points, the 15 points 
are divided by 22 points, which equals 68.18 percent, or a grade of 
C.

    Multiple site assessment: A project may be comprised of two or 
more discreet, individual sites. HUD may elect to assess one or more 
of these sites individually. If so, each site assessed will be 
assessed in each of the 12 categories listed above. For any given 
reason, one or more of these categories may be excluded if they do 
not apply to a particular site. The total points earned for all of 
the categories for which a site is assessed is divided by the 
maximum points possible to determine the overall score for each 
site. The maximum points possible are determined by identifying the 
total number of criteria that were not excluded and by multiplying 
the number by two points, as described above.
    All individual site assessments will be combined to produce a 
single project-wide assessment score in each of the 12 categories, 
as follows:
    (1) The site-specific scores for each category will be averaged 
to determine a unit-weighted average project-wide score for each 
category. Any category that is excluded from the assessment at all 
sites will also be excluded from the project-wide assessment.
    (2) All average project-wide scores in all categories will be 
summed to determine the unit-weighted overall project-wide total 
points. These points will be divided by the maximum points possible 
to determine the grade equivalent for this component. The maximum 
points possible are determined by identifying the total number of 
non-excluded criteria from all site assessments and by multiplying 
that number by 2 points.

D. Scoring of Component 5.3, Occupancy Review

    The questions listed under this component on form HUD-5834, 
Management Review for Public Housing Projects, cannot be completed 
unless form HUD-5834-A, Tenant File Review, and form HUD-5834-B, 
Upfront Income Verification Review, have been completed. This 
component is not scored, and forms HUD-5834-A and HUD-5834-B are not 
scored.

E. Example of Score Computations

    The indicator score equals the sum of the subindicator scores, 
as shown in Table 4. The indicator score for a project is rounded to 
two decimal places. The indicator score for a PHA is rounded to the 
nearest whole number. The subindicator scores equal the sum of the 
component scores.

                       Table 4--Example Assessment of the Management Operations Indicator
----------------------------------------------------------------------------------------------------------------
     Subindicator/Component         Points      Grade      Value               Calculations              Score
----------------------------------------------------------------------------------------------------------------
1, General Appearance          6.0                                                                 4.50
 and Security.
----------------------------------------------------------------------------------------------------------------
    1.1 Appearance and Market           5.0           C        .70  (5.0) x (.70) = 3.50.............       3.50
     Appeal.
----------------------------------------------------------------------------------------------------------------
    1.2 Security................        1.0          A        1.00  (1.0) x (1.0) = 1.00.............       1.00
----------------------------------------------------------------------------------------------------------------
2, Follow-Up and               0.0                         Not Scored                               N/S
 Monitoring of Project
 Inspections.
----------------------------------------------------------------------------------------------------------------
    2.1 Exigent Health and              0.0                         Not Scored                               N/S
     Safety (EHS) Deficiencies.
----------------------------------------------------------------------------------------------------------------
    2.2 Lead-Based Paint (LBP)          0.0                         Not Scored                               N/S
     Inspection Deficiencies.
----------------------------------------------------------------------------------------------------------------
3, Maintenance and             6.0                                                                 5.10
 Modernization.
----------------------------------------------------------------------------------------------------------------
    3.1 Unit Inspections........        1.0           C        .70  (1.0) x (.70) = .70..............        .70
----------------------------------------------------------------------------------------------------------------
    3.2 Work Orders.............        3.0          A        1.00  (3.0) x (1.0) = 3.00.............       3.00
----------------------------------------------------------------------------------------------------------------
    3.3 Preventive Maintenance..        1.0           C        .70  (1.0) x (.70) = .70..............        .70
----------------------------------------------------------------------------------------------------------------
    3.4 Energy Conservation/            1.0           C        .70  (1.0) x (.70) = .70..............        .70
     Utility Consumption.
----------------------------------------------------------------------------------------------------------------
    3.5 Modernization...........        0.0                         Not Scored                               N/S
----------------------------------------------------------------------------------------------------------------
4, Financial Management        8.0                                                                 5.60
----------------------------------------------------------------------------------------------------------------
    4.1 Percentage of Accounts          4.0           C        .70  (4.0) x (.70) = 2.80.............       2.80
     Payable.
----------------------------------------------------------------------------------------------------------------
    4.2 Rent Collection.........        4.0           C        .70  (4.0) x (.70) = 2.80.............       2.80
----------------------------------------------------------------------------------------------------------------

[[Page 49583]]

 
    4.3 Budget Management.......        0.0                         Not Scored                               N/S
----------------------------------------------------------------------------------------------------------------
    4.4 Procurement.............        0.0                         Not Scored                               N/S
----------------------------------------------------------------------------------------------------------------
5, Leasing and                18.0                                                                 9.40
 Occupancy.
----------------------------------------------------------------------------------------------------------------
    5.1 Vacancy Rate............       16.0          D         .50  (16.0) x (.50) = 8.00............       8.00
----------------------------------------------------------------------------------------------------------------
     5.2 Turnaround Time........        2.0           C        .70  (2.0) x (.70) = 1.40.............       1.40
----------------------------------------------------------------------------------------------------------------
    5.3 Occupancy Review........        0.0                         Not Scored                                NS
----------------------------------------------------------------------------------------------------------------
6, Tenant/Management           2.0                                                                 1.70
 Relations.
----------------------------------------------------------------------------------------------------------------
    6.1 Economic Self-                  1.0           C        .70  (1.0) x (.70) = .70..............        .70
     Sufficiency.
----------------------------------------------------------------------------------------------------------------
    6.2 Resident Involvement in         1.0          A        1.00  (1.0) x (1.0) = 1.00.............       1.00
     Project Administration.
----------------------------------------------------------------------------------------------------------------
7, General Management          0.0                         Not Scored                               N/S
 Practices.
----------------------------------------------------------------------------------------------------------------
    7.1 Finding Correction:             0.0                         Not Scored                               N/S
     Management Review Findings.
----------------------------------------------------------------------------------------------------------------
    7.2 Finding Correction:             0.0                         Not Scored                               N/S
     Other Prior Review Findings.
----------------------------------------------------------------------------------------------------------------
    7.3 Insurance...............        0.0                         Not Scored                               N/S
----------------------------------------------------------------------------------------------------------------
        Total Points............  .........  ..........  .........  .................................      26.30
----------------------------------------------------------------------------------------------------------------

F. Scoring Projects During the First Year and Subsequent Years of 
Implementation Under the New PHAS

    During the first year of implementation under the new PHAS, a 
PHA's Management Operations Indicator score of record will be 
converted to the 40-point value if a project does not have a 
management review during the first year. Table 5 shows the 
conversion from a 30-point value to a 40-point value.

                                                Table 5--Conversion from 30-Point Value to 40-Point Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
30-Pt. Value....................     30      29      28      27      26      25      24      23      22      21      20      19      18      17      16
--------------------------------------------------------------------------------------------------------------------------------------------------------
40-Pt. Value....................   40.0    38.7    37.3    36.0    34.7    33.3    32.0    30.7    29.3    28.0    26.7    25.3    24.0    22.7    21.3
========================================================================================================================================================
30-Pt. Value....................     15      14      13      12      11      10       9       8       7       6       5       4       3       2       1
--------------------------------------------------------------------------------------------------------------------------------------------------------
40-Pt. Value....................   20.0    18.7    17.3    16.0    14.7    13.3    12.0    10.7     9.3     8.0     6.7     5.3     4.0     2.7     1.3
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The score that will be used is the PHA's most recent score of 
record. Table 6 includes an example of how scoring will be computed 
during the first year of implementation of the new PHAS, with each 
project having 100 units.

                                  Table 6--First Year of Implementation Scoring
----------------------------------------------------------------------------------------------------------------
                                                             PHA's 30-point                       First year of
                 Project                     Management      value score of   Conversion to 40-  implementation
                                            review score         record          point value         scoring
----------------------------------------------------------------------------------------------------------------
1.......................................               0.0              24.0              32.0              32.0
2.......................................              27.0               0.0               0.0              27.0
3.......................................              36.0               0.0               0.0              36.0
----------------------------------------------------------------------------------------------------------------
    Overall Total: First Year of Implementation PHAS Scoring..................................              31.7
----------------------------------------------------------------------------------------------------------------

    During the second year of implementation under the new PHAS, a 
PHA's score of record will be converted to the 40-point value if a 
project does not have a management review during the first or second 
years. The score that will be used is the PHA's most recent score of 
record. Table 7 includes an example of how scoring will be computed 
during the second year of implementation of the new PHAS, with each 
project having 100 units. In this example, every project has 
received a management review.

[[Page 49584]]



                                 Table 7--Second Year of Implementation Scoring
----------------------------------------------------------------------------------------------------------------
                                                             PHA's 30-point                      Second year of
                 Project                     Management      value score of   Conversion to 40-  implementation
                                            review score         record          point value          score
----------------------------------------------------------------------------------------------------------------
1.......................................              36.0               0.0               0.0              36.0
2.......................................              32.0               0.0               0.0              32.0
3.......................................              37.0               0.0               0.0              37.0
----------------------------------------------------------------------------------------------------------------
    Overall Total: Second Year of Implementation PHAS Scoring.................................              35.0
----------------------------------------------------------------------------------------------------------------

    For subsequent years, the most recent management review score 
for a project will be used for a project's management operations 
score, or the most recent score of record will be used. The most 
recent management operations scores for all projects will be used to 
calculate a PHA's overall management operations score.

G. Examples of Score Computations for the Redistribution of Points

     An example of computing a subindicator score with a 
non-assessed component. When a non-assessed component exists, the 
value of the component shall be redistributed proportionally across 
the components that have been assessed within the same subindicator 
in order to maintain the same scoring ratios. To redistribute the 
points for a non-assessed component, each assessed component shall 
be multiplied by the total possible points for the subindicator and 
divided by the total points of the assessed components, as shown in 
Table 8.

                          Table 8--Example of a Redistribution of Points Within the Maintenance and Modernization Subindicator
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Total     Assessed
             Component               possible      comp.        Redistribution       Redis.       Grade       Grade      Score calculation       Comp.
                                      points      points         calculation         points                   value                              score
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.1 Unit Inspections..............         1.0         1.0  (1.0 x 6.0)/5.0......        1.20           F         0.0  1.20 x 0.0...........        0.00
3.2 Work Orders...................         3.0         3.0  (3.0 x 6.0)/5.0......        3.60           A         1.0  3.60 x 1.0...........        3.60
3.3 Prev. Maint...................         1.0         1.0  (1.0 x 6.0)/5.0......        1.20           C         0.7  1.20 x 0.7...........        0.84
3.4 Energy/Utility................         1.0         N/A  N/A..................         N/A         N/A         N/A  N/A..................         N/A
3.5 Mod...........................         0.0         N/S  N/S..................         N/S         N/S         N/S  N/S..................         N/S
                                   ---------------------------------------------------------------------------------------------------------------------
    Total Points..................         6.0         5.0  .....................         6.0  ..........  ..........  .....................        4.44
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In the example in Table 8, the energy/utility component under 
maintenance is not assessed. To redistribute the energy/utility 
points, each assessed component must be multiplied by the total 
possible points for the subindicator (6), and divided by the total 
possible points of the assessed components (5). The redistributed 
value of the total possible points for the preventive maintenance 
component is calculated to be 1.20 points. In the example, the 
project has received a grade of C for preventive maintenance and the 
project then receives 70 percent of the redistributed point value 
for preventive maintenance. As shown in Table 8, 70 percent of 1.20 
equals 0.84 points. The maintenance subindicator score is then 
computed by summing the redistributed components, thus making the 
final score for the maintenance subindicator 4.44 points.
     An example of computing the Management Operations 
Indicator score for a project excluding the tenant/management 
relations subindicator. Table 9 provides an example for the 
calculation of the Management Operations Indicator score when the 
tenant/management relations subindicator has not been assessed. When 
a non-assessed subindicator exists, the value of the non-assessed 
subindicator shall be redistributed proportionally across the 
subindicators that have been assessed. To redistribute the tenant/
management relations subindicator points, each assessed subindicator 
shall be multiplied by the total possible points for the Management 
Operations Indicator (40), and divided by the total possible points 
of the assessed subindicators (38). The final Management Operations 
Indicator score is derived by summing the redistributed subindicator 
points.

                               Table 9--Example of the Exclusion of a Subindicator
----------------------------------------------------------------------------------------------------------------
                                                Total possible      Actual                         Redistributed
         Subindicator           Total possible     assessed      subindicator     Redistributed    subindicator
                                    points          points           score         calculation        points
----------------------------------------------------------------------------------------------------------------
General Appearance and                     6.0             6.0            3.00  (3.00 x 40)/38..            3.16
 Security.
Maintenance and Modernization.             6.0             6.0            4.44  (4.44 x 40)/38..            4.67
Financial Management..........             8.0             8.0            8.00  (8.00 x 40)/38..            8.42
Leasing and Occupancy.........            18.0            18.0           18.00  (18.0 x 40)/38..           18.95
Tenant/Management Relations...             2.0             N/A             N/A  N/A.............             N/A
                               ---------------------------------------------------------------------------------
    Total Points..............            40.0            38.0  ..............  ................           35.20
----------------------------------------------------------------------------------------------------------------

     An example of rescaling components so that the sum of 
components equals a redistributed subindicator. In the previous 
example, the subindicator points were redistributed because the 
tenant/management relations subindicator was not assessed. After the 
subindicator points were redistributed, the component points 
comprising the subindicator no longer added up to the redistributed 
value of the subindicator. Therefore, a calculation must be 
performed to rescale the components of subindicators that were 
assessed so that those components add up to the redistributed 
subindicators. Table 10 contains an example of rescaling the 
maintenance subindicator components so that they add up to the 
redistributed maintenance subindicator. In Table 10, each

[[Page 49585]]

component is rescaled by multiplying by a factor of 40 (total 
possible points), divided by 38 (total assessed points). The 
rescaled component values add up to 4.67 points, which are the 
redistributed subindicator points for the maintenance subindicator.

                                  Table 10--Example of Rescaling of Components
----------------------------------------------------------------------------------------------------------------
                                                                     Component rescaling       Component values
                 Component                    Component value            calculation            after rescaling
----------------------------------------------------------------------------------------------------------------
Unit Inspections..........................                0.00  0.00 x (40/38)..............                0.00
Work Orders...............................                3.60  3.60 x (40/38)..............                3.79
Preventive Maint..........................                0.84  0.84 x (40/38)..............                 .88
Energy/Utility............................                 N/A  N/A.........................                 N/A
Modernization.............................                 N/S  N/S.........................                 N/S
                                           ---------------------------------------------------------------------
    Total Points..........................                4.44  ............................                4.67
----------------------------------------------------------------------------------------------------------------

H. Physical Condition and/or Neighborhood Environment

    The overall management operations score for a project will be 
adjusted upward to the extent that negative conditions are caused by 
situations outside the control of the project. These situations are 
related to the poor physical condition of the project or the overall 
depressed condition of the major census tract in which a project is 
located. The intent of this adjustment is to avoid penalizing 
projects through appropriate application of the adjustment. In 
addition, the overall PHA Management Operations Indicator score will 
be adjusted upward to reflect the individual project adjustments.
    Definitions and application of physical condition and 
neighborhood environment factors are:
    (1) A physical condition adjustment applicable to projects at 
least 28 years old, based on the unit-weighted average Date of Full 
Availability (DOFA) date.
    (2) A neighborhood environment adjustment applicable to projects 
in census tracts in which at least 40 percent of the families have 
an income below the poverty rate, as documented by the most recent 
census data. If a project is in more than one census tract, the 
census data for the census tract where the majority of units are 
located shall be used. If there is no census tract data available 
for a project, the census data for that project will be based on the 
county's census data, and if county data is not available, then the 
state census data will be used.
     Adjustment for physical condition and neighborhood 
environment. HUD will adjust the overall management operations score 
of a project subject to one or both of the physical condition and 
neighborhood environment conditions. The adjustments will be made to 
the individual project scores, and then to the overall management 
operations score, so as to reflect the difficulty in managing the 
projects.
    The adjustment for physical condition and neighborhood 
environment will be calculated by HUD and applied to all eligible 
projects. The data to determine if a project is eligible for either 
adjustment will be derived from the Public and Indian Housing 
Information Center databases.
    In each instance where the actual management operations score 
for a project is rated below the maximum score of 40 points, one 
unit-weighted point each will be added for physical condition and/or 
neighborhood environment, but not to exceed the maximum number of 40 
points available for the Management Operations Indicator for a 
project. Table 11 shows an example of the calculation of physical 
condition and/or neighborhood environment points for a hypothetical 
PHA with four projects. The adjustment for physical condition and/or 
neighborhood environment is a unit-weighted average of a PHA's 
individual project physical condition and/or neighborhood 
environment adjustments.

            Table 11--Calculation of Physical Condition and/or Neighborhood Environment (PCNE) Points
----------------------------------------------------------------------------------------------------------------
                                                          Proj.       Proj.       Proj.       Proj.
              Line                      Project        1  2  3  4  Total PHA
----------------------------------------------------------------------------------------------------------------
1..............................  Units...............         133          65          89          25         12
----------------------------------------------------------------------------------------------------------------
2..............................  Weight..............       42.6%       20.8%       28.5%        8.0%     100.0%
================================================================================================================
3..............................  Physical Condition             1           1           1           0  .........
                                  Points.
----------------------------------------------------------------------------------------------------------------
4..............................  Neighborhood                   1           1           0           0  .........
                                  Environment Points.
----------------------------------------------------------------------------------------------------------------
5..............................  Total PCNE Points at           2           2           1           0  .........
                                  Project Level.
================================================================================================================
6..............................  Weighted Physical           0.43        0.21        0.29        0.00       0.92
                                  Condition Points.
----------------------------------------------------------------------------------------------------------------
7..............................  Weighted                    0.43        0.21        0.00        0.00       0.63
                                  Neighborhood
                                  Environment Points.
----------------------------------------------------------------------------------------------------------------
8..............................  Weighted PCNE Points        0.85        0.42        0.29        0.00       1.55
----------------------------------------------------------------------------------------------------------------

    This PHA has 312 total units in four projects (see line 1). The 
weight of each project is based on units and is calculated by 
dividing the project units into the total PHA units (see line 2). 
Project 1 and project 2 qualify for both points; 
project 3 qualifies for only physical condition; and 
project 4 does not qualify for any points (see lines 3 
through 5). Each project contributes its physical condition and/or 
neighborhood environment points to the overall PHA Management 
Operations Indicator score based on its weight. For example, in 
project 1, the weighted physical condition and neighborhood 
environment point is 0.85 and is calculated by multiplying the 
project weight of 42.6 percent (line 2) by the physical condition 
and neighborhood environment point of 2 (see line 5). The overall 
physical condition and neighborhood environment adjustment at the 
PHA level is calculated at 1.55 points by adding the individual 
project weighted scores (see line 8 under the Total PHA column).

Appendix D to Part 902--Capital Fund Scoring

I. Purpose of This Appendix

    This appendix provides information about the scoring process for 
PHAS Indicator 4, Capital Fund program. The purpose of the 
Capital Fund program assessment is to

[[Page 49586]]

examine the period of time it takes a PHA to obligate and expend the 
funds provided to a PHA from the Capital Fund program under section 
9(j) of the Act (42 U.S.C. 1437g(9)(j)). Funds from the Capital Fund 
program under section 9(d) of the 1937 Act (42 U.S.C. 1437g(d)(2)) 
do not include HOPE VI program funds.
    This indicator is not applicable for PHAs that choose not to 
participate in the Capital Fund program under section 9(d) of the 
1937 Act. This indicator is applicable on a PHA-wide basis, and not 
to individual projects.
    The assessment required under the PHAS Capital Fund program 
indicator will be performed through analysis of obligated and 
expended amounts in HUD's electronic Line of Credit Control System 
(e-LOCCS) (or its successor) for all Capital Fund program grants 
that were open during a PHA's assessed fiscal year. Of the total 100 
points available for a PHAS score, a PHA may receive up to 10 points 
based on the Capital Fund program indicator. Scoring for this 
indicator will be dependent on the amount of time it takes a PHA to 
obligate and expend its capital funds. If a PHA has no obligation 
end dates or no expenditure end dates in the assessed fiscal year, 
and does not have any Sec.  9(j) of the 1937 Act sanctions against 
it, the points for that subindicator will be redistributed to the 
remaining subindicator.

II. Subindicators

    A. Subindicators of Capital Fund Program Indicator. The two 
subindicators of the Capital Fund program indicator are:
     Timeliness of fund obligation; and
     Timeliness of fund expenditure.
    B. Grades for Capital Fund Program Indicator. This indicator 
measures the statutory requirements for the Capital Fund program.
    Subindicator #1, Timeliness of Fund Obligation. This 
subindicator examines the period of time it takes for a PHA to 
obligate funds from the Capital Fund program under section 9(j)(1) 
of the 1937 Act (42 U.S.C. 1437g(9)(j)). HUD may extend the period 
of time for the obligation of funds in accordance with 24 CFR 
905.120 and section 9(j)(2) of the 1937 Act.
    Grade A: The PHA has obligated 90 percent or more of the grant 
amount for all of its grants on its obligation end date for all open 
Capital Fund program grants that have obligation end dates during 
the assessed fiscal year and does not have any grants that have been 
sanctioned pursuant to Sec.  9(j) of the 1937 Act during the 
assessed fiscal year.
    Grade F: The PHA has obligated less than 90 percent of the grant 
amount for any of its open grants on the obligation end date during 
the assessed fiscal year or is undergoing sanctions as per Section 
III of this appendix D.
    Subindicator #2, Timeliness of Fund Expenditure. This 
subindicator examines the period of time it takes for a PHA to 
expend funds from the Capital Fund program under section 9(j)(5) of 
the 1937 Act.
    Grade A: The PHA has:
    (1) Expended 100 percent of the grant amount for all of its 
grants on the expenditure end date for all Capital Fund program 
grants that have an expenditure end date within a PHA's assessed 
fiscal year; or
    (2) A remaining balance of one percent or less of the grant 
amount or $1,000 or less of the grant amount (whichever is smaller) 
for all Capital Fund program grants that have an expenditure end 
date within a PHA's assessed fiscal year.
    Grade F: The PHA has a remaining balance of greater than one 
percent of the grant amount or more than $1,000 of the grant amount 
(whichever is smaller) for all Capital Fund program grants that have 
an expenditure end date within a PHA's assessed fiscal year.

III. Sanctions

    Sanctions for the obligation and expenditure of funds, and HUD's 
right to recapture funds are in accordance with 24 CFR 905.120. If a 
PHA has been sanctioned during the assessment period, the PHA will 
receive an automatic grade of ``F'' for the timeliness of fund 
obligation, the timeliness of fund expenditure, or both, as 
appropriate.

IV. Elements of Scoring

    A. Points and Threshold. The Capital Fund program indicator is 
based on a maximum of 10 points. In order to receive a passing score 
under this indicator, a PHA must achieve at least 6 points or 60 
percent of the available points under this indicator.
    B. Scoring Elements. The Capital Fund program indicator score 
provides an assessment of a PHA's ability to obligate and expend 
Capital Fund program funds in a timely manner. The computation of 
the score under this PHAS indicator utilizes data obtained through 
analysis of obligated and expended amounts in HUD's e-LOCCS (or its 
successor) for all Capital Fund program grants that were open during 
the assessed fiscal year and requires two main calculations, which 
are:
     Scores are first calculated for each subindicator.
     From the two subindicator scores, an indicator score is 
then calculated.
    The two calculations are performed based on:
     The point value of the two subindicators, which are 
listed in Table 1; and
     The point equivalent to the grades assigned for each 
subindicator, which are listed in Table 2.

          Table 1--Capital Fund Program Subindicator and Points
------------------------------------------------------------------------
                         Subindicator                            Points
------------------------------------------------------------------------
Timeliness of Fund Obligation................................          5
Timeliness of Fund Expenditure...............................          5
------------------------------------------------------------------------

    The grades for each subindicator are assigned point equivalent 
values to indicate the percentage of the subindicator points that 
will be awarded in the calculation. The assigned point equivalent 
values for the grades, which are listed in Table 2, are the same for 
each subindicator. For example, a PHA with a grade of A for 
timeliness of fund obligation will receive all of the subindicator 
points of 5, for a score of 5.0 for the subindicator.

                        Table 2--Possible Grades
------------------------------------------------------------------------
                                                                 Point
                            Grade                                value
------------------------------------------------------------------------
A............................................................       1.00
F............................................................       0.00
------------------------------------------------------------------------

    C. Example of Score Computations. The indicator score equals the 
sum of the subindicator scores, as shown in Table 3.

                        Table 3--Example Assessment of the Capital Fund Program Indicator
----------------------------------------------------------------------------------------------------------------
                                                                   Point
            Subindicator                 Points       Grade        value          Calculations          Score
----------------------------------------------------------------------------------------------------------------
Timeliness of Fund Obligation.......            5            A         1.00  (5.0) x (1.0) = 5.0...          5.0
Timeliness of Fund Expenditure......            5            A         1.00  (5.0) x (1.0) = 5.0...          5.0
----------------------------------------------------------------------------------------------------------------
    Total Points...................................................................................         10.0
----------------------------------------------------------------------------------------------------------------

    D. PHA Responsibility. PHAs are responsible for ensuring that 
their Capital Fund program information is submitted to e-LOCCS by 
the submission due date. A PHA may not appeal its PHAS and/or 
Capital Fund program score based on the fact that it did not submit 
its Capital Fund program information to e-LOCCS by the submission 
due date. PHAs shall retain supporting documentation for the Capital 
Fund program for at least 3 years.

    3. Part 907 is added to read as follows:

PART 907--SUBSTANTIAL DEFAULT BY A PUBLIC HOUSING AGENCY

Sec.
907.1 Purpose and scope.
907.3 Bases for substantial default.
907.5 Procedures for declaring substantial default.
907.7 Remedies for substantial default.

    Authority: 42 U.S.C. 1437d(j), 42 U.S.C. 3535(d).

[[Page 49587]]

Sec.  907.1  Purpose and scope.

    This part provides the criteria and procedures for determining and 
declaring substantial default by a public housing agency (PHA) and the 
actions available to HUD to address and remedy substantial default by a 
PHA. Nothing in this part shall limit the discretion of HUD to take any 
action available under the provisions of section 6(j)(3)(A) of the 1937 
Act (42 U.S.C. 1437d(j)(3)(A)), any applicable annual contributions 
contract (ACC), or any other law or regulation that may authorize HUD 
to take actions against a PHA that is in substantial default.


Sec.  907.3  Bases for substantial default.

    (a) Violations of laws and agreements. A PHA may be declared in 
substantial default when the PHA:
    (1) Violates a federal statute;
    (2) Violates a federal regulation; or
    (3) Violates one or more terms of an ACC, or other covenants or 
conditions to which the PHA is subject.
    (b) Failure to act. In addition to the violations listed in 
paragraph (a) of this section, in the case where a PHA is designated as 
a troubled performer under PHAS, the PHA shall be in substantial 
default if the PHA:
    (1) Fails to execute an MOA;
    (2) Fails to comply with the terms of an MOA; or
    (3) Fails to show substantial improvement, as provided in Sec.  
902.75(d).


Sec.  907.5  Procedures for declaring substantial default.

    (a) Notification of finding of substantial default. If the PHA is 
found in substantial default, the PHA shall be notified of such 
determination in writing. Except in situations as described in 
paragraph (d) of this section, the PHA shall have an opportunity to 
respond to the written determination, and an opportunity to cure the 
default, if a cure of the default is determined appropriate by HUD. The 
determination of substantial default shall be transmitted to the 
Executive Director of the PHA, the Chairperson of the Board of the PHA, 
and the appointing authority(ies) of the PHA's Board of Commissioners, 
and shall:
    (1) Identify the specific statute, regulation, covenants, 
conditions, or agreements of which the PHA is determined to be in 
violation;
    (2) Identify the specific events, occurrences, or conditions that 
constitute the violation;
    (3) Specify the time period, which shall be a period of 10 but not 
more than 30 days, during which the PHA shall have an opportunity to 
demonstrate that the determination or finding is not substantively 
accurate, if required;
    (4) If determined by HUD to be appropriate, provide for an 
opportunity to cure and specify the time period for the cure; and
    (5) Notify the PHA that, absent a satisfactory response in 
accordance with paragraph (b) of this section, action shall be taken as 
determined by HUD to be appropriate.
    (b) Receipt of notification and response. Upon receipt of the 
notification described in paragraph (a) of this section, the PHA may 
submit a response, in writing and within the specified time period, 
demonstrating:
    (1) The description of events, occurrences, or conditions described 
in the written determination of substantial default is in error, or 
establish that the events, occurrences, or conditions described in the 
written determination of substantial default do not constitute 
noncompliance with the statute, regulation, covenants, conditions, or 
agreements that are cited in the notification under paragraph (a) of 
this section; or
    (2) If any opportunity to cure is provided, that the violations 
have been cured or will be cured in the time period specified by HUD.
    (c) Waiver of notification and the opportunity to respond. A PHA 
may waive, in writing, receipt of written notification from HUD of a 
finding of substantial default and the opportunity to respond to such 
finding. HUD may then immediately proceed with the remedies as provided 
in Sec.  907.7.
    (d) Emergency situations. A PHA shall not be afforded the 
opportunity to respond to a written determination or to cure a 
substantial default in any case where:
    (1) HUD determines that conditions exist that pose an imminent 
threat to the life, health, or safety of public housing residents or 
residents of the surrounding neighborhood; or
    (2) The events or conditions precipitating the default are 
determined to be the result of criminal or fraudulent activity.


Sec.  907.7  Remedies for substantial default.

    (a) Except as provided in Sec.  907.7(c), upon determining that 
events have occurred or conditions exist that constitute a substantial 
default, HUD may:
    (1) Take any action provided for in section 6(j)(3) of the Act (42 
U.S.C. 1437d(j)(3));
    (2) Provide technical assistance for existing PHA management staff; 
or
    (3) Provide assistance deemed necessary, in the discretion of HUD, 
to remedy emergency conditions.
    (b) HUD may take any of the actions described in paragraph (a) of 
this section sequentially or simultaneously in any combination.
    (c) In the case of a substantial default by a troubled PHA pursuant 
to Sec.  902.83(b):
    (1) For a PHA with 1,250 or more units, HUD shall petition for the 
appointment of a receiver pursuant to section 6(j)(3)(A)(ii) of the 
1937 Act (42 U.S.C. 1437d(j)(3)(A)(ii)); or
    (2) For a PHA with fewer than 1,250 units, HUD shall either 
petition for the appointment of a receiver pursuant to section 
6(j)(3)(A)(ii) of the Act (42 U.S.C. 1437d(j)(3)(A)(ii)), or take 
possession of the PHA (including all or part of any project or program 
of the PHA) pursuant to section 6(j)(3)(A)(iv) of the 1937 Act (42 
U.S.C. 1437d(j)(3)(A)(iv)), and appoint, on a competitive or 
noncompetitive basis, an individual or entity as an administrative 
receiver to assume the responsibilities of HUD for the administration 
of all or part of the PHA (including all or part of any project or 
program of the PHA).
    (d) To the extent feasible, while a PHA is operating under any of 
the actions that may have been taken by HUD, all services to residents 
will continue uninterrupted.
    (e) HUD may limit remedies under this part to one or more of a 
PHA's specific operational areas (e.g., maintenance, capital 
improvement, occupancy, or financial management), to a single program 
or group of programs, or to a single project or a group of projects. 
For example, HUD may select, or participate in the selection of, an AME 
to assume management responsibility for a specific project, a group of 
projects in a geographical area, or a specific operational area, while 
permitting the PHA to retain responsibility for all programs, 
operational areas, and projects not so designated.

    Dated: July 14, 2008.
Paula O. Blunt,
General Deputy Assistant Secretary for Public and Indian Housing.
 [FR Doc. E8-18753 Filed 8-20-08; 8:45 am]
BILLING CODE 4210-67-P