CFR 990 Public Housing Subsdiy Operating Fund

Monday,
September 19, 2005

Part II

Department of
Housing and Urban
Development
24 CFR Part 990
Revisions to the Public Housing
Operating Fund Program; Final Rule

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Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Part 990
[Docket No. FR–4874–F–08]
RIN 2577–AC51

Revisions to the Public Housing
Operating Fund Program
Office of the Assistant
Secretary for Public and Indian
Housing, HUD.
ACTION: Final rule.
AGENCY:

SUMMARY: This rule amends the
regulations of the Public Housing
Operating Fund Program (Operating
Fund Program) to provide a new
formula for distributing operating
subsidy to public housing agencies
(PHAs) and to establish requirements for
PHAs to convert to asset management.
HUD developed the final rule with the
active participation of PHAs, public
housing residents, and other relevant
parties using the procedures of the
Negotiated Rulemaking Act of 1990.
These regulatory changes improve and
clarify the current regulations governing
the Operating Fund Program and take
into consideration the recommendations
of the congressionally funded study by
the Harvard University Graduate School
of Design on the cost of operating wellrun public housing. The final rule
follows publication of an April 14, 2005,
proposed rule, and takes into
consideration the public comments
received.
DATES:

Effective Date: November 18,

2005.
FOR FURTHER INFORMATION CONTACT:

Elizabeth Hanson, Public Housing
Financial Management Division, Office
of Public and Indian Housing,
Department of Housing and Urban
Development, 550 12th Street SW.,
Suite 100, Washington, DC 20410;
telephone (202) 475–7949 (this
telephone number is not toll-free).
Individuals with speech or hearing
impairments may access this number
through TTY by calling the toll-free
Federal Information Relay Service at 1–
800–877–8339.
SUPPLEMENTARY INFORMATION:
I. Background
Section 519 of the Quality Housing
and Work Responsibility Act of 1998
(Pub. L. 105–276, approved October 21,
1998) amended section 9 of the United
States Housing Act of 1937 (42 U.S.C.
1437 et seq.) (1937 Act). As amended,
section 9 of the 1937 Act established an
Operating Fund to make assistance

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available to PHAs to operate and
manage public housing. Section 9 of the
1937 Act also required that the amount
of the assistance to be made available to
a PHA from that fund be determined
using a formula developed through
negotiated rulemaking procedures as
provided in subchapter III of chapter 5
of title 5, United States Code, commonly
referred to as the Negotiated
Rulemaking Act of 1990 (5 U.S.C. 561 et
seq.).
Negotiated rulemaking on the
Operating Fund Program was initiated
in March 1999, and the negotiated
rulemaking committee consisted of 25
members representing PHAs, tenant
organizations, community-based
organizations, and the three national
organizations representing PHAs—the
Public Housing Authorities Directors
Association (PHADA), Council of Large
Public Housing Authorities (CLPHA),
and National Association of Housing
and Redevelopment Officials (NAHRO).
Based on the recommendations made by
the negotiated rulemaking committee,
HUD published a proposed rule on July
10, 2000 (65 FR 42488), which was
followed by an interim rule published
on March 29, 2001 (66 FR 17276). The
March 29, 2001, interim rule established
the Operating Fund Program regulations
that are currently in effect. These
regulations are located in part 990 of
HUD’s regulations in title 24 of the Code
of Federal Regulations.
During the negotiated rulemaking for
the Operating Fund Formula, Congress
directed that HUD contract with the
Harvard University Graduate School of
Design (Harvard GSD) to conduct a
study on the costs incurred in operating
well-run public housing (Cost Study).
This congressional direction was
contained in the Conference Report
(H.R. Rep. No. 106–379 at 91 (1999))
accompanying HUD’s Fiscal Year (FY)
2000 Appropriations Act (Pub. L. 106–
74, approved October 20, 1999).
Congress further directed that HUD
make the results of the Cost Study
available to the negotiated rulemaking
committee and appropriate
congressional committees.
The Harvard GSD performed
extensive research on the question of
what the expense level of managing
well-run public housing should be.
HUD, consistent with congressional
direction, made the results of the Cost
Study available to the members of the
negotiated rulemaking committee who
developed the current Operating Fund
Program regulations, and also invited
the committee members to be active
participants in the Harvard GSD’s
research for and development of the
Cost Study. The Harvard GSD also

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conducted several public meetings to
allow for an exchange of views and
expectations with the public housing
industry, beyond those industry
members who were part of the
negotiated rulemaking committee. The
Cost Study was completed and officially
released in July 2003.
II. The Negotiated Rulemaking
Advisory Committee on the Operating
Fund
The FY 2004 Consolidated
Appropriations Act (Pub. L. 108–199,
approved January 23, 2004) required
HUD to undertake further negotiated
rulemaking to make changes to the
Operating Fund formula.
In response to this statutory language,
HUD convened a negotiated rulemaking
advisory committee (Committee) for the
purposes of developing possible
changes to the Operating Fund Program
in response to the Cost Study. The
Committee consisted of 28 members,
including representatives of PHAs,
public housing tenant organizations,
public housing advocacy groups, the
three national PHA organizations
(CLPHA, NAHRO, and PHADA), the
National Organization of African
Americans in Housing (NOAAH),
multifamily housing providers, and
HUD. The Committee held four
meetings. The meetings were held on
March 30-April 1, 2004, in Washington,
DC; April 13–15, 2004, also in
Washington, DC; May 11–12, 2004, in
Atlanta, Georgia; and June 8–9, 2004, in
Potomac, Maryland. Committee sessions
were announced in the Federal Register
and were open to the public. Members
of the public were permitted to make
statements during the meetings at
designated times and to file written
statements with the Committee for its
consideration.
The Committee developed a report
containing several recommendations for
revising the current Operating Fund
Program regulations (Committee
Recommendations). HUD developed a
draft proposed rule based on these
recommendations. Consistent with
HUD’s obligations under Executive
Order 12866 (entitled ‘‘Regulatory
Planning and Review’’) and other
rulemaking authorities, the draft rule
underwent further HUD and executive
branch review prior to publication.
On April 14, 2005 (70 FR 19858),
HUD published its proposed rule to
revise the Operating Fund Program in
the Federal Register. As a result of the
pre-publication review processes, ten
substantive modifications were made to
the Committee Recommendations.
Specifically, the April 14, 2005,
proposed rule did not include seven of

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the changes recommended by the
Committee. In addition, the proposed
rule contained three modifications to
the Operating Fund Program that were
not part of the Committee
Recommendations. Additional
information regarding the proposed
regulatory changes to the Operating
Fund Program, and the modifications
made to the Committee
Recommendations, can be found in the
preamble to the April 14, 2005,
proposed rule.
III. Differences Between This Final Rule
and the April 14, 2005, Proposed Rule
This final rule follows publication of
the April 14, 2005, proposed rule and
takes into consideration the public
comments received on the proposed
rule. Sections IV, V, and VI of this
preamble provide a summary of the
significant issues raised by the public
commenters on the proposed rule and
HUD’s responses to the comments. After
reviewing the public comments, HUD
has made the following changes to the
April 14, 2005, proposed rule.
Adoption of Five Committee
Recommendations
HUD has adopted five of the seven
Committee Recommendations that were
omitted from the April 14, 2005,
proposed rule. These are:
1. The ten percent non-profit
coefficient.
2. The three percent vacancy
allowance.
3. The phase-in of operating subsidy
gains over two years.
4. The provision regarding the
discontinuation of subsidy reduction
through demonstration of successful
conversion to asset management (i.e.,
‘‘stop-loss provision’’).
5. The language requiring use of an
advisory committee to review the
Project Expense Level (PEL)
methodology and utility benchmarking,
convened in accordance with the
Federal Advisory Committee Act
(FACA).
With respect to the remaining two
Committee Recommendations not
adopted in the April 14, 2005, proposed
rule (i.e., the change in methodology for
inflating PELs and the elimination of the
$2 per unit per month public entity fee),
the final rule remains unchanged.
Removal of Provisions Not Contained in
the Committee Recommendations
Additionally, HUD has removed the
three proposed rule provisions that were
not part of the Committee
Recommendations. These are:

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1. The adjustment in § 990.190(i)
based on the Committee
Recommendations for certain PHAs.
2. The two-year limit on a higher
subsidy for vacant units due to changing
market conditions, and the related
requirements that PHAs requesting such
subsidy submit a plan for ending the
higher subsidy within the two-year
period.
3. The provision authorizing
sanctions on PHAs that fail to comply
with the asset management
requirements or that do not submit
accurate and timely data.
Energy Loan Amortization Expenses
In response to comments, HUD has
also added language relating to the
eligible expenses that can be funded
under the ‘‘add-on’’ for energy loan
amortization. This language was
included in the Committee
Recommendations, but was
inadvertently omitted in the April 14,
2005, proposed rule.
Technical Non-Substantive Changes
In addition to the changes described
above, HUD has also made several
technical non-substantive corrections to
the April 14, 2005, proposed rule, such
as correcting cross-references and
making other grammatical and editorial
changes.
IV. Public Comments Received on the
April 14, 2005, Proposed Rule
The public comment period for the
proposed rule closed on June 13, 2005.
The proposed rule was of significant
interest to the public. HUD received 573
public comments on the April 14, 2005,
proposed rule. Comments were
submitted by PHAs, PHA industry
groups, resident organizations,
advocates for low-income housing,
housing experts, and other organizations
and individuals. Many of the comments
were part of a letter-writing campaign
consisting of several form letters that
were similar in substance. In some
instances, individual commenters
submitted multiple comments
consisting of different form letters. In
general, the comments objected to the
modifications made to the Committee
Recommendations and urged that HUD
issue a rule adopting the
recommendations.
The next two sections of the preamble
present a summary of the significant
issues raised by the public comments,
and HUD’s responses to the comments.
Comments are organized in two
categories. Section V of the preamble
discusses the public comments
regarding the changes to the Committee
Recommendations. Section VI of the

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preamble discusses additional topics
that were raised by the commenters.
Within each category of comments, the
headings present the issue or question,
followed by a brief description of the
comment and HUD’s response to the
comment.
V. Public Comments Regarding the
Changes to Committee
Recommendations
General Comments
Comment: Support for proposed rule.
Four commenters supported
implementation of the April 14, 2005,
proposed rule. The commenters wrote
that although the proposed rule
contained changes to the Committee
Recommendations and did not fulfill
every resident’s and PHA’s needs, the
rule maintained ‘‘some of the more
prevailing themes of the negotiated
rulemaking agreement,’’ such as the
conversion to the PEL, which will ‘‘lead
to more efficient property-based
management.’’ The commenters wrote
that with the resulting increase in
subsidy, PHAs will be able to provide
additional services to their residents
and urged HUD to quickly implement
the April 14, 2005, proposed rule.
HUD Response. HUD agrees that this
final rule will result in better-managed
PHAs and improved services to
residents.
Comment: HUD should fully
implement the Committee
Recommendations. As noted above, the
majority of the public commenters
objected to the changes made to the
Committee Recommendations and urged
that HUD either fully implement the
regulatory proposals developed during
the negotiated rulemaking process or
reconvene the Committee for new
negotiations. Several of the commenters
expressed concern that the ‘‘proposed
rule modification of the funding
methodology will have a long term
negative impact on PHAs in order to
achieve a short-term solution for this
budget year’’ and that ‘‘budget
constraints should more appropriately
be handled by prorating the budget
based on the level of congressional
appropriations.’’
HUD Response. While it is true that
the Committee Recommendations were
developed as part of a formal process,
the completion of the Committee’s work
did not conclude the rulemaking
process. HUD indicated throughout the
negotiated rulemaking sessions that the
Committee Recommendations, like all
significant rulemakings, would undergo
further HUD and Executive Order 12866
review prior to publication and that the
recommendations might be revised as a

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result of those review processes. The
changes made to the Committee
Recommendations were designed to
further the goals of the Operating Fund
program and the Administration
policies and budgetary priorities, while
also advancing the goals of the
Committee to implement an improved
and more accurate Operating Fund
formula.
HUD recognizes that, as part of a
negotiated rulemaking process,
concessions were made by all parties to
arrive at the proposed regulatory
changes recommended by the
Committee. In light of the issues raised
by the public commenters, HUD has
reconsidered the changes to the
Committee Recommendations, and this
final rule adopts all but two of the
provisions recommended by the
Committee. HUD believes that the final
rule furthers the implementation of the
recommendations of the Cost Study, the
policy and budgetary goals of the
Administration, and the consensus
decisions reached during the negotiated
rulemaking process.
Comment: HUD should initiate new
rulemaking on the Operating Fund.
Several commenters wrote that HUD
should discard both the April 14, 2005,
proposed rule and the Committee
Recommendations, and start the
rulemaking process again to produce a
rule that would be more reflective of the
costs associated with well-managed
public housing. The commenters wrote
that the cuts recommended by the Cost
Study would impair the ability of PHAs
to carry out necessary functions to
maintain decent, safe, and sanitary
housing.
HUD Response. While the Committee
Recommendations and the April 14,
2005, proposed rule may not meet with
the complete satisfaction of all parties,
both reflect the results of extensive
deliberations based on the sound and
thorough Cost Study. As HUD has
previously indicated, it believes that the
Cost Study’s methodology is an interim
solution, with the ultimate goal to
establish funding levels based on actual
and reasonable cost data by property,
which is to be achieved with the
implementation of asset management.
However, HUD has acknowledged that
PHAs that face a reduction under the
new formula will need some time to
align their resources with the new
funding. Accordingly, HUD has
provided a 5-year transition period.
Comments on Specific Regulatory
Provisions
Comment: The non-profit coefficient
should be increased to ten percent. The
Cost Study and the Committee had

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recommended a non-profit coefficient of
ten percent based on estimated
differences in operating costs between
for-profit and non-profit entities
according to the Federal Housing
Administration (FHA) database of
properties that was used for the Cost
Study. The April 14, 2005, proposed
rule reduced the non-profit coefficient
from ten percent to four percent,
reflecting the belief that the difference
in costs between for-profit and nonprofit entities represented inefficiencies
that should not be supported in the
formula.
Many comments objected to HUD’s
reduction of the non-profit coefficient
from ten to four percent on the grounds
that it was contrary to the
recommendations of both the
Committee and the Cost Study, and that
it would not provide PHAs with
sufficient funding to support their
specific non-profit operating functions.
HUD Response. As noted above, HUD
has adopted the suggestion made by the
commenters and has adopted the nonprofit coefficient as contained in the
Committee Recommendations.
Comment: Support for a $2 Per Unit
Per Month (PUM) Public Entity Fee. The
Committee recommended that a public
entity fee of $2 PUM be added to the
initial PELs. The public entity fee was
intended to reimburse PHAs for
additional services (above and beyond
the non-profit coefficient) that are
unique to PHAs as public entities. The
April 14, 2005, proposed rule did not
adopt this additional fee. HUD’s
position was that these expenses were
addressed through other means in the
proposed rule.
Many commenters recommended
adoption of the $2 PUM public entity
fee. Several of the commenters asked
where in the April 14, 2005, proposed
rule such expenses were covered,
especially given the fact that the nonprofit coefficient had been reduced.
HUD Response. HUD has not revised
the rule in response to these comments.
The FHA portfolio, which was the basis
for the new Project Expense Level (PEL)
calculation, contains a high percentage
of assisted properties, which are also
subject to HUD regulations. Thus, the
expenses associated with the public
entity fee are reflected in the PEL’s
percent-assisted coefficient and the nonprofit coefficient. Furthermore, the final
rule adopts the Cost Study’s
recommendation of a ten percent nonprofit coefficient, which HUD believes
adequately covers the additional
services unique to PHAs.
Comment: Support for the three
percent allowance for vacant units.
Under the Committee

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Recommendations, PHAs would receive
a subsidy for occupied dwelling units
and dwelling units with an approved
vacancy. PHAs would also receive an
operating subsidy for a limited number
of vacancies if the annualized rate is
less than or equal to three percent, or for
up to five units if the PHA has 100 or
fewer units. The April 14, 2005,
proposed rule did not adopt these
recommendations.
Many commenters recommended that
HUD adopt the vacancy allowance,
indicating that it would be unrealistic to
expect any housing operator to maintain
100 percent occupancy at all times.
Several commenters mentioned that the
three percent vacancy allowance is the
industry standard and that the monthly
rent charge in FHA’s multifamily
housing program also reflects
assumptions on occupancy loss.
HUD Response. HUD has revised the
rule in response to the suggestion made
by the commenters. The final rule
adopts the recommendation of the
Committee with regard to vacancies.
Hence, PHAs will receive an operating
subsidy for a limited number of
vacancies if the annualized rate is less
than or equal to three percent, or for up
to five units if the PHA has 100 or fewer
units.
Comment: Support for Committee
recommendation regarding the PEL
inflation factor. The annual inflation
factors used to adjust the current
Allowable Expense Level (AEL) are
based on a 60 percent wage factor and
a 40 percent non-wage factor. Under the
Committee Recommendations, the
weights would have remained the same,
but the methodology for calculating the
inflation factor would have changed.
For the wage component, the factor
would have been based on the
Employment Cost Index (ECI) instead of
the current formula’s Bureau of Labor
Statistics (BLS) 202 Local Government
Wage series. For the non-wage
component, this factor would have been
based on the Consumer Price Index
(CPI) instead of the current formula’s
Producer Price Index (PPI). The April
14, 2005, proposed rule retained the
current formula’s inflation factor
methodology for adjusting annually the
PEL.
Many commenters urged that HUD
adopt the methodology recommended
by the Committee for calculating the
PEL inflation factor. The commenters
wrote that the recommended
methodology is a more accurate measure
of inflation. The commenters wrote that
the current wage factor does not keep
pace with health care costs, which was
addressed by the Committee with the
recommended use of the ECI. In

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addition, several commenters wrote that
because PHAs are not producers, but,
instead, purchasers of goods and
services, the more appropriate index for
non-wage inflation would be the CPI.
HUD Response. HUD has not revised
the rule in response to these public
comments. During negotiated
rulemaking, HUD sought to devise a
more accurate and transparent inflation
factor methodology than the one used
under the current regulations, one that
PHAs could calculate by accessing the
BLS Web site. After further review, HUD
believes that the inflation factors
recommended by the Committee are less
accurate and no more transparent than
the current methodology. Specifically,
for the wage component, the current
BLS–202 local government wage series
is more accurate than the BLS—
Employment Cost Index (ECI)
contemplated by the Committee for the
following reasons:
1. The current methodology measures
wages of local government employees,
which are more similar to PHAs,
whereas the ECI data includes State and
local government employees.
2. The current methodology includes
data that is available at the county level,
summed to either state metropolitan and
nonmetropolitan level, whereas the
methodology recommended by the
Committee (i.e., ECI) is available at only
a national level and, for private sector
wages, at the regional level. Local wage
patterns can vary significantly from
national averages.
For the non-wage component, the
current methodology uses the Producer
Price Index (PPI), which excludes the
cost of food and energy and measures
national average cost changes in
finished goods used by businesses. The
Committee recommended using the
overall CPI, which primarily measures
changes in the costs of food, housing,
apparel, recreation, transportation,
medical expenses, utilities, and other
services. HUD believes the PPI is a more
appropriate measure of the type of
goods and services purchased by PHAs,
and that the overall CPI has little
relevance to the costs of PHA purchases.
In addition, utility costs are covered in
the Operating Fund formula under a
separate component than the PEL and
should be excluded from the PEL
inflation factor.
All factors considered, the current
methodology for the inflation factor is
considerably more appropriate than the
methodology recommended by the
Committee.
Comment: Support for two-year
phase-in of operating subsidy gains.
Under the Committee
Recommendations, PHAs that

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experience a gain in their operating
subsidy would have those gains phased
in over a two-year period. The April 14,
2005, proposed rule would have phased
in those gains over a four-year period to
more closely align the gains with the
five-year phase-in period for those PHAs
that would have their subsidy
decreased.
Many commenters objected to the
change in phase-in for PHAs gaining
operating subsidy. The commenters
indicated that the four-year phase-in
period would be too long and that, for
PHAs that have been historically
underfunded, increases in subsidy
should be distributed expeditiously.
HUD Response. HUD has adopted the
suggestion of the commenters to adopt
the language of the Committee
Recommendations so that gains in
subsidy will be phased in over two
years.
Comment: Support for adoption of
‘‘stop-loss’’ provision. The Committee
Recommendations allowed PHAs to
discontinue their subsidy reduction
(stop-loss) by demonstrating successful
conversion to asset management. The
April 14, 2005, proposed rule did not
adopt this stop-loss provision on the
grounds that the Cost Study’s results
should be equally applied to all PHAs
and that this stop-loss would weaken
the implementation of the Cost Study.
Further, PHAs that feel that their
formula is not correctly calculated have
remedies under the appeals provision.
Many commenters supported
adoption of the stop-loss provision. The
commenters indicated that such a
provision is necessary to prevent PHAs
from experiencing reductions in their
subsidy amounts that impact their
staffing and PHA services. In addition,
commenters wrote that the stop-loss
provision would provide PHAs with an
incentive to convert to asset
management in order to limit their
decrease in subsidy.
HUD Response. HUD has revised the
rule in response to these comments. The
final rule adopts the stop-loss provision
recommended by the Committee, which
allows PHAs to discontinue their
subsidy reduction by demonstrating
successful conversion to asset
management.
Comment: Opposition to the
adjustment for certain PHAs. The April
14, 2005, proposed rule would have
established an ‘‘add on’’ for certain
PHAs that would have gained subsidy
under the Committee
Recommendations, but would have had
their subsidy decreased under the
proposed rule. These PHAs would
receive additional funding at the

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formula amount recommended by the
Committee.
Many of the public commenters
objected to this special add-on. Most
believed that this adjustment created a
special class of agencies and essentially
a two-tier, inequitable funding system.
HUD Response. HUD agrees with the
public commenters and has removed the
adjustment for certain PHAs. All PHAs
will be funded under the same
Operating Fund formula and provisions.
Comment: Opposition to the two-year
time limit and plan requirements on
subsidies for vacant units due to
changing market conditions. The April
14, 2005, proposed rule included a
provision that would have required
PHAs that appeal to receive subsidy on
vacant units due to changing market
conditions. The provision would have
required such PHAs to submit, along
with their appeal, a plan to lease the
units within two years, and imposed a
two-year limit on receipt of such
subsidy. The Committee
Recommendations did not include a
similar provision for a plan or a twoyear time limit.
Many commenters objected to the
two-year time limit on subsidies for
units vacant due to changing market
conditions and the related requirement
for submission of a plan for leasing
those units within that time period.
Many commenters also noted that
HUD’s regulations governing the
mandatory and voluntary conversion of
public housing developments to tenantbased voucher assistance (see 24 CFR
part 972) already provide PHAs with
guidelines for addressing vacancies
based on market conditions.
HUD Response. HUD has adopted the
suggestion of the commenters and has
removed both the two-year limit on
receipt of subsidy and the related plan
requirement.
Comment: Opposition to sanctions for
failure to convert to asset management
and to submit accurate and timely data.
The April 14, 2005, proposed rule
included two provisions authorizing
sanctions, as deemed necessary and
otherwise provided by law, for those
PHAs not in compliance with asset
management by FY 2011 and that fail to
submit accurate and timely data as
required by the regulations. These
sanctions might include the imposition
of a daily monetary fine until the PHA
converted to asset management.
Many commenters objected to the
new sanction provisions. The
commenters wrote that the provisions
are unnecessary, since HUD already has
numerous remedies if PHAs are not in
compliance with applicable
requirements. In addition, the

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commenters wrote that the imposition
of a daily monetary fine is inappropriate
and will harm the people the program
is designed to assist. Some commenters
also wrote that the conversion to asset
management is a complex task and that,
even with good faith and best efforts, a
PHA could be subject to fines for
noncompliance.
HUD Response. HUD has adopted the
suggestion of the commenters and
removed the sanction language that was
found in proposed §§ 990.200(d) and
990.290(e). HUD agrees with the
commenters that it already has the
authority to impose a broad range of
sanctions for non-compliance with
program rules.
Comment: The 2009 review of PEL
methodology should be conducted in
accordance with the procedures of the
Federal Advisory Committee Act
(FACA). The Committee
Recommendations provided that in
2009, HUD will convene a meeting with
representatives of appropriate
stakeholders to review the methodology
to evaluate the PEL based on actual cost
data and to establish utility
benchmarking for the PEL. The
provision stated that the meetings shall
be convened in accordance with FACA
procedures. The April 14, 2005,
proposed rule modified that language to
state that the meetings would be
convened in accordance with ‘‘FACA or
such other authority or protocol
determined appropriate.’’
Several commenters objected to the
new FACA language included in the
proposed rule. The commenters wrote
that the issues to address in 2009 as part
of the discussions of the PEL
methodology and utility benchmarking
are inherently complex and that the
April 14, 2005, proposed rule language
does not provide sufficient assurances
that interested stakeholders will have an
official role in the 2009 discussions.
HUD Response. As noted above, HUD
has adopted the language recommended
by the Committee. Specifically, this
final rule provides that HUD will
convene a FACA committee to review
the methodology to evaluate the PEL
based on actual cost data and establish
utility benchmarking.
VI. Discussion of Additional Public
Comments Received on the April 14,
2005, Proposed Rule
General Comments
This section of the preamble discusses
general comments received on the April
14, 2005, proposed rule not related to a
specific regulatory provision.
Comment: HUD should provide
updated calculations by property and by

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PHA so that the impact of the rule can
be understood. One commenter wrote
that, in response to a request during the
negotiations, HUD did not provide
updated calculations modeling the
impact of the rule on individual PHAs.
Another commenter wrote that the April
14, 2005, proposed rule does not
provide sufficient information for each
PHA to determine the extent of the gains
or losses under the formula and that
HUD should provide this information in
an easy to understand way that shows
the percent of change and the dollar
amount of the change.
HUD Response. HUD agrees that all
PHAs should understand the formula
for calculating operating subsidy under
the final rule. Data was presented to the
Committee and later made available to
the public housing community on the
projected impact of the rule based on
the Committee Recommendations.
Similarly, HUD provided data modeling
on the projected impact of the April 14,
2005, proposed rule on individual
PHAs. This data was shared with
representatives of the public housing
industry groups and other stakeholders.
Finally, HUD has posted a complete
report showing the operating subsidy
amounts for all PHAs and the
methodology documents on the HUD
Web site at http://www.hud.gov.
Comment: HUD should clarify what
the rule means when it refers to ‘‘fiscal
year.’’ Several commenters suggested
that HUD clarify in the rule whether
references to ‘‘fiscal year’’ mean a PHA’s
fiscal year or the federal fiscal year.
HUD Response. HUD has revised
references to the term ‘‘fiscal year’’ in
the regulatory text of this final rule to
clarify whether the terms refer to a
federal or PHA fiscal year.
Comment: HUD should make
permanent Moving to Work Agreements.
One commenter suggested that HUD
give PHAs participating in the Moving
to Work program the option of making
their current agreement permanent.
HUD Response. The suggestion made
by the commenter is outside the scope
of this rulemaking, which is concerned
with implementation of the new
Operating Fund formula.
Comment: Concerns regarding
implementation of future deregulatory
changes. One commenter expressed
concern about the language in the
preamble indicating that HUD and its
negotiating partners on the Committee
may contemplate additional
organizational and regulatory changes
beyond those included in the Operating
Fund in order to implement asset
management. The commenter wrote that
this language appears to indicate that
HUD seeks deregulation, which is

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beyond the mandate of the Committee,
and that HUD may try to implement
significant policy changes by
circumventing the normal regulatory
process. Another commenter cautioned
that HUD should concentrate first on
implementing the new formula and,
once implemented, then turn to these
other regulatory items.
HUD Response. Deregulation was part
of the Cost Study’s recommendations
and, although the subject of
deregulation was not directly before the
Committee, it is an important aspect of
the implementation of asset
management. Therefore, the Committee
discussed deregulation during the
negotiated rulemaking sessions.
However, any changes to other HUD
regulations would be completed through
the appropriate regulatory or
administrative processes, which would
provide opportunities for public
comments, as appropriate. Additionally,
HUD is sensitive to the timing of the
related changes and will take that into
consideration as it proceeds on these
other elements.
Comment: Concerns regarding
reduced funding for the Operating Fund
program. Several commenters wrote that
the Operating Fund should be fully
funded in order for PHAs that have
historically been underfunded to realize
the full gains under the new formula.
Several commenters wrote that, with the
expected decrease in funding for this
program in 2006, PHAs would have to
cut critical services to residents
including anti-crime and job training
activities.
HUD Response. The suggestion made
by the commenters addresses the annual
federal budget process and is outside
the scope of this rulemaking, which is
concerned with the implementation of
the new Operating Fund formula.
Comment: Rule should consider the
needs of small PHAs. One commenter
wrote that the final rule should consider
the needs and issues facing small PHAs.
HUD Response. HUD agrees that there
are special considerations for smaller
PHAs. The final rule authorizes small
PHAs (those with under 250 units) to
treat all of their units as one project.
Small PHAs are provided the flexibility
of either maintaining their current
management practices or converting to
asset management.
Comment: HUD should provide
additional funding for PHAs to
transition to asset management if
additional regulatory relief is not
achieved. One commenter referred to
language in § 990.255(b) that provides
that ‘‘HUD recognizes that appropriate
changes in its regulatory and monitoring
programs will be needed to support

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PHAs’’ to undertake asset management.
The commenter recommended that a
provision be added to the rule that
would provide additional funding to
transition to asset management systems
should HUD fail to timely implement
needed regulatory and monitoring
changes. The commenter also
recommended that this transition
funding be based on actual costs data
presented through the appeal process
for higher project cost data under
§ 990.245(e).
HUD Response. HUD has not adopted
the suggestion made by the commenter.
Transition costs were discussed by the
Committee, but were not part of the
Committee Recommendations. The
phase-in provisions, as well as the
current level of PHA reserves, factored
heavily in the decision not to include
special transition funding.
Comment: PHA data requirements.
One commenter asked what additional
data PHAs will be required to maintain,
other than the current data, at a property
level instead of at a PHA-level.
HUD Response. In general, PHAs will
be asked to submit additional data to
HUD with respect to asset management
and utility data as referenced under
§ 990.170(f). Further information on the
data submission requirements will be
provided in subsequent HUD guidance.
Comment: The rule imposes an
unfunded mandate on PHAs. Two
commenters wrote that the April 14,
2005, proposed rule does not meet the
requirements of the Unfunded Mandates
Reform Act of 1995 because it fails to
take into consideration the significant
budgetary impact on PHAs to meet the
requirements of the regulation.
HUD Response. HUD, in the
development of the proposed rule,
reviewed the regulatory proposals for
compliance with all legal rulemaking
requirements, including the
requirements contained in title II of the
Unfunded Mandates Reform Act of 1995
(2 U.S.C. 1531–1538) (UMRA). The
UMRA establishes specific thresholds
and other requirements for determining
whether a rule would impose an
unfunded federal mandate. Neither the
April 14, 2005, proposed rule, nor this
final rule, impose any federal mandates
on any State, local, or tribal government,
nor on the private sector, within the
meaning of the UMRA.
Comments Regarding Subpart A—
Purpose, Applicability, Formula, and
Definitions
Comment: Disagrees with HUD
issuing non-codified guidance. One
commenter objected to the language in
§ 990.110(c), which provides that, for
certain secondary elements that will be

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used in the formula, HUD will provide
information in various forms of noncodified guidance HUD deems
appropriate. The commenter wrote that,
without notice and comment
procedures, errors in the guidance
cannot be challenged and adjusted
except through appeals, which may not
fit the appeal categories. The commenter
suggested that HUD implement
secondary formula elements by interim
rulemaking, thereby allowing comments
and requests for modification.
HUD Response. HUD has not revised
the rule in response to this comment.
HUD will use notice and comment
rulemaking procedures when such
procedures are appropriate or necessary
(for example, when a policy change
would require the revision of regulatory
language codified by this final rule). In
other instances, where rulemaking is
neither appropriate nor required, but
where HUD has determined that
clarification of existing regulatory
requirements is needed, HUD will issue
such guidance through non-regulatory
means. Rulemaking can be a timeconsuming process and use of such
procedures where not required might
unnecessarily delay the issuance of
needed guidance. Non-regulatory
guidance can be amended or updated in
a more expeditious manner. In addition,
non-codified guidance provides greater
flexibility to make changes, if necessary,
in a more expeditious manner. As
appropriate, HUD will consult with
stakeholders and other interested parties
in the development of non-regulatory
guidance on the Operating Fund.
Comment: HUD should establish a
definition for the term ‘‘asset
repositioning fee.’’ One commenter
made this suggestion.
HUD Response. HUD has not added a
definition for the term ‘‘asset
repositioning fee.’’ During the
negotiated rulemaking it was agreed that
the definitions would be limited to
essential terms. Because the assetrepositioning fee is described in detail
in § 990.190(h), it has not been added to
the definitions section at § 990.115. The
asset repositioning fee established in
this final rule is the counterpart to the
phase-down funding fee in the current
part 990 regulations and, in accordance
with the provisions in § 990.190, will be
paid to PHAs that transition projects or
buildings out of their inventory.
Comment: The definition of ‘‘rolling
base consumption level’’ should state
that the 36-month period ends on June
30th. One commenter made this
suggestion.
HUD Response. HUD agrees with this
suggestion and has revised the rule
accordingly.

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Comments Regarding Subpart B—
Eligibility for Operating Subsidy
Subpart B of the rule describes the
requirements and procedures governing
the computation of eligible unit months.
A public housing unit may receive
operating subsidy for each unit month
that it qualifies as an occupied dwelling
unit or a dwelling unit with an
approved vacancy. The total number of
eligible unit months for each PHA will
be calculated from July 1st to June 30th
prior to the first day of the applicable
funding period and will consist of
eligible units as defined in this rule. The
rule reserves to HUD the right to
determine the status of any public
housing units based on information in
HUD’s information systems. In addition,
the rule provides for a change in a
PHA’s formula within each one-year
funding period based on the addition
and deletion of units in a PHA’s
inventory.
Comment: HUD should provide
operating subsidy for new units. One
commenter, citing § 990.150, asked how
HUD expects PHAs to operate new units
without operating subsidy funds. The
commenter wrote that the rule requires
PHAs to report new units periodically,
but does not provide funding until the
next funding cycle.
HUD Response. The commenter has
misinterpreted § 990.150, which
requires that PHAs report the addition
of new units and deletion of units on a
quarterly basis. This section goes on to
state that once the PHA has reported
that the new unit is online, HUD will
assume that the unit is fully occupied
for the balance of the funding period,
and HUD will provide funds from the
current funding cycle. However, in the
following year, once actual data is
available, HUD will make an adjustment
to the PHA’s funding amount that
would take into account the actual
occupancy of the new unit(s).
Comment: HUD should clarify the
definition of ‘‘occupied unit.’’ One
commenter, citing § 990.140, requested
that HUD clarify when a unit is
considered occupied. Two examples
provided were: (1) When a tenant is
hospitalized and (2) When a PHA
refuses to renew a lease for failure to
comply with the community service
requirements. The commenter suggested
that HUD define ‘‘occupied’’ as a unit
with an occupant or where the occupant
is paying rent.
HUD Response. Consistent with
§ 990.140 of this final rule, a unit that
is under lease to a public housingeligible family is considered to be
occupied.

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Comment: Units with approved
vacancies under the current regulations
should be included in the final rule.
Several commenters requested that all of
the units for which PHAs may receive
subsidy under the current part 990
regulations be included in this final
rule, stating that changes would result
in decreases in their operating subsidy
eligibility. One commenter asked for
subsidy for units vacant due to federal
and state laws and regulations and
another asked for subsidy for units
vacant due to HUD approved
desegregation plans.
HUD Response. HUD has not made
any changes to the rule in response to
these comments. The provisions on
subsidy eligibility for vacant units,
which were discussed extensively
during the negotiated rulemaking
sessions, have been clarified and
streamlined. Under § 990.145, units
undergoing modernization and units
used for special uses, such as resident
services or anticrime activities, are
eligible for subsidy. On a project-byproject basis, units that are vacant due
to litigation (which includes units
vacant due to desegregation plans),
disasters, and casualties are eligible for
subsidy. PHAs may appeal to HUD to
receive operating subsidy for units that
are vacant due to changing market
conditions. While the final rule no
longer expressly provides subsidy
eligibility for units vacant due to laws
(Federal or State laws of general
applicability, or their implementing
regulations), the final rule does provide
subsidy eligibility for units if they are
undergoing modernization, including
those undergoing modernization in
order to meet construction or
habitability standards.
Comment: Add community and
management spaces to approved
vacancies. One commenter wrote that
the final rule should include a vacancy
allowance for units converted to
community and management spaces and
for units that are reconfigured to comply
with litigation and legal requirements.
HUD Response. As noted above in
this preamble, this final rule has
adopted the Committee
Recommendation under which PHAs
are eligible to receive subsidy for three
percent of their vacancies, or up to five
units if the PHA has less than 100 units.
PHAs also are eligible to receive subsidy
for special use units, which are
described in § 990.145(b) as units
approved and used for resident services,
resident organization offices, and
related activities such as self sufficiency
and anti-crime activities. With regard to
unit reconfiguration due to litigation or
a legal requirement, if a unit has to be

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vacant during this reconfiguration, then
the unit may be eligible for subsidy
under § 990.145(c), which provides
subsidy eligibility for units vacant due
to litigation.
Comments Regarding Subpart C—PEL
Subpart C describes how formula
expenses will be calculated under the
revised Operating Fund formula.
Specifically, the rule provides a detailed
description with respect to the
computation of the PEL. The PEL is
calculated in terms of PUM costs and
represents the costs associated with the
project except for utilities and add-ons.
HUD will calculate the PEL using the
ten variables from the Cost Study and
their associated coefficients (i.e., values
that are expressed in percentage terms).
Comment: HUD should make further
adjustments to the Cost Study
methodology for calculating the PEL.
Several commenters suggested changes
in the Cost Study’s methodology for
developing the PEL. Suggestions
provided by the commenters included:
(1) Eliminating ceilings; (2) providing
additional funding to take into account
costs associated with older properties;
(3) removing the four percent reduction
for PELs greater than $325; and (4)
modifying statistical techniques.
HUD Response. HUD has not adopted
the suggestions made by the
commenters for changes in the Cost
Study methodology for calculating the
PEL. All of the suggested changes to the
PEL methodology were discussed by the
Committee during the negotiated
rulemaking sessions. HUD believes that
the Cost Study methodology is sound
and should be preserved. The final rule
provides certain add-ons that went
beyond the Cost Study’s
recommendations (for example, the
information technology (IT) fee) and
provides additional financial incentives
(for example, the freezing of rental
income for three years).
Comment: HUD should clarify
application of the rule to mixed-finance
projects. Referring to § 990.165(g),
which grandfathers existing mixedfinance agreements for purposes of
funding, one commenter raised
technical and implementation issues
regarding the applicability of the rule
and, in particular, the asset management
provisions, including project-based
budgeting and accounting, and the
calculation of operating subsidy for
mixed-finance developments. The
commenter asked about the treatment of
the development-wide replacement
reserves in the determination of the PEL
for mixed-finance developments and the
use of the non-profit coefficient when
determining the PEL for mixed-finance

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developments. The commenter also
inquired about the requirements for
project-based budgeting and accounting,
as well as about determination of
compliance with asset management for
mixed-finance developments that are
owned and managed by entities other
than PHAs and for which the owner and
manager handle all management and
provide information and financial
reports to PHAs for review and
monitoring.
HUD Response. HUD views all public
housing units under an Annual
Contributions Contract (ACC) as public
housing assets, regardless of where they
are located or whether they are part of
a mixed-finance development or a
public housing development. As such,
the non-profit coefficient will be
applied to the PEL for public housing
units in mixed-finance developments.
However, there will be no separate addon to cover the cost of replacement
reserves that are established in mixedfinance developments, which are not
operating costs, per se. With regard to
how the requirements for project-based
budgeting and accounting and how the
determination of compliance with asset
management will apply to mixedfinance developments, HUD will issue
this information in future guidance on
these matters.
Comment: Mixed-finance
developments should not receive
different subsidy amounts. One
commenter wrote that § 990.165(g)
allows PHAs with certain mixed
developments to receive a higher PEL
immediately, rather than requiring the
higher PEL to be phased in, and that this
is contradictory to the provisions of
§ 990.235.
HUD Response. The provision in
§ 990.165(g) regarding the level of
funding that PHAs would receive for
certain mixed-finance projects was
included in the regulation for the
express purpose of honoring the
structure of those mixed-finance
agreements. Because the financing and
approval in mixed-finance agreements is
tied to a specific level of funding, the
Committee agreed that future funding
should continue at that level, subject to
appropriations.
Comments Regarding Subpart C—
Utilities
Subpart C describes the Utilities
Expense Level (UEL) component of the
Operating Fund formula. The UEL
includes the computation of the current
consumption level and the rolling base
consumption level. In addition, a PHA
that undertakes energy conservation
measures financed by an entity other
than HUD may qualify under this rule

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for financial incentives with HUD
approval.
Comment: HUD should clarify that
‘‘other direct costs’’ are also eligible for
additional operating subsidy as part of
an energy conservation contract and
define what constitutes ‘‘direct costs.’’
Several commenters wrote that
proposed § 990.185(a)(3) inadvertently
omitted language agreed to by the
Committee which provided that the
PHA is eligible for additional operating
subsidy for the cost of amortizing the
loan and ‘‘other direct costs related to
the energy project under the contract.’’
In addition, the commenter suggested
that HUD define the type of costs that
are eligible for additional operating
subsidy.
HUD Response. The language
regarding the ‘‘other direct costs’’ was
inadvertently omitted from the April 14,
2005, proposed rule. As noted above in
this preamble, HUD has adopted the
suggestion of the commenters and has
inserted the suggested language in
§ 990.185(a)(3) of this final rule. HUD
will provide additional clarification in
subsequent guidance as to the types of
direct costs that will be eligible for the
additional operating subsidy.
Comment: HUD should modify the
definition of ‘‘utility rate’’ from ‘‘actual
average rate’’ to ‘‘actual weighted
average.’’ The April 14, 2005, proposed
rule at § 990.115 defined ‘‘utility rate’’
as ‘‘the actual average rate for any given
utility for the most recent 12-month
period that ended the June 30th prior to
the beginning of the applicable funding
period.’’ One commenter requested that
the definition be modified to provide for
an ‘‘actual weighted average’’ rather
than an ‘‘actual average weight.’’ The
commenter wrote that a simple average
may understate the true utility rate
because natural gas and heating oil
prices tend to be higher during winter
when usage is higher, and lower in the
summer when usage is reduced.
Conversely, electricity prices will tend
to be lower in winter and higher in
summer. Thus, in order to capture the
true rate over a 12-month period, a
weighted average would more
accurately take into account seasonal
usage and rates in use at that time.
HUD Response. HUD has not adopted
the suggestion made by the commenters.
The Committee discussed various ways
to calculate the UEL and it was
determined that an actual average rate,
not a weighted average, was the most
appropriate means to capture utility
rates for the past year. The final rule
states that funding for utility expenses
will be based on the most recent 12month period, which includes both a
heating and cooling season and will

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include an inflation/deflation factor.
Furthermore, by shifting the funding to
a calendar cycle and standardizing the
rolling base to a July 1st to June 30th
cycle, all PHAs will be funded for
utilities on the same cycle.
Comment: HUD should not prorate
the incentives for energy conservation
improvements. One commenter wrote
that PHAs may be reluctant to undertake
energy conservation measures because
the incentives are subject to proration,
and PHAs will be unable to realize the
full amount of the subsidy associated
with the incentives. The commenter
suggested that the incentives for energy
conservation improvements not be
subject to proration.
HUD Response. HUD has not adopted
the suggestion made by the commenters.
The Department believes that it would
be inequitable to the approximately
3,200 PHAs nationwide to provide
special treatment for any one
component of the formula. Because
HUD regards all components of the
Operating Fund formula to be of equal
importance, HUD believes that it is
more equitable when there is a proration
to uniformly prorate operating subsidy
eligibility based on all components.
Comment: HUD should allow PHAs to
substitute ‘‘future approved rates’’ as
the basis for calculating a PHA’s utility
subsidy. One commenter wrote that
basing utility subsidy on the ‘‘most
recent 12-month period that ended the
June 30th prior to the beginning of the
applicable funding period’’ may not
adequately address near-term changes in
utility costs. Specifically, the
commenter wrote that rates used in the
utility subsidy calculation may be at
least nine months old at the time of
calculation and over 12 months old at
the beginning of the new fiscal year. The
commenter suggested that language
applicable to the current Operating
Fund formula be added. The current
formula language allows ‘‘future
approved rates’’ to be used as the basis
for utility subsidy calculation when
these rate changes have been approved
and published prior to the due date of
the operating subsidy eligibility
calculation to HUD.
HUD Response. HUD has not adopted
the suggestion made by the commenter.
During the negotiated rulemaking
sessions, the Committee recognized that
the utility subsidy calculation time
frame as specified in the rule might not
adequately address near-term changes in
utility rates. To address this concern,
the Committee provided for the
inclusion of an inflation/deflation factor
in each PHA utility calculation.
Comment: HUD should provide for
large utility rate increases. One

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commenter requested that the PHAs that
experience large utility rate increases
that are greater than the inflation factor
be given consideration in the
calculation of the utility subsidy.
HUD Response. In the negotiations,
the Committee acknowledged and
discussed that utility rate spikes above
the rate of inflation have occurred in
past fiscal years and could occur again.
However, the Committee agreed that
since year-end adjustments to the utility
funding could no longer be processed
due to congressional appropriation
language, the new system of funding
utilities under this final rule (based on
the actual average rate from the last
twelve months that ended on June 30 of
the year prior to the funding year to be
adjusted by an inflation/deflation factor)
was the most reasonable and consistent
way to fund utilities for all PHAs. If
utility rates spike during the course of
a PHA’s fiscal year, that increase will be
picked up in the calculation of the UEL
during the next fiscal year.
Comment: Increases in utility costs
lower rental income to PHAs with
resident-paid utilities. One commenter
wrote that when utility costs increase,
PHAs with resident-paid utilities must
increase utility allowances, thus
lowering rental income to the PHA. The
commenter wrote that since formula
income will be frozen at the 2004 level,
the PHA will have no recourse but to
request a waiver for an adjustment to
rental income.
HUD Response. Section 990.170(e)
addresses this issue in providing that,
with regard to resident-paid utilities,
increases/decreases in tenant utility
allowances shall result in a
commensurate increase/decrease in
operating subsidy. HUD will issue
guidance regarding the implementation
of this language.
Comment: HUD should provide
incentives for PHAs that achieve energy
efficiency programs. One commenter
made this suggestion.
HUD Response: HUD has retained the
current incentives for energy efficiency
programs, which are contained in
§ 990.185.
Comments Regarding Subpart C—Addons
Comment: HUD should clarify which
‘‘coordinators’’ are funded under the
self-sufficiency add-on. Several
commenters asked for clarification as to
which program coordinators are
included under § 990.190(a) and also
whether additional coordinators could
be funded.
HUD Response. Section 990.190(a)
provides that the self-sufficiency add-on
will be ‘‘in accordance with HUD’s self-

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sufficiency program regulations and
notices.’’ HUD has issued guidance
indicating that the Operating Fund will
provide subsidy for elderly and disabled
service coordinators for those PHAs that
previously received funding under the
Resident Opportunities and Self
Sufficiency (ROSS) program, and at the
levels they received funding under the
ROSS program. This guidance may
change to reflect program objectives;
however, at present, there is no
additional funding for these activities.
Comment: HUD should provide PHAs
with additional operating subsidy for
Family Self-Sufficiency (FSS)
coordinators. One commenter wrote that
in FY 2004, HUD began to fund the cost
of the FSS Coordinator program from
the ROSS program, which led to the loss
of FSS funding for many PHAs because
ROSS is a competitive grant program.
To compensate for this loss, the
commenter recommended that every
PHA with at least 25 public housing
FSS slots approved in its FSS action
plan receive operating subsidy for the
full cost of one coordinator. Costs for
other coordinators would fall outside
the Operating Fund Program.
HUD Response. At this time, in
accordance with recent HUD guidance,
funding for FSS coordinators is
available only through the ROSS
program. However, funding selfsufficiency coordinators is an eligible
activity under the Operating Fund and,
although no additional funds will be
provided, PHAs can spend their
operating subsidy on this type of
activity.
Comment: HUD should exclude FSS
escrow deposits from calculation of
formula income. One commenter wrote
that under HUD’s current procedures, a
PHA excludes FSS escrow deposits from
the tenant income that are reported to
HUD. The commenter expressed
concern that under the new formula,
which would freeze tenant income
based on data from the audited financial
statements for the purposes of
determining operating subsidy, that FSS
escrow deposits would no longer
continue to be excluded from the
formula income calculation.
HUD Response. The rental income
amount collected on PHA’s financial
statements already excludes amounts
from FSS escrow deposits. Thus, HUD
will continue to exclude FSS escrow
deposits when calculating the formula
income component.
Comment: HUD should provide PHAs
with operating subsidy for contributions
to FSS escrow accounts. One commenter
wrote that the cost of contributions to
the FSS escrow accounts should be
included as an add-on to operating

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subsidy. The commenter indicated that
HUD had in the past paid for the costs
of the FSS escrow accounts by allowing
PHAs to deduct contributions to the FSS
escrow account from the rent roll
reported to HUD for calculating
operating subsidy.
HUD Response. HUD has not adopted
the suggestion made by the commenter
to provide an add-on for PHA
contributions to the FSS escrow
account. HUD does not believe that a
separate add-on is needed. As stated
above, HUD will continue to exclude
the FSS escrow deposits in the
calculation of the formula income
component.
Comment: Other HUD grant programs
for self-sufficiency activities should not
be eliminated. One commenter asked if,
with implementation of this final rule,
other grant programs will be eliminated
and whether PHAs will have to request
and fund program coordinators through
the use of operating subsidy.
HUD Response. This final rule applies
only to the Operating Fund Program.
The final rule does not establish a new
requirement, or remove or alter any
existing requirement for the ROSS
Program.
Comment: HUD should provide
additional funding through the
Operating Fund formula to wellmanaged PHAs for resident services.
One commenter made this suggestion.
HUD Response. HUD has not adopted
the suggestion of the commenter. While
operating subsidy may be used to
provide resident services (i.e., that is an
eligible use of funds), HUD disagrees
that additional funding should be
provided outside the add-ons that
already exist for self-sufficiency, as
described in § 990.190(a), and resident
participation, as described in
§ 990.190(e).
Comment: HUD should clarify
whether PHAs will receive the add-on
for payment in lieu of taxes (PILOT) in
circumstances when the PILOT payment
to the local municipality is waived. One
commenter posed this question
regarding the PILOT add-on described
in § 990.190(i).
HUD Response. The final rule
provides that the add-on is based on a
PHA’s ‘‘cooperation agreement or latest
actual PILOT payment.’’ Providing that
a cooperation agreement is in place,
HUD will provide funding for PILOT
regardless of whether the local
government waives payment.
Comment: HUD should clarify which
activities can be funded with the add-on
for resident participation. One
commenter posed this question
regarding the add-on described in
§ 990.190(e).

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HUD Response. The final rule
provides that the add-on is for the
funding of ‘‘resident participation
activities, including but not limited to
those described in 24 CFR part 964.’’
The intent of this language was to allow
resident participation funds to be used
for a broader range of activities than
outlined in 24 CFR part 964, including
resident services.
Comment: There may be an error in
the example on the repositioning fee in
§ 990.190(h)(4). One commenter
submitted this observation.
HUD Response. The language in
§ 990.190(h)(4) should have referenced a
PHA with a 1,000 unit inventory, not a
1,000 EUM inventory. The language in
this rule has been changed accordingly,
and the calculation is now correct.
Comment: HUD should provide an
add-on to cover the cost of employee
benefits. Several commenters wrote that
because their PHA is part of the state
retirement system and because much of
their work force is unionized, the costs
associated with employee benefits
including retirement, health, and dental
benefits have increased dramatically.
The commenters wrote that these costs
are not reflected in the FHA cost
structure or in other PHAs. The
commenters suggested that HUD
provide an add-on to cover the costs
associated with employee benefits.
HUD Response. HUD has not adopted
the suggestion made by the commenters.
As the commenters acknowledged, their
PHAs may be somewhat unique in that
they belong to a state pension system,
which is not the case for most PHAs. To
provide such an add-on would be unfair
to other PHAs. The new Operating Fund
formula takes a ‘‘benchmark’’ approach.
It represents what essentially other nonprofit operators would spend on
housing in the same market with similar
characteristics. The model does not
attempt to reimburse PHAs for
requirements imposed uniquely on
them by state or local governments.
Rather, the formula represents a
reasonable amount that other housing
operators would incur to run the
properties.
Comment: HUD should use interim
rulemaking to issue procedures for
changes in subsidy due to changes in
laws, regulations, or the economy.
Section 990.190(i) provides that in the
event that HUD determines that
enactment of a Federal law or revision
in HUD or other Federal regulations has
caused or will cause a significant
change in expenditures of a continuing
nature above the PEL and UEL, HUD
may, at its sole discretion, decide to
prescribe a procedure under which the
PHA may apply for or may receive an

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adjustment in operating subsidy. One
commenter suggested that HUD should
use interim rulemaking to establish such
procedures. The commenter wrote that
this would ensure that the relevant
factors have been considered and that
adequate procedures are provided.
HUD Response. HUD has not revised
the rule in response to this comment.
The language referred to by the
commenter, which was agreed to by the
Committee, grants HUD the necessary
authority to determine the process
under which PHAs may apply for
subsidy adjustments. Where
appropriate, HUD will issue an interim
rule to establish these procedures.
However, interim rulemaking may not
be the best choice in all circumstances,
and HUD does not believe it would be
appropriate to limit the available
options as suggested by the commenter.
Comments Regarding Subpart D—
Formula Income
Comment: HUD should provide for
regulatory review in determining
changes to the formula income
component after FY 2008. Several
commenters objected to the preamble
language of the April 14, 2005, proposed
rule indicating that HUD, after FY 2008,
will determine how PHA income is to
be treated through non-regulatory
means. The commenter suggested that
HUD clarify that the determination of
changes to PHA income post-FY 2008 be
accomplished through regulatory means
so that the public can comment.
HUD Response. HUD has not revised
the rule in response to these comments.
However, HUD does agree that
residents, organizations representing
residents, and other interested parties
should have an opportunity to submit
comments. To that end, the preamble to
the April 14, 2005, proposed rule
explicitly stated that the public will
have an opportunity to comment before
HUD makes the post-2008 policy
determination on the income
component of the formula (see 70 FR
19858 at 19862, first column).
Comments Regarding Subpart E—
Determination and Payment of
Operating Subsidy
Comment: Clarify the phrase ‘‘two
funding levels.’’ One commenter wrote
that it is not clear what is meant by the
phrase ‘‘two funding levels’’ in
§ 990.230(a). The commenter wrote that
neither funding level is explained
clearly or referenced.
HUD Response. The phrase ‘‘two
funding levels’’ refers to the funding
level under the current formula and the
funding level under the new formula
established by this final rule, as

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explained in § 990.225, which describes
how HUD will determine the amount of
a PHA’s increase or decrease in subsidy.
Comment: The application of the
inflation factor each year will result in
a higher PEL during the phase-in of
subsidy reductions. One commenter
wrote that the application of the
inflation factor each year will result in
an increase in the PEL, thereby changing
the dollar amounts of the subsidy
reductions that will occur each year
during the five-year phase-in of
reductions.
HUD Response. As provided in
§ 990.225, HUD will calculate the
amount of a PHA’s reduction or gain in
operating subsidy only one time after
the effective date of the final rule. The
calculation will be made in terms of
2004 dollars. The resulting dollar
amount of the loss or gain is the amount
that all reductions or gains will be built
on during the respective phase-in
periods. Thus, the inflation factor will
not impact the calculation of the PEL
each year for purposes of the amount of
loss or gain.
Comment: Objection to calendar
funding when PHAs have different fiscal
year ends. One commenter wrote that
HUD should consider the impact that
calendar year funding will have on
PHAs whose fiscal years are not
calendar years. The commenter wrote
that, when PHAs receive subsidy from
two different federal fiscal years, they
would experience operating budget and
reporting issues that HUD should
address.
HUD Response. Congress directed
HUD to change from funding the
operating subsidy on a fiscal year basis
to funding it on a calendar year basis in
HUD’s 2005 appropriations. HUD has
implemented this change without
requiring PHAs to change their fiscal
year ends and will issue guidance to
assist PHAs in this change in the
funding cycle. When completing
operating budgets and financial reports,
PHAs will use procedures similar to
those that they currently use for capital
fund, ROSS, and Section 8, which HUD
does not fund on a PHA fiscal year
basis.

commenter suggested that this section
be rewritten to take into account
changes in a PHA’s property inventory
during the transition period.
HUD Response. HUD has not adopted
the suggestion made by the commenter.
The Committee addressed this matter
during the negotiated rulemaking
sessions. The Committee decided that,
overall, it would be unnecessarily
complicated and administratively
burdensome to recalculate the five-year
transition funding for ‘‘decliners’’ and
two-year transition funding for
‘‘gainers’’ on an annual basis. Instead,
the rule provides that the transition
funding will be calculated in the first
year based on FY 2004 data and is
unchanged during the transition
funding period. That said, the
commenter’s suggestion is addressed
through the PEL calculation, which
provides that as properties leave or
enter the PHA’s inventory, these
changes will be reflected in the annual
PEL calculation.
Comment: The reductions in subsidy
should be phased in differently. One
commenter recommended that the
reductions in subsidy be phased in
differently, with more of the reductions
occurring in the later years. Rather than
phasing in reductions over five years at
24 percent the first year, 43 percent the
second year, 62 percent the third year,
81 percent the fourth year, and with the
full amount of the reduction being
realized in the fifth year, the commenter
suggested that the reduction would be
managed more prudently by PHAs over
five years at 18 percent the first year, 37
percent the second year, 56 percent the
third year, 76 percent the fourth year,
and with the full amount of the
reduction being realized in the fifth
year.
HUD Response. HUD has not adopted
this approach to phasing in the
reductions to subsidy. The final rule at
§ 990.230 retains the five-year phase in
schedule that was set forth in the April
14, 2005, proposed rule and agreed to by
the Committee. The Committee
discussed the phase in of reductions at
length and agreed on this schedule as
reasonable.

Comments Regarding Subpart F—
Transition Policy and Transition
Funding
Comment: When calculating
transition funding, HUD should take
into account changes in a PHA’s
inventory. One commenter wrote that
the rule does not address how transition
funding is calculated if a PHA’s
property inventory changes during the
transition period, which would result in
a different subsidy calculation. The

Comments Regarding Subpart G—
Appeals
Comment: The Operating Fund
formula does not provide adequate
funding. A number of commenters
wrote that the Operating Fund formula
did not provide PHAs with sufficient
funding to maintain well-run public
housing.
HUD Response. HUD has not revised
the rule in response to these comments.
Subpart G of the final rule provides five

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types of appeals for PHAs that feel that
their formula amount is inadequate.
Comment: HUD should allow for
appeals of individual property PELs.
Two commenters inquired about the
permissibility of PHAs appealing on an
individual property PEL rather than on
a portfolio basis.
HUD Response. HUD has not adopted
the suggestion of the commenters. As
discussed by the Committee during
negotiations, § 990.240(b) provides that
appeals must cover an entire portfolio,
not single projects, with the exception
that the Assistant Secretary for Public
and Indian Housing may accept appeals
for less than an entire portfolio for PHAs
with more than 5,000 public housing
units.
Comment: For appeals under
§ 990.245(e), HUD should accept
information other than actual expenses.
One commenter stated that other
information beyond actual expenses
should be accepted as part of an appeal,
because actual expenses are constrained
by actual funding and, therefore, the
costs of a PHA that has been
underfunded will be understated.
HUD Response. HUD has not revised
the rule in response to this comment.
However, HUD will provide subsequent
guidance to clarify the type of data that
is indicative of actual project costs and
that will be accepted as part of an
appeal.
Comment: PEL calculation does not
reflect the unique circumstances of
certain PHAs. Several commenters
wrote that the PEL calculations for their
PHAs are incorrect. Several commenters
wrote that the geographic coefficient
applied to their PHA does not take into
account the unique geographical
location of the PHA and the location of
its properties. Higher transportation
costs, therefore, translate into higher
costs for goods and services.
HUD Response. During the negotiated
rulemaking sessions, the Committee
recognized that it was important that
accurate data be used in the new
formula calculations. As a result, the
Committee determined that it would be
appropriate to provide PHAs with the
opportunity to appeal subsidy amounts
under five different categories.
Therefore, PHAs that believe that an
Operating Fund formula component has
a ‘‘blatant and objective flaw’’ and/or
that the model’s predictions are not
accurate because of ‘‘specific local
conditions’’ can appeal their operating
subsidy amount.
Comment: A PHA cannot determine
whether there is variance of ten percent
or greater without knowing the factors
or variables that can vary or be
challenged. One commenter requested

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clarification on the sentence in
§ 990.245(c) that reads: ‘‘To be eligible,
the affected PHA must demonstrate a
variance of ten percent or greater in its
PEL.’’ The commenter wrote that a PHA
cannot know if there is a variance of ten
percent or more in order to appeal
without knowing the factors or variable
that can vary or be challenged.
HUD Response. This ground of appeal
covers the appeals of specific variables
in the formula model that are not
reliable for a particular PHA. Thus, any
of the ten variables in the PEL
calculation may be challenged. While
HUD will be issuing more guidance on
appeals, an example of an appeal under
this paragraph would be when a PHA is
physically located in a non-city central
metropolitan area, but actually has all of
the characteristics of a location in a city
central metropolitan area.
Comment: The independent assessors
should be familiar with PHAs. One
commenter urged that the professional
who will conduct the independent
assessments for appeals and
determinations of compliance with asset
management be familiar with PHAs,
their mission, and how HUD
requirements affect their structure and
operations.
HUD Response. The primary purpose
of the appeals is to determine if the cost
estimate produced by the formula is
valid. Because the Harvard Cost Study
was based on a benchmark model, so
too will the appeals be based on what
other non-profit operators of federally
subsidized housing would spend to run
the subject properties. Similarly, the
asset management assessments would
be based on basic principles of asset
management for owners of subsidized
housing.
Comments Regarding Subpart H—Asset
Management
Comment: HUD should reconsider the
requirement that PHAs with 250 units or
more implement project-based
budgeting and accounting. A number of
commenters submitted comments on the
requirement for project-based
accounting and project-based
accounting. Some of the commenters
wrote that the requirement is
unnecessary and a financial and
administrative burden, particularly on
smaller PHAs. Others commenters
proposed different thresholds for
applicability of the asset management
requirements, such as 500 units and
1,249 units. Another commenter wrote
that, based on the number of units in its
portfolio and their locations, it would be
impossible to be an asset manager.
HUD Response. HUD has not adopted
the suggestion of the commenters. PHAs

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with less than 250 units can treat their
entire public housing portfolio as one
‘‘project.’’ Implementation of projectbased budgeting and accounting, as well
as project-based management, were
fundamental elements of both the Cost
Study and the Committee
Recommendations. HUD remains
committed to their implementation.
Comment: HUD should phase in the
implementation of asset management. A
number of commenters suggested that,
because of the organizational and other
changes required of a PHA to move to
asset management, there should be a
phase-in approach. One commenter
suggested that that phase in be based on
PHA size.
HUD Response. HUD has not adopted
the suggestion of the commenter. The
implementation dates in the rule were
considered and adopted by the
Committee. Different phase-in dates
would not only treat different classes of
PHAs in a disparate manner, but would
also create an administrative burden on
HUD and its systems.
Comment: Central office cost centers
are unnecessary. Many commenters
wrote that the establishment of a central
office cost center is an unneeded level
of accounting. Several commenters
wrote that PHAs should be allowed to
develop alternative methods of
allocating central office costs, consistent
with OMB Circular A–87. One
commenter proposed distributing the
actual costs between the projects based
on size or utility consumption or any
other method. Another commenter
wrote that the fee-for-service system
may work for some functions like
centralized maintenance, but it may not
work for others where it is difficult to
determine a fee. Thus, PHAs should be
allowed in some instances to allocate
their costs, which will result in less
cumbersome recordkeeping systems.
HUD Response. HUD has not revised
the rule in response to these comments.
The use of a fee-for-service approach for
the treatment of overhead and centrally
provided services will ensure that such
costs are reasonable and that projects
are charged only for services received.
These procedures are standard in the
multifamily housing industry. As
necessary, HUD will provide guidance
on the use of a fee-for-service approach
consistent with the accounting and
management practices of the
multifamily housing industry.
Comment: The requirement to
apportion assets, liabilities, and equity
is unrealistic. One commenter wrote
that because accounting has previously
been maintained only at the ‘‘program’’
level and not at the ‘‘property’’ level,
PHAs do not now segregate assets,

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liabilities, and equity by project. Hence,
efforts to break out these amounts by
project will be prone to error. HUD
should require only the preparation of
project operating statements and
therefore not require project balance
sheets.
HUD Response. HUD has not revised
the rule in response to the commenter.
However, HUD recognizes that the
transition to a project-based accounting
system will raise questions and pose
certain challenges for PHAs. To assist
PHAs in making the transition, HUD
will issue guidance, as necessary, on the
apportionment of assets, liabilities, and
equity. HUD believes that balance sheets
will provide important information on
each project’s financial position,
increase PHAs’ access to debt financing,
and improve monitoring of property
performance.
Comment: The 2007 deadline for
implementation of project-based
budgeting and accounting should be
delayed. Commenters were particularly
concerned that guidance has not been
provided for PHAs to move forward
with the changes they will need to make
to their systems as well as other
organizational arrangements. One
commenter suggested that HUD provide
PHAs with a minimum of 24 months to
implement project-based systems after
the requirement takes effect.
HUD Response. HUD has not revised
the rule in response to these comments.
HUD believes that the change to projectbased accounting is feasible within the
FY 2007 time frame. HUD plans to make
the changes to project-based accounting
through the current Financial
Assessment Subsystem (FASS–PH),
where PHAs already have had
experience submitting PHA-level
financial data to HUD. As noted above,
HUD intends to issue guidance that will
assist PHAs in making the transition to
project-based budgeting within the
targeted time frames.
Comment: PHAs require financial
assistance to implement the new
accounting, budgeting, and
management changes. Many
commenters wrote that HUD should
provide PHAs with special transition
funds to address the costly changes in
technology and other areas required by
the rule.
HUD Response. The Committee
discussed, but did not adopt in the
Committee Recommendations, special
transition funds. The final rule contains
two operating subsidy add-ons that can
be used by PHAs toward converting to
and maintaining technology to facilitate
asset management. The first is the asset
management fee described in
§ 990.190(f) that provides an additional

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$4 PUM to PHAs with 250 or more units
and a $2 PUM to PHAs with less than
250 units that choose to convert (PHAs
can charge an even higher asset
management fee, provided that the fee is
‘‘reasonable’’ and if the project generates
excess cash flow). The second is the
information technology fee described in
§ 990.190(g) that provides an additional
$2 PUM to all PHAs.
Comment: HUD should consult PHAs
when establishing guidance. HUD
should establish guidance on converting
to asset management in an open manner
and consult with PHAs in doing so.
HUD Response. As indicated in
previous responses to the commenters,
HUD will be issuing a variety of
guidance and, where appropriate,
intends to consult with its constituents
in the development of the guidance.
Comment: HUD should provide
training on these new asset management
requirements. One commenter asked
about the type and quality of training
that HUD plans to provide for PHAs,
auditors, and field staff to transition to
asset management.
HUD Response. HUD intends to
conduct training shortly following
publication of this final rule. This
training, in addition to the guidance that
will be issued, should assist PHAs,
auditors, and field staff in this
transition.
Comment: Although other regulatory
changes (outside of the Operating Fund
Program) are required to complete the
conversion to asset management, HUD
should take care not to abandon the
segment of the population public
housing serves. One commenter wrote
that, if asset management is to take
advantage of cost savings in the private
market, then certain regulations unique
to public housing should be removed
that restrict PHA movement in that
direction. However, these changes
should not cause PHAs to abandon the
segment of the population that public
housing is intended to serve.
HUD Response. The Cost Study
showed that, while generally similar,
there were certain statutory and
regulatory requirements that, if
modified, would align public housing
more closely to the regulatory
environment of other multifamilyassisted housing programs. As stated in
the preamble to the April 14, 2005,
proposed rule, the Committee
recognized that, with the conversion to
asset management, other changes were
necessary. These changes, including
deregulation efforts to continue to
lessen burdens on PHAs, will be
implemented separately and HUD will
provide opportunity for input by
stakeholders, as appropriate.

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Comment: In some cases, centralized
services are more efficient. Several
commenters wrote that asset
management was not a cost-effective
way to run public housing, especially
for PHAs that have small to moderatesized projects for whom centralized or
quasi project-based management is
superior. Forcing PHAs to decentralize
will increase costs, duplicate efforts,
and decrease ability to respond to
resident needs.
HUD Response. Section 990.275
expressly provides that PHAs can
continue to maintain centralized
property management services.
However, consistent with practices in
multifamily housing, this section further
provides that services must be arranged
in accordance with the best interests of
the property and that the cost for any
centralized service must be reasonable.
Comment: PHAs already run more
efficiently than FHA properties and,
therefore, asset management is
unnecessary. Several commenters wrote
that there was no compelling reason for
PHAs to convert to asset management
since there is no evidence that
conversion will improve efficiency and
effectiveness. The Cost Study
recommended an increase in subsidy to
PHAs based on a comparison between
AELs and the FHA benchmark, thereby
showing that PHAs administer their
properties more efficiently than FHA.
HUD Response. The fact that the Cost
Study recommended increased funding
levels, based on costs in other federally
subsidized housing, does not
necessarily mean that PHAs operate
efficiently. Indeed, the Cost Study’s
recommendations to move to asset
management were related to concerns
that program effectiveness could be
greatly improved.
Comment: Other institutions similar
to PHAs do not perform asset
management. One commenter wrote
that, although project-based
management is the norm for the
multifamily housing industry, it is not
the norm for other institutions that are
similar to PHAs. Universities, municipal
governments, school systems, and
hospitals manage multiple properties
and do so more similarly to PHAs than
the multifamily housing industry.
HUD Response. HUD believes that the
appropriate peer group in this situation
is, indeed, the multifamily housing
industry and not entities such as
universities, schools, or hospitals. In the
multifamily housing industry, projectbased budgeting, accounting, and
management is the norm.
Comment: HUD should require PHAs
to distribute reports to resident
organizations and other entities with

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oversight and monitoring
responsibilities. Several commenters
suggested that HUD add language to
§ 990.285(b) and § 990.315(a) requiring
that PHAs provide project-based
budgets, year-end statements, and
operating budgets to resident
organizations and other entities.
HUD Response. HUD has not adopted
the suggestion of the commenters. While
HUD does encourage PHAs to discuss
these documents with resident
organizations and other entities, HUD
believes that this decision should be left
to individual PHAs and their PHA
Board of Commissioners.
Comment: HUD should include
responsibilities to resident organizations
in the responsibilities of asset
management. One commenter suggested
that § 990.270 be amended to include
language regarding a PHA’s
responsibility to resident organizations.

review under the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501–3520). In
accordance with the Paperwork
Reduction Act, an agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless the collection
displays a valid control number. The
information collection requirements for
the Operating Fund program have been
approved by OMB and assigned OMB
Control Number 2577–0029. The revised
public reporting burden for this
collection of information is estimated to
include the time for reviewing the
instructions, searching existing data
sources, gathering and maintaining the
data needed, and completing and
reviewing the collection of information.
Information on the revised estimated
public reporting burden is provided in
the following table:

The commenter suggested that
‘‘responding to and supporting
independent resident organizations,
consulting with residents and the
Resident Advisory Board (RAB) in the
development of and any amendments to
the PHA’s annual and five year plans’’
be added to the sentence at the end of
the section.
HUD Response. HUD has not adopted
this suggestion. The requirement
regarding PHA annual and five-year
plans are codified in 24 CFR part 903,
including all of the requirements for
resident participation and meetings.
VII. Findings and Certifications
Information Collection Requirements
The revised information collection
requirements contained in this final rule
have been submitted to the Office of
Management and Budget (OMB) for
Number of
respondents

HUD form number

Responses
per
respondents

Total annual
responses

Hours per
response

Total hours

HUD–52722 .........................................................................
HUD–52723 .........................................................................
HUD–53087 .........................................................................

3,141
3,141
24

1
1
1

1
1
1

.75
.75
.75

2,355.75
2,355.75
18.00

Total ..............................................................................

........................

........................

........................

........................

4,729.50

Environmental Impact
A Finding of No Significant Impact
with respect to the environment for this
rule was made at the proposed rule
stage in accordance with HUD
regulations at 24 CFR part 50, which
implement section 102(2)(C) of the
National Environmental Policy Act of
1969 (42 U.S.C. 4321 et seq.). The
Finding of No Significant Impact
remains applicable to this final rule and
is available for public inspection
between 8 a.m. and 5 p.m. weekdays in
the Regulations Division, Office of the
General Counsel, Department of
Housing and Urban Development, 451
Seventh Street, SW., Room 10276,
Washington, DC 20410–5000.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
(5 U.S.C. 601 et seq.), generally requires
an agency to conduct a regulatory
flexibility analysis of any rule subject to
notice and comment rulemaking
requirements unless the agency certifies
that the rule will not have a significant
economic impact on a substantial
number of small entities. The entities
that would be subject to this rule are
public housing agencies that administer
public housing. Under the definition of
‘‘small governmental jurisdiction’’ in
section 601(5) of the RFA, the

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provisions of the RFA are applicable
only to those public housing agencies
that are part of a political jurisdiction
with a population of under 50,000
persons. The number of entities
potentially affected by this rule is
therefore not substantial. Further, the
proposed regulatory changes were
developed using negotiated rulemaking
procedures and with the active
participation of PHAs that will be
affected by the revised Operating Fund
requirements. The membership of the
negotiated rulemaking committee
included representatives of smaller
PHAs, which expressed the views and
concerns of these PHAs during
development of the proposed regulatory
changes.
Accordingly, the undersigned certifies
that this rule will not have a significant
economic impact on a substantial
number of small entities.
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial direct compliance costs on
state and local governments and is not
required by statute, or the rule preempts
state law, unless the agency meets the
consultation and funding requirements

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of section 6 of the executive order. This
rule does not have federalism
implications and will not impose
substantial direct compliance costs on
State and local governments nor
preempt State law within the meaning
of the executive order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 (2 U.S.C. 1531–
1538) (UMRA) establishes requirements
for Federal agencies to assess the effects
of their regulatory actions on State,
local, and tribal governments, and on
the private sector. This rule does not
impose any Federal mandates on any
State, local, or tribal government, nor on
the private sector, within the meaning of
UMRA.
Executive Order 12866, Regulatory
Planning and Review
The Office of Management and Budget
(OMB) reviewed this rule under
Executive Order 12866 (‘‘entitled
Regulatory Planning and Review’’). This
rule was determined to be economically
significant under E.O. 12866. The
docket file is available for public
inspection in the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 Seventh Street, SW., Room 10276,
Washington, DC 20410–0500. Due to

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security measures at the HUD
Headquarters building, please schedule
an appointment to review the docket file
by calling the Regulations Division at
(202) 708–3055 (this is not a toll-free
number). The Economic Analysis
prepared for this rule is also available
for public inspection at the same
location and on HUD’s Web site at
http://www.hud.gov.
Congressional Review of Major Proposed
Rules
This rule is a ‘‘major rule’’ as defined
in Chapter 8 of 5 U.S.C. The final rule
has been submitted for congressional
review in accordance with this chapter.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic
Assistance (CFDA) program number is
14.850.
List of Subjects in 24 CFR Part 990
Accounting, Grant programs-housing
and community development, Public
housing, Reporting and recordkeeping
requirements.
■ Accordingly, for the reasons described
in the preamble, HUD revises 24 CFR
part 990 to read as follows:
PART 990—THE PUBLIC HOUSING
OPERATING FUND PROGRAM
Subpart A—Purpose, Applicability,
Formula, and Definitions
Sec.
990.100 Purpose.
990.105 Applicability.
990.110 Operating fund formula.
990.115 Definitions.
990.116 Environmental review
requirements.

990.190

Other formula expenses (add-ons).

Subpart D—Calculating Formula Income
990.195 Calculation of formula income.
Subpart E—Determination and Payment of
Operating Subsidy
990.200 Determination of formula amount.
990.205 Fungibility of operating subsidy
between projects.
990.210 Payment of operating subsidy.
990.215 Payments of operating subsidy
conditioned upon reexamination of
income of families in occupancy.
Subpart F—Transition Policy and Transition
Funding
990.220 Purpose.
990.225 Transition determination.
990.230 PHAs that will experience a
subsidy reduction.
990.235 PHAs that will experience a
subsidy increase.
Subpart G—Appeals
990.240 General.
990.245 Types of appeals.
990.250 Requirements for certain appeals.
Subpart H—Asset Management
990.255 Overview.
990.260 Applicability.
990.265 Identification of projects.
990.270 Asset management.
990.275 Project-based management (PBM).
990.280 Project-based budgeting and
accounting.
990.285 Records and reports.
990.290 Compliance with asset
management requirements.
Subpart I—Operating Subsidy for
Properties Managed by Resident
Management Corporations (RMCs)
990.295 Resident Management Corporation
operating subsidy.
990.300 Preparation of operating budget.
990.305 Retention of excess revenues.

Subpart B—Eligibility for Operating
Subsidy; Computation of Eligible Unit
Months
990.120 Unit months.
990.125 Eligible units.
990.130 Ineligible units.
990.135 Eligible unit months (EUMs).
990.140 Occupied dwelling units.
990.145 Dwelling units with approved
vacancies.
990.150 Limited vacancies.
990.155 Addition and deletion of units.

Subpart J—Financial Management Systems,
Monitoring, and Reporting
990.310 Purpose—General policy on
financial management, monitoring, and
reporting.
990.315 Submission and approval of
operating budgets.
990.320 Audits.
990.325 Record retention requirements.

Subpart C—Calculating Formula Expenses
990.160 Overview of calculating formula
expenses.
990.165 Computation of project expense
level (PEL).
990.170 Computation of utilities expense
level (UEL): Overview.
990.175 Utilities expense level:
Computation of the current consumption
level.
990.180 Utilities expense level:
Computation of the rolling base
consumption level.
990.185 Utilities expense level: Incentives
for energy conservation/rate reduction.

Subpart A—Purpose, Applicability,
Formula, and Definitions

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Authority: 42 U.S.C. 1437g; 42 U.S.C.
3535(d).

§ 990.100

Purpose.

This part implements section 9(f) of
the United States Housing Act of 1937
(1937 Act), (42 U.S.C. 1437g). Section
9(f) establishes an Operating Fund for
the purposes of making assistance
available to public housing agencies
(PHAs) for the operation and
management of public housing. In the
case of unsubsidized housing, the total
expenses of operating rental housing

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54997

should be covered by the operating
income, which primarily consists of
rental income and, to some degree,
investment and non-rental income. In
the case of public housing, the
Operating Fund provides operating
subsidy to assist PHAs to serve low,
very low, and extremely low-income
families. This part describes the policies
and procedures for Operating Fund
formula calculations and management
under the Operating Fund Program.
§ 990.105

Applicability.

(a) Applicability of this part. (1) With
the exception of subpart I of this part,
this part is applicable to all PHA rental
units under an Annual Contributions
Contract (ACC). This includes PHAs
that have not received operating subsidy
previously, but are eligible for operating
subsidy under the Operating Fund
Formula.
(2) This part is applicable to all rental
units managed by a resident
management corporation (RMC),
including a direct-funded RMC.
(b) Inapplicability of this part. (1) This
part is not applicable to Indian Housing,
section 5(h) and section 32
homeownership projects, the Housing
Choice Voucher Program, the section 23
Leased Housing Program, or the section
8 Housing Assistance Payments
Programs.
(2) With the exception of subpart J of
this part, this part is not applicable to
the Mutual Help Program or the
Turnkey III Homeownership
Opportunity Program.
§ 990.110

Operating fund formula.

(a) General formula. (1) The amount
of annual contributions (operating
subsidy) each PHA is eligible to receive
under this part shall be determined by
a formula.
(2) In general, operating subsidy shall
be the difference between formula
expense and formula income. If a PHA’s
formula expense is greater than its
formula income, then the PHA is
eligible for an operating subsidy.
(3) Formula expense is an estimate of
a PHA’s operating expense and is
determined by the following three
components: Project Expense Level
(PEL), Utility Expense Level (UEL), and
other formula expenses (add-ons).
Formula expense and its three
components are further described in
subpart C of this part. Formula income
is an estimate for a PHA’s non-operating
subsidy revenue and is further
described in subpart D of this part.
(4) Certain portions of the operating
fund formula (e.g., PEL) are calculated
in terms of per unit per month (PUM)
amounts and are converted into whole

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dollars by multiplying the PUM amount
by the number of eligible unit months
(EUMs). EUMs are further described in
subpart B of this part.
(b) Specific formula. (1) A PHA’s
formula amount shall be the sum of the
three formula expense components
calculated as follows: {[(PEL multiplied
by EUM) plus (UEL multiplied by EUM)
plus add-ons] minus (formula income
multiplied by EUM)}.
(2) A PHA whose formula amount is
equal to or less than zero is still eligible
to receive operating subsidy equal to its
most recent actual audit cost for its
Operating Fund Program.
(3) Operating subsidy payments will
be limited to the availability of funds as
described in § 990.210(c).
(c) Non-codified formula elements.
This part defines the major components
of the Operating Fund Formula and
describes the relationships of these
various components. However, this part
does not codify certain secondary
elements that will be used in the revised
Operating Fund Formula. HUD will
more appropriately provide this
information in non-codified guidance,
such as a Handbook, Federal Register
notice, or other non-regulatory means
that HUD determines appropriate.
§ 990.115

Definitions.

The following definitions apply to the
Operating Fund program:
1937 Act means the United States
Housing Act of 1937 (42 U.S.C. 1437 et
seq.).
Annual contributions contract (ACC)
is a contract prescribed by HUD for
loans and contributions, which may be
in the form of operating subsidy,
whereby HUD agrees to provide
financial assistance and the PHA agrees
to comply with HUD requirements for
the development and operation of its
public housing projects.
Asset management is a management
model that emphasizes project-based
management, as well as long-term and
strategic planning.
Current consumption level is the
amount of each utility consumed at a
project during the 12-month period that
ended the June 30th prior to the
beginning of the applicable funding
period.
Eligible unit months (EUM) are the
actual number of PHA units in eligible
categories expressed in months for a
specified time frame and for which a
PHA receives operating subsidy.
Formula amount is the amount of
operating subsidy a PHA is eligible to
receive, expressed in whole dollars, as
determined by the Operating Fund
Formula.

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Formula expense is an estimate of a
PHA’s operating expense used in the
Operating Fund Formula.
Formula income is an estimate of a
PHA’s non-operating subsidy revenue
used in the Operating Fund Formula.
Funding period is the calendar year
for which HUD will distribute operating
subsidy according to the Operating
Fund Formula.
Operating Fund is the account/
program authorized by section 9 of the
1937 Act for making operating subsidy
available to PHAs for the operation and
management of public housing.
Operating Fund Formula (or Formula)
means the data and calculations used
under this part to determine a PHA’s
amount of operating subsidy for a given
period.
Operating subsidy is the amount of
annual contributions for operations a
PHA receives each funding period
under section 9 of the 1937 Act as
determined by the Operating Fund
Formula in this part.
Other operating costs (add-ons)
means PHA expenses that are
recognized as formula expenses but are
not included either in the project
expense level or in the utility expense
level.
Payable consumption level is the
amount for all utilities consumed at a
project that the Formula recognizes in
the computation of a PHA’s utility
expense level at that project.
Per unit per month (PUM) describes a
dollar amount on a monthly basis per
unit, such as Project Expense Level,
Utility Expense Level, and formula
income.
Project means each PHA project under
an ACC to which the Operating Fund
Formula is applicable. However, for
purposes of asset management, as
described in subpart H of this part,
projects may be as identified under the
ACC or may be a reasonable grouping of
projects or portions of a project or
projects under the ACC.
Project-based management is the
provision of property management
services that is tailored to the unique
needs of each property, given the
resources available to that property.
Project expense level (PEL) is the
amount of estimated expenses for each
project (excluding utilities and add-ons)
expressed as a PUM cost.
Project units means all dwelling units
in all of a PHA’s projects under an ACC.
Rolling base consumption level
(RBCL) is the average of the yearly
consumption levels for the 36-month
period ending on the June 30th that is
18 months prior to the beginning of the
applicable funding period.

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Transition funding is the timing and
amount by which a PHA will realize
increases and reductions in operating
subsidy based on the new funding levels
of the Operating Fund Formula.
Unit months are the total number of
project units in a PHA’s inventory
expressed in months for a specified time
frame.
Utilities means electricity, gas,
heating fuel, water, and sewerage
service.
Utilities expense level (UEL) is a
product of the utility rate multiplied by
the payable consumption level
multiplied by the utilities inflation
factor expressed as a PUM dollar
amount.
Utility rate (rate) means the actual
average rate for any given utility for the
most recent 12-month period that ended
the June 30th prior to the beginning of
the applicable funding period.
Yearly consumption level is the actual
amount of each utility consumed at a
project during a 12-month period
ending June 30th.
§ 990.116 Environmental review
requirements.

The environmental review procedures
of the National Environmental Policy
Act of 1969 (42 U.S.C. 4332(2)(C)) and
the implementing regulations at 24 CFR
parts 50 and 58 are applicable to the
Operating Fund Program.
Subpart B—Eligibility for Operating
Subsidy; Computation of Eligible Unit
Months
§ 990.120

Unit months.

(a) Some of the components of HUD’s
Operating Fund Formula are based on a
measure known as unit months. Unit
months represent a PHA’s public
housing inventory during a specified
period of time. The unit months eligible
for operating subsidy in a 12-month
period are equal to the number of
months that the units are in an
operating subsidy-eligible category,
adjusted for changes in inventory (e.g.,
units added or removed), as described
below.
(b) A PHA is eligible to receive
operating subsidy for a unit on the date
it is both placed under the ACC and
occupied. The date a unit is eligible for
operating subsidy does not change the
Date of Full Availability (DOFA) or the
date of the End of Initial Operating
Period (EIOP), nor does this provision
place a project into management status.
§ 990.125

Eligible units.

A PHA is eligible to receive operating
subsidy for public housing units under
an ACC for:

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(a) Occupied dwelling units as
defined in § 990.140;
(b) A dwelling unit with an approved
vacancy (as defined in § 990.145); and
(c) A limited number of vacancies (as
defined in § 990.150).
§ 990.130

Ineligible units.

(a) Vacant units that do not fall within
the definition of § 990.145 or § 990.150
are not eligible for operating subsidy
under this part.
(b) Units that are eligible to receive an
asset-repositioning fee, as described in
§ 990.190(h), are not eligible to receive
operating subsidy under this subpart.
§ 990.135

Eligible unit months (EUMs).

(a) A PHA’s total number of EUMs
will be calculated for the 12-month
period from July 1st to June 30th that is
prior to the first day of the applicable
funding period, and will consist of
eligible units as defined in § 990.140,
§ 990.145, or § 990.150.
(b)(1) The determination of whether a
public housing unit satisfies the
requirements of § 990.140, § 990.145, or
§ 990.150 for any unit month shall be
based on the unit’s status as of either the
first or last day of the month, as
determined by the PHA.
(2) HUD reserves the right to
determine the status of any and all
public housing units based on
information in its information systems.
(c) The PHA shall maintain and, at
HUD’s request, shall make available to
HUD, specific documentation of the
status of all units, including, but not
limited to, a listing of the units, street
addresses or physical address, and
project/management control numbers.
(d) Any unit months that do not meet
the requirements of this subpart are not
eligible for operating subsidy, and will
not be subsidized by the Operating
Fund.
§ 990.140

Occupied dwelling units.

A PHA is eligible to receive operating
subsidy for public housing units for
each unit month that those units are
under an ACC and occupied by a public
housing-eligible family under lease.
§ 990.145 Dwelling units with approved
vacancies.

(a) A PHA is eligible to receive
operating subsidy for vacant public
housing units for each unit month the
units are under an ACC and meet one
of the following HUD-approved
vacancies:
(1) Units undergoing modernization.
Vacancies resulting from project
modernization or unit modernization
(such as work necessary to reoccupy
vacant units) provided that one of the
following conditions is met:

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(i) The unit is undergoing
modernization (i.e., the modernization
contract has been awarded or force
account work has started) and must be
vacant to perform the work, and the
construction is on schedule according to
a HUD-approved PHA Annual Plan; or
(ii) The unit must be vacant to
perform the work and the treatment of
the vacant unit is included in a HUDapproved PHA Annual Plan, but the
time period for placing the vacant unit
under construction has not yet expired.
The PHA shall place the vacant unit
under construction within two federal
fiscal years (FFYs) after the FFY in
which the capital funds are approved.
(2) Special use units. Units approved
and used for resident services, resident
organization offices, and related
activities, such as self-sufficiency and
anti-crime initiatives.
(b) On a project-by-project basis,
subject to prior HUD approval and for
the time period agreed to by HUD, a
PHA shall receive operating subsidy for
the units affected by the following
events that are outside the control of the
PHA:
(1) Litigation. Units that are vacant
due to litigation, such as a court order
or settlement agreement that is legally
enforceable; units that are vacant in
order to meet regulatory and statutory
requirements to avoid potential
litigation (as covered in a HUDapproved PHA Annual Plan); and units
under voluntary compliance agreements
with HUD or other voluntary
compliance agreements acceptable to
HUD (e.g., units that are being held
vacant as part of a court-order, HUDapproved desegregation plan, or
voluntary compliance agreement
requiring modifications to the units to
make them accessible pursuant to 24
CFR part 8).
(2) Disasters. Units that are vacant due
to a federally declared, state-declared, or
other declared disaster.
(3) Casualty losses. Damaged units
that remain vacant due to delays in
settling insurance claims.
(c) A PHA may appeal to HUD to
receive operating subsidy for units that
are vacant due to changing market
conditions (see subpart G of this part—
Appeals).
§ 990.150

Limited vacancies.

(a) Operating subsidy for a limited
number of vacancies. HUD shall pay
operating subsidy for a limited number
of vacant units under an ACC if the
annualized vacancy rate is less than or
equal to:
(1) Three percent of the PHA’s total
unit inventory (not to exceed 100
percent of the unit months under an

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54999

ACC) for the period July 1, 2004, to June
30, 2005, and
(2) Three percent of the total units on
a project-by-project basis based on the
definition of a project under subpart H
of this part, beginning July 1, 2005.
(b) Exception for PHAs with 100 or
fewer units. Notwithstanding paragraph
(a) of this section, a PHA with 100 or
fewer units will be paid operating
subsidy for up to five vacant units not
to exceed 100 percent of the unit
months under an ACC. For example, a
PHA with an inventory of 100 units and
four vacancies during its fiscal year will
be eligible for operating subsidy for all
100 units. A PHA with an inventory of
50 units with seven vacancies during its
fiscal year will be eligible for operating
subsidy for 48 units.
§ 990.155

Addition and deletion of units.

(a) Changes in public housing unit
inventory. To generate a change to its
formula amount within each one-year
funding period, PHAs shall periodically
(e.g., quarterly) report the following
information to HUD, during the funding
period:
(1) New units that were added to the
ACC, and occupied by a public housingeligible family during the prior
reporting period for the one-year
funding period, but have not been
included in the previous EUMs’ data;
and
(2) Projects, or entire buildings in a
project, that are eligible to receive an
asset repositioning fee in accordance
with the provisions in § 990.190(h).
(b) Revised EUM calculation. (1) For
new units, the revised calculation shall
assume that all such units will be fully
occupied for the balance of that funding
period. The actual occupancy/vacancy
status of these units will be included to
calculate the PHA’s operating subsidy in
the subsequent funding period after
these units have one full year of a
reporting cycle.
(2) Projects, or entire buildings in a
project, that are eligible to receive an
asset repositioning fee in accordance
with § 990.190(h) are not to be included
in the calculation of EUMs. Funding for
these units is provided under the
conditions described in § 990.190(h).
Subpart C—Calculating Formula
Expenses
§ 990.160 Overview of calculating formula
expenses.

(a) General. Formula expenses
represent the costs of services and
materials needed by a well-run PHA to
sustain the project. These costs include
items such as administration,
maintenance, and utilities. HUD also

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determines a PHA’s formula expenses at
a project level. HUD uses the following
three factors to determine the overall
formula expense level for each project:
(1)The project expense level (PEL)
(calculated in accordance with
§ 990.165);
(2) The utilities expense level (UEL)
(calculated in accordance with
§§ 990.170, 990.175, 990.180, and
990.185); and
(3)Other formula expenses (add-ons)
(calculated in accordance with
§ 990.190).
(b) PEL, UEL, and Add-ons. Each
project of a PHA has a unique PEL and
UEL. The PEL for each project is based
on ten characteristics and certain
adjustments described in § 990.165. The
PEL represents the normal expenses of
operating public housing projects, such
as maintenance and administration
costs. The UEL for each project
represents utility expenses. Utility
expense levels are based on an incentive
system aimed at reducing utility
expenses. Both the PEL and UEL are
expressed in PUM costs. The expenses
not included in these expense levels
and which are unique to PHAs are titled
‘‘other formula expenses (add-ons)’’ and
are expressed in a dollar amount.
(c) Calculating project formula
expense. The formula expense of any
one project is the sum of the project’s
PEL and the UEL, multiplied by the
total EUMs specific to the project, plus
the add-ons.
§ 990.165 Computation of project expense
level (PEL).

(a) Computation of PEL. The PEL is
calculated in terms of PUM cost and
represents the costs associated with the
project, except for utility and add-on
costs. Costs associated with the PEL are
administration, management fees,
maintenance, protective services,
leasing, occupancy, staffing, and other
expenses, such as project insurance.
HUD will calculate the PEL using
regression analysis and benchmarking
for the actual costs of Federal Housing
Administration (FHA) projects to
estimate costs for public housing
projects. HUD will use the ten variables
described in paragraph (b) of this
section and their associated coefficient
(i.e., values that are expressed in
percentage terms) to produce a PEL.
(b) Variables. The ten variables are:
(1) Size of project (number of units);
(2) Age of property (Date of Full
Availability (DOFA));
(3) Bedroom mix;
(4) Building type;
(5) Occupancy type (family or senior);
(6) Location (an indicator of the type
of community in which a property is

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located; location types include rural,
city central metropolitan, and non-city
central metropolitan (suburban) areas);
(7) Neighborhood poverty rate;
(8) Percent of households assisted;
(9) Ownership type (profit, non-profit,
or limited dividend); and
(10) Geographic.
(c) Cost adjustments. HUD will apply
four adjustments to the PEL. The
adjustments are:
(1) Application of a $200 PUM floor
for any senior property and a $215 PUM
floor for any family property;
(2) Application of a $420 PUM ceiling
for any property except for New York
City Housing Authority projects, which
have a $480 PUM ceiling;
(3) Application of a four percent
reduction for any PEL calculated over
$325 PUM, with the reduction limited
so that a PEL will not be reduced to less
than $325; and
(4) The reduction of audit costs as
reported for FFY 2003 in a PUM
amount.
(d) Annual inflation factor. The PEL
for each project shall be adjusted
annually, beginning in 2005, by the
local inflation factor. The local inflation
factor shall be the HUD-determined
weighted average percentage increase in
local government wages and salaries for
the area in which the PHA is located,
and non-wage expenses.
(e) Calculating a PEL. To calculate a
specific PEL for a given property, the
sum of the coefficients for nine variables
(all variables except ownership type)
shall be added to a formula constant.
The exponent of that sum shall be
multiplied by a percentage to reflect the
non-profit ownership type, which will
produce an unadjusted PEL. For the
calculation of the initial PEL, the cost
adjustments described in paragraphs
(c)(1), (c)(2), and (c)(3) of this section
will be applied. After these initial
adjustments are applied, the audit
adjustment described in paragraph (c)(4)
of this section will be applied to arrive
at the PEL in year 2000 dollars. After the
PEL in year 2000 dollars is created, the
annual inflation factor as described in
paragraph (d) of this section will be
applied cumulatively to this number
through 2004 to yield an initial PEL in
terms of current dollars.
(f) Calculation of the PEL for Moving
to Work PHAs. PHAs participating in
the Moving to Work (MTW)
Demonstration authorized under section
204 of the Omnibus Consolidated
Rescissions and Appropriations Act of
1996 (Pub. L. 104–134, approved April
26, 1996) shall receive an operating
subsidy as provided in Attachment A of
their MTW Agreements executed prior
to November 18, 2005. PHAs with an

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MTW Agreement will continue to have
the right to request extensions of or
modifications to their MTW
Agreements.
(g) Calculation of the PELs for mixedfinance developments. If, prior to
November 18, 2005, a PHA has either a
mixed-finance arrangement that has
closed or has filed documents in
accordance with 24 CFR 941.606 for a
mixed-finance transaction, then the
project covered by the mixed-finance
transaction will receive funding based
on the higher of its former Allowable
Expense Level or the new computed
PEL.
(h) Calculation of PELs when data are
inadequate or unavailable. When
sufficient data are unavailable for the
calculation of a PEL, HUD may calculate
a PEL using an alternative methodology.
The characteristics may be used from
similarly situated properties.
(i) Review of PEL methodology by
advisory committee. In 2009, HUD will
convene a meeting with representation
of appropriate stakeholders, to review
the methodology to evaluate the PEL
based on actual cost data. The meeting
shall be convened in accordance with
the Federal Advisory Committee Act (5
U.S.C. Appendix) (FACA). HUD may
determine appropriate funding levels for
each project to be effective in FY 2011
after following appropriate rulemaking
procedures.
§ 990.170 Computation of utilities expense
level (UEL): Overview.

(a) General. The UEL for each PHA is
based on its consumption for each
utility, the applicable rates for each
utility, and an applicable inflation
factor. The UEL for a given funding
period is the product of the utility rate
multiplied by the payable consumption
level multiplied by the inflation factor.
The UEL is expressed in terms of PUM
costs.
(b) Utility rate. The utility rate for
each type of utility will be the actual
average rate from the most recent 12month period that ended June 30th prior
to the beginning of the applicable
funding period. The rate will be
calculated by dividing the actual utility
cost by the actual utility consumption,
with consideration for pass-through
costs (e.g., state and local utility taxes,
tariffs) for the time period specified in
this paragraph.
(c) Payable consumption level. The
payable consumption level is based on
the current consumption level adjusted
by a utility consumption incentive. The
incentive shall be computed by
comparing current consumption levels
of each utility to the rolling base
consumption level. If the comparison

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reflects a decrease in the consumption
of a utility, the PHA shall retain 75
percent of this decrease. Alternately, if
the comparison reflects an increase in
the consumption of a utility, the PHA
shall absorb 75 percent of this increase.
(d) Inflation factor for utilities. The
UEL shall be adjusted annually by an
inflation/deflation factor based upon the
fuels and utilities component of the
United States Department of Labor,
Bureau of Labor Statistics (BLS)
Consumer Price Index for All Urban
Consumers (CPI–U). The annual
adjustment to the UEL shall reflect the
most recently published and localized
data available from BLS at the time the
annual adjustment is calculated.
(e) Increases in tenant utility
allowances. Increases in tenant utility
allowances, as a component of the
formula income, as described in
§ 990.195, shall result in a
commensurate increase of operating
subsidy. Decreases in such utility
allowances shall result in a
commensurate decrease in operating
subsidy.
(f) Records and reporting. (1)
Appropriate utility records, satisfactory
to HUD, shall be developed and
maintained, so that consumption and
rate data can be determined.
(2) All records shall be kept by utility
and by project for each 12-month period
ending June 30th.
(3) HUD will notify each PHA when
HUD has the automated systems
capacity to receive such information.
Each PHA then will be obligated to
provide consumption and cost data to
HUD for all utilities for each project.
(4) If a PHA has not maintained or
cannot recapture utility data from its
records for a particular utility, the PHA
shall compute the UEL by:
(i) Using actual consumption data for
the last complete year(s) of available
data or data of comparable project(s)
that have comparable utility delivery
systems and occupancy, in accordance
with a method prescribed by HUD; or
(ii) Requesting field office approval to
use actual PUM utility expenses for its
UEL in accordance with a method
prescribed by HUD when the PHA
cannot obtain necessary data to
calculate the UEL in accordance with
paragraph (f)(4)(i) of this section.
§ 990.175 Utilities expense level:
Computation of the current consumption
level.

The current consumption level shall
be the actual amount of each utility
consumed during the 12-month period
ending June 30th that is 6 months prior
to the first day of the applicable funding
period.

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§ 990.180 Utilities expense level:
Computation of the rolling base
consumption level.

(a) General. (1) The rolling base
consumption level (RBCL) shall be
equal to the average of yearly
consumption levels for the 36-month
period ending on the June 30th that is
18 months prior to the first day of the
applicable funding period.
(2) The yearly consumption level is
the actual amount of each utility
consumed during a 12-month period
ending June 30th. For example, for the
funding period January 1, 2006, through
December 31, 2006, the RBCL will be
the average of the following yearly
consumption levels:
(i) Year 1 = July 1, 2001, through June
30, 2002.
(ii) Year 2 = July 1, 2002, through June
30, 2003.
(iii) Year 3 = July 1, 2003, through
June 30, 2004.
Note to paragraph (a)(2): In this example,
the current year’s consumption level will be
July 1, 2004, through June 30, 2005.

(b) Distortions to rolling base
consumption level. The PHA shall have
its RBCL determined so as not to distort
the rolling base period in accordance
with a method prescribed by HUD if:
(1) A project has not been in operation
during at least 12 months of the rolling
base period;
(2) A project enters or exits
management after the rolling base
period and prior to the end of the
applicable funding period; or
(3) A project has experienced a
conversion from one energy source to
another, switched from PHA-supplied to
resident-purchased utilities during or
after the rolling base period, or for any
other reason that would cause the RBCL
not to be comparable to the current
year’s consumption level.
(c) Financial incentives. The threeyear rolling base for all relevant utilities
will be adjusted to reflect any financial
incentives to the PHA to reduce
consumption as described in § 990.185.
§ 990.185 Utilities expense level:
Incentives for energy conservation/rate
reduction.

(a) General/consumption reduction. If
a PHA undertakes energy conservation
measures that are financed by an entity
other than HUD, the PHA may qualify
for the incentives available under this
section. For a PHA to qualify for these
incentives, the PHA must obtain HUD
approval. Approval shall be based on a
determination that payments under the
contract can be funded from the
reasonably anticipated energy cost
savings. The contract period shall not

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55001

exceed 12 years. The energy
conservation measures may include, but
are not limited to: Physical
improvements financed by a loan from
a bank, utility, or governmental entity;
management of costs under a
performance contract; or a shared
savings agreement with a private energy
service company.
(1) Frozen rolling base. (i) If a PHA
undertakes energy conservation
measures that are approved by HUD, the
RBCL for the project and the utilities
involved may be frozen during the
contract period. Before the RBCL is
frozen, it must be adjusted to reflect any
energy savings resulting from the use of
any HUD funding. The RBCL also may
be adjusted to reflect systems repaired
to meet applicable building and safety
codes as well as to reflect adjustments
for occupancy rates increased by
rehabilitation. The RBCL shall be frozen
at the level calculated for the year
during which the conservation measures
initially shall be implemented.
(ii) The PHA operating subsidy
eligibility shall reflect the retention of
100 percent of the savings from
decreased consumption until the term of
the financing agreement is complete.
The PHA must use at least 75 percent
of the cost savings to pay off the debt,
e.g., pay off the contractor or bank loan.
If less than 75 percent of the cost
savings is used for debt payment,
however, HUD shall retain the
difference between the actual
percentage of cost savings used to pay
off the debt and 75 percent of the cost
savings. If at least 75 percent of the cost
savings is paid to the contractor or bank,
the PHA may use the full amount of the
remaining cost savings for any eligible
operating expense.
(iii) The annual three-year rolling base
procedures for computing the RBCL
shall be reactivated after the PHA
satisfies the conditions of the contract.
The three years of consumption data to
be used in calculating the RBCL after
the end of the contract period shall be
the yearly consumption levels for the
final three years of the contract.
(2) PHAs undertaking energy
conservation measures that are financed
by an entity other than HUD may
include resident-paid utilities under the
consumption reduction incentive, using
the following methodology:
(i) The PHA reviews and updates all
utility allowances to ascertain that
residents are receiving the proper
allowances before energy savings
measures are begun;
(ii) The PHA makes future
calculations of rental income for
purposes of the calculation of operating
subsidy eligibility based on these

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baseline allowances. In effect, HUD will
freeze the baseline allowances for the
duration of the contract;
(iii) After implementation of the
energy conservation measures, the PHA
updates the utility allowances in
accordance with provisions in 24 CFR
part 965, subpart E. The new allowance
should be lower than baseline
allowances;
(iv) The PHA uses at least 75 percent
of the savings for paying the cost of the
improvement (the PHA will be
permitted to retain 100 percent of the
difference between the baseline
allowances and revised allowances);
(v) After the completion of the
contract period, the PHA begins using
the revised allowances in calculating its
operating subsidy eligibility; and
(vi) The PHA may exclude from its
calculation of rental income the
increased rental income due to the
difference between the baseline
allowances and the revised allowances
of the projects involved, for the duration
of the contract period.
(3) Subsidy add-on. (i) If a PHA
qualifies for this incentive (i.e., the
subsidy add-on, in accordance with the
provisions of paragraph (a) of this
section), then the PHA is eligible for
additional operating subsidy each year
of the contract to amortize the cost of
the loan for the energy conservation
measures and other direct costs related
to the energy project under the contract
during the term of the contract subject
to the provisions of this paragraph (a)(3)
of this section. The PHA’s operating
subsidy for the current funding year will
continue to be calculated in accordance
with paragraphs (a), (b), and (c) of
§ 990.170 (i.e., the rolling base is not
frozen). The PHA will be able to retain
part of the cost savings in accordance
with § 990.170(c).
(ii) The actual cost of energy (of the
type affected by the energy conservation
measure) after implementation of the
energy conservation measure will be
subtracted from the expected energy
cost, to produce the energy cost savings
for the year.
(iii) If the cost savings for any year
during the contract period are less than
the amount of operating subsidy to be
made available under this paragraph to
pay for the energy conservation measure
in that year, the deficiency will be offset
against the PHA’s operating subsidy
eligibility for the PHA’s next fiscal year.
(iv) If energy cost savings are less than
the amount necessary to meet
amortization payments specified in a
contract, the contract term may be
extended (up to the 12-year limit) if
HUD determines that the shortfall is the
result of changed circumstances rather

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than a miscalculation or
misrepresentation of projected energy
savings by the contractor or PHA. The
contract term may be extended only to
accommodate payment to the contractor
and associated direct costs.
(b) Rate reduction. If a PHA takes
action beyond normal public
participation in rate-making
proceedings, such as well-head
purchase of natural gas, administrative
appeals, or legal action to reduce the
rate it pays for utilities, then the PHA
will be permitted to retain one-half the
annual savings realized from these
actions.
(c) Utility benchmarking. HUD will
pursue benchmarking utility
consumption at the project level as part
of the transition to asset management.
HUD intends to establish benchmarks
by collecting utility consumption and
cost information on a project-by-project
basis. In 2009, after conducting a
feasibility study, HUD will convene a
meeting with representation of
appropriate stakeholders to review
utility benchmarking options so that
HUD may determine whether or how to
implement utility benchmarking to be
effective in FY 2011. The meeting shall
be convened in accordance with the
Federal Advisory Committee Act (5
U.S.C. Appendix) (FACA). The HUD
study shall take into account typical
levels of utilities consumption at public
housing developments based upon
factors such as building and unit type
and size, temperature zones, age and
construction of building, and other
relevant factors.
§ 990.190
ons).

Other formula expenses (add-

In addition to calculating operating
subsidy based on the PEL and UEL, a
PHA’s eligible formula expenses shall
be increased by add-ons. The allowed
add-ons are:
(a) Self-sufficiency. A PHA may
request operating subsidy for the
reasonable cost of program
coordinator(s) and associated costs in
accordance with HUD’s self-sufficiency
program regulations and notices.
(b) Energy loan amortization. A PHA
may qualify for operating subsidy for
payments of principal and interest cost
for energy conservation measures
described in § 990.185(a)(3).
(c) Payments in lieu of taxes (PILOT).
Each PHA will receive an amount for
PILOT in accordance with section 6(d)
of the 1937 Act, based on its
cooperation agreement or its latest
actual PILOT payment.
(d) Cost of independent audits. A
PHA is eligible to receive operating
subsidy equal to its most recent actual

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audit costs for the Operating Fund
Program when an audit is required by
the Single Audit Act (31 U.S.C. 7501–
7507) (see 24 CFR part 85) or when a
PHA elects to prepare and submit such
an audit to HUD. For the purpose of this
rule, the most recent actual audit costs
include the associated costs of an audit
for the Operating Fund Program only. A
PHA whose operating subsidy is
determined to be zero based on the
formula is still eligible to receive
operating subsidy equal to its most
recent actual audit costs. The most
recent actual audit costs are used as a
proxy to cover the cost of the next audit.
If a PHA does not have a recent actual
audit cost, the PHA working with HUD
may establish an audit cost. A PHA that
requests funding for an audit shall
complete an audit. The results of the
audit shall be transmitted in a time and
manner prescribed by HUD.
(e) Funding for resident participation
activities. Each PHA’s operating subsidy
calculation shall include $25 per
occupied unit per year for resident
participation activities, including, but
not limited to, those described in 24
CFR part 964. For purposes of this
section, a unit is eligible to receive
resident participation funding if it is
occupied by a public housing resident
or it is occupied by a PHA employee, or
a police officer or other security
personnel who is not otherwise eligible
for public housing. In any fiscal year, if
appropriations are not sufficient to meet
all funding requirements under this
part, then the resident participation
component of the formula will be
adjusted accordingly.
(f) Asset management fee. Each PHA
with at least 250 units shall receive a $4
PUM asset management fee. PHAs with
fewer than 250 units that elect to
transition to asset management shall
receive an asset management fee of $2
PUM. PHAs with fewer than 250 units
that elect to have their entire portfolio
treated and considered as a single
project as described in § 990.260(b) or
PHAs with only one project will not be
eligible for an asset management fee. For
all PHAs eligible to receive the asset
management fee, the fee will be based
on the total number of ACC units. PHAs
that are not in compliance with asset
management as described in subpart H
of this part by FY 2011 will forfeit this
fee.
(g) Information technology fee. Each
PHA’s operating subsidy calculation
shall include $2 PUM for costs
attributable to information technology.
For all PHAs, this fee will be based on
the total number of ACC units.
(h) Asset repositioning fee. (1) A PHA
that transitions projects or entire

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buildings of a project out of its
inventory is eligible for an assetrepositioning fee. This fee supplements
the costs associated with administration
and management of demolition or
disposition, tenant relocation, and
minimum protection and service
associated with such efforts. The assetrepositioning fee is not intended for
individual units within a multi-unit
building undergoing similar activities.
(2) Projects covered by applications
approved for demolition or disposition
shall be eligible for an asset
repositioning fee on the first day of the
next quarter six months after the date
the first unit becomes vacant after the
relocation date included in the
approved relocation plan. When this
condition is met, the project and all
associated units are no longer
considered an EUM as described in
§ 990.155. Each PHA is responsible for
accurately applying and maintaining
supporting documentation on the start
date of this transition period or is
subject to forfeiture of this add-on.
(3) Units categorized for demolition
and which are eligible for an asset
repositioning fee are eligible for
operating subsidy at the rate of 75
percent PEL per unit for the first twelve
months, 50 percent PEL per unit for the
next twelve months, and 25 percent PEL
per unit for the next twelve months.
(4) Units categorized for disposition
and which are eligible for an asset
repositioning fee are eligible for
operating subsidy at the rate of 75
percent PEL per unit for the first twelve
months and 50 percent PEL per unit for
the next twelve months.
(5) The following is an example of
how eligibility for an asset-repositioning
fee is determined:
(i) A PHA has HUD’s approval to
demolish (or dispose of) a 100-unit
project from its 1,000 unit inventory. On
January 12th, in conjunction with the
PHA’s approved Relocation Plan, a unit
in that project becomes vacant.
Accordingly, the demolition/
disposition-approved project is eligible
for an asset-repositioning fee on October
1st. (This date is calculated as follows:
January 12th + six months = July 12th.
The first day of the next quarter is
October 1st.)
(ii) Although payment of the assetrepositioning fee will not begin until
October 1st, the PHA will receive its full
operating subsidy based on the 1,000
units through September 30th. On
October 1st the PHA will begin to
receive the 36-month asset-repositioning
fee in accordance with paragraph (h)(3)
of this section for the 100 units
approved for demolition. (Asset
repositioning fee requirements for

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projects approved for disposition are
found in paragraph (h)(4) of this
section.) On October 1st, the PHA’s
units will be 900.
(i) Costs attributable to changes in
Federal law, regulation, or economy. In
the event that HUD determines that
enactment of a Federal law or revision
in HUD or other Federal regulations has
caused or will cause a significant
change in expenditures of a continuing
nature above the PEL and UEL, HUD
may, at HUD’s sole discretion, decide to
prescribe a procedure under which the
PHA may apply for or may receive an
adjustment in operating subsidy.
Subpart D—Calculating Formula
Income
§ 990.195

Calculation of formula income.

(a) General. For the purpose of the
formula, formula income is equal to the
amount of rent charged to tenants
divided by the respective unit months
leased, and is therefore expressed as a
PUM. Formula income will be derived
from a PHA’s year-end financial
information. The financial information
used in the formula income
computation will be the audited
information provided by the PHA
through HUD’s information systems.
The information will be calculated
using the following PHA fiscal year-end
information:
(1) April 1, 2003, through March 31,
2004;
(2) July 1, 2003, through June 30,
2004;
(3) October 1, 2003, through
September 30, 2004; and
(4) January 1, 2004, through December
31, 2004.
(b) Calculation of formula income. To
calculate formula income in whole
dollars, the PUM amount will be
multiplied by the EUMs as described in
subpart B of this part.
(c) Frozen at 2004 level. After a PHA’s
formula income is calculated as
described in paragraph (a) of this
section, it will not be recalculated or
inflated for fiscal years 2006 through
2008, unless a PHA can show a severe
local economic hardship that is
impacting the PHA’s ability to maintain
some semblance of its formula income
(see subpart G of this part—Appeals). A
PHA’s formula income may be
recalculated if the PHA appeals to HUD
for an adjustment in its formula.
(d) Calculation of formula income
when data are inadequate or
unavailable. When audited data are
unavailable in HUD’s information
systems for the calculation of formula
income, HUD may use an alternative
methodology, including, but not limited

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to, certifications, hard copy reports, and
communications with the respective
PHAs.
(e) Inapplicability of 24 CFR 85.25.
Formula income is not subject to the
provisions regarding program income in
24 CFR 85.25.
Subpart E—Determination and
Payment of Operating Subsidy
§ 990.200
amount.

Determination of formula

(a) General. The amount of operating
subsidy that a PHA is eligible for is the
difference between its formula expenses
(as calculated under subpart C of this
part) and its formula income (as
calculated under subpart D of this part).
(b) Use of HUD databases to calculate
formula amount. HUD shall utilize its
databases to make the formula
calculations. HUD’s databases are
intended to be employed to provide
information on all primary factors in
determining the operating subsidy
amount. Each PHA is responsible for
supplying accurate information on the
status of each of its units in HUD’s
databases.
(c) PHA responsibility to submit
timely data. PHAs shall submit data
used in the formula on a regular and
timely basis to ensure accurate
calculation under the formula. If a PHA
fails to provide accurate data, HUD will
make a determination as to the PHA’s
inventory, occupancy, and financial
information using available or verified
data, which may result in a lower
operating subsidy. HUD has the right to
adjust any or all formula amounts based
on clerical, mathematical, and
information system errors that affect any
of the data elements used in the
calculation of the formula.
§ 990.205 Fungibility of operating subsidy
between projects.

(a) General. Operating subsidy shall
remain fully fungible between ACC
projects until operating subsidy is
calculated by HUD at a project level.
After subsidy is calculated at a project
level, operating subsidy can be
transferred as the PHA determines
during the PHA’s fiscal year to another
ACC project(s) if a project’s financial
information, as described more fully in
§ 990.280, produces excess cash flow,
and only in the amount up to those
excess cash flows.
(b) Notwithstanding the provisions of
paragraph (a) of this section and subject
to all of the other provisions of this part,
the New York City Housing Authority’s
Development Grant Project Amendment
Number 180, dated July 13, 1995, to
Consolidated Annual Contributions
Contract NY–333, remains in effect.

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Payment of operating subsidy.

(a) Payments of operating subsidy
under the formula. HUD shall make
monthly payments equal to 1⁄12 of a
PHA’s total annual operating subsidy
under the formula by electronic funds
transfers through HUD’s automated
disbursement system. HUD shall
establish thresholds that permit PHAs to
request monthly installments. Requests
by PHAs that exceed these thresholds
will be subject to HUD review. HUD
approvals of requests that exceed these
thresholds are limited to PHAs that have
an unanticipated and immediate need
for disbursement.
(b) Payments procedure. In the event
that the amount of operating subsidy
has not been determined by HUD as of
the beginning of the funding period,
operating subsidy shall be provided
monthly, quarterly, or annually based
on the amount of the PHA’s previous
year’s formula or another amount that
HUD may determine to be appropriate.
(c) Availability of funds. In the event
that insufficient funds are available,
HUD shall have discretion to revise, on
a pro rata basis, the amounts of
operating subsidy to be paid to PHAs.
§ 990.215 Payments of operating subsidy
conditioned upon reexamination of income
of families in occupancy.

(a) General. Each PHA is required to
reexamine the income of each family in
accordance with the provisions of the
ACC, the 1937 Act, and HUD
regulations. Income reexaminations
shall be performed annually, except as
provided in the 1937 Act, in HUD
regulations, or in the MTW agreements.
A PHA must be in compliance with all
reexamination requirements in order to
be eligible to receive full operating
subsidy. A PHA’s calculations of rent
and utility allowances shall be accurate
and timely.
(b) A PHA in compliance. A PHA
shall submit a certification that states
that the PHA is in compliance with the
annual income reexamination
requirements and its rent and utility
allowance calculations have been or
will be adjusted in accordance with
current HUD requirements and
regulations.
(c) A PHA not in compliance. Any
PHA not in compliance with annual

income reexamination requirements at
the time of the submission of the
calculation of operating subsidy shall
furnish to the responsible HUD field
office a copy of the procedures it is
using to achieve compliance and a
statement of the number of families that
have undergone reexamination during
the 12 months preceding the current
funding cycle. If, on the basis of this
submission or any other information,
HUD determines that the PHA is not
substantially in compliance with all of
the annual income reexamination
requirements, HUD shall withhold
payments to which the PHA may be
entitled under this part. Payment may
be withheld in an amount equal to
HUD’s estimate of the loss of rental
income to the PHA resulting from its
failure to comply with the requirements.
Subpart F—Transition Policy and
Transition Funding
§ 990.220

Purpose.

This policy is aimed at assisting all
PHAs in transitioning to the new
funding levels as determined by the
formula set forth in this rule. PHAs will
be subject to a transition funding policy
that will either increase or reduce their
total operating subsidy for a given year.
§ 990.225

Transition determination.

The determination of the amount and
period of the transition funding shall be
based on the difference in subsidy levels
between the formula set forth in this
part and the formula in effect prior to
November 18, 2005. The difference in
subsidy levels will be calculated using
FY 2004 data. When actual data are not
available for one of the formula
components needed to calculate the
formula of this part for FY 2004, HUD
will use alternate data as a substitute
(e.g., unit months available for eligible
unit months, etc.) If the difference
between these formulas indicates that a
PHA shall have its operating subsidy
reduced as a result of this formula, the
PHA will be subject to a transition
policy as indicated in § 990.230. If the
difference between these formulas
indicates that a PHA will have its
operating subsidy increased as a result
of this formula, the PHA will be subject

to the transition policy as indicated in
§ 990.235.
§ 990.230 PHAs that will experience a
subsidy reduction.

(a) For PHAs that will experience a
reduction in their operating subsidy, as
determined in § 990.225, such
reductions will have a limit of:
(1) 24 percent of the difference
between the two funding levels in the
first year following November 18, 2005;
(2) 43 percent of the difference
between the two funding levels in the
second year following November 18,
2005;
(3) 62 percent of the difference
between the two levels in the third year
following November 18, 2005; and
(4) 81 percent of the difference
between the two levels in the fourth
year following November 18, 2005.
(b) The full amount of the reduction
in the operating subsidy level shall be
realized in the fifth year following
November 18, 2005.
(c) For example, a PHA has a subsidy
reduction from $1 million under the
formula in effect prior to November 18,
2005 to $900,000 under the formula
used for calculating operating subsidy
under this part using FY 2004 data. The
difference would be calculated at
$100,000 ($1 million¥$900,000 =
$100,000). In the first year, the subsidy
reduction would be limited to $24,000
(24 percent of the difference). Thus, the
PHA will receive an operating subsidy
amount of this rule plus a transitionfunding amount of $76,000 (the
$100,000 difference between the two
subsidy amounts minus the $24,000
reduction limit).
(d) If a PHA can demonstrate a
successful conversion to the asset
management requirements of subpart H
of this part, as determined under
paragraph (f) of this section, HUD will
discontinue the reduction at the PHA’s
next subsidy calculation following such
demonstration, as reflected in the
schedule in paragraph (e) of this section,
notwithstanding § 990.290(c).
(e) The schedule of reductions for a
PHA that will experience a reduction in
subsidy is reflected in the table below.

Funding period

Demonstration date
by

Reduction limited to

Prior to year 1 ....................................................................

October 1, 2005 ...............

Year
Year
Year
Year
Year

October
October
October
October
October

5 percent of the difference between the two funding levels.
24 percent of the difference.
43 percent of the difference.
62 percent of the difference.
81 percent of the difference.
Full reduction reached.

1
2
3
4
5

................................................................................
................................................................................
................................................................................
................................................................................
................................................................................

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1,
1,
1,
1,

2006
2007
2008
2009
2010

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...............
...............
...............
...............

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(f)(1) For purposes of this section,
compliance with the asset management
requirements of subpart H of this part
will be based on an independent
assessment conducted by a HUDapproved professional familiar with
property management practices in the
region or state in which the PHA is
located.
(2) A PHA must select from a list of
HUD-approved professionals to conduct
the independent assessment. The
professional review and
recommendation will then be forwarded
to the Assistant Secretary for Public and
Indian Housing (or designee) for final
determination of compliance with the
asset management requirements of
subpart H of this part.
(3) Upon completion of the
independent assessment, the assessor
shall conduct an exit conference with
the PHA. In response to the exit
conference, the PHA may submit a
management response and other
pertinent information (including, but
not limited to, an additional assessment
procured at the PHAs’ own expense)
within ten working days of the exit
conference to be included in the report
submitted to HUD.
(4) In the event that HUD is unable to
produce a list of independent assessors
on a timely basis, the PHA may submit
its own demonstration of a successful
conversion to asset management directly
to HUD for determination of
compliance.
(5) The Assistant Secretary for Public
and Indian Housing (or designee) shall
consider all information submitted and
respond with a final determination of
compliance within 60 days of the
independent assessor’s report being
submitted to HUD.
§ 990.235 PHAs that will experience a
subsidy increase.

(a) For PHAs that will experience a
gain in their operating subsidy, as
determined in § 990.225, such increases
will have a limit of 50 percent of the
difference between the two funding
levels in the first year following
November 18, 2005.
(b) The full amount of the increase in
the operating subsidy level shall be
realized in the second year following
November 18, 2005.
(c) For example, a PHA’s subsidy
increased from $900,000 under the
formula in effect prior to November 18,
2005 to $1 million under the formula
used to calculate operating subsidy
under this part using FY 2004 data. The
difference would be calculated at
$100,000 ($1 million ¥$900,000 =
$100,000). In the first year, the subsidy
increase would be limited to $50,000

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(50 percent of the difference). Thus, in
this example the PHA will receive the
operating subsidy amount of this rule
minus a transition-funding amount of
$50,000 (the $100,000 difference
between the two subsidy amounts
minus the $50,000 transition amount).
(d) The schedule for a PHA whose
subsidy would be increased is reflected
in the table below.
Funding
period

Increase limited to

Year 1 .......
Year 2 .......

50 percent of the difference.
Full increase reached.

Subpart G—Appeals
§ 990.240

General.

(a) PHAs will be provided
opportunities for appeals. HUD will
provide up to a two percent hold-back
of the Operating Fund appropriation for
FY 2006 and FY 2007. HUD will use the
hold-back amount to fund appeals that
are filed during each of these fiscal
years. Hold-back funds not utilized will
be added back to the formula within
each of the affected fiscal years.
(b) Appeals are voluntary and must
cover an entire portfolio, not single
projects. However, the Assistant
Secretary for Public and Indian Housing
(or designee) has the discretion to
accept appeals of less than an entire
portfolio for PHAs with greater than
5,000 public housing units.
§ 990.245

Types of appeals.

(a) Streamlined appeal. This appeal
would demonstrate that the application
of a specific Operating Fund formula
component has a blatant and objective
flaw.
(b) Appeal of formula income for
economic hardship. After a PHA’s
formula income has been frozen, the
PHA can appeal to have its formula
income adjusted to reflect a severe local
economic hardship that is impacting the
PHA’s ability to maintain rental and
other revenue.
(c) Appeal for specific local
conditions. This appeal would be based
on demonstrations that the model’s
predictions are not reliable because of
specific local conditions. To be eligible,
the affected PHA must demonstrate a
variance of ten percent or greater in its
PEL.
(d) Appeal for changing market
conditions. A PHA may appeal to
receive operating subsidy for vacant
units due to changing market
conditions, after a PHA has taken
aggressive marketing and outreach
measures to rent these units. For
example, a PHA could appeal if it is

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55005

located in an area experiencing
population loss or economic
dislocations that faces a lack of demand
for housing in the foreseeable future.
(e) Appeal to substitute actual project
cost data. A PHA may appeal its PEL if
it can produce actual project cost data
derived from actual asset management,
as outlined in subpart H of this part, for
a period of at least two years.
§ 990.250
appeals.

Requirements for certain

(a) Appeals under § 990.245 (a) and
(c) must be submitted once annually.
Appeals under § 990.245 (a) and (c)
must be submitted for new projects
entering a PHA’s inventory within one
year of the applicable Date of Full
Availability (DOFA).
(b) Appeals under § 990.245 (c) and
(e) are subject to the following
requirements:
(1) The PHA is required to acquire an
independent cost assessment of its
projects;
(2) The cost of services for the
independent cost assessment is to be
paid by the appellant PHA;
(3) The assessment is to be reviewed
by a professional familiar with property
management practices and costs in the
region or state in which the appealing
PHA is located. This professional is to
be procured by HUD. The professional
review and recommendation will then
be forwarded to the Assistant Secretary
for Public and Indian Housing (or
designee) for final determination; and
(4) If the appeal is granted, the PHA
agrees to be bound to the independent
cost assessment regardless of new
funding levels.
Subpart H—Asset Management
§ 990.255

Overview.

(a) PHAs shall manage their
properties according to an asset
management model, consistent with the
management norms in the broader
multi-family management industry.
PHAs shall also implement projectbased management, project-based
budgeting, and project-based
accounting, which are essential
components of asset management. The
goals of asset management are to:
(1) Improve the operational efficiency
and effectiveness of managing public
housing assets;
(2) Better preserve and protect each
asset;
(3) Provide appropriate mechanisms
for monitoring performance at the
property level; and
(4) Facilitate future investment and
reinvestment in public housing by
public and private sector entities.

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(b) HUD recognizes that appropriate
changes in its regulatory and monitoring
programs may be needed to support
PHAs to undertake the goals identified
in paragraph (a) of this section.
§ 990.260

Applicability.

(a) PHAs that own and operate 250 or
more dwelling rental units under title I
of the 1937 Act, including units
managed by a third-party entity (for
example, a resident management
corporation) but excluding section 8
units, are required to operate using an
asset management model consistent
with this subpart.
(b) PHAs that own and operate fewer
than 250 dwelling rental units may treat
their entire portfolio as a single project.
However, if a PHA selects this option,
it will not receive the add-on for the
asset management fee described in
§ 990.190(f).
§ 990.265

Identification of projects.

For purposes of this subpart, project
means a public housing building or set
of buildings grouped for the purpose of
management. A project may be as
identified under the ACC or may be a
reasonable grouping of projects or
portions of a project under the ACC.
HUD shall retain the right to disapprove
of a PHA’s designation of a project.
PHAs may group up to 250 scatteredsite dwelling rental units into a single
project.
§ 990.270

Asset management.

As owners, PHAs have asset
management responsibilities that are
above and beyond property management
activities. These responsibilities include
decision-making on topics such as longterm capital planning and allocation,
the setting of ceiling or flat rents, review
of financial information and physical
stock, property management
performance, long-term viability of
properties, property repositioning and
replacement strategies, risk management
responsibilities pertaining to regulatory
compliance, and those decisions
otherwise consistent with the PHA’s
ACC responsibilities, as appropriate.
§ 990.275
(PBM).

Project-based management

PBM is the provision of propertybased management services that is
tailored to the unique needs of each
property, given the resources available
to that property. These property
management services include, but are
not limited to, marketing, leasing,
resident services, routine and
preventive maintenance, lease
enforcement, protective services, and
other tasks associated with the day-today operation of rental housing at the

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project level. Under PBM, these
property management services are
arranged, coordinated, or overseen by
management personnel who have been
assigned responsibility for the day-today operation of that property and who
are charged with direct oversight of
operations of that property. Property
management services may be arranged
or provided centrally; however, in those
cases in which property management
services are arranged or provided
centrally, the arrangement or provision
of these services must be done in the
best interests of the property,
considering such factors as cost and
responsiveness.
§ 990.280 Project-based budgeting and
accounting.

(a) All PHAs covered by this subpart
shall develop and maintain a system of
budgeting and accounting for each
project in a manner that allows for
analysis of the actual revenues and
expenses associated with each property.
Project-based budgeting and accounting
will be applied to all programs and
revenue sources that support projects
under an ACC (e.g., the Operating Fund,
the Capital Fund, etc.).
(b)(1) Financial information to be
budgeted and accounted for at a project
level shall include all data needed to
complete project-based financial
statements in accordance with
Accounting Principles Generally
Accepted in the United States of
America (GAAP), including revenues,
expenses, assets, liabilities, and equity
data. The PHA shall also maintain all
records to support those financial
transactions. At the time of conversion
to project-based accounting, a PHA shall
apportion its assets, liabilities, and
equity to its respective projects and
HUD-accepted central office cost
centers.
(2) Provided that the PHA complies
with GAAP and other associated laws
and regulations pertaining to financial
management (e.g., OMB Circulars), it
shall have the maximum amount of
responsibility and flexibility in
implementing project-based accounting.
(3) Project-specific operating income
shall include, but is not limited to, such
items as project-specific operating
subsidy, dwelling and non-dwelling
rental income, excess utilities income,
and other PHA or HUD-identified
income that is project-specific for
management purposes.
(4) Project-specific operating expenses
shall include, but are not limited to,
direct administrative costs, utilities
costs, maintenance costs, tenant
services, protective services, general
expenses, non-routine or capital

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expenses, and other PHA or HUDidentified costs which are projectspecific for management purposes.
Project-specific operating costs also
shall include a property management
fee charged to each project that is used
to fund operations of the central office.
Amounts that can be charged to each
project for the property management fee
must be reasonable. If the PHA contracts
with a private management company to
manage a project, the PHA may use the
difference between the property
management fee paid to the private
management company and the fee that
is reasonable to fund operations of the
central office and other eligible
purposes.
(5) If the project has excess cash flow
available after meeting all reasonable
operating needs of the property, the
PHA may use this excess cash flow for
the following purposes:
(i) Fungibility between projects as
provided for in § 990.205.
(ii) Charging each project a reasonable
asset management fee that may also be
used to fund operations of the central
office. However, this asset management
fee may be charged only if the PHA
performs all asset management activities
described in this subpart (including
project-based management, budgeting,
and accounting). Asset management fees
are considered a direct expense.
(iii) Other eligible purposes.
(c) In addition to project-specific
records, PHAs may establish central
office cost centers to account for nonproject specific costs (e.g., human
resources, Executive Director’s office,
etc.). These costs shall be funded from
the property-management fees received
from each property, and from the asset
management fees to the extent these are
available.
(d) In the case where a PHA chooses
to centralize functions that directly
support a project (e.g., central
maintenance), it must charge each
project using a fee-for-service approach.
Each project shall be charged for the
actual services received and only to the
extent that such amounts are reasonable.
§ 990.285

Records and reports.

(a) Each PHA shall maintain projectbased budgets and fiscal year-end
financial statements prepared in
accordance with GAAP and shall make
these budgets and financial statements
available for review upon request by
interested members of the public.
(b) Each PHA shall distribute the
project-based budgets and year-end
financial statements to the Chairman
and to each member of the PHA Board
of Commissioners, and to such other

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state and local public officials as HUD
may specify.
(c) Some or all of the project-based
budgets and financial statements and
information shall be required to be
submitted to HUD in a manner and time
prescribed by HUD.
§ 990.290 Compliance with asset
management requirements.

(a) A PHA is considered in
compliance with asset management
requirements if it can demonstrate
substantially, as described in paragraph
(b) of this section, that it is managing
according to this subpart.
(b) Demonstration of compliance with
asset management will be based on an
independent assessment.
(1) The assessment is to be conducted
by a professional familiar with property
management practices and costs in the
region or state in which the PHA is
located. This professional is to be
procured by HUD.
(2) The professional review and
recommendation will then be forwarded
to the Assistant Secretary for Public and
Indian Housing (or designee) for final
determination of compliance to asset
management.
(c) Upon HUD’s determination of
successful compliance with asset
management, PHAs will then be funded
based on this information pursuant to
§ 990.165(i).
(d) PHAs must be in compliance with
the project-based accounting and
budgeting requirements in this subpart
by FY 2007. PHAs must be in
compliance with the remainder of the
components of asset management by FY
2011.
Subpart I—Operating Subsidy for
Properties Managed by Resident
Management Corporations (RMCs)
§ 990.295 Resident Management
Corporation operating subsidy.

(a) General. This part applies to all
projects managed by a Resident
Management Corporation (RMC),
including a direct funded RMC.
(b) Operating subsidy. Subject to
paragraphs (c) and (d) of this section,
the amount of operating subsidy that a
PHA or HUD provides a project
managed by an RMC shall not be
reduced during the three-year period
beginning on the date the RMC first
assumes management responsibility for
the project.
(c) Change factors. The operating
subsidy for an RMC-managed project
shall reflect changes in inflation, utility
rates, and consumption, as well as
changes in the number of units in the
resident managed project.

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(d) Exclusion of increased income.
Any increased income directly
generated by activities by the RMC or
facilities operated by the RMC shall be
excluded from the calculation of the
operating subsidy.
(e) Exclusion of technical assistance.
Any technical assistance the PHA
provides to the RMC will not be
included for purposes of determining
the amount of funds provided to a
project under paragraph (b) of this
section.
(f) The following conditions may not
affect the amounts to be provided under
this part to a project managed by an
RMC:
(1) Income reduction. Any reduction
in the subsidy or total income of a PHA
that occurs as a result of fraud, waste,
or mismanagement by the PHA; and
(2) Change in total income. Any
change in the total income of a PHA that
occurs as a result of project-specific
characteristics when these
characteristics are not shared by the
project managed by the RMC.
(g) Other project income. In addition
to the operating subsidy calculated in
accordance with this part and the
amount of income derived from the
project (from sources such as rents and
charges), the management contract
between the PHA and the RMC may
specify that income be provided to the
project from other legally available
sources of PHA income.
§ 990.300

Preparation of operating budget.

(a) The RMC and the PHA must
submit operating budgets and
calculations of operating subsidy to
HUD for approval in accordance with
§ 990.200. The budget will reflect all
project expenditures and will identify
the expenditures related to the
responsibilities of the RMC and the
expenditures that are related to the
functions that the PHA will continue to
perform.
(b) For each project or part of a project
that is operating in accordance with the
ACC amendment relating to this subpart
and in accordance with a contract
vesting maintenance responsibilities in
the RMC, the PHA will transfer into a
sub-account of the operating reserve of
the PHA an operating reserve for the
RMC project. When all maintenance
responsibilities for a resident-managed
project are the responsibility of the
RMC, the amount of the reserve made
available to a project under this subpart
will be the per-unit cost amount
available to the PHA operating reserve,
excluding all inventories, prepaids, and
receivables at the end of the PHA fiscal
year preceding implementation,
multiplied by the number of units in the

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55007

project operated. When some, but not
all, maintenance responsibilities are
vested in the RMC, the management
contract between the PHA and RMC
may provide for an appropriately
reduced portion of the operating reserve
to be transferred into the RMC’s subaccount.
(c) The RMC’s use of the operating
reserve is subject to all administrative
procedures applicable to the
conventionally owned public housing
program. Any expenditure of funds from
the reserve must be for eligible
expenditures that are incorporated into
an operating budget subject to approval
by HUD.
(d) Investment of funds held in the
reserve will be in accordance with HUD
regulations and guidance.
§ 990.305

Retention of excess revenues.

(a) Any income generated by an RMC
that exceeds the income estimated for
the income categories specified in the
RMC’s management contract must be
excluded in subsequent years in
calculating:
(1) The operating subsidy provided to
a PHA under this part; and
(2) The funds the PHA provides to the
RMC.
(b) The RMC’s management contract
must specify the amount of income that
is expected to be derived from the
project (from sources such as rents and
charges) and the amount of income to be
provided to the project from the other
sources of income of the PHA (such as
operating subsidy under this part,
interest income, administrative fees, and
rents). These income estimates must be
calculated consistent with HUD’s
administrative instructions. Income
estimates may provide for adjustment of
anticipated project income between the
RMC and the PHA, based upon the
management and other projectassociated responsibilities (if any) that
are to be retained by the PHA under the
management contract.
(c) Any revenues retained by an RMC
under this section may be used only for
purposes of improving the maintenance
and operation of the project,
establishing business enterprises that
employ residents of public housing, or
acquiring additional dwelling units for
lower income families. Units acquired
by the RMC will not be eligible for
payment of operating subsidy.
Subpart J—Financial Management
Systems, Monitoring, and Reporting
§ 990.310 Purpose—General policy on
financial management, monitoring and
reporting.

All PHA financial management
systems, reporting, and monitoring of

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program performance and financial
reporting shall be in compliance with
the requirements of 24 CFR 85.20, 85.40,
and 85.41. Certain HUD requirements
provide exceptions for additional
specialized procedures that are
determined by HUD to be necessary for
the proper management of the program
in accordance with the requirements of
the 1937 Act and the ACC between each
PHA and HUD.
§ 990.315 Submission and approval of
operating budgets.

(a) Required documentation:
(1) Prior to the beginning of its fiscal
year, a PHA shall prepare an operating
budget in a manner prescribed by HUD.
The PHA’s Board of Commissioners
shall review and approve the budget by
resolution. Each fiscal year, the PHA
shall submit to HUD, in a time and
manner prescribed by HUD, the
approved Board resolution.

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(2) HUD may direct the PHA to
submit its complete operating budget
with detailed supporting information
and the Board resolution if the PHA has
breached the ACC contract, or for other
reasons, which, in HUD’s
determination, threaten the PHA’s
future serviceability, efficiency,
economy, or stability. When the PHA no
longer is operating in a manner that
threatens the future serviceability,
efficiency, economy, or stability of the
housing it operates, HUD will notify the
PHA that it no longer is required to
submit a complete operating budget
with detailed supporting information to
HUD for review and approval.
(b) If HUD finds that an operating
budget is incomplete, inaccurate,
includes illegal or ineligible
expenditures, contains mathematical
errors or errors in the application of
accounting procedures, or is otherwise
unacceptable, HUD may, at any time,

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require the PHA to submit additional or
revised information regarding the
budget or revised budget.
§ 990.320

Audits.

All PHAs that receive financial
assistance under this part shall submit
an acceptable audit and comply with
the audit requirements in 24 CFR 85.26.
§ 990.325

Record retention requirements.

The PHA shall retain all documents
related to all financial management and
activities funded under the Operating
Fund for a period of five fiscal years
after the fiscal year in which the funds
were received.
Dated: September 12, 2005.
Paula O. Blunt,
General Deputy Assistant Secretary for Public
and Indian Housing.
[FR Doc. 05–18624 Filed 9–16–05; 8:45 am]
BILLING CODE 4210–33–P

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