[Federal Register Volume 75, Number 11 (Tuesday, January 19, 2010)]
[Rules and Regulations]
[Pages 2800-2820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-925]


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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

[Docket ID FEMA-2005-0051]

44 CFR Part 206

RIN 1660-AA44


Special Community Disaster Loans Program

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Final rule.

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SUMMARY: The Federal Emergency Management Agency (FEMA) is amending its 
Special Community Disaster Loan Program regulations to establish loan 
cancellation provisions. The Special Community Disaster Loan Program, 
and these cancellation provisions, apply to communities in the Gulf 
Coast region who received Special Community Disaster Loans following 
Hurricanes Katrina and Rita. The period for new Special Community 
Disaster Loan eligibility closed at the end of fiscal year 2006. This 
final rule establishes procedures and requirements for Special 
Community Disaster Loan recipients to apply for cancellation of their 
loan as authorized by the U.S. Troop Readiness, Veterans' Care, Katrina 
Recovery, and Iraq Accountability Appropriations Act, 2007. This final 
rule does not cancel all Special Community Disaster Loans, nor does it 
apply to loans made under FEMA's Community Disaster Loan program which 
is governed under separate regulations. This rule also finalizes the 
2005 Special Community Disaster Loan Program interim rule.

DATES: This final rule is effective March 22, 2010.

ADDRESSES: Copies of this final rule, the 2005 interim Rule, the 2009 
notice of proposed rulemaking, all public comments received, and 
supplementary information (if any) are available electronically on the 
Federal

[[Page 2801]]

eRulemaking Portal at www.regulations.gov in Docket ID: FEMA-2005-0051. 
The regulatory docket is also available for inspection at the Office of 
Chief Counsel, Federal Emergency Management Agency, Room 835, 500 C 
Street, SW., Washington, DC 20472.

FOR FURTHER INFORMATION CONTACT: James A. Walke, Disaster Assistance 
Directorate, Federal Emergency Management Agency, 500 C Street, SW., 
Washington DC 20472-3300, or call (202) 646-2751, or e-mail 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    The Federal Emergency Management Agency's (FEMA) Community Disaster 
Loan (CDL) Program for local governments began in 1974. The program 
provides funding to help communities that, due to a presidentially-
declared disaster, have incurred a significant loss in revenue that 
hinders the community's ability to provide essential municipal services 
such as public schools, sanitation, fire and police services. The CDL 
program is governed by regulations at 44 CFR part 206 subpart K. See 44 
CFR 206.360.
    After the catastrophic damage caused by Hurricanes Katrina and Rita 
in 2005, communities in Louisiana, Texas, Mississippi, and Alabama 
experienced severely depleted tax bases, but a remaining need to 
provide essential services such as a police force, medical care, public 
education, and firefighting. The costs to provide these services are 
not eligible for funding from FEMA under the Public Assistance Program 
or any other FEMA grant or assistance program.
    Due to the unusual circumstances facing these communities, Congress 
passed the Community Disaster Loan Act of 2005, Public Law 109-88 (Oct. 
7, 2005) (2005 Act). The 2005 Act authorized FEMA to loan up to $1 
billion to communities that had sustained revenue losses due to the 
disaster. Loans that FEMA issued under the 2005 Act are referred to as 
``Special Community Disaster Loans'' (Special CDLs). Special CDLs and 
FEMA's regulations governing the issuance of Special CDL's, (44 CFR 
206.370-206.377), only apply to communities affected by Hurricanes 
Katrina and Rita.
    The eligibility requirements and procedures for Special CDLs 
provided under the 2005 Act are similar to those of the CDL program. 
Special CDLs, however, are different in three aspects: (1) The $5 
million limit on individual loans found in the CDL program was removed; 
(2) the Special CDLs could only be used to assist local governments in 
providing essential service[s]; and (3) the loan cancellation provision 
of section 417(c)(1) of the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act (Stafford Act), which was applicable to CDLs, 
was not applicable to Special CDLs. On October 18, 2005, FEMA published 
an interim rule to implement the provisions of the 2005 Act. See 70 FR 
60443; also 44 CFR 206.370-206.377. The interim rule took immediate 
effect and only authorized FEMA to approve Special CDLs during fiscal 
year (FY) 2005 or FY 2006. Accordingly, FEMA is no longer authorized to 
grant new Special CDLs.
    After FEMA published the interim rule, Congress passed the 
Emergency Supplemental Appropriations Act for Defense, the Global War 
on Terror, and Hurricane Recovery, 2006, Public Law 109-234 (June 15, 
2006) (2006 Act), which appropriated funds to support $371,733,000 in 
loan authority in addition to the loans authorized under the 2005 Act. 
Special CDLs provided under the 2006 Act included three additional 
limitations: (1) The maximum loan amount was increased to 50 percent of 
the applicant's operating budget during the fiscal year of the disaster 
(FY 2005); (2) the loan analysis could only consider ``tax revenue'' 
losses and not ``other revenues'' as permitted in the 2005 Act; and (3) 
applicants were required to demonstrate actual loss in tax revenues of 
25 percent or greater. Like the 2005 Act, the 2006 Act also 
specifically stated that the loan cancellation provision of section 
417(c)(1) of the Stafford Act did not apply. Under the authority of the 
2005 and 2006 Acts, FEMA approved 152 Special CDLs, totaling 
$1,270,501,241, to 109 eligible applicants in Mississippi and 
Louisiana.
    On May 25, 2007, Congress passed The U.S. Troop Readiness, 
Veterans' Care, Katrina Recovery, and Iraq Accountability 
Appropriations Act, 2007, Public Law 110-28, section 4502(a), Public 
Law 110-28, section 4502(a), 119 Stat. 2061 (2007 Act). The 2007 Act 
provided FEMA the discretionary authority to cancel Special CDLs, but 
that authority is limited by the language in section 417(c)(1) of the 
Stafford Act. See 42 U.S.C. 5184. FEMA's discretionary authority to 
cancel Special CDLs is identical to the agency's authority to cancel 
loans issued under the CDL program. FEMA's procedures and criteria for 
cancellation of CDLs are set forth at 44 CFR 206.366. FEMA has found 
these provisions to be successful in providing the information 
necessary to determine whether cancellation of a CDL is appropriate. 
FEMA similarly has determined that these processes and criteria should 
apply to the process for cancellation of Special CDLs. Therefore, on 
April 3, 2009, FEMA published a notice of proposed rulemaking that 
proposed to revise the regulations established in the interim rule to 
include the same cancellation requirements and procedures for the 
Special CDL program as FEMA has been using for the CDL program. See 74 
FR 15228.
    Pursuant to FEMA's statutory authority under the 2007 Act, FEMA may 
cancel ``* * * all or any part of [a Special CDL] to the extent that 
revenues of the local government during the three full fiscal year 
period following the major disaster are insufficient to meet the 
operating budget of the local government, including additional 
disaster-related expenses of a municipal operation character.'' 42 
U.S.C. 5184(c). As required by statute, FEMA's decision must be based 
on the revenues of the local government during the three-full-fiscal-
year period following the major disaster. In the proposed rule, FEMA 
established that the Federal government's ``fiscal year'' typically 
runs from October 1 to September 30, and that FEMA would modify the 
three-year period to reflect the 36 calendar months following the 
disaster for governments that operate under a different fiscal year. 
FEMA also proposed to define the term ``operating budget'' as actual 
revenues and expenditures of the local government as published in the 
official financial statements of the local government.
    Furthermore, since the purpose of the Special CDL program is not to 
underwrite pre-disaster budget or deficits of the local government, 
FEMA proposed that such deficits carried forward would reduce any 
amounts otherwise eligible for loan cancellation. Therefore, 
expenditures would be reduced accordingly for purposes of evaluating 
any request for loan cancellation if the transfer is from an operating 
funds account to a capital funds account, or if operating funds are 
used for other than routine maintenance purposes, or non-disaster 
related expenditures are increased (except increases due to inflation, 
the annual operating budget or operating statement). Additionally, FEMA 
proposed that the tax and other revenue rates or the tax assessment 
valuation of undamaged property in effect at the time of the disaster 
would be used without reduction for purposes of computing revenues 
received.
    As the statute authorizes FEMA to cancel ``all or any part'' of a 
Special CDL,

[[Page 2802]]

FEMA proposed to cancel a part of a loan as opposed to the entire loan 
where the application for cancellation reflects that the applicant's 
revenues are insufficient to repay the entire loan but sufficient to 
repay a portion of the loan. If FEMA were to determine that all or a 
part of an applicant's Special CDL should be cancelled, the proposed 
rule stated that the amount of principal would be cancelled and the 
related interest forgiven. FEMA further proposed that the determination 
concerning loan cancellation would specify that any uncancelled 
principal and related interest must be repaid according to the terms 
and conditions of the promissory note; if repayment would constitute a 
financial hardship, then the local government would be required to 
submit a repayment schedule to FEMA for review, providing a plan for 
settling the indebtedness on a timely basis.
    FEMA also proposed that, although a loan or cancellation of a loan 
would not reduce or affect other disaster-related grants or other 
disaster assistance, FEMA would not approve any Special CDL 
cancellation that would result in a duplication of benefits to the 
applicant. Finally, as proposed, if FEMA denies an Application for Loan 
Cancellation, in whole or in part, the applicant would be allowed to 
appeal and to submit any additional information in support of the 
application within 60 days of the date the application is denied. The 
decision of the Assistant Administrator on appeal would be final.

II. Changes From the Proposed Rule

    FEMA made five substantive changes to the regulatory text in 
response to the 68 comments received by FEMA on the proposed rule. (A 
discussion of the comments received on the proposed rule, the 2005 
interim rule, and FEMA's responses to those comments, is in section IV 
below.) Further, as a result of these five substantive changes, FEMA 
redesignated the paragraphs in 44 CFR 206.376 to accommodate the new 
regulatory text.
    First, FEMA has revised 44 CFR 206.376(c)(4) to allow the transfer 
of ad valorem property tax revenues under certain conditions. The 
proposed rule contained a restriction that a transfer from an operating 
fund for debt service (i.e., principal and interest payment on bonded 
indebtedness, capital leases, or other debt for capital expenditures 
which is paid for through property tax levies) would be excluded from 
allowable expenditures in the operating budget calculation. This 
exclusion was proposed because the use of the loan funds was limited to 
the provision of essential services, and the regulations clearly 
prohibited the use of the funds for capital expenses under the 
regulations. See 44 CFR 206.371(f). However, one commenter noted that 
the loss of tax revenue in non-operating funds will require the 
reallocation of ad valorem tax resources from operations to debt 
service and retirement obligation funding. In evaluating this comment, 
FEMA realized that this type of transfer may be legitimate if required 
by law. Excluding the transfers from expenditures in the operating 
budget calculation may result in an operating surplus instead of a 
deficit (when making a loan cancellation determination) if such 
transfers were allowed as a legitimate expenditure.
    To account for this situation, in this final rule, FEMA has revised 
44 CFR 206.376(c)(4) to allow the transfer of ad valorem property tax 
revenues under certain conditions. If a local government or other 
entity that received a Special CDL has property tax revenues affected 
by the disaster, FEMA will consider the impact of the loss of property 
tax revenue in Debt Service or Pension Funds (non-operating funds) if 
all of the following conditions are met: (1) The entity experienced a 
loss of property tax revenue as a result of the disaster and the 
assessed value during the three years following the disaster, in the 
aggregate, is less than the pre-disaster assessed value; (2) the entity 
has a property tax cap limitation on the ability to raise property 
taxes post-disaster; and (3) the property taxes are levied through the 
General Operating Fund and transfers for obligations mandated by law 
are made to fund Debt Service or Pension Obligations which result in 
the entity experiencing a reduction of property tax revenues in the 
General Fund. If all three conditions are met, the amount of property 
taxes that are transferred to other funds for Debt Service or Pension 
Obligations funding will not be excluded from the calculation of the 
operating budget or from expenditures in calculation of the operating 
deficit, to the extent that the property tax revenues in the General 
Fund are less than the property tax revenues were pre-disaster.
    Third, FEMA added definitions for the terms ``revenues'' and 
``operating expenses'' which were critical, but undefined, terms in the 
proposed rule. See 44 CFR 206.376(b). For cancellation purposes, these 
definitions will be used to determine if the applicant experienced a 
deficit during the three full fiscal years following the disaster. For 
additional guidance, non-governmental applicants may choose to refer to 
the standards established by the Financial Accounting Standards Board 
(FASB). Governmental applicants may choose to refer to the general 
accounting standards established by the Government Accounting Standards 
Board (GASB) and published by the Government Finance Officers 
Association (GFOA). The FASB and GASB provide general accounting 
principles that are not controlled or required by FEMA.
    Fourth, the language in the proposed rule at 44 CFR 206.376(d)(4) 
proposed that the initial review of an application for cancellation was 
to be conducted by the Assistant Administrator of the Disaster 
Assistance Directorate or designee. The proposed rule also stated that 
should the local government seek reconsideration, it could submit 
additional information in support of the application within 60 days. 
The reconsideration was to be made by the Assistant Administrator for 
the Disaster Assistance Directorate. Although, in practice, the 
Assistant Administrator for the Disaster Assistance Directorate had 
delegated the initial determination responsibility for CDL cancellation 
to the Director of the Public Assistance Division, this delegation was 
not apparent in the proposed regulation. As a result, FEMA received 
comments requesting that a different person determine the appeal than 
the person who makes this initial decision. In response to those 
comments, FEMA revised the regulatory text to specify that the Director 
of the Public Assistance Division makes the initial determination. 
Although a revision to the regulatory text will not change FEMA's 
actual procedure for reviewing and adjudicating appeals of cancellation 
determinations, in this final rule the language at 44 CFR 206.376 (f) 
clearly places the initial determination decision with the Director of 
the Public Assistance Division.
    Fifth, FEMA received a comment noting that the proposed rule lacked 
a timeline for the review and processing of applications for 
cancellation. The commenter requested a time period in which FEMA will 
conduct its review and make its initial determination regarding loan 
cancellation. In response to this request, FEMA revised 44 CFR 
206.376(f), to add a new paragraph (f)(1) which provides that once all 
required and requested information has been provided by the applicant 
including un-reimbursed disaster related expenses, the Director of the 
Public Assistance Division will complete the initial evaluation within 
60 days.
    Finally, FEMA realized that the language of the proposed regulatory 
text did not align with the language of the

[[Page 2803]]

preamble of the proposed rule with respect to how the three-fiscal-year 
period in 44 CFR 206.376(a)(3) is calculated. Compare the proposed 44 
CFR 206.376(a)(3) at 74 FR 15235 with 74 FR 15230, bottom of first 
column. The 36-month period referenced in the proposed regulatory text 
was intended to prevent communities from revising their fiscal years 
during the evaluation period to artificially extend their evaluation 
period beyond the traditional 36-month period of three fiscal years. 
However, the explanation in the preamble describing how FEMA would 
calculate the three-full-fiscal-year period did not make it into the 
proposed regulatory text. The preamble explained that the Federal 
fiscal year begins on October 1st and for those governments that 
operate under a different fiscal year, FEMA would modify the three-year 
period to reflect the 36 calendar months following the disaster. To 
align the regulatory text with the preamble, language has been added to 
paragraph 206.376(b)(3) to clarify that at the local government's 
discretion, the three-fiscal-year period following the disaster is 
either a 36-month period beginning on September 1, 2005 or the 36 
months of the local government's fiscal year as established before the 
disaster.

III. FEMA's Process for Reviewing Applications

    When reviewing the comments received on the proposed rule, FEMA 
realized that applicants for cancellation would benefit from a concise 
explanation of the steps FEMA will follow in its internal review 
process. When reviewing applications, FEMA will review the operating 
budgets for the three full fiscal years following the disaster. The 
budgets of the General Fund, Special Revenue Funds of an operating 
nature, and Enterprise Funds of an operating nature will be reviewed. 
Revenues from the Special CDL will be excluded from the revenues 
considered in this analysis. Further, debt service payments and capital 
expenditures will be excluded from the operating budget calculations 
per the regulations. Next, revenues will be compared to expenses for 
all funds noted above to determine if there is an operating deficit. If 
there is no operating deficit, then loan cancellation will not be 
approved. If there is an operating deficit for the three full fiscal 
years following the disaster, then revenue losses will be reviewed. If 
the revenue losses are great enough to offset the entire amount of the 
Special CDL, then no further work will be done, and the loan will be 
canceled and all accrued interest forgiven. If the revenue losses are 
not enough to offset the loan, then FEMA will review the applicant's 
unreimbursed disaster-related expenses. If the revenue loss and 
unreimbursed disaster related expenses do not offset the entire amount 
of the loan, then any remaining principal that is not offset, and the 
associated accrued interest will be due at the end of the five-year 
term of the loan. The amount of the loan that is offset will be 
canceled, and the related interest forgiven.
    For these cancellation procedures to provide the greatest benefit, 
loan recipients should submit their Application for Loan Cancellation 
before the expiration date of their loan. This will allow FEMA to 
cancel all or part of the loan if appropriate, and to forgive all 
related interest before loan repayment commences. If the loan recipient 
applies for and is granted cancellation before the expiration date of 
its Special CDL, then all interest on the amount of the loan that is 
cancelled would be forgiven regardless of the date that the loan amount 
was dispersed or the date that loan cancellation is granted.

IV. Discussion of the Public Comments Received

A. The 2005 Interim Rule

    FEMA published an interim rule in 2005 which created the Special 
CDL program. FEMA solicited public comment on those interim regulations 
and received one comment. The commenter questioned FEMA's determination 
that recreation districts did not provide ``essential services'' as 
provided for in the 2005 Act, and therefore would not be eligible to 
receive a loan under the 2005 Act. The commenter stated that since 
recreation districts were considered subdivisions of a State, they 
should qualify as ``essential services.''
    Upon review of this comment, FEMA re-evaluated the eligibility of 
recreation districts under the 2005 Act in light of the limited funding 
available to address priority needs of local governments. The 2005 
funds were limited to $1 billion, and all $1 billion was provided to 
eligible applicants with many of the applicants receiving only a 
portion of the funds for which they were eligible due to a lack of 
available funds. In making its award determinations, FEMA prioritized 
services, finding the needs of a police force, medical care, public 
education, and firefighting, as examples, to be more ``essential'' than 
the services provided by a recreation district. Because there were more 
than enough applicants who met the eligibility criteria to utilize the 
complete amount of the limited available funding, FEMA did not grant 
loans to recreation districts under the 2005 Act. The 2006 Act, on the 
other hand, provided additional available funds, but the eligibility 
requirements were more restrictive. Only a small fraction of those 
eligible for the 2005 Act funds were eligible for the 2006 Act funds. 
No recreation districts applied for the 2006 Act funds. Had they 
applied and been eligible for the 2006 Act funds, FEMA would have 
considered them for funding.

B. The 2009 Notice of Proposed Rulemaking

    FEMA published a notice of proposed rulemaking on April 3, 2009 
that proposed to revise the interim rule by adding cancellation 
procedures. See 74 FR 15228. The proposed rule also included a proposed 
Paperwork Reduction Act collection of information. Comments on the 
proposed rule were due on or before June 2, 2009. FEMA received 68 
comments on the proposed rule from a wide and diverse representation of 
the public affected by the proposed rule. Commenters included members 
of Congress, States, cities, parishes, public and private non-profit 
service providers, public and private organizations, utilities, a 
school board, and individual citizens. The substantive comments 
received, and FEMA's responses thereto, are as follows:
1. General Comments
    Nearly every comment expressed general support for the cancellation 
of Special CDLs. Commenters see the action as aiding in disaster 
recovery by reducing the tax burden on the local population. Further, 
the commenters recognized that relieving this financial burden would 
increase communities' ability to provide vital services to the 
communities' residents. Only one commenter opposed the rule. However, 
the opposing commenter's rationale alleged an improper use of funds for 
cars, boats and trips in lieu of repairing one's property and 
referenced disapproval of FEMA's activities related to the housing of 
individuals for almost four years after the disaster. Based on this 
rationale, FEMA believes this commenter misconstrued the intent of the 
proposed rule, which does not provide assistance to individuals and 
households.
2. Small Business Administration Loans
    Twenty-nine comments sought cancellation of Small Business 
Administration (SBA) loans and/or mortgages for individual homeowners 
or business owners. These requests are

[[Page 2804]]

outside the scope of this rulemaking and FEMA's authority. FEMA has 
forwarded these comments to the SBA.
3. Increase in Market Values
    After the disaster, the Gulf region realized severe inflation in 
costs to maintain a workforce (increased salaries and employee 
benefits); obtain materials, insurance, and equipment; and house 
evacuees from other areas. Had the disaster not occurred, these costs 
would likely not have been incurred to the extent that existed in the 
post-Katrina environment. One hospital representative commented that 
they experienced a 695 percent increase in the cost of nursing contract 
labor in calendar year 2006 as compared to 2005 because of the loss of 
staff. Five commenters requested that FEMA consider the increased costs 
of workforce maintenance, obtaining materials, insurance and equipment, 
and housing evacuees as disaster-related expenses, thereby considering 
increased expenditures on regular and disaster-related budget items 
when evaluating loan cancellation.
    Although non-disaster related expenses may not be considered, the 
three-year operating budget used for calculation purposes takes into 
account any increase in expenditures based upon local labor and other 
economic conditions. Expenditures will be reviewed for reasonableness 
and FEMA may request demonstration by the local authority that 
conditions existed to cause an increase in expenditures above the 
normal inflation rate as a result of the disaster. As proposed in 44 
CFR 206.376(a)(4), increases due to inflation will not be reduced for 
purposes of evaluating a loan cancellation request. Therefore FEMA will 
apply disaster-related costs at their actual incurred expense.
    Two commenters stated that loan recipients are experiencing post-
event needs and incurring non-reimbursable expenses which, while not 
directly covered by the Stafford Act, are a result of post-effect 
conditions such as increased homelessness, and law enforcement/code 
enforcement issues. The commenters recommended that all post-Katrina 
and Rita expenditures be considered disaster-related under proposed 44 
CFR 206.376(a)(4) because of the nature of the disaster and its scope 
of devastation.
    The examples provided by the commenters would be characterized as 
disaster-related expenses of a municipal operation character, and 
therefore eligible for consideration. Unless otherwise indicated, all 
expenditures in the adopted operating budgets will be assumed to be 
related to carrying out the essential services of the local government, 
and would therefore be considered disaster-related expenses of a 
municipal operation character.
    One commenter stated that applicants were required to have at least 
a 25 percent decrease in operating revenues to receive the Special CDL 
funds, but that operating expenditures were not considered. Another 
commenter noted that it experienced a growth in some specific revenues, 
but the growth was strictly attributable to the significant purchases 
made by its citizens to recover their losses, and the commenter has 
seen its operating expenditures grow roughly 24 percent. These 
commenters requested that FEMA take into consideration the gap between 
a decrease in operating revenues with a limited decrease or even an 
increase in operating expenditures.
    The Special CDL Program was designed to provide loans based upon 
post-disaster estimated revenue losses, not expenditures. Therefore, 
the first test for cancellation of a Special CDL is to determine 
whether there is an operating deficit. If expenditures exceeded 
revenues during the three-full-fiscal-year period (which would create 
an operating deficit), then loan cancellation may be possible. If a 
cumulative three fiscal year operating deficit exists, FEMA will 
consider revenue losses and/or unreimbursed disaster-related 
expenditures in determining how much of the loan may be cancelled.
4. Treatment of Property Values
    Three commenters were concerned that the proposed rule would create 
an unnecessary burden on the applicants to determine which properties 
were or were not physically damaged by the storms. They noted that 
properties which may not have been physically damaged by the storms may 
have experienced a drop in property value in revenue evaluation. One 
city requested an agreement by FEMA that the entire city was damaged or 
destroyed, and recommended the creation of a threshold for establishing 
that an entire community has been damaged, rather than going from 
structure to structure. Another commenter suggested that FEMA not seek 
to determine if revenue decreases are associated with assessed property 
value decline related to the disaster, or to general market conditions.
    Revenue loss calculations will use actual property taxes collected. 
See 44 CFR 206.374(b)(2). Property tax revenues are considered on an 
aggregate basis, not an individual property assessment basis, so FEMA 
expects the impact on the revenues will be properly reflected in the 
financial statements, based upon actual property tax collection. 
Furthermore, because property tax revenues are considered on an 
aggregate basis, applicants will not need to make a property by 
property determination as feared by the commenters. Finally, unless 
provided information to the contrary, FEMA will assume that any 
assessed property value decline during the three full fiscal years 
after the disaster was related to the disaster, and not to general 
market conditions, as market conditions themselves were severely 
affected by the disaster during that period of time.
    One commenter alleged that the use of post-disaster reassessment of 
property values will show a false economic increase to property 
assessment values. However, if one is using actual tax revenues 
collected, and applying them to actual expenditures incurred, FEMA does 
not agree that there would be a false increase. For purposes of 
determining loan cancellation, FEMA uses actual tax revenues collected, 
and the actual inability of an applicant to meet its operating budget. 
The post-disaster reassessment of property values is not used to 
determine eligibility for cancellation. It is the taxes received based 
on those revised property values, along with all other revenues, 
compared to the expenses incurred in the operating budget which then 
results in either an operating surplus or deficit.
    Finally, one commenter stated that some State constitutions provide 
for the mandatory reappraisal and valuation at least every four years 
of all property that is subject to taxation. According to the 
commenter, that reappraisal and valuation requirement is designed to 
result in local governments receiving the same amount of ad valorem 
taxes received before the reassessment. The commenter advised that 
rates are therefore established to yield the same amount of tax revenue 
collected in the prior year. So, although rates may go down, actual tax 
revenues may not decrease.
    FEMA uses actual tax revenues in making its determination of an 
operating deficit. FEMA expects the reassessment will have no impact on 
the calculation of the operating deficit since no revenues will be lost 
as a result of this process. Regardless of whether the applicant's 
revenues remained constant, increased, or decreased, if those revenues 
were insufficient to meet its operating expenses during the three full 
fiscal years after the event, then the applicant may be eligible for 
cancellation.

[[Page 2805]]

5. Appeals Process
    FEMA proposed in the NPRM, 44 CFR 206.376(d)(4), that if the 
Assistant Administrator of the Disaster Assistance Directorate, or 
designee disapproved, in whole or in part, an Application for Loan 
Cancellation, the applicant could submit additional information in 
support of its application within 60 days of the date of the 
disapproval notice. The application and any new information would then 
be considered by the Assistant Administrator for the Disaster 
Assistance Directorate (Assistant Administrator) on appeal. Any 
decision made by the Assistant Administrator on the additional 
information would be final. Four commenters requested that this process 
be revised so that a different person determines the appeal than the 
person who makes the initial decision.
    In response to these comments, FEMA has revised the regulatory text 
explaining the appeals process. The proposed language mirrored the CDL 
cancellation appeal text and said that the Assistant Administrator or 
designee could make the initial decision. In practice, the Director of 
the Public Assistance Division has been fulfilling this duty. The 
Director of the Public Assistance Division therefore makes the initial 
decision, and the Assistant Administrator reviews the Director of the 
Public Assistance Division's decision, and any additional information, 
to make the final agency decision on the request. Although a revision 
to the regulatory text will not change FEMA's actual procedure for 
reviewing and adjudicating appeals of cancellation determinations, the 
revised language at 44 CFR 206.376(f) clearly vests the initial 
determination decision with the Director of the Public Assistance 
Division.
6. Extent of Cancellation
    The proposed rule explained that the cancellation authority 
provided to FEMA in the 2007 Act authorized FEMA to cancel all or a 
part of a Special CDL if a certain threshold is met. Congress did not 
provide FEMA with the blanket authority to cancel all Special CDLs. 
Seven commenters, however, requested blanket cancellation. Several 
noted that it would be the least complicated and most beneficial 
method; others opined that since FEMA considered it as an alternative 
in the rule FEMA therefore has implied authority to do so; and another 
asserted that because of the differences in the funding and eligibility 
requirements between the CDL and Special CDL programs, there should be 
a difference in the requirements for cancellation.
    FEMA does not have the legal authority to unilaterally cancel all 
Special CDLs. As some commenters noted, FEMA did consider whether it 
had the authority to cancel all loans when drafting the proposed rule, 
but after careful consideration, concluded that it lacks the statutory 
authority to issue a blanket cancellation. Furthermore, it is not in 
FEMA's discretion to apply a different threshold for cancellation of 
Special CDLs than CDLs. The 2007 Act clearly noted that the 
cancellation provisions of section 417 of the Stafford Act were to 
apply to the cancellation of Special CDLs. Section 417 of the Stafford 
Act only allows FEMA to cancel all or a part of a community's loans if 
``revenues of the local government during the three-full-fiscal-year 
period following the major disaster are insufficient to meet the 
operating budget of the local government, including additional 
disaster-related expenses of a municipal operation character.'' See 42 
U.S.C. 5184(c)(1).
    Therefore, when considering requests for cancellation, each loan 
will be considered on a case-by-case basis. FEMA will cancel all or a 
part of an applicant's Special CDL based on a review of actual losses 
and/or increased expenditures, and will cancel all or a part of a 
Special CDL if that applicant's budget results in an operating deficit.
    One commenter noted that if blanket forgiveness is not possible, 
FEMA should amend the program to offer further deferrals, forgiveness 
of interest accrual in the meantime, and/or individual consideration 
for partial forgiveness or further deferral if justified.
    FEMA does provide for deferral. If an applicant does not qualify 
for full or partial cancellation, the remaining debt may be paid over 
the remaining five-year period in accordance with the terms and 
conditions of the Promissory Note. See 44 CFR 206.376(f). The 
regulations also provide that if repayment will constitute a financial 
hardship, the applicant can submit a repayment schedule to FEMA for 
review. That time schedule would establish the applicant's plan for 
settling the indebtedness on a timely basis. See Id. Further, the term 
of a Special CDL may be extended by the Assistant Administrator for the 
Disaster Assistance Directorate, and he or she may defer payments of 
principal and interest for up to five years. See 44 CFR 206.377(b)(1) 
and (4). If such deferment should occur, however, interest will 
continue to accrue. See 44 CFR 2006.377(b)(4). Also, in unusual 
circumstances involving financial hardship, the Assistant Administrator 
for the Disaster Assistance Directorate may also provide an additional 
period of time, beyond the extension allowed in 44 CFR 206.377(b), to 
repay the indebtedness. The conditions on this hardship extension are 
contained in 44 CFR 206.377(c).
    Finally, one commenter noted that some communities prudently spread 
out the use of their eligible loan amounts. As a result, the commenter 
alleged that forgiveness should be for the total loan amount for which 
the jurisdiction qualified, regardless of any remaining balances which 
may be available at the time the application for forgiveness is 
submitted.
    Although FEMA applauds wise financial management by communities, it 
finds that accommodating the commenter's suggestion would not be wise 
financial management by the Federal Government. A loan recipient may 
only use the loaned funds to assist in providing essential services, 
not to finance capital improvements or the repair or restoration of 
damaged facilities, or to pay the nonfederal share of any Federal 
program. See 44 CFR 206.371(f). To ensure that the level and frequency 
of periodic payments are justified, and to ensure that funds are 
appropriately received and disbursed, all loan recipients must show a 
need and must establish necessary accounting records before they may 
draw down funds. See 44 CFR 206.375. As communities continue to 
recover, at some point they are not going to be able to show a need to 
draw down additional funds.
    To ensure appropriate management of funds, forgiveness of loans 
will be based on the amounts qualified for, and actually drawn down, 
and for which the applicant qualifies for cancellation of the loan 
under these regulations. Any outstanding principal and interest balance 
on a Special CDL after the review for cancellation will still be due 
and payable within the five-year time frame, unless extended by FEMA if 
requested by the applicant. Cancellation will not prevent a loan 
recipient from continuing to draw down funds, however. If a loan 
recipient has unused loan funds available, and they ultimately draw 
down those funds after the initial cancellation review, a separate 
cancellation review will be required before the Promissory Note expires 
(including any extensions provided under the authority of these 
regulations). If cancellation of those additional funds is not 
requested, or if FEMA does not deem those additional

[[Page 2806]]

funds eligible for cancellation, the new loan amount will have to be 
repaid.
7. Time Period Considered
    As previously noted, section 417 of the Stafford Act allows for all 
or a part of a Special CDL to be canceled if the revenues of the local 
government ``during the three-full-fiscal-year period following the 
major disaster'' are insufficient to meet its operating budget. FEMA 
received nine comments requesting that FEMA adjust the three-fiscal-
year period. See 44 CFR 206.371(h).
    One commenter requested that the three-year period (or longer) 
commence after the last FEMA appeal from the disaster is complete or 
after the last Project Worksheet is closed out, whichever is later. Not 
only does FEMA lack the legal authority to make the change as 
requested, but to do so would significantly delay any cancellation 
determination. The current approach allows loan recipients to more 
quickly request and receive cancellation of their loans, if they have 
an operating deficit caused by disaster-related revenue losses or 
increases in expenditures due to unreimbursed disaster-related 
expenditures. Disasters often remain open for many years, (e.g., the 
Northridge Earthquake declaration has been open since January 1994) and 
it is not expected that the disasters declared as a result of 
Hurricanes Katrina and Rita will close faster than the norm. Requiring 
loan recipients to wait the several years for all Project Worksheets to 
close or all appeals to be resolved would pose an undue hardship on 
those who seek cancellation of their Special CDL. FEMA believes the 
three-year period is adequate and, in most cases, will be more 
favorable to applicants.
    Noting the long duration of disasters, one commenter stated that 
the full economic impact of public assistance work may not be known 
until the storm is closed out. The commenter advised that their sales 
tax revenues, which are a part of the General Fund receipts, declined 
nearly 17 percent this year and are predicted to fall another 10 
percent in the coming fiscal year. Although the rule focuses only on 
the three full fiscal years immediately following the event, the 
commenter asserted that the effects are only now being felt, in the 
fourth year, and the commenter predicts that it will worsen in the 
fifth and possibly sixth year, before a stabilization of revenues is 
realized. Four commenters asserted that in the initial two years after 
the storm, sales tax revenues were extraordinarily inflated because of 
replacement and rebuilding purchases. As sales tax diversions normalize 
in the coming years, commenters fear future operating deficits that 
were initially offset by these replacement purchases might ensue. 
Further, several commenters suggested a six-year or simply ``longer'' 
evaluation period be considered. Another commenter sought a longer 
evaluation period while allowing for immediate application for 
cancellation for those local governments who can document adequate 
revenue shortfalls at this time.
    If sales tax revenues are declining as significantly as suggested, 
it is likely that an operating deficit occurred within the three-year 
period, which will result in an evaluation of all revenue losses and a 
review of unreimbursed disaster-related expenditures, if applicable. 
Even if FEMA had the legal authority to extend the period, which it 
does not, the longer it is extended, the greater the likelihood that 
the loss would be unrelated to the disaster (e.g., due to the 
nationwide economic downturn).
    Similarly, one commenter noted that some states' ad valorem taxes 
are paid in arrears, meaning that tax revenues may not have been 
impacted in 2005 or 2006, but may have reduced significantly in 2007 
and following. The commenter found three years to be insufficient. 
Although FEMA recognizes the impact that the ad valorem tax structure 
of some states could put them at a disadvantage, FEMA has attempted to 
apply as liberal an interpretation of its statutory authority as 
possible, and determined that it does not have the authority to shift 
the three-year period. The statutory language states ``during the three 
full fiscal year period following the major disaster.'' See 42 U.S.C. 
5184(c)(1). The language of the statute explicitly requires FEMA to 
consider only the three full fiscal years immediately after the major 
disaster, therefore FEMA cannot revise the regulation in response to 
this comment.
    Two commenters asserted that because of the difference in 
applicants' fiscal years, some may be at a disadvantage if FEMA 
automatically applies a 36-month period for calculating the three full 
fiscal years. As an example, one commenter's fiscal year is from July 1 
to June 30, so the commenter asserted that their review period would 
commence July 1, 2006; 10 months after the disaster. The commenters 
expressed concern that at that point some improvement in financial 
conditions should have already occurred beyond the conditions that 
existed immediately after the disaster. The commenters requested that 
an applicant be given the option of basing its cancellation request 
upon its fiscal year or a 36-month period commencing on the first full 
month after the disaster.
    In reviewing the proposed rule in light of this comment, FEMA 
realized that the proposed language of the regulatory text does not 
align with the language in the preamble of the proposed rule. Compare 
proposed 44 CFR 206.376(a)(3) at 74 FR 15235 with 74 FR 15230, bottom 
of first column. The 36-month period referenced in the proposed 
regulatory text was intended to prevent applicants from revising their 
fiscal years during the evaluation period to artificially extend their 
evaluation period beyond the traditional 36-month period of three 
fiscal years. However, the explanation in the preamble describing how 
FEMA would calculate the three-full-fiscal-year period did not make it 
into the proposed regulatory text. The preamble explained that the 
Federal fiscal year begins on October 1st and for those applicants that 
operate under a different fiscal year, FEMA would modify the three-year 
period to reflect the 36 calendar months following the disaster. Since 
Hurricane Katrina made landfall on August 29, 2005, allowing a 36-month 
period to begin immediately thereafter would place the beginning of the 
calculation on September 1, 2005.
    Both of these commenters noted that allowing applicants to start 
with September 1, 2005, instead of their fiscal year start, would 
ensure that the extraordinary expenses and lost revenue incurred 
immediately after the event are fully taken into consideration. The 
regulatory text that would implement this change, however, was 
unintentionally omitted from the proposed rule. As a result, language 
has been added to paragraph 206.376(b)(3) to clarify that at the local 
government's discretion, the three-fiscal-year period following the 
disaster is either a 36-month period beginning on September 1, 2005, or 
the 36 months of the local government's fiscal year as established 
before the disaster. Should applicants elect the 36-month period 
beginning September 1, 2005, FEMA will prorate the revenues and 
expenses for the partial years. For example, if a city's fiscal year 
runs from January 1 through December 31, FEMA will apply one third of 
the city's fiscal year 2005 budget, all of its fiscal years 2006 and 
2007 budgets, and two thirds of its fiscal year 2008 budget.
8. Rules for Cancellation--General
    Three commenters requested that FEMA align the accounting methods 
for the consideration of revenues and expenditures for the purpose of 
loan cancellation with the accounting

[[Page 2807]]

methods for loan eligibility to reduce subjective interpretations 
during the evaluation process and prevent any extreme changes in FEMA 
determinations.
    FEMA will apply the same accounting methods in its review of 
applications for cancellation of Special CDLs as it applied to 
applications for the loans themselves. To provide clarity, in this 
final rule FEMA added definitions for the terms ``revenues'' and 
``operating expenses'' to 44 CFR 206.376(b). In addition, for further 
guidance, non-governmental applicants may choose to refer to the 
standards established by the FASB and governmental applicants may 
choose to refer to the general accounting standards established by the 
GASB. These standards boards provide general accounting principles that 
are not controlled or required by FEMA.
    Although FEMA will apply the same accounting methods, it will not 
apply the same criteria to applications for cancellation as applied to 
loan applications. This is because unlike the application stage where 
estimates are made because actual future budget data are not available, 
actual expenditures are known during the cancellation stage. The actual 
expenditure data provide a much more accurate presentation of a 
community's budget than estimates.
    Further, FEMA is unable to use the same criteria for eligibility 
for the loan, as the criteria established by statute were not the same 
for all Special CDLs. To qualify for the Special CDLs issued under the 
authority of the 2005 Act, applicants were required to demonstrate that 
they had suffered substantial loss (i.e., 5 percent) of tax and other 
revenues, whereas the 2006 Act further defined ``substantial'' by 
requiring at least a 25 percent loss of only tax revenues. The Special 
CDL issuance criteria also differed. The 2005 Act established loan 
amounts based upon the lesser of 25 percent of the operating budget, or 
the projected revenue loss and unreimbursed disaster-related expense. 
The Special CDLs issued under the 2006 Act, however, established loan 
amounts at 50 percent of the operating budget.
    Just showing a loss, however, does not prove that a local 
government's revenues are insufficient to meet its operating budget as 
required by section 417 of the Stafford Act. To make this 
determination, the cancellation reviewer will first determine if there 
is an operating deficit, regardless of the projected revenue losses at 
the time the Special CDL was issued. The accounting procedures for 
cancellation use the same governmental accounting principles, but the 
calculation of the operating deficit is expanded to include all revenue 
sources affected by the disaster so that the full picture of the 
financial condition of the local government is considered. This 
computation may result in revenue losses being realized that are 
greater than what was initially projected at the time of loan 
application. Reviewing all revenues affected by the disaster is 
expected to generally favor the applicant during the loan cancellation 
review process.
    Two commenters were in favor of the rule as proposed and encouraged 
FEMA to provide equal treatment to the Gulf Coast communities and 
forgive Special CDLs under the same rules as CDLs are forgiven in other 
States for other storms. Three commenters, however, recommended that 
FEMA create new, different regulatory requirements for cancellation of 
Special CDLs because of the special circumstances related to this 
disaster. One of those commenters asserted that Special CDLs are not 
contemplated under section 417(c)(1) of the Stafford Act, so FEMA has 
the discretion to choose other methods for cancellation. All three 
commenters asserted that new, more flexible regulatory requirements 
should be established that maximize the possibility for cancellation 
for each individual recipient.
    FEMA agrees that it should be as flexible and least restrictive as 
possible when establishing the procedures for cancellation. However, 
contrary to the one commenter's assertion, the 2007 Act explicitly 
ordered FEMA to apply section 417 of the Stafford Act when considering 
Special CDLs for cancellation. See 42 U.S.C. 5184. Therefore, the 
underlying statutory requirement that FEMA only forgive all or a part 
of those loans if, during the three-full-fiscal-year period following 
the event, revenues of the local government are insufficient to meet 
its operating budget, applies. The Special CDL program was created to 
assist communities in providing essential functions to their residents. 
Therefore, forgiveness should not be provided because a community would 
be inconvenienced by the requirement to repay the debt, but because it 
actually cannot do so and continue to provide those essential 
functions. This need is apparent when a community's revenues are 
insufficient to meet its operating budget.
    As discussed throughout this preamble, FEMA has attempted to 
broadly construe its statutory authority and provide as much 
flexibility in the process as possible. However, FEMA has been using 
the existing procedures for CDL cancellation since 1990, and has found 
them to be an efficient and accurate method of determining when 
revenues of a local government are insufficient to meet its operating 
budget. These procedures were successfully applied after other major 
hurricanes, including but not limited to hurricanes Andrew (1992) and 
Marilyn (1995).
    Since each jurisdiction was not equally impacted by hurricanes 
Katrina and Rita, each loan cancellation application should be 
considered on its own merits. To ensure fairness, each applicant's 
request for cancellation will be reviewed individually to determine if 
the loan may be cancelled. Since each application for cancellation is 
considered individually, the evidence for cancellation eligibility will 
be unique to each applicant. If the magnitude of damage resulting from 
hurricanes Katrina and Rita resulted in a cumulative operating deficit 
during the three-full-fiscal-year period following the disaster, then 
Special CDL applicants will receive loan forgiveness based upon the 
revenues actually lost, up to the amount of the loan. If the revenue 
loss is not sufficient to cancel the entire loan, then FEMA will 
consider unreimbursed disaster-related expenses to offset the loan. If, 
after considering both revenue losses and unreimbursed disaster-related 
expenses, the entire loan is not cancelled, any remaining principal 
that was not cancelled along with associated accrued interest must be 
repaid at the end of the loan term, including any extensions, if 
approved.
    One commenter asserted that FEMA should apply all expenses of the 
applicant in its evaluation, and not assess whether the expense is 
disaster-related. The commenter explained that all expenditures were 
made in accordance with local and state law governing the use of public 
funds, thus they were necessary and appropriate to meet the needs of 
the citizenry and/or constituents of the local government. While that 
may be true, the purpose of the Special CDL was to help local 
governments recover from losses associated with Hurricanes Katrina and 
Rita. Therefore, any losses due to an increase in expenditures must 
also be related to Hurricanes Katrina or Rita.
    Three commenters suggested that FEMA provide cancellation in those 
situations where a cumulative operating deficit is not realized, or 
consider the operating deficit as a secondary criterion if an 
applicant's cumulative post-disaster revenue shortfall is less than the 
outstanding balance of the loan. One commenter encouraged FEMA to 
compare pre-storm revenue

[[Page 2808]]

projections to post storm actual revenues as the primary criteria for 
determining eligibility for partial or complete cancellation. In 
particular, the commenter requested that FEMA use the schedule of 
historic and projected revenues provided by loan recipients when they 
applied for the Special CDL.
    FEMA's statutory authority only allows loans to be canceled if the 
local government's revenues are insufficient to meet its operating 
budget. See 42 U.S.C. 5184(c)(1). When actual operating revenues are 
not sufficient to meet actual operating expenditures, an operating 
deficit occurs. Therefore, for FEMA to cancel a loan, the applicant 
must first have an operating deficit. FEMA does not have the authority 
to waive this requirement.
    If a local government has the financial ability to maintain its 
operating budget, the surplus should go to repay its debts. To the 
extent possible, Federal funds which were provided with the expectation 
of repayment should be repaid if the borrower has the assets available 
to repay them. Further, projected revenues versus actual revenues 
should not be used in lieu of actual revenues applied to actual costs 
because the latter provides a more accurate representation of an 
applicant's true financial status. The purpose of cancellation is to 
assist those communities that, due to the disaster, have incurred a 
revenue loss of such a magnitude that they no longer have sufficient 
funds to operate. These loans were provided to ensure that essential 
services would continue to be provided in the aftermath of the 
disaster. Therefore, cancellation should be provided when repayment of 
the debt would cause the community to no longer have the budget 
available to provide these essential services; not simply to provide a 
replacement for lost revenue.
    Finally, one commenter was concerned that any increase in 
expenditures for the Special CDL recipients will be benchmarked to pre-
Katrina levels. However, FEMA already reviewed the pre-Katrina 
operating budgets at the time the loan was made. When considering 
applications for cancellation, FEMA will review post-Katrina budgets 
for reasonableness but will assume that any costs in the operating 
budget are disaster-related unless otherwise noted.
9. Today's Economy
    Four commenters noted that loan recipients are now finding 
themselves in a deep recession, although 2009 figures will not be 
considered for cancellation. They stated that a three-year qualifying 
snapshot as outlined in the proposed rule might unfairly disqualify 
certain loan recipients for loan cancellation. Another commenter 
asserted that requiring loan recipients to repay is in direct conflict 
with what President Obama and Congress are trying to accomplish with 
the economic stimulus package. Finally, another commenter urged FEMA to 
consider the effectiveness of simultaneously collecting Special CDL 
repayments from recovering communities and distributing funds 
appropriated by the American Recovery and Reinvestment Act of 2009 
(ARRA) (Pub. L. 111-5) to the same communities. The commenter 
encouraged FEMA to consider forgiveness as a component of the Nation's 
economic recovery effort.
    The Special CDL Program was established to help communities 
affected by Hurricanes Katrina and Rita recover from revenue losses due 
to the disaster, not revenue losses for any other reason. The operating 
deficit and revenue loss/increased expenditures must be related to 
Hurricanes Katrina or Rita as required by 44 CFR 206.371(h). Further, 
unlike the ARRA, the Special CDL program was designed to replace lost 
revenues to continue essential services of an operating character, not 
provide capital funding for public works projects. The ARRA stimulus 
funding is provided for different reasons under separate authority, and 
is generally used for capital projects, which are not eligible costs 
under the Special CDL program. Therefore, these comments are outside 
the scope of this rulemaking.
10. Documentation for Consideration
    The proposed rule in 44 CFR 206.376(c), set out specific documents 
and data that are to be submitted in a community's Application for Loan 
Cancellation. Four commenters encouraged FEMA to allow for the 
submittal of additional documentation, above and beyond what is 
required by regulation, to support an application for loan forgiveness. 
One commenter specifically cited the GAO report: ``Hurricane Katrina: 
Trends in Operating Results of Five Hospitals in New Orleans Before and 
After Hurricane Katrina.'' One commenter mentioned the value of 
original revenue projections, and said that FEMA should allow 
applicants to file this information with the application, not only 
during an appeal. Another argued that the rule should not limit 
information source documents to the publicly available financial 
statements of the local government. That commenter asserted that all 
sources of data should be considered in the local government's 
application for cancellation as there is a great deal of variation 
among the local governments.
    Applicants may submit any supporting documentation they believe 
supports an operating deficit, a disaster-related loss in revenue, or 
an increase in disaster-related unreimbursed expenditures. Furthermore, 
the application may include a narrative presentation to supplement the 
financial material accompanying the application and to present any 
extenuating circumstances for FEMA's consideration. See 44 CFR 
206.376(e)(2). However, FEMA suggests that applicants not submit 
additional supporting documentation, outside of that required initially 
by FEMA, until they are notified by FEMA that they do not qualify for 
cancellation of all or part of the loan. Such notification is provided 
to each applicant in writing after FEMA has reviewed the financial 
statements, budgets, revenues, and if applicable, the unreimbursed 
disaster-related expenditures of the applicant; and made a 
determination that they do or do not qualify for cancellation under the 
regulations. If the applicant wishes to appeal that decision, 
additional supporting documentation may be submitted to FEMA at that 
time.
    With respect to the audited financial statements and operating 
budgets of the local government, these are used because they will 
reflect the financial condition of the local government and its ability 
to repay the loan. Should a community choose to do so, it may submit 
other underlying documentation to support the information in the 
audited financial statements, provided it can be tracked into the 
financial system that was audited.
11. Use of Official Financial Statements
    Six commenters were concerned with FEMA's use of official financial 
statements. One was concerned that ``additional disaster-related 
expenses of a municipal operation character'' might not be reflected in 
official financial statements. Another was concerned that using 
official financial statements instead of actual cash expenditures might 
overstate the actual financial health of an applicant in the aftermath 
of a disaster.
    Assuming the entity accounts for all expenditures through their 
accounting system, the official financial statements reflect the 
financial health of the applicant in accordance with generally accepted 
accounting principles; therefore their use is most appropriate. All 
expenses of an applicant should be included in the official financial 
statements. Although details of

[[Page 2809]]

unreimbursed disaster-related expenditures may not be reflected in the 
official financial statements, specifically, FEMA will ask applicants 
to identify such detailed information in the accounting system that may 
be eligible for consideration during the Special CDL cancellation 
process.
    When making cancellation determinations, three commenters urged 
FEMA to also consider the revenue projections and other materials that 
were reviewed and accepted during the loan application process (5 year 
budgets, etc.), to take into account the overall loss of revenues that 
the applicant incurred as a result of the hurricanes.
    Although FEMA based eligibility for the Special CDLs on revenue 
projections, it did so only because actual data were not available. Now 
that the statutorily-mandated three-fiscal-year period has passed, 
actual data exist. The official financial statements show the actual 
operating results, which will show whether or not the applicant 
actually experienced a loss of revenues and incurred an operating 
deficit. Because FEMA is limited to evaluating the data from the three 
full fiscal years after the disaster, projected data for that period 
would be less accurate and the consideration of projected data for a 
period thereafter is outside the scope of the authority provided in 
section 417 of the Stafford Act. Further, revenue losses as a result of 
the hurricane are part of the basis for determining an operating 
deficit. It is possible that other revenues not affected by the 
hurricane could offset the losses of revenues affected by the disaster, 
but if that were true, then there would be no operating deficit unless 
expenditures increased dramatically and the applicant had unreimbursed 
disaster-related expenses great enough to offset the loan. Therefore, 
FEMA made no change to this final rule based on the commenter's 
request.
    One commenter noted that some cities are required by their state 
constitution to have a balanced budget. The commenter advised that this 
may have resulted in loan recipients reducing expenditures to match 
their decreased revenues. FEMA's acceptance of actual financial 
statements without a review of reduced expenditures that were made to 
match revenues would, the commenter stated, result in a distorted 
picture of the financial condition of the applicant. To remedy this, 
the commenter recommended that expenditures have a component of 
expenses not incurred, and therefore services not provided, as a result 
of the reduced revenues.
    The Special CDL program was intended to provide loans that would 
replace estimated lost revenues as a result of the disaster. The loan 
proceeds were to be used to provide essential services that could 
otherwise not be provided due to the loss of those revenues. It would 
be difficult, if not impossible, for FEMA to determine which expenses, 
if any, were not incurred or services not provided as a result of the 
disaster, as the decision to fund services are made by the local 
authorities. In addition, the constitutional requirements for a 
balanced budget of state or local governments and the allocation of 
resources at the local level are outside the authority of FEMA. In 
calculating the operating budget, FEMA excludes the Special CDL 
proceeds which may create an operating deficit for many applicants that 
otherwise may not show an operating deficit in their own financial 
statements.
    One commenter noted that some applicants may be required to prepare 
their budgets on a cash basis, so the budget-to-actual comparisons in 
the official financial statements are presented on a cash basis, the 
fund financial statements presented on a modified accrual basis and the 
government-wide financial statements prepared on a full accrual basis. 
In calculating the cumulative operating deficit from the official 
financial statements of the local government, the commenter asked, 
whether the applicant should begin with the statement of activities in 
the government-wide financial statements or the statement of revenues, 
expenditures, and changes in fund balance in the fund financial 
statements or the statement of revenues, expenditures, and changes in 
fund balances--budget and actual.
    The operating budget used in the loan cancellation calculation is 
based upon the required supplementary budget schedules for all 
operating funds with revenues affected by the disaster, contained in 
the Comprehensive Annual Financial Report (CAFR). The operating budget 
schedules will be adjusted to exclude capital expenditures, debt 
service payments, or capital lease payments for equipment or buildings 
for purposes of calculating the operating budget at the time of 
cancellation review. Use of the statement of revenues, expenditures, 
and fund balance-budget and actuals may include funds which are of a 
non-operating nature. Such funds would not qualify for use of the 
Special CDL proceeds, and therefore, should not be used as the basis 
for Special CDL cancellation.
12. Documentation Required
    One commenter stated that in the initial months after the storm, 
cities faced many challenges and in many cases did not track ``un-
reimbursed expenses'', which may include, for example, police 
protection to FEMA trailer parks. Because of this, the commenter 
requested that FEMA consider expenses without supporting documentation.
    If an applicant needs to identify unreimbursed disaster-related 
expenditures in order to cancel more of the loan, FEMA will work with 
the applicant to develop methods to identify and calculate unreimbursed 
disaster-related expenditures. However, without documentation, FEMA 
will not consider such undocumented unreimbursed disaster-related 
expenses for purposes of loan cancellation. FEMA applies the 
requirements of Office of Management and Budget (OMB) Circular A-129 
``Policies for Federal Credit Programs and Non-Tax Receivables'' to the 
management of its loan programs. OMB Circular A-129 is available 
electronically at http://www.whitehouse.gov/omb/rewrite/circulars/a129/a129rev.html. Although OMB Circular A-129 does not specifically address 
the unusual circumstance of the cancellation of Federal loans, it does 
require Federal Departments (including the Department of Homeland 
Security, of which FEMA is a component) to ``follow sound financial 
practices in the design and administration of their credit programs,'' 
and loan documentation is required for the extension of credit. See OMB 
Circular A-129, Appendix A, paragraphs II.2 and III.A.2. Further, FEMA 
and government-wide regulations such as those at 44 CFR Part 13 and 2 
CFR Part 215 require cost documentation to support reimbursement of 
funds in its grant programs, including documentation to support 
reimbursement of costs incurred for the response to and recovery from 
hurricanes Katrina and Rita under the Public Assistance program. 
Requiring the documentation of costs and revenues to justify the 
cancellation of a loan is a sound financial practice, is consistent 
with management of other programs, and is not changed in this final 
rule.
13. Definition of ``Revenues''
    The proposed rule contained no definitions for the terms 
``revenues'' or ``operating expenses.'' Two commenters sought 
definitions for these terms, and further, requested that FEMA define 
these terms to have the meaning

[[Page 2810]]

ascribed to them by the GASB and as discussed in the ``Blue Book'' by 
the GFOA except to the extent expressly modified in these regulations. 
Another commenter stated that the proposed rule focused only on 
property assessments and related taxes; the commenter encouraged FEMA 
to allow revenues from all sources, including sales taxes and in some 
cases, the relationship between local revenues and state revenues.
    The individual comment highlighted the need for the definitions 
sought by the other two commenters. All sources of revenues will be 
considered in FEMA's cancellation calculation procedures, provided the 
entity has a cumulative operating deficit. To ensure applicants and 
FEMA apply consistent professional standards and common terminology to 
these words, the regulation has been revised to add definitions for 
these terms at 44 CFR 206.376(b). These definitions align with the 
usage of those terms by the GASB and GFOA.
    Three commenters requested that one-time funds such as grants, 
awards, waivers, settlements and insurance proceeds, which are non-
recurring, not be considered revenue when FEMA reviews a community's 
budget for loan cancellation. These one-time income surges, the 
commenters asserted, could overstate the run-rate of revenues to the 
local government.
    Revenue calculations for cancellation review will use actual post-
disaster revenue minus actual post-disaster expenditures to determine 
if an operating deficit exists. Federal grants, for example, received 
to fund operating programs are offset by expenditures for those grants, 
and should have no impact on the operating deficit. Grants and other 
one-time revenues received by the community that are not related to the 
Special CDL program, will be included if they represent revenues sought 
by the government and received to offset expenses of an operating 
character. Insurance proceeds directly related to the disaster must be 
included as revenue if they are reimbursing expenses of an operating 
character, or disaster-related expenses. Special CDL proceeds, however, 
will be excluded. By matching such revenues against operating expenses, 
FEMA expects the net effect will have no impact on the operating 
deficit.
    Another commenter requested that FEMA clarify the term ``revenues'' 
to include revenues from traditional sources existing before the 
disaster. The commenter provided the example of a prison facility whose 
closing resulted in the loss of revenue to a sheriff and tax 
collector's office, and requested that revenues after the disaster be 
compared to revenues before the disaster, including the consideration 
of the loss of its traditional revenue sources.
    In response to this comment, FEMA added a definition of the term 
``revenue'' in 44 CFR 206.376(b)(2). During the cancellation review 
process, all revenues during the three-full-fiscal-year period will be 
reviewed, including those from traditional sources existing before the 
disaster. These actual revenues will be compared to the actual 
expenditures during that period to determine eligibility for 
cancellation.
    Two commenters noted that many loan recipients have pledged their 
revenues as the security for bonds. They encouraged FEMA to exclude 
from ``revenues'' those that are received by a local government, but 
are not available for the payment of operating expenses by law or 
contract.
    Any revenues that are dedicated to non-operating expenditures, such 
as debt service or capital expenditures are excluded on both the 
revenue and expenditure side of the budget calculation to determine the 
net eligible operating budget. As for whether the entity has these 
funds available for the repayment of the loan, each entity knew of 
commitments of operating revenues that were pledged at the time the 
loan was made. Further, each applicant signed a collateral security 
agreement at the time it was granted the Special CDL, pledging future 
revenues to be used to repay the loan, if necessary.
    Two commenters requested that FEMA consider pre-disaster budgets 
and/or financial statements to determine base revenue and expenditure 
levels for comparison against post-disaster levels to establish a more 
realistic and accurate shortfall. Although FEMA does consider the pre-
disaster budgets and financial statements in base revenues at the time 
the loan is made, the shortfall, if any, must be from actual revenues 
lost.
    One commenter requested that the ``revenues'' included in the 
``operating budget'' submitted for cancellation consideration be 
adjusted to remove any increased tax revenues resulting from a 
voluntary increase in millage rates or other fees (ex: An airport's 
airline fees) during the applicable three-full-fiscal-year period 
following the disaster. FEMA uses actual tax and other revenues 
received during the three-full-fiscal-year period in calculating the 
operating deficit and ultimately possible cancellation of the Special 
CDL. Further, property tax revenues are considered in the aggregate for 
purposes of calculating the cumulative three-year operating deficit. To 
ensure an accurate review of the entity's ability to meet its operating 
budget, if the local government increases taxes or adds new fees or 
raises existing fees, the actual revenues received during the three-
full-fiscal-year period following the disaster will be included in the 
loan cancellation calculation of operating revenues.
    Finally, one commenter asked if the terminal and landing fees of a 
regional airport will have an impact on the forgiveness of its loan. If 
the regional airport qualified for a Special CDL, those revenues will 
be considered in the calculation for cancellation. If the regional 
airport was part of a larger governmental entity and treated as an 
enterprise fund, the impact fees will still be considered. The impact 
on the loan forgiveness will be determined by whether or not there is 
(1) a cumulative operating deficit; (2) whether there was a loss of 
revenues during the three-year period; and (3) if there are any 
unreimbursed disaster-related expenditures which offset all or part of 
the loan.
14. Definition of ``Disaster-Related Expenses''
    In the proposed rule at 44 CFR 206.376(b)(1), FEMA defined 
disaster-related expenses of a municipal operation character as those 
expenses incurred ``for general government purposes, including but not 
limited to police and fire protection, trash collection, collection of 
revenues, maintenance of public facilities, flood and other hazard 
insurance.'' Because of the insertion of new definitions at new (b), 
and the expansion of the regulatory text on revenue calculation 
procedures in new (c), the subparagraph on disaster-related expenses 
was re-designated to 44 CFR 206.376(d) The redesignation is not a 
substantive change.
    Several commenters sought revisions to this definition to include 
additional expenditures. Two commenters sought to include expenditures 
associated with debt service. One of those commenters stated that 
operating losses incurred because of Hurricane Katrina caused it to 
default on its debt covenant compliance. As a result, its covenant 
compliance threshold was increased; it was required to engage 
consultants to conduct a review of operations and make recommendations 
to improve operations; and was required to file a mortgage on all of 
the entity's equipment and properties. Another commenter requested that 
FEMA revise the definition of expenses not only to include debt 
service, but also major repairs, rebuilding, replacement or 
reconstruction of public facilities or

[[Page 2811]]

other capital projects, intra-governmental services, special 
assessments, trust and agency fund operations.
    Another commenter urged FEMA to also consider the following 
expenses when evaluating an application for cancellation: The cost of 
maintaining a workforce, the cost of drainage work and the replacement 
of streets and roadways for which communities had to borrow or use 
their own funds, code enforcement expenditures (additional staffing, 
legal costs, and demolitions needed to accommodate the code enforcement 
department), insurance expenses, and finally legal and consultant fees 
incurred to deal with FEMA appeals and FEMA paperwork processing. Two 
other commenters inquired as to the eligibility of legal fees, 
asserting that such fees are not eligible for reimbursement under 
project applications or any other Federal program.
    For the reasons explained below, FEMA made no changes to the 
disaster-related expenses at 44 CFR 206.376(d) based on these comments. 
Labor costs for code enforcement and insurance expense increases due to 
the disaster are reflected in an applicant's post-disaster operating 
budgets and actual expenditures. The Special CDL program is intended to 
cover expenses of an operating nature in the budget. Therefore, capital 
expenditures for drainage work and street repairs are ineligible uses 
for Special CDL funds but may be eligible for reimbursement under 
another Federal program. Debt service is also generally incurred for 
capital expenditures. Although debt service is not considered an 
operating expense which provides essential government services, if the 
applicant can demonstrate that the debt service is related to debt 
assumed to cover normal operating expenditures, then the applicant may 
include the related interest on the debt as an unreimbursed disaster-
related expenditure. Debt service used for capital expenditures, 
however, is not eligible for consideration.
    Major repairs, rebuilding, replacement or reconstruction of public 
facilities damaged by the disaster are likely to be eligible under the 
Public Assistance program, which is a FEMA grant program separate from 
the Special CDL program. Eligible applicants should have applied for 
and received grant funds to reimburse these costs under the Public 
Assistance program. Intra-governmental services, (i.e., an Internal 
Service Fund such as a Fleet Maintenance Fund or Central Purchasing 
Services), of an operating character were eligible for consideration in 
the original loan application and will be included in the subsequent 
review for loan cancellation. See 44 CFR 206.376(d)(2).
    With respect to legal fees, if the expenditure is disaster-related, 
and not reimbursable through any other Federal or State program, or not 
covered by insurance, FEMA may consider such expense as an unreimbursed 
disaster-related expenditure. If the attorneys' fees are incurred as a 
regular operating expenditure, the attorneys' fees will be included in 
the operating budget and will be part of the calculation of an 
operating deficit or surplus.
    Disaster-related expenses that are not reimbursed through any other 
program will be included to determine if the entity incurred an 
operating deficit for the three-full-fiscal-year period following the 
disaster. If revenue losses are insufficient to offset the full amount 
of the loan at the time of loan cancellation review, unreimbursed 
disaster-related expenses that are of a municipal operating character 
as defined in the regulations may be used to offset principal of the 
loan. If there is any balance of the loan after revenue losses and 
unreimbursed disaster-related expenses are considered, the remaining 
balance will remain due in accordance with the terms and conditions of 
the Promissory Note.
    One commenter sought inclusion of the local government's cost share 
of assistance provided by FEMA under the Stafford Act's Public 
Assistance program. The Federal cost share for both Louisiana and 
Mississippi for the disasters declared as a result of Hurricanes 
Katrina and Rita was adjusted to 100 percent See 70 FR 70086 (November 
21, 2005) for Louisiana; and 71 FR 41228 (July 20, 2006) and 72 FR 
34704 (June 25, 2007) for Mississippi. Therefore there should have been 
no cost share incurred by the local governments during that time.
    Finally, one commenter requested that unfunded needs to basic 
services be taken into consideration as the reduction in operating 
budgets after Hurricane Katrina demanded that expected services were 
cut but still left a void that needed to be filled. The Special CDL 
program is not intended to supplant the decisions of the local 
government in determining what constitutes ``basic services.'' However, 
unless applicants indicate that revenues were lost or expenses 
increased due to other non-Hurricane Katrina or Rita related factors, 
FEMA will assume that any operating deficit occurred during the three-
year period is related to Hurricanes Katrina or Rita.
15. Definition of ``Operating Budget''
    For loan application, the ``operating budget'' is that document or 
documents approved by an appropriating body, which contains an estimate 
of proposed expenditures, other than capital outlays for fixed assets 
for a stated period of time and the proposed means of financing the 
expenditures. See 44 CFR 206.374(b)(2). Two commenters recommended that 
the operating budget consist of a pro forma budget constructed from the 
revenues of the character and to the extent permitted by law to be used 
to pay operating expenses and not otherwise required by contract to be 
used for another purpose, and expenditures actually incurred during the 
applicable period, together with an adjustment to expenditures 
(increase) to reflect the level of expenditures required during the 
applicable period to allow for adequate performance of its governmental 
functions at the levels reflected in the last full fiscal year before 
the disaster.
    The Special CDL Program was not designed to fund estimated 
expenditures, but rather the loan amounts were based on estimated lost 
revenues, established by historical data three years prior to the 
disaster and a projection of lost revenues three years after the 
disaster. Any revenues that are dedicated to non-operating 
expenditures, such as debt service or capital expenditures are excluded 
on both the revenue and expenditure side of the budget calculation to 
determine the net eligible operating budget. As for repayment of the 
loan, each loan recipient knew of commitments of operating revenues 
that were pledged at the time the loan was made. Further, each 
applicant signed a collateral security agreement pledging future 
revenues to be used to repay the loan, if necessary.
    Another commenter noted that some revenue streams may be dedicated 
to specific purposes by the taxpayers and may not be spent in other 
areas. As a result, revenue growth in one area cannot be used to 
supplement losses in other areas. The commenter encouraged FEMA to take 
this into account when reviewing applications for cancellation. Another 
commenter requested that FEMA allow a cancelled debt requirement to 
substitute for lost revenues that will never be replaced.
    Any revenues that are dedicated to non-operating expenditures, such 
as debt service or capital expenditures are excluded on both the 
revenue and expenditure side of the budget calculation to determine the 
net eligible operating budget, so FEMA expects

[[Page 2812]]

there will be no effect on the calculation of the operating deficit. 
However, if the debt service or pension payments are mandated by law 
and the entity has a property tax cap limitation by law, FEMA has 
modified the regulations to review that situation and its impact on the 
calculation of the operating deficit. See 44 CFR 206.376(c)(4)(ii). 
Debt payments, whether cancelled or paid, are not included in the 
operating budget calculation.
    One commenter asserted that FEMA's interpretation of the term 
``operating budget'' basically eliminates most, if not all, local 
governments from consideration for any sort of loan cancellation 
because, unlike the Federal Government, local governments are 
prohibited by law from operating at a deficit. The commenter stated 
that they reduce expenditures to the extent of incoming revenues 
regardless of pre-disaster revenue levels or the revenue amounts 
budgeted at the time of the disaster.
    The purpose of cancellation is to assist those communities that 
have incurred a loss due to the disaster to ensure that they can 
continue providing essential services; that loss must first be evident 
in an operating deficit. FEMA understands that some states require 
balanced budgets, but that issue is outside the scope of FEMA's 
authority with regard to loan cancellation. In calculating the 
operating budget FEMA excludes the Special CDL itself, which may result 
in an operating deficit for many communities who otherwise were 
required by law to have a balanced budget, if other revenues were not 
adopted to cover either the loss of revenues or increased expenditures 
as a result of the disaster.
    Another commenter advised that before the disaster, cities had 
planned for infrastructure repair and improvement projects that were 
put on hold. The commenter noted that in the mean-time these projects 
have been continually deteriorating, and the costs to complete the work 
have increased. In addition, the number of households decreased, 
resulting in lower annual revenues, while the amount of waste produced 
per consumer has increased, causing an additional strain on the budget. 
The commenter requested that FEMA focus on cash flow, as opposed to a 
supposed surplus indicated on the city's published financial 
statements. One commenter stated that operating budgets and audits 
(which are generally modified accrual audits) may not show the unfunded 
and deferred maintenance issues communities continue to struggle with 
as a result of Hurricane Katrina. Another commenter simply requested 
that FEMA consider expenditures that were deferred by local governments 
because money was not available.
    The Special CDL program is not intended to provide funding for 
unfunded or deferred maintenance issues, but rather to replace lost 
revenues as a result of the disaster. Capital expenditures have 
traditionally been excluded costs for the CDL program. The Special CDL 
program was created to assist those who demonstrated a need for Federal 
financial assistance to provide essential services. Because capital 
projects are not part of the Special CDL program, the impact of 
deferring projects is unrelated, and the timing and funding of projects 
is a local decision outside the scope of FEMA's authority. The official 
financial statements should reflect all costs of the entity. The 
operating budget used in the calculation is the required supplementary 
budget schedule, excluding capital expenditures, debt service payments, 
or capital lease payments for equipment or buildings.
    Finally, one commenter advised that accounting adjustments required 
by the advent of GASB 34 are on the full accrual basis, but one of the 
major distortions created by the entity-wide accrual basis is that 
capital projects are not expensed, but cost is allocated over time. The 
commenter sought clarification that the term ``operating budget as 
shown on our published financial statements'' means the Budgetary 
Comparison Schedule included in the Required Supplementary Information 
of its published financial report.
    The operating budget used in the loan cancellation calculation is 
the required supplementary budget schedule, found in the Supplementary 
Information Section of the Comprehensive Annual Financial Report (CAFR) 
which is the official financial statement of the government. The 
calculation, for purposes of loan cancellation, excludes capital 
expenditures, debt service payments, or capital lease payments for 
equipment or buildings.
16. Statutory Criteria for Cancellation
    Several commenters sought changes to FEMA's statutory authority for 
cancellation. Although FEMA is unable to provide cancellation outside 
the authority provided in the 2007 Act, FEMA has attempted to interpret 
its authority in as broad and flexible manner as possible.
    One commenter stated that if a local government's deficit is 
retained as an eligibility criterion, the unfunded need of the local 
government should be included for the purpose of determining deficits. 
If unmet needs are not considered, the commenter said, the local 
government's reward for conservative management would be to repay their 
Special CDL, while less fiscally conservative local governments would 
be rewarded with cancellation. To reward conservative financial 
management, the commenter encouraged FEMA to look solely at revenues in 
determining eligibility for cancellation.
    FEMA's authority is to cancel the loans of communities whose 
revenues are insufficient to meet their operating expenses, not simply 
those who have experienced a loss in revenue. Further, such a 
calculation may not be in the community's best interest. If an 
operating deficit exists, then revenue losses may offset only part of a 
loan. If FEMA looked solely at revenues, then the cancellation may not 
be total because unreimbursed disaster-related expenditures would not 
be included in the calculation. When reviewing applications for 
cancellation, unless applicants indicate that revenues were lost or 
expenses increased due to other non-Hurricane Katrina or Rita related 
factors, FEMA will assume that any operating deficit occurred during 
the three-year period is Hurricane Katrina or Rita related.
    Along the same line, another commenter stated that sound fiscal 
policy before the disaster that allows a community to retain good 
reserves should not be compromised and reserves depleted to fund the 
payback of this loan. With respect to reserve balances, these do not 
play a role in the calculation of the loan cancellation. Further, local 
governments pledged their future revenues to pay the loan. This pledge 
was not contingent upon the retention of a certain amount of reserve.
    Another commenter declared that organizations that effectively 
manage expenditures could potentially be adversely impacted, while 
those that are less effective at managing expenses could enjoy the 
benefits of full forgiveness. Without proper actual documentation of 
revenues and expenditures for a particular applicant, FEMA cannot 
confirm the accuracy of the commenter's statement. Each loan 
cancellation application will be evaluated independently and this 
cannot be assumed. According to one commenter, the proposed rule said 
that for communities that have not exhibited reasonable financial 
recovery after three years, cancellation may be appropriate subject to 
the limitations of section 417(c) of the Stafford Act. However, FEMA 
disagrees with the commenter

[[Page 2813]]

because section 417 reiterates the aforementioned three-full-fiscal-
year rule. The commenter suggested that a more appropriate determining 
factor may be whether or not a local government can prove that it has 
not ``exhibited reasonable financial recovery'' after three years even 
if it did not actually meet the requirement of cumulative operating 
deficits in the first three years after recovery. Two other commenters 
reiterated this position, but added that FEMA should require the 
community to also demonstrate that repayment of the loan will adversely 
impact the community's long-term recovery.
    The authority in section 417 of the Stafford Act authorizes FEMA to 
cancel loans of communities who are able to show an operating deficit 
``during the three full fiscal year period following the major 
disaster.'' As a result, the Special CDL regulations require that the 
entity have a cumulative operating deficit during the three full fiscal 
years following the disaster to qualify for cancellation of all or part 
of the loan. If no operating deficit exists, then FEMA determines that 
the community has exhibited reasonable financial recovery for purposes 
of this program. The statute does not authorize FEMA to cancel loans 
based on the finances of a community after that three-fiscal-year 
period.
17. Reimbursement
    In the proposed rule at 44 CFR 206.376(a)(4), any transfers from 
operating accounts to capital fund accounts (for other than routine 
maintenance purposes) will be reduced from the operating budget for 
purposes of evaluating any request for loan cancellation. In this final 
rule, proposed 44 CFR 206.376(a)(4) was re-designated as 44 CFR 
206.376(c)(3) without further change. One commenter requested that 
there be some recognition for capital expenditures that cannot be 
recovered through the FEMA Public Assistance grant program project 
worksheet damage assessments or other revenue sources. As an example, 
the commenter stated that the project worksheet includes the 
anticipated insurance proceeds an organization would receive from 
property insurance. These insurance proceeds are often tied up in 
litigation for long periods of time and recoveries reduced by the cost 
of litigation. To cover these gaps pending settlement of litigation, 
the commenter explained, organizations may need to transfer resources 
from operating funds to capital funds.
    Transfers from operating accounts to capital fund accounts are not 
allowed by FEMA as part of the operating budget calculation because 
Special CDL funds may not be used for capital expenditures. See 44 CFR 
206.371(a). However, interest paid on money borrowed to pay amounts 
FEMA does not advance towards completion of approved projects under the 
Public Assistance grant program is an eligible unreimbursed disaster-
related expenditure.
    Another commenter noted that FEMA Public Assistance grants 
reimburse governments for expenses, meaning that the expenses must 
first be paid by the community before they can receive FEMA funds. So, 
although they will eventually receive these expenditures, the commenter 
asserted, the costs are a drain on the General Fund operating budget 
and cripple continuing essential operations. The commenter believes 
that repaying Special CDLs will further worsen the situation.
    Although the commenter is correct that the Public Assistance grant 
program works on a system of reimbursements, FEMA reimburses approved 
funds on project worksheets within a short period of time. Entities do 
not languish for long periods of time with reimbursable expenses on 
their books. If an entity borrowed money while waiting for FEMA 
reimbursement, the accrued interest related to that loan is an eligible 
unreimbursed disaster-related expenditure. While it would be easier for 
communities to pay their expenses without being required to repay their 
Special CDL, each applicant signed a collateral security agreement at 
the time the initial loan was made stating they would utilize resources 
of the local government to ensure repayment of the loan. Such 
commitment extends until the loan is either cancelled or repaid.
    Finally, one commenter asked if a Special CDL recipient would be 
penalized for moving funding from a pertinent operating expenditure to 
another. In response, if an expense is an operating expense budgeted 
for one purpose, but utilized for another operating purpose, there is 
no ``penalty'' for such transfer.
18. Loss of Tax Revenue
    One commenter requested that FEMA consider the loss of tax revenue 
in non-operating funds, as they may require the reallocation of ad 
valorem tax resources from operations to debt service and retirement 
obligation funding.
    As proposed in 44 CFR 206.376(c)(3), a transfer from an operating 
fund for debt service (i.e., principal and interest payment on bonded 
indebtedness, capital leases, or other debt for capital expenditures 
which is paid for through property tax levies) is generally excluded 
from allowable expenditures in the operating budget calculation. 
However, such a transfer could be appropriate for inclusion in a loan 
cancellation determination if the transfer is required by law. 
Excluding such a transfer from expenditures in the operating budget 
calculation may result in an operating surplus instead of a deficit.
    To account for this situation, FEMA has revised the rule to allow 
the transfer of ad valorem property tax revenues. See 44 CFR 
206.376(c)(4). If a Special CDL recipient has property tax revenues 
affected by the disaster, FEMA will consider the impact of the loss of 
property tax revenue in Debt Service or Pension Funds (non-operating 
funds) if all of the following conditions are met: (1) The entity 
experienced a loss of property tax revenue as a result of the disaster 
and the assessed value during the three years following the disaster, 
in the aggregate, is less than the pre-disaster assessed value; (2) the 
entity has a property tax cap limitation on the ability to raise 
property taxes post-disaster; and (3) the property taxes are levied 
through the General Operating Fund and transfers for obligations 
mandated by law are made to fund Debt Service or Pension Obligations 
which result in the entity experiencing a reduction of property tax 
revenues in the General Fund. If all three conditions are met, the 
amount of property taxes that are transferred to other funds for Debt 
Service or Pension Obligations funding will not be excluded from the 
calculation of the operating budget or from expenditures in calculation 
of the operating deficit, to the extent that the property tax revenues 
in the General Fund are less than they were pre-disaster.
    Another commenter asked simply what impact the ad valorem tax would 
have on the forgiveness of one's loan. In response, if a loss of 
revenues from reduced property taxes results in a cumulative operating 
deficit, then it is possible that all or part of the loan may be 
cancelled.
19. Form 90-5
    One commenter requested that if the Application for Loan 
Cancellation Form 90-5 (the form used for cancellation applications for 
CDLs) is used, FEMA should ask for budget revenue in line 6 and actual 
revenue in line 7 instead of one entry combining the two. The commenter 
explained that this is because the language in proposed 44 CFR 
206.376(a)(1) references a budget, which is a forward projection, as 
opposed to actual revenues and

[[Page 2814]]

expenditures. The commenter does not believe that both of these can be 
addressed in a single line.
    FEMA re-designated proposed 44 CFR 206.376(a)(1) as 44 CFR 
206.376(a) in this final rule for ease in reading. FEMA has not revised 
the application form in response to this comment. When filling out the 
form, applicants should enter on line 6 the annual operating budget for 
each of the years specified on line 6. This form should be completed 
for each operating fund that had revenues affected by the disaster 
(i.e., General Operating Funds, Special Revenue Funds of an operating 
nature, and Enterprise Funds), and then summarized on one form in 
total. On line 7, enter the total actual revenues including the 
proceeds of the Special CDL. FEMA will subtract the Special CDL funds 
received from the actual revenues in determining the operating deficit. 
Actual expenditures are required to be entered on line 8 for ``normal'' 
non-disaster related expenditures (i.e., regular operating costs), and 
line 9 is for disaster-related expenses. This method should result in 
the submission of four forms at the maximum: 1 for General Fund, 1 for 
Special Revenue Funds, 1 for Enterprise Funds and 1 summary.
    Another commenter requested that when developing and evaluating the 
application form, FEMA take into consideration that local government 
entities and private non-profit entities operate differently. Further, 
the commenter encouraged FEMA to recognize that some entities may 
properly enter ``not applicable'' relative to some inquiries, such as 
levying or collecting taxes, so that those entities are not unfairly 
disadvantaged.
    FEMA will consider the operating differences between a local 
government and a non-governmental entity, such as a hospital, in the 
cancellation evaluation. If no property taxes are levied or collected 
by a non-profit entity, there will be no impact to the applicant if 
they enter ``not applicable'' to the question on property taxes, in 
determining loan cancellation eligibility.
20. Other Sources of Funds
    School districts benefitted from an influx of Federal funding after 
Hurricane Katrina using aid from the Department of Education to get 
schools back in operation. According to one commenter, now that those 
funds are no longer available, school districts are only now realizing 
the full extent of their revenue shortfalls. Further, State education 
funding to these districts is also decreasing because of decreased 
enrollments. The commenter alleged that requiring school districts to 
repay these loans could create budget deficits.
    The effect of funding from the Department of Education (DOEd) on 
the Special CDL Program is outside the scope of FEMA's authority. If 
the DOEd funding is not adequate to cover all revenues affected by the 
disaster during the three-year period following the disaster, and the 
school district has an operating deficit as a result of other revenue 
losses or reduced enrollment resulting in revenue losses, then it may 
qualify for loan cancellation. As for repayment of the loan, each 
entity knew of commitments of operating revenues that were pledged at 
the time the loan was made. Further, each applicant signed a collateral 
security agreement pledging future revenues to be used to repay the 
loan, if necessary.
    Two commenters asked, when calculating a cumulative operating 
deficit, whether FEMA-reimbursed expenses should be deducted from the 
actual revenues and expenditures of the local government as published 
in the official financial statements of the local government.
    FEMA does not believe FEMA-reimbursed expenses should be deducted 
from the actual revenues and expenditures of the local government as 
published in the official financial statements of the local government. 
The expenditures incurred that are of an operating nature, even if 
reimbursed by FEMA through the Special CDL program, the Public 
Assistance Program, or some other program should not be excluded. 
However, FEMA staff will exclude the Special CDL proceeds from the 
revenues as part of the calculation. Further, funds received from a 
FEMA program that were applied to operating costs should not hurt the 
applicant's bottom line as those revenues should be canceled out by the 
incurred cost.
    Finally, one commenter asked if insurance proceeds could be 
excluded from calculation of the operating deficit. Insurance proceeds 
that were received to address business interruption or to reimburse the 
entity for expenditures of an operating nature must be included as 
revenue since the insurance proceeds were used to cover expenses of an 
operating nature.
21. Deadlines
    One commenter noted that the proposed rule does not provide a 
timeline for FEMA to conduct its reviews and make determinations for 
loan cancellation. The commenter requested that the final rule include 
such timelines as well as FEMA's timeline for reviewing appeals.
    As has traditionally been done in the CDL program, once an 
applicant submits an application for cancellation, FEMA performs an 
initial review and either approves the request or informs the applicant 
that the application is insufficient, and provides applicants an 
opportunity to provide additional documentation to support its request 
for cancellation. In this initial determination, FEMA attempts to be as 
flexible as possible in considering additional documentation to support 
cancellation. However, the timeline for review is not indefinite, and 
applicants must provide the information as quickly as possible during 
the appeals process so the loan cancellation determination can be 
finalized. Limiting the applicant's time during which it can provide 
additional supporting information and engage in a dialogue with FEMA 
staff would provide a disservice to the applicant.
    To protect the applicant's flexibility, while ensuring that FEMA 
will issue its determination in a timely manner, in response to the 
comment, FEMA revised 44 CFR 206.376(f) to provide that once all 
required and requested information has been provided by the applicant 
including un-reimbursed disaster related expenses, the Director of the 
Public Assistance Division will make a cancellation determination 
within 60 days. The term ``required'' represents that information 
explicitly required by the regulations (e.g., financial reports, and 
tax rates established in 44 CFR 206.376(e)). The term ``requested'' 
relates to information such as invoices and purchase orders FEMA may 
seek from the applicant in support of the applicant's stated 
unreimbursed disaster-related expenditures.
22. Outside the Scope
    FEMA received several comments that, although substantive, were 
outside the scope of this rulemaking. One commenter encouraged FEMA to 
incorporate a formula in the Stafford Act for the designation of a 
``catastrophic disaster'' to differentiate those disasters of more 
devastating impact from the existing category of major disaster. 
Another commenter requested that the CDL program revert to a grant 
program as it was when it originated in 1970. Finally, one commenter 
felt that rather than singling out one area or local jurisdiction, 
there should be a loan cancellation program for all taxpayers who 
suffer hardship from floods and storms. This commenter stated that 
forgiveness should not be limited to the debts of cities, towns, 
counties and parishes, but provided to the individuals as well, and 
should

[[Page 2815]]

alleviate mortgage and SBA debt. Each of these comments is outside the 
scope of this rulemaking and would require a change to the Stafford Act 
to implement. FEMA does not have the authority to change the Stafford 
Act.

IV. Statutory and Regulatory Review

A. Executive Order 12866

    In the April 2009 proposed rule, FEMA stated that this rule is an 
economically significant regulatory action because it is expected to 
have an annual effect on the economy of more than $100 million, and 
materially alter the budgetary impact of the Special CDL Program. 74 FR 
15231. The purpose of this final rule is to address comments and 
finalize the 2005 interim rule that established the Special CDL 
program, and further revise those regulations to implement cancellation 
provisions that were proposed in the April 2009 notice of proposed 
rulemaking. Those cancellation provisions are authorized by the U.S. 
Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq 
Accountability Appropriations Act, 2007, Public Law 110-28, section 
4502(a), Public Law 110-28, section 4502(a), 119 Stat. 2061 (2007 Act). 
Pursuant to that authority, FEMA shall cancel ``* * * all or any part 
of [a] Special Community Disaster Loan to the extent that revenues of 
the local government during the three full fiscal year period following 
the major disaster are insufficient to meet the operating budget of the 
local government, including additional disaster-related expenses of a 
municipal operation character.'' See 42 U.S.C. 5184. The cancellation 
provisions apply only to Special CDLs. CDLs, which are issued as a 
separate program, are not affected by this rule. Consequently, this 
rule will only affect those local governments in the Gulf Coast region 
who received Special CDLs following Hurricanes Katrina and Rita and 
will not have any impact on local governments that do not have a 
Special CDL.
    In this rule, FEMA is establishing the application requirements 
communities would be required to follow to apply for cancellation of 
their Special CDL. Although it also finalizes the application 
requirements for the issuance of loans, these loans are statutorily 
limited to communities affected by hurricanes Katrina and Rita, and 
FEMA was only authorized to approve loans during fiscal years 2005 and 
2006. Therefore, FEMA is no longer authorized to grant new Special 
CDLs, and the only substantive change effected by this final rule is 
the establishment of cancellation procedures.
    In establishing cancellation procedures, FEMA used the procedures 
established for the CDL program. The Special CDL program and the CDL 
program share the same cancellation authority (Section 417 of the 
Stafford Act), and FEMA has been using the cancellation procedures for 
the CDL program since 1990. FEMA has found the cancellation procedures 
for the CDL program to be successful in providing the information 
necessary to determine whether cancellation is appropriate. Based on 
this success, FEMA proposed to apply the same provisions for the 
Special CDL program.
    In response to the proposed rule, FEMA received several comments 
seeking blanket cancellation of the loans, with no application 
required. The blanket cancellation of loans is outside the scope of 
FEMA's authority. The text of the authorizing statute shows that 
Congress did not automatically cancel these loans, but allows for 
partial or full forgiveness of community disaster loan repayments if, 
after three years, local revenue remains insufficient to meet operating 
expenses.
    Among other suggestions for revision of the regulations, FEMA 
received comments seeking the consideration of additional costs (such 
as the increase in market values) and exclude certain sources of 
revenue (such as insurance proceeds). Commenters also sought the 
consideration of estimated expenses and revenues, in lieu of the 
proposed method of reviewing an applicant's actual expenses and 
revenues to determine if it experienced an actual operating deficit in 
the three full fiscal years after the event. FEMA evaluated these 
comments and discusses each of them in the discussion of the comments 
section, Section III of this final rule. In the end, FEMA has revised 
the rule as a result of public comments, to make five substantive 
changes.
    First, transfers from an operating fund for debt service are 
allowed for the transfer of ad valorem property tax revenues under 
certain conditions See 44 CFR 206.376(c)(4). Second, FEMA added 
definitions for the terms ``revenues'' and ``operating expenses.'' See 
44 CFR 206.376(b). Third, the title of the individual who makes FEMA's 
initial determination on the application for cancellation has been 
clarified to remove the appearance that the same individual who makes 
the initial determination also makes the determination on appeal See 44 
CFR 206.376(f). Fourth, FEMA revised 44 CFR 206.376(f), to add a new 
paragraph (f)(1) which provides that once all required and requested 
information has been provided by the applicant including un-reimbursed 
disaster related expenses, the Director of the Public Assistance 
Division will complete the initial evaluation within 60 days. And, 
finally, FEMA added language that at the local government's discretion, 
the three-full-fiscal-year period following the disaster is either a 
36-month period beginning on September 1, 2005, or the 36 months of the 
local government's fiscal year as established before the disaster. See 
44 CFR 206.376(c)(2).
    These revisions create no change in the overall impact of this 
rule. The overall impact of this rule is the cost to the applicant to 
apply for the cancellation, as well as the impact on the economy of 
potentially forgiving all Special CDLs and any related interest and 
costs. The burden on the public is low with respect to new 
administrative requirements associated with submitting the Application 
for Loan Cancellations. As explained in the proposed rule, FEMA 
estimates that the annual estimated cost to submit the Application for 
Loan Cancellation will be $4,850.32. FEMA issued 152 Special CDLs 
totaling $1,270,501,241 to 109 eligible applicants in Mississippi and 
Louisiana. The application period for these loans has closed, so no new 
loans can be granted under this program. If all 152 loan recipients 
apply for and are found eligible for full cancellation under this rule, 
up to $1,270,501, 241, plus any applicable interest and costs, could be 
forgiven.
    The maximum total economic impact of this rule, therefore, is 
approximately $1.3 billion (conservatively assuming that all funds 
awarded will be drawn down, and exclusive of any interest that may also 
be forgiven). However, without knowing the dollar amounts or even the 
number of loans that will be cancelled, it is impossible to predict the 
amount of the economic impact of this rule with any precision. Although 
the impact of the rule could be spread over multiple years as 
applications are received, processed, and loans cancelled, the total 
economic effects of a specific loan cancelation would only occur once, 
rather than annually.

B. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (5 U.S.C. 601-612), FEMA has 
considered whether this final rule would have a significant economic 
impact on a substantial number of small entities. The term ``small 
entities'' comprises small businesses, not-for-profit organizations 
that are independently owned and operated and are not dominant in their 
fields, and

[[Page 2816]]

governmental jurisdictions with populations of less than 50,000.
    FEMA certifies under 5 U.S.C. 605(b) that this final rule would not 
have a significant economic impact on a substantial number of small 
entities. Section 601(5) defines small governmental jurisdictions as 
governments of cities, counties, towns, townships, villages, school 
districts, or special districts with a population of less than 50,000. 
This final rule would affect the following entities, some of which 
might be small entities: The 109 eligible applicants devastated by 
Hurricanes Katrina and Rita located in Mississippi and Louisiana that 
received Special CDLs authorized in the 2005 and 2006 Acts. This final 
rule will not impose any additional requirements on local governments 
that do not have Special CDLs.
    As stated previously, the potential for loan cancellation under the 
proposed procedures would not have a negative impact on any loan 
applicant as any funds cancelled will have a positive beneficial effect 
on the State and local governments by reducing ongoing operating 
expenses and debt related to the loan. FEMA previously explained that 
State and local governments that choose to seek loan cancellation 
consideration will need to spend a minimal amount of staff time 
preparing the required application. Such a minimal staffing burden is 
not considered to be a significant economic impact. Consequently, this 
final rule would not have a significant economic impact on a 
substantial number of small entities.

C. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 
1531-1538, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments, and on the private sector. This rule is excluded from the 
Unfunded Mandates Reform Act as provisions in proposed or final Federal 
regulations that require compliance with accounting and auditing 
procedures with respect to grants or other money or property provided 
by the Federal Government, and those that provide for emergency 
assistance or relief at the request of any State, local, or tribal 
government or any official of a State, local, or tribal government. See 
2 U.S.C. 1503.

D. Federalism

    Pursuant to Executive Order 13132, FEMA has determined that this 
action will not have a substantial direct effect on the States, or the 
relationship between the Federal Government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government, and, therefore, does not have federalism implications. 
Eligible applicants who applied for Special CDLs, or who received 
Special CDLs and choose to apply for loan cancellation do so 
voluntarily. State policymaking discretion is not affected.

E. National Environmental Policy Act

    FEMA's regulations implementing the National Environmental Policy 
Act of 1969 (42 U.S.C. 4321 et seq.) at 44 CFR 10.8(d)(2)(ii) 
categorically exclude the preparation, revision, adoption of 
regulations, directives, manuals, and other guidance documents related 
to actions that qualify for categorical exclusions. The changes in this 
final rule constitute actions that qualify for the following 
categorical exclusions: the enforcement of existing Federal 
regulations, and the involvement in emergency and disaster response and 
recovery activities under section 417 of the Stafford Act. See 44 CFR 
10.8(d)(2)(iv) and 10.8(d)(2)(xix)(K). This rulemaking will not have a 
significant effect on the human environment and, therefore, neither an 
environmental assessment nor an environmental impact statement is 
required.

F. Paperwork Reduction Act of 1995

    In the October 19, 2005 Interim Rule (at 70 FR 60442; also 44 CFR 
206.370-206.377), FEMA determined that implementation of the Interim 
Rule would be subject to the Paperwork Reduction Act of 1995 (PRA) (44 
U.S.C. 3501-3520). FEMA submitted with the interim rule two information 
collection requests to OMB for review and clearance in accordance with 
the review procedures of the PRA. OMB approved the requested revision 
of the collection entitled ``Application for Community Disaster Loan 
(CDL) Program and the Special Community Disaster Loan (SCDL) Program,'' 
which was assigned OMB Control Number 1660-0083 and expires on June 30, 
2012. This final rule does not contain any changes that would affect 
that currently approved collection.
    In this final rule, FEMA is finalizing the Special CDL regulations 
published in the Interim Rule and implementing the cancellation 
provisions outlined in the 2007 Act as applied to loans issued under 
the 2005 and 2006 Acts. As previously stated, FEMA intends to apply the 
cancellation procedures already existing under the CDL program as 
outlined in 44 CFR 206.360 through 206.367. It is intended that 
applicants seeking cancellation of a Special CDL will use the 
Application for Loan Cancellation and its associated forms, if 
applicable, already approved by OMB under OMB Control Number 1660-0082, 
which expires on January 31, 2010.
    Collection 1660-0082 uses FEMA Form 90-5, Application for Loan 
Cancellation, which has an annual number of respondents of one (the 
number of communities who apply for cancellation of a Community 
Disaster Loan under the existing procedures in 44 CFR 206.366). With 
this Final Rule, applicants seeking cancellation of a Special Community 
Disaster Loan will use the same form submitted for Community Disaster 
Loans. FEMA therefore seeks to amend that existing collection to 
increase the number of respondents to 153. This number reflects the one 
Community Disaster Loan cancellation application already received 
annually under the Community Disaster Loan program, and the potential 
152 applications for cancellation of Special Community Disaster Loans 
allowed in this rule.
    Accordingly, in the proposed rule, FEMA published a 60-day notice 
seeking a revision to the already existing collection of OMB Control 
Number 1660-0082, FEMA Form 90-5, to include the cancellation of 
Special CDLs. FEMA received no public comments in response to the 60-
day notice. Section 3507(d) of the PRA and 5 CFR 1320.11 require 
Federal agencies to submit new and revised collections of information 
to OMB for review. FEMA will submit the appropriate request to OMB for 
approval, with a copy of this rule. FEMA invites the general public to 
comment on the collection of information.
    Collection of Information:
    Title: Application for Community Disaster Loan Cancellation.
    Type of Information Collection: Revision of a currently approved 
collection.
    OMB Number: 1660-0082.
    Form Numbers: FEMA Form 90-5.
    Abstract: Local governments may submit an Application for Loan 
Cancellation through the Governor's Authorized Representative to the 
FEMA Regional Administrator prior to the expiration date of the loan. 
FEMA has the authority to cancel repayment of all or part of a 
Community Disaster Loan or a Special Community Disaster Loan to the 
extent that a determination is made that revenues of the local 
government during the three fiscal years following the disaster are 
insufficient to meet the operating budget of that local government 
because of disaster-related

[[Page 2817]]

revenue losses and additional unreimbursed disaster-related municipal 
operating expenses. Operating budget means actual revenues and 
expenditures of the local government as published in the official 
financial statements of the local government.
    Affected Public: State, local or tribal governments.
    Number of Respondents: 153.
    Frequency of Response: 1 per year.
    Hour Burden per Response: 1 hour.
    Estimated Total Annual Burden Hours: 153 hours.

                                                 Table A-12--Estimated Annualized Burden Hours and Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Number of   Avg. burden     Total                     Total
                                                                             Number of    responses       per         annual    Avg. hourly     annual
           Type of respondent                    Form name/form No.         respondents      per        response   burden  (in   wage rate    respondent
                                                                                          respondent   (in hours)     hours)                     cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
State, local and Tribal Government......  Application for Loan                        1            1            1            1       $31.91       $31.91
                                           Cancellation/FEMA Form 90-5
                                           (under 44 CFR 206.366 as
                                           currently approved by OMB).
State, local and Tribal Government......  Application for Loan                      152            1            1          152        31.91     4,850.32
                                           Cancellation/FEMA Form 90-5
                                           (under 44 CFR 206.376, the
                                           change associated with this
                                           rule).
                                                                           -----------------------------------------------------------------------------
    Total...............................  ................................          153  ...........  ...........          153  ...........     4,882.23
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated Cost: $0. There are no start-up, operational or other 
costs associated with this information collection in addition to the 
burden hour cost noted in the table above.
    Comments: Written comments are solicited to (a) evaluate whether 
the proposed data collection is necessary for the proper performance of 
the agency, including whether the information shall have practical 
utility; (b) evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used; (c) enhance the 
quality, utility, and clarity of the information to be collected; and 
(d) minimize the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission of responses.
    Interested persons are invited to submit written comments on the 
proposed information collection to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Attention: Desk 
Officer, Department of Homeland Security/FEMA, and sent via electronic 
mail to [email protected] or faxed to (202) 395-6974. 
Comments must be submitted on or before February 18, 2010.You may 
contact the Records Management Branch for copies of the proposed 
collection of information at facsimile number (202) 646-3347 or e-mail 
address: [email protected].

G. Executive Order 12630, Taking of Private Property

    This rule will not effect a taking of private property or otherwise 
have taking implications under Executive Order 12630, Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights.

H. Executive Order 12988, Civil Justice Reform

    This rule meets applicable standards in sections 3(a) and 3(b)(2) 
of Executive Order 12988, Civil Justice Reform, to minimize litigation, 
eliminate ambiguity, and reduce burden.

I. Executive Order 13175, Consultation and Coordination With Indian 
Tribal Governments

    Because no Special Community Disaster Loans were made to Indian 
Tribal Governments, this rule does not have tribal implications under 
Executive Order 13175, Consultation and Coordination with Indian Tribal 
Governments. This rule would not have a substantial direct effect on 
one or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

List of Subjects in 44 CFR Part 206

    Administrative practice and procedure, Coastal zone, Community 
facilities, Disaster assistance, Fire prevention, Grant programs--
housing and community development, Housing; Insurance, 
Intergovernmental relations, Loan programs--housing and community 
development, Natural resources, Penalties, Reporting and recordkeeping 
requirements.

0
Accordingly, the Interim Rule published on October 18, 2005 (70 FR 
60443), is adopted as a final rule with the following changes:

PART 206--FEDERAL DISASTER ASSISTANCE

0
1. The authority citation for part 206 continues to read as follows:

    Authority: 42 U.S.C. 5121-5206; 6 U.S.C. 101; 6 U.S.C. 311-321j; 
Reorganization Plan No. 3 of 1978, 43 FR 41943, 3 CFR, 1978 Comp., 
p. 329; E.O. 12127, 44 FR 19367, 3 CFR, 1979 Comp., p. 376; E.O. 
12148, 44 FR 43239, 3 CFR, 1979 Comp., p. 412; E.O. 12673, 54 FR 
12571, 3 CFR, 1989 Comp., p. 214; E.O. 13286, 68 FR 10619, 3 CFR, 
2003 Comp., p. 166.


0
2. In Sec.  206.370 revise paragraphs (a) and (b) to read as follows:


Sec.  206.370  Purpose and scope.

    (a) Purpose. Sections 206.370 through 206.377 provide procedures 
for local governments and State and Federal officials concerning the 
Special Community Disaster Loans program under section 417 of the 
Stafford Act (42 U.S.C. 5184), the Community Disaster Loan Act of 2005, 
Public Law 109-88, and the Emergency Supplemental Appropriations Act 
for Defense, the Global War on Terror, and Hurricane Recovery, 2006, 
Public Law 109-234.
    (b) Scope. Sections 206.370 through 206.377 apply only to Special 
Community Disaster Loans issued under the Community Disaster Loan Act 
of 2005, Public Law 109-88, and the Emergency Supplemental 
Appropriations Act for Defense, the Global War on Terror, and Hurricane 
Recovery, 2006, Public Law 109-234.


0
3. In Sec.  206.371, revise the last sentence of paragraph (f), revise

[[Page 2818]]

paragraph (g) and add new paragraph (h) to read as follows:


Sec.  206.371  Loan program.

* * * * *
    (f) * * * Neither the loan nor any cancelled portion of the loans 
may be used as the non-Federal share of any Federal program, including 
those under the Stafford Act.
    (g) Relation to other assistance. Any Special Community Disaster 
Loans including cancellations of loans made under this subpart shall 
not reduce or otherwise affect any commitments, grants, or other 
assistance provided under the authority of the Stafford Act or this 
part.
    (h) Cancellation. The Director of the Public Assistance Division 
shall cancel repayment of all or part of a Special Community Disaster 
Loan to the extent that he/she determines that revenues of the local 
government during the three full fiscal years following the disaster 
are insufficient to meet the operating budget of that local government 
because of disaster-related revenue losses and additional unreimbursed 
disaster-related municipal operating expenses.


0
4. In Sec.  206.372 revise paragraphs (a), (c), (d) and (e) to read as 
follows:


Sec.  206.372  Responsibilities.

    (a) The local government shall submit the financial information 
required by FEMA in the application for a Community Disaster Loan or 
other format specified by FEMA and comply with the assurances on the 
application, the terms and conditions of the Promissory Note, the 
application for loan cancellation, if submitted, and Sec. Sec.  206.370 
through 206.377. The local government shall send all loan application, 
loan administration, loan cancellation, and loan settlement 
correspondence through the Governor's Authorized Representative (GAR) 
and the FEMA Regional Office to the Director of the Public Assistance 
Division.
* * * * *
    (c) The Regional Administrator or designee shall review each loan 
application or loan cancellation request received from a local 
government to ensure that it contains the required documents and 
transmit the application to the Director of the Public Assistance 
Division. He/she may also submit appropriate recommendations to the 
Director of the Public Assistance Division.
    (d) The Director of the Public Assistance Division or a designee, 
shall execute a Promissory Note with the local government and shall 
administer the loan until repayment or cancellation is completed and 
the Promissory Note is discharged.
    (e) The Director of the Public Assistance Division shall approve or 
disapprove each loan request, taking into consideration the information 
provided in the local government's request and the recommendations of 
the GAR and the Regional Administrator. The Director of the Public 
Assistance Division shall approve or disapprove a request for loan 
cancellation in accordance with the criteria for cancellation in these 
regulations.
* * * * *

0
5. In Sec.  206.374, add a sentence at the end of paragraph (b)(2) to 
read as follows:


Sec.  206.374  Loan application.

* * * * *
    (b) * * *
    (2) * * * For loan cancellation purposes, FEMA interprets the term 
``operating budget'' to mean actual revenues and expenditures of the 
local government as published in the official financial statements of 
the local government.
* * * * *

0
6. Add Sec.  206.376 to read as follows:


Sec.  206.376  Loan cancellation.

    (a) FEMA shall cancel repayment of all or part of a Special 
Community Disaster Loan to the extent that the Director of the Public 
Assistance Division determines that revenues of the local government 
during the three-full-fiscal-year period following the disaster are 
insufficient, as a result of the disaster, to meet the operating budget 
for the local government, including additional unreimbursed disaster-
related expenses of a municipal operating character.
    (b) Definitions. For loan cancellation purposes,
    (1) ``Operating budget'' means actual revenues and expenditures of 
the local government as published in the official financial statements 
of the local government.
    (2) ``Revenue'' means any source of income from taxes, fees, fines, 
and other sources of income, and will be recognized only as they become 
susceptible to accrual (measurable and available).
    (3) ``Three-full-fiscal-year period following the disaster'' means 
either a 36-month period beginning on September 1, 2005, or the 36 
months of the applicant's fiscal year as established before the 
disaster, at the applicant's discretion.
    (4) ``Operating expenses'' means those expenses and expenditures 
incurred as a result of performing services, including salaries and 
benefits, contractual services, and commodities. Capital expenditures 
and debt service payments and capital leases are not considered 
operating expenses. Under accrual accounting, expenses are recognized 
as soon as a liability is incurred, regardless of the timing of related 
cash flows.
    (c) Revenue Calculation procedures. (1) If the tax rates and other 
revenues or the tax assessment valuation of property which was not 
damaged or destroyed by the disaster are reduced during the three full 
fiscal years subsequent to the major disaster, the tax rates and other 
revenues and tax assessment valuation factors applicable to such 
property in effect at the time of the major disaster shall be used 
without reduction for purposes of computing revenues received.
    (2) At the applicant's discretion, the three-full-fiscal-year 
period following the disaster is either a 36-month period beginning on 
September 1, 2005 or the 36 months of the applicant's fiscal year as 
established before the disaster. If the applicant's fiscal year is 
changed within the 36 months immediately following the disaster, the 
actual period will be modified so that the required financial data 
submitted covers an inclusive 36-month period. Should the applicant 
elect the 36-month period beginning September 1, 2005, FEMA will 
prorate the revenues and expenses for the partial years based on the 
applicant's annual financial statements.
    (3) If the local government transfers funds from its operating 
funds accounts to its capital funds account, utilizes operating funds 
for other than routine maintenance purposes, or significantly increases 
expenditures which are not disaster related, except increases due to 
inflation, the annual operating budget or operating statement 
expenditures will be reduced accordingly for purposes of evaluating any 
request for loan cancellation.
    (4) Notwithstanding paragraph (c)(3) of this section, the amount of 
property taxes that are transferred to other funds for Debt Service or 
Pension Obligations funding will not be excluded from the calculation 
of the operating budget or from expenditures in calculation of the 
operating deficit, to the extent that the property tax revenues in the 
General Fund are less than they were pre-disaster. FEMA will consider 
the impact of the loss of property tax revenue in Debt Service or 
Pension Funds (non-operating funds) if all of the following conditions 
are met:
    (i) The entity experienced a loss of property tax revenue as a 
result of the

[[Page 2819]]

disaster and the assessed value during the three years following the 
disaster, in the aggregate, is less than the pre-disaster assessed 
value;
    (ii) the entity has a property tax cap limitation on the ability to 
raise property taxes post-disaster; and
    (iii) the property taxes are levied through the General Operating 
Fund and transfers for obligations mandated by law are made to fund 
Debt Service or Pension Obligations which result in the entity 
experiencing a reduction of property tax revenues in the General Fund.
    (5) It is not the purpose of this loan program to underwrite pre-
disaster budget or actual deficits of the local government. 
Consequently, such deficits carried forward will reduce any amounts 
otherwise eligible for loan cancellation.
    (6) The provisions of this section apply to all Special Community 
Disaster loans issued from the dates of enactment of Public Law 109-88 
and Public Law 109-234.
    (d) Disaster-related expenses of a municipal operation character. 
(1) For purposes of this loan, unreimbursed expenses of a municipal 
operating character are those incurred for general government purposes, 
including but not limited to police and fire protection, trash 
collection, collection of revenues, maintenance of public facilities, 
flood and other hazard insurance.
    (2) Disaster-related expenses do not include expenditures 
associated with debt service, any major repairs, rebuilding, 
replacement or reconstruction of public facilities or other capital 
projects, intragovernmental services, special assessments, and trust 
and agency fund operations. Disaster expenses which are eligible for 
reimbursement under project applications or other Federal programs are 
not eligible for loan cancellation.
    (3) Each applicant shall maintain records including documentation 
necessary to identify expenditures for unreimbursed disaster-related 
expenses. Examples of such expenses include but are not limited to:
    (i) Interest paid on money borrowed to pay amounts FEMA does not 
advance toward completion of approved Project Applications.
    (ii) Unreimbursed costs to local governments for providing usable 
sites with utilities for mobile homes used to meet disaster temporary 
housing requirements.
    (iii) Unreimbursed costs required for police and fire protection 
and other community services for mobile home parks established as the 
result of or for use following a disaster.
    (iv) The cost to the applicant of flood insurance required under 
Public Law 93-234, as amended, and other hazard insurance required 
under section 311, Public Law 93-288, as amended, as a condition of 
Federal disaster assistance for the disaster under which the loan is 
authorized.
    (4) The following expenses are not considered to be disaster-
related for Special Community Disaster Loan purposes:
    (i) The local government's share for assistance provided under the 
Stafford Act including flexible funding under section 406(c)(1) of the 
Act (42 U.S.C. 5172).
    (ii) Improvements related to the repair or restoration of disaster 
public facilities approved on Project Applications.
    (iii) Otherwise eligible costs for which no Federal reimbursement 
is requested as a part of the applicant's disaster response commitment, 
or cost sharing as specified in the FEMA-State Agreement for the 
disaster.
    (iv) Expenses incurred by the local government which are reimbursed 
on the applicant's Project Application.
    (e) Cancellation application. A local government which has drawn 
loan funds from the U.S. Treasury may request cancellation of the 
principal and related interest by submitting an Application for Loan 
Cancellation through the Governor's Authorized Representative to the 
Regional Administrator prior to the expiration date of the loan.
    (1) Financial information submitted with the application shall 
include the following:
    (i) Annual Operating Budgets for the fiscal year of the disaster 
and the three subsequent fiscal years;
    (ii) Annual Financial Reports (Revenue and Expense and Balance 
Sheet) for each of the above fiscal years. Such financial records must 
include copies of the local government's annual financial reports, 
including operating statements and balance sheets and related 
consolidated and individual presentations for each fund account. In 
addition, the local government must include an explanatory statement 
when figures in the Application for Loan Cancellation form differ from 
those in the supporting financial reports.
    (iii) The following additional information concerning annual real 
estate property taxes pertaining to the community for each of the above 
fiscal years:
    (A) The market value of the tax base (dollars);
    (B) The assessment ratio (percent);
    (C) The assessed valuation (dollars);
    (D) The tax levy rate (mils);
    (E) Taxes levied and collected (dollars).
    (iv) Audit reports for each of the above fiscal years certifying to 
the validity of the Operating Statements. The financial statements of 
the local government shall be examined in accordance with generally 
accepted auditing standards by independent certified public 
accountants. The report should not include recommendations concerning 
loan cancellation or repayment.
    (v) Other financial information specified in the Application for 
Loan Cancellation.
    (2) Narrative justification. The application may include a 
narrative presentation to supplement the financial material 
accompanying the application and to present any extenuating 
circumstances which the local government wants the Director of the 
Public Assistance Division to consider in rendering a decision on the 
cancellation request.
    (f) Determination. (1) The Director of the Public Assistance 
Division will make a cancellation determination within 60 days of the 
date the applicant submits all required and requested information, 
including documentation in support of un-reimbursed disaster related 
expenses.
    (2) If, based on a review of the Application for Loan Cancellation 
and FEMA audit, the Director of the Public Assistance Division 
determines that all or part of the Special Community Disaster Loan 
funds should be canceled, the amount of principal canceled and the 
related interest will be forgiven. The Director of the Public 
Assistance Division's determination concerning loan cancellation will 
specify that any uncancelled principal and related interest must be 
repaid in accordance with the terms and conditions of the Promissory 
Note, and that, if repayment will constitute a financial hardship, the 
local government must submit for FEMA review and approval, a repayment 
schedule for settling the indebtedness on a timely basis. Such 
repayments must be made to the Treasurer of the United States and be 
sent to FEMA, Attention: Office of the Chief Financial Officer.
    (3) A loan or cancellation of a loan does not reduce or affect 
other disaster-related grants or other disaster assistance. However, no 
cancellation may be made that would result in a duplication of benefits 
to the applicant.
    (4) The uncancelled portion of the loan must be repaid in 
accordance with Sec.  206.377.
    (5) Appeals. If an Application for Loan Cancellation is 
disapproved, in

[[Page 2820]]

whole or in part, by the Director of the Public Assistance Division, 
the local government may submit any additional information in support 
of the application within 60 days of the date of disapproval. The 
decision by the Assistant Administrator for the Disaster Assistance 
Directorate on the additional information is final.

0
7. Amend Sec.  206.377 by revising the first sentence of the 
introductory text in paragraph (b), adding a new sentence at the end of 
paragraph (b)(2), revising paragraph (b)(4) and revising (c)(2) to read 
as follows:


Sec.  206.377  Loan repayment.

* * * * *
    (b) Repayment. To the extent not otherwise cancelled, loan funds 
become due and payable in accordance with the terms and conditions of 
the Promissory Note. * * *
* * * * *
    (2) * * * If any portion of the loan is cancelled, the interest 
amount due will be computed on the remaining principal with the 
shortest outstanding term.
* * * * *
    (4) The Assistant Administrator for the Disaster Assistance 
Directorate may defer payments of principal and interest until FEMA 
makes its final determination with respect to any Application for Loan 
Cancellation which the borrower may submit. However, interest will 
continue to accrue.
* * * * *
    (c) * * *
    (2) The principal amount shall be the original uncancelled 
principal plus related interest less any payments made.
* * * * *

    Dated: January 12, 2010.
W. Craig Fugate,
Administrator, Federal Emergency Management Agency.
[FR Doc. 2010-925 Filed 1-15-10; 8:45 am]
BILLING CODE 9110-10-P