[Federal Register Volume 76, Number 36 (Wednesday, February 23, 2011)]
[Notices]
[Pages 10047-10050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2656]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5094-N-04]


Changes to the Public Housing Assessment System (PHAS): Financial 
Condition Scoring Notice

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

ACTION: Notice.

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SUMMARY: This notice provides additional information to public housing 
agencies (PHAs) and members of the public about HUD's process for 
issuing scores under the financial condition indicator of the Public 
Housing Assessment System (PHAS). This notice includes threshold values 
and associated scores for each financial subindicator derived from 
generally accepted accounting principles (GAAP)-based financial 
information. This notice updates and clarifies the audit flags and tier 
classification chart.

DATES: Effective Date: March 25, 2011.
    Comment Due Date: April 25, 2011.

ADDRESSES: Interested persons are invited to submit comments on this 
notice to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. Communications must refer to the 
above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

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

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

FOR FURTHER INFORMATION CONTACT: Claudia Yarus, Department of Housing 
and Urban Development, Office of Public and Indian Housing, Real Estate 
Assessment Center (REAC), 550 12th Street, SW., Suite 100, Washington, 
DC 20410 at 202-475-8830 (this is not a toll-free number). Persons with 
hearing or speech impairments may access this number through TTY by 
calling the toll-free Federal Information Relay Service at 800-877-
8339. Additional information is available from the REAC Internet site 
at http://www.hud.gov/offices/reac/.

SUPPLEMENTARY INFORMATION: 

I. Purpose of This Notice

    The purpose of this notice is to provide information about the 
scoring process for PHAS indicator 2, financial condition, 
under the PHAS. The purpose of the financial condition indicator is to 
measure the financial condition of each public housing project.

II. Background

A. Financial Condition Indicator Regulatory Background

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

B. Comparable Scoring Systems

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

III. Transition to Asset Management and Frequency of Financial 
Condition Submissions

    The number of units in a PHA's Low-Rent program and the PHAS 
designation for small PHAs will determine the frequency of financial 
condition submissions during and after the transition to asset 
management. PHAs with fewer than 250 public housing units will receive 
a PHAS assessment, based on its PHAS designation, as follows:
    (1) A small PHA that is a high performer will receive a PHAS 
assessment every 3 years;
    (2) A small PHA that is a standard or substandard performer will 
receive a PHAS assessment every other year; and
    (3) All other small PHAs will receive a PHAS assessment every year, 
including a PHA that is designated as

[[Page 10048]]

troubled or Capital Fund troubled in accordance with Sec.  902.75.
    In the baseline year, every PHA will receive an overall PHAS score 
and in all four of the PHAS indicators: physical condition; financial 
condition; management operations; and Capital Fund program. This will 
allow a baseline year for the small deregulated PHAs.

IV. Subindicators

A. Subindicators of the Financial Condition Indicator

    There are three subindicators that examine the financial condition 
of each project. The values of the three subindicators, derived from 
the FDS submitted by the PHA, comprise the overall financial assessment 
of a project. The three subindicators of the financial condition 
indicator are:
     Quick Ratio (QR);
     Months Expendable Net Assets Ratio (MENAR); and
     Debt Service Coverage Ratio (DSCR).

B. Description of the Financial Condition Subindicators

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

V. GAAP-Based Scoring Process and Elements of Scoring

A. Points and Threshold

    The financial condition indicator is based on a maximum of 25 
points. In order to receive a passing score under this indicator, a 
project must achieve at least 15 points, or 60 percent of the available 
points under this indicator.

B. Scoring Elements

    The financial condition indicator score provides an assessment of a 
project's financial condition. Under the PHAS financial condition 
indicator, HUD will calculate an overall score based on the unit 
weighted average score for each project. In order to compute an overall 
financial condition score, an individual project financial condition 
score is multiplied by the number of units in each project to determine 
a ``weighted value.'' The sum of the weighted values is then divided by 
the total number of units in a PHA's portfolio to derive the overall 
PHAS financial condition indicator score. The three subindicator scores 
are produced using GAAP-based financial data contained in the FDS. The 
minimum number of points (zero) and the maximum number of points (25) 
can be achieved over a range of values.

------------------------------------------------------------------------
         Subindicators              Measurement of           Points
------------------------------------------------------------------------
QR............................  Liquidity............               12.0
MENAR.........................  Adequacy of reserves.               11.0
DSCR..........................  Capacity to cover                    2.0
                                 debt.
                               -----------------------------------------
    Total.....................  .....................               25.0
------------------------------------------------------------------------

QR
    A project will receive zero points when its QR is less than 1.0. If 
its QR equals 1.0, it will receive 7.2 points. If its QR is greater 
than 1.0 and less than 2.0, it will receive greater than 7.2 points but 
less than 12.0 points, on a proportional basis. A project will receive 
the maximum of 12.0 points when its QR is equal to or greater than 2.0.

------------------------------------------------------------------------
                QR Value                              Points
------------------------------------------------------------------------
<1.0....................................  0.0
1.0.....................................  7.2
>1.0 but <2.0...........................  >7.2 but <12.0
>=2.0...................................  12.0
------------------------------------------------------------------------

MENAR
    A project will receive zero points when its MENAR is less than 1.0. 
If its MENAR equals 1.0, it will receive 6.6 points. If its MENAR is 
greater than 1.0 and less than 4.0, it will receive greater than 6.6 
points but less than 11.0 points, on a proportional basis. A project 
will receive the maximum of 11 points when its MENAR is equal to or 
greater than 4.0.

------------------------------------------------------------------------
               MENAR Value                            Points
------------------------------------------------------------------------
<1.0....................................  0.0
1.0.....................................  6.6
>1.0 but <4.0...........................  >6.6 but <11.0
>=4.0...................................  11.0
------------------------------------------------------------------------

DSCR
    A project will receive zero points when its DSCR ratio is less than 
1.0. If its DSCR equals at least 1.0 but less than 1.25, it will 
receive 1 point. A project will receive the maximum of 2.0 points if 
its DSCR is equal to or greater than 1.25 or if it has no debt at all.

------------------------------------------------------------------------
                       DSCR Value                             Points
------------------------------------------------------------------------
<1.0....................................................             0.0
>=1.0 but <1.25.........................................             1.0
>=1.25..................................................             2.0
No Debt Service.........................................             2.0
------------------------------------------------------------------------

VI. Audit Adjustment

    Pursuant to Sec.  902.30, HUD calculates a revised financial 
condition score after it receives audited financial information. The 
revised financial condition score, which is based on the audited 
information, can increase or decrease the initial PHA-wide score that 
was based on the unaudited financial information. The audited score 
reflects two types of adjustments. The first type is based on audit 
flags and reports the result from the audit itself. Significant 
deficiencies and material weaknesses are considered to be audit flags, 
alerting the REAC to an internal control

[[Page 10049]]

deficiency or an instance of noncompliance with laws and regulations. 
The second adjustment type addresses significant differences between 
the unaudited and audited financial information reported to HUD 
pursuant to Sec.  902.30.

Audit Opinion and Flags

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

Audit Flag Tiers

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

                                      Audit Flags and Tier Classifications
----------------------------------------------------------------------------------------------------------------
               Audit Flags                         Tier classification                       comments
----------------------------------------------------------------------------------------------------------------
Financial Statement Audit Opinion(s):
    1. Unqualified opinion(s)...........  None.                                  ...............................
    2. Qualified opinion(s).............  Tier 2...............................  Deduction only if the departure
                                                                                  includes the Low Rent or
                                                                                  Capital Fund programs.
         Departures from GAAP
         not significant enough to cause
         an adverse opinion(s).
         Limitations on the
         scope of the audit (regardless
         of cause) not significant
         enough to cause a disclaimer of
         opinion.
    3. Adverse opinion(s) regardless of   Tier 1.                                ...............................
     reason(s).
    4. Disclaimer of opinion(s)           Tier 1.                                ...............................
     regardless of reason(s).
Opinion(s) on Supplemental Information    .....................................  Applies to the FDS.
 (Statement of Auditing Standard (SAS)
 29 ``in relation to'' type of opinion):
    1. Fairly stated....................  None.                                  ...............................
    2. Fairly stated except for.........  Tier 2.                                ...............................
    3. No opinion.......................  Tier 1.                                ...............................
    4. Incomplete or missing............  Tier 1.                                ...............................
Report on Internal Control and            .....................................  Deduction applies only if the
 Compliance and Other Matters Noted in                                            internal control deficiency
 an Audit of the Financial Statement                                              and/or noncompliance relates
 performed in accordance with Government                                          to the Low Rent or Capital
 Auditing Standards (GAS) (Yellow Book):                                          Fund programs.
    1. Control deficiencies.............  Tier 3...............................
         Significant
         deficiencies.
         Material weakness......
    2. Material noncompliance...........  Tier 3.                                ...............................
    3. Fraud............................  Tier 3...............................
    4. Illegal acts.....................  Tier 3...............................
    5. Abuse............................  Tier 3...............................
Report on Compliance with Requirements                                           ...............................
 Applicable to Major Federal Programs
 and Internal Control over Compliance
 with OMB Circular A-133--Opinion on
 compliance with each major Federal
 program requirements:
    1. Unqualified opinion(s) on          None.................................
     compliance with Low Rent program
     and Capital Fund program major
     federal requirements.
    2. Qualified opinion(s) on            Tier 2...............................
     compliance with Low Rent Program
     program and Capital Fund program
     major federal requirements
     (regardless of cause).
    3. Adverse opinion(s) on compliance   Tier 1...............................
     with Low Rent program and Capital
     Fund program major federal
     requirements (regardless of cause).
    4. Disclaimer of opinion(s) on        Tier 1...............................
     compliance with Low Rent Program
     and Capital Fund program major
     federal requirements (regardless of
     cause).
Internal Controls and Compliance:
    1. Control Deficiencies:............  Tier 3...............................
         Significant
         deficiencies in internal
         controls over compliance with
         Low Rent program and Capital
         Fund program requirements.

[[Page 10050]]

 
         Material weakness in
         internal controls over
         compliance with Low Rent
         program and Capital Fund
         program requirements.
    2. Material noncompliance with Low    Tier 3...............................
     Rent program and Capital Fund
     program requirements.
Other Consideration:
    1. Significant change penalty         Tier 2...............................
     deduction applies only if the
     significant change(s) relate to the
     Low Rent or Capital Fund programs.
    2. Going concern....................  Tier 1...............................
    3. Management Discussion and          Tier 2...............................
     Analysis.
    and other supplemental information
     omitted.
    4. Financial statements using basis   Tier 1...............................
     other than GAAP.
----------------------------------------------------------------------------------------------------------------

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

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

Review of Audited Versus Unaudited Submission

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

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

Significant Change Penalty

    HUD views the transmission of significantly inaccurate unaudited 
financial data as a serious condition. Therefore, projects are 
encouraged to assure that financial data is as reliable as possible for 
their unaudited submissions.
    A significant change penalty will be assessed for significant 
differences between the unaudited and audited submissions. A 
significant difference is considered to be an overall financial 
condition score decrease of three or more points from the unaudited to 
the audited submission. A significant change penalty is considered a 
tier 2 flag and will result in a reduction of 10 percent of the total 
audited financial condition score.
    The PHAS system automatically deducts the significant change 
penalty from the audited score, and this reduction triggers the REAC 
analyst's review. REAC may waive the significant change penalty if the 
project provides reasonable documentation of the significant difference 
in its submission.

    Dated: February 1, 2011.
Sandra B. Henriquez,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 2011-2656 Filed 2-22-11; 8:45 am]
BILLING CODE 4210-67-P