Revisions to the Public Housing Operating Fund Program, 19858-19875 [05-7376]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 70, Number 71 (Thursday, April 14, 2005)]
[Proposed Rules]
[Pages 19858-19875]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-7376]



[[Page 19857]]

-----------------------------------------------------------------------

Part III





Department of Housing and Urban Development





-----------------------------------------------------------------------



24 CFR Part 990



Revisions to the Public Housing Operating Fund Program; Proposed Rule

Federal Register / Vol. 70, No. 71 / Thursday, April 14, 2005 / 
Proposed Rules

[[Page 19858]]


-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 990

[Docket No. FR-4874-P-07, HUD-2005-0005]
RIN 2577-AC51


Revisions to the Public Housing Operating Fund Program

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would revise the regulations for the Public 
Housing Operating Fund Program (Operating Fund Program). Through the 
Operating Fund Program, HUD determines the allocation of operating 
subsidies to public housing agencies (PHAs). HUD developed the proposed 
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 reflect the 
recommendations made by the negotiated rulemaking committee, with some 
modifications, on ways to 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 well-run 
public housing.

DATES: Comments Due Date: June 13, 2005.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500. Electronic comments may be submitted 
through either:
     The Federal Rulemaking Portal: at https://
www.regulations.gov; or
     The HUD electronic Web site at: https://www.epa.gov/
feddocket. Follow the link entitled View Open HUD Dockets.'' Commenters 
should follow the instructions provided on that site to submit comments 
electronically.
    Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available, without revision, for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Copies are also available for inspection and downloading 
at https://www.epa.gov/feddocket.

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 20024; 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 establishes an Operating 
Fund for the purpose of making assistance available to public housing 
agencies (PHAs) for the operation and management of public housing. 
Section 9 of the 1937 Act also requires 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 for an 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--
Public Housing Authorities Directors Association (PHADA), Council of 
Large Public Housing Authorities (CLPHA) and National Association of 
Housing and Redevelopment Officials (NAHRO). The negotiated rulemaking 
committee concluded with a proposed rule, published 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 
Harvard GSD's research for and development of the Cost Study. The 
Harvard GSD also 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 negotiated 
rulemaking to make changes to the Operating Fund formula. Specifically, 
section 222 of the administrative provisions for the HUD appropriations 
provides for HUD to conduct negotiated rulemaking with representatives 
from interested parties for purposes of any changes to the Operating 
Fund, and that a final rule be issued no later than July 1, 2004.
    In response to this statutory language, HUD published a notice on 
January 28, 2004 (69 FR 4212), announcing its intent to establish an 
advisory committee to provide advice and recommendations on developing 
a rule for effectuating changes to the Operating Fund Program in 
response to the Harvard Cost Study. The January 28, 2004, notice 
solicited public comments on the proposed membership of the committee, 
and explained how persons could be nominated for membership. On March 
10, 2004 (69 FR 11349), HUD

[[Page 19859]]

published a notice in the Federal Register announcing both the 
establishment of its negotiated rulemaking advisory committee on the 
Operating Fund (Committee) and the final list of Committee members.
    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. All of the 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.

III. Changes to Committee Recommendations

    This proposed rule is based primarily on the recommendations made 
by the Committee on ways to improve the current Operating Fund 
regulations. HUD developed a draft proposed rule based on those 
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. As a result of those 
review processes, certain Committee recommendations have been revised. 
These changes have been made to better reflect a comparison with 
subsidized market-based units and Administration policies and budgetary 
priorities. HUD believes that these changes to the recommendations 
advance the goals of the Committee to implement an improved and more 
accurate Operating Fund formula.
    The overall proposed rule sets forth a formula that is comparable 
with subsidized market-based units; however, differences between public 
housing units and subsidized market-based units makes certain 
comparisons difficult. In acknowledgment of these difficulties, certain 
add-ons were included that went beyond the Harvard Cost Study 
recommendations and provide additional incentives in some cases (for 
example, the freezing of rental income for three years). With these 
changes, the proposed rule would provide PHAs more flexibility to 
augment the operating subsidy appropriations with additional revenue. 
In total, the Department believes the changes contained in the proposed 
rule and the flexibility provided is sufficient to provide for the 
operation and maintenance of public housing.
    This section of the preamble describes those situations where the 
recommendations submitted by the Committee have been revised, and the 
rationale for the changes.

A. Public Entity Fee

    The calculation of the Project Expense Level (PEL) would not 
include a $2 per unit month (PUM) public entity fee. The Committee 
recommended that a public entity fee of $2 PUM should be added to the 
initial PELs. After careful review of the proposal, it was determined 
that the expenses to be covered by the additional subsidy from this 
public entity fee were already adequately addressed through other means 
in the proposed rule.

B. Operating Subsidy for Vacant Units

    Under the proposed rule, PHAs would receive subsidy for occupied 
dwelling units and dwelling units with an approved vacancy. The 
Committee recommended that PHAs also receive operating subsidy for a 
limited number of vacancies if the annualized rate is less than or 
equal to three percent. It is true that there are special circumstances 
that may preclude PHAs from attaining full occupancy and, therefore, 
HUD will continue to pay subsidy for dwelling units meeting these 
circumstances (e.g., units undergoing modernization, special use units, 
etc). However, payment of subsidy for vacancies of up to three percent 
or for five units if the PHA has 100 or fewer units is contradictory to 
the goals of subsidized housing and asset management and comparability 
with subsidized market-based units. Accordingly, the proposed rule does 
not provide for such additional subsidy.

C. PEL Inflation Factor

    The annual inflation factor used to adjust the PEL would continue 
to be the applicable local inflation factor used to adjust the 
Allowable Expense Level (AEL) used under the current Operating Fund 
Program regulations. The Committee recommended that the inflation 
factor should be based on information published by the Department of 
Labor Bureau of Labor Statistics (BLS). The Committee further 
recommended that the adjustment factor should reflect a weight of 40 
percent for increases in cost of living as shown for such annual period 
by the BLS U.S. Cities Average All Items Consumer Price Index, and 60 
percent for increases in wages, salaries and benefits for an annualized 
period as shown in the BLS Employment Cost Index. The Committee based 
its recommendation on the fact that the BLS data is readily available 
to the public. Upon further consideration, the Department has concluded 
that the purpose of the inflation factor is better served by using the 
existing inflation factor. Retaining the current inflation factor will 
provide PHAs with continuity and an inflation factor that has 
adequately served to adjust the AEL for many years.
    The current inflation factor has a 60 percent wage and 40 percent 
non-wage structure in keeping with the Committee's recommendation. 
Additionally, the current inflation factor better reflects wages 
because it uses Bureau of Labor Statistics wage data generated from 
county level government wages, which is then averaged to the 
metropolitan and non-metropolitan level for each state. For the 40 
percent non-wage inflation factor, the current formula uses the 
Producer Price Index (PPI) instead of the Consumer Price Index (CPI). 
The PPI more accurately reflects the actual costs associated with the 
production of non-food and non-energy goods.

D. Nonprofit Ownership Coefficient

    The PEL for a given property consists of the sum of nine variable 
coefficients added to a formula constant. The exponent of that sum is 
then multiplied by a percentage, to reflect the nonprofit ownership of 
the property. This proposed rule provides for a nonprofit coefficient 
of four percent. The Committee recommended that the non-profit 
coefficient be ten percent. The Department believes that PHAs have 
strong characteristics of both profit and non-profit entities, and 
agrees with the Cost Study's inclusion of a coefficient. However, the 
ten percent differential between the costs associated with for-profit 
and non-profit entities also reflects inefficiencies that currently 
exist in the delivery of housing services that should not be supported 
in the formula. Accordingly, the coefficient has been reduced to 
account for these current inefficiencies.

E. Phase-In of Operating Subsidy Gains

    For PHAs that would experience a gain in their operating subsidy, 
the proposed rule provides that the gain will be phased in over a four-
year period. The Committee recommended that such increases be phased in 
over a two-year period. HUD recognizes that PHAs should receive the 
full benefit of increases to their operating subsidy allocation, but 
also believes that this period of time should be more closely aligned 
with the five-year phase in period for those PHAs that would have their 
subsidy decreased as a result of the proposed regulatory changes.

[[Page 19860]]

F. Discontinuation of Subsidy Reduction Through Demonstration of 
Successful Conversion to Asset Management

    PHAs that experience a reduction in their operating subsidy will 
not be able to discontinue the reduction at the PHA's next subsidy 
calculation by demonstrating a successful conversion to asset 
management. The Committee recommended that HUD should discontinue 
subsidy reductions for a PHA that can demonstrate a successful 
conversion to asset management. It was concluded that the Cost Study 
methodology should be equally applied to all PHAs, and that providing 
for discontinuation of subsidy reductions would weaken implementation 
of the Cost Study. However, the proposed rule continues to phase in the 
reduction of subsidy over the five-year period and by the percentages 
recommended by the Committee. Further, in accordance with the Committee 
recommendations, the proposed rule allows PHAs to substitute 
independent cost data for use as a basis of subsidy funding through an 
appeals process.

G. Adjustment Based on Committee Recommendations for Certain PHAs

    The proposed rule would provide an ``add on'' for certain PHAs that 
would experience a reduction in its operating subsidy between the 
formula in the current Operating Fund Program regulations and the 
formula contained in the proposed rule. Specifically, if such a PHA 
would instead experience an operating subsidy increase if the four 
factors listed below were applied to the formula in the proposed rule, 
the PHA will receive an add on to its subsidy allocation. The 
Department recognizes that many PHAs, especially those that would have 
experienced an operating subsidy reduction, may have already begun 
initial conversion steps to asset management. The Department believes 
that a reduction in subsidy from the current regulations for those PHAs 
that were expecting to receive an increase in subsidy jeopardizes their 
timely and successful conversion to asset management. The amount of the 
add-on would be equal to the difference between the PHA's operating 
subsidy calculated under the formula in the proposed rule and the 
amount of the PHA's operating subsidy under the proposed rule with the 
application of the four factors listed below. The amount of the 
increased funding would be determined using FY 2004 data and would be 
subject to the transition policies and requirements contained in the 
proposed rule. The four factors used for purposes of this calculation 
reflect certain Committee recommendations that, as discussed above, 
were not adopted in the proposed rule. Specifically, the four factors 
would be: (1) A $2 PUM public entity fee; (2) a ten percent nonprofit 
coefficient; (3) payment of operating subsidy on a limited number of 
vacancies if the annualized rate is less than or equal to three 
percent; and (4) an annual inflation factor based on the most recent 
annual data published by the BLS.

H. Subsidy for Vacant Units

    PHAs that appeal to receive higher subsidy on vacant units due to 
changing market conditions would be required to submit, with their 
appeal, a plan to end the higher subsidy within two years. In addition, 
a PHA shall only be granted one such appeal and shall only receive the 
higher subsidy for a maximum period of two years. The Committee 
recommendations did not provide for the submission of a plan to end the 
higher subsidy, nor did the recommendations provide for a limit on the 
number of appeals or the term a PHA would be permitted receive this 
higher subsidy. HUD recognizes that when units are vacant due to 
changing market conditions, receipt of additional subsidy may be 
necessary. However, the Department believes that continuing to support 
vacant units is not sound fiscal policy and a two year period is a 
sufficient time in which to implement a plan to lease these vacant 
units.

I. Sanctions for Failure To Convert to Asset-Based Management

    The proposed rule provides that HUD shall impose sanctions as 
deemed necessary, and otherwise provided by law, for those PHAs that 
are not in compliance with asset management by FY2011. These sanctions 
may include the imposition of a daily monetary fine until the PHA 
converts to asset management. The Committee sessions did not make a 
recommendation regarding sanctions for PHAs not in compliance with 
asset management. HUD believes that such a provision is necessary to 
help ensure enforcement of the asset management requirements contained 
in the proposed rule.

IV. This Proposed Rule

    The proposed rule reflects the recommendations made by the 
Committee, with some modifications, on ways to improve and clarify the 
current regulations governing the Operating Fund Program, and takes 
into consideration the recommendations contained in the Cost Study. The 
most significant features of the proposed rule are described below.

A. Implementation of Cost Study

    The Committee used the Cost Study as the basis for developing the 
interim regulatory changes. For example, the proposed rule would 
implement the recommendation made by the Cost Study to replace the 
current factor known as the Allowable Expense Level (AEL) with a new 
Project Expense Level (PEL). The proposed rule also adopts the 
recommendation of the Cost Study to redirect the focus of the public 
housing program from an ``agency-centric'' to a ``property-based'' 
management model, as is the case generally with multifamily rental 
housing management.
    However, the Committee recognized that asset management reflects a 
significant change in the direction and methods employed by many PHAs 
and by HUD, and will require a longer implementation period because 
there are many aspects to this change. Such changes will include the 
creation of new goals, a conversion to project-based accounting, the 
establishment of a different operational approach, and the 
implementation of additional organizational and regulatory changes 
beyond those included in this rule. The regulatory changes made by this 
rule are a significant initial step in the direction of asset 
management.

B. Other Regulatory Goals

    In addition to implementing the recommendations of the Cost Study, 
the changes contained in this proposed rule improve and clarify the 
existing requirements for the Operating Fund Program. As more fully 
described below, the proposed rule: (1) Provides more explicit guidance 
on the expected outcomes contained in the operating subsidy formula; 
(2) streamlines and simplifies the operating subsidy calculation to 
determine appropriate subsidy amounts for each PHA by project and to 
distribute those correct amounts timely and accurately, to use 
effective administrative control of funds; to reduce reporting errors 
and facilitate more efficient and robust data collection; and (3) 
improves the operating subsidy estimation process by placing more 
emphasis on actual or historical data rather than on forecasted 
information.
    1. Streamlined calculation. The proposed rule re-organizes part 990 
to describe and simplify the operating subsidy calculation. The rule 
clearly defines the major components of the formula (such as the new 
Project Expense Level, Utilities Expense Level, Other Formula Expenses 
(Add-ons), and Formula Income) and notes the

[[Page 19861]]

relationships of these various components.
    Consistent with the Committee's decision to streamline the 
operating subsidy calculation, the proposed rule would not codify 
certain secondary elements that will be used in the revised Operating 
Fund Formula. These elements include the coefficients used to adjust 
the variables for calculating the new PEL, the units of measurement and 
round-off conventions that will be used in the formula, and the 
determination of the geographic variable used in the PEL calculation. 
Regulatory codification of these formula elements would require the use 
of notice and comment rulemaking for future amendments and, thus, 
potentially delay HUD's ability to update the formula as new and more 
accurate data becomes available. After careful consideration, the 
Committee determined that these details should more appropriately be 
provided in non-codified guidance that may be more quickly revised, 
such as a Handbook, Federal Register notice, or other non-regulatory 
means. Following publication of the final rule for this proposed rule, 
HUD will issue guidance providing the information described above, as 
well as other guidance regarding the revised operating subsidy 
calculation.
    In furtherance of this goal, the Committee also elected to 
streamline regulatory text concerning statutory and other cross-cutting 
federal requirements that apply to the Operating Fund Program (for 
example, the environmental review procedures of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321) and the implementing 
regulations at 24 CFR parts 50 and 58 currently referenced at Sec.  
990.111). This regulatory streamlining would not reflect any change in 
the timing and applicability of the requirements of part 58 as 
currently described in Sec.  990.111(c), including the need to obtain 
approval of a request for release of funds, HUD environmental approval, 
or a responsible entity's determination of exemption before the funding 
of non-routine maintenance and capital expenditure activities may be 
incorporated into a PHA's initial operating budget and before the PHA 
may commit any funds to such activities. HUD will issue non-regulatory 
guidance providing further instructions on the applicability of these 
requirements.
    2. Increased focus on actual or historical data. The typical budget 
cycle results in an 18-month lag between the time HUD formulates the 
Operating Fund budget request and the actual budget year. In the past, 
HUD has based its budget request to Congress on forecasted information. 
The proposed rule seeks to provide more accurate reporting and improve 
HUD's ability to estimate budget requirements by relying more on 
historical data. For example, HUD will develop a PHA's formula income 
from a PHA's year-end financial information provided by the PHA through 
HUD's information systems.
    3. Funding period. In this proposed rule, a PHA's fiscal year-end 
is no longer tied to the formula and funding process. Under this 
proposed rule, HUD will run the formula and obligate funds for all PHAs 
at the same time during the fiscal year. This is a change from prior 
practice where HUD based the funding on a limited number of actual 
current year subsidy calculations submissions and estimates of the 
remaining outstanding subsidy calculations. This change will result in 
a one-time transition of obligating funds based on a PHA's fiscal year-
end to a calendar year. It is also HUD's intent to use the data, where 
available from its systems, to populate the formula and to eliminate 
duplicate data reporting.

C. New Information Systems

    As noted in this preamble and the proposed regulatory text, the 
changes to the Operating Fund Formula will require that PHAs maintain 
and report data not required under the current operating subsidy 
calculation process. Further, HUD will be required to update its 
automated information systems to accommodate the new data collections 
required by the rule. HUD has begun the process of updating its 
systems, and will notify each PHA when HUD has the automated systems 
capacity to receive the information required by the rule.

V. Overview of Revised Part 990

    The proposed rule re-organizes the regulations in 24 CFR part 990 
for purposes of clarity and to reflect the recommendations of the Cost 
Study. The proposed rule establishes ten subparts (A through J) in part 
990, with each subpart addressing a specific aspect of the Operating 
Fund. This section of the preamble summarizes the requirements of each 
subpart. Further guidance will be provided in a transition notice and 
through annual notices provided at the beginning of each funding cycle.

Subpart A--Purpose, Applicability, Operating Fund Formula, and 
Definitions

    Subpart A contains the definitions applicable to the Operating Fund 
and also describes the Operating Fund Formula along with its 
applicability to various HUD programs. The proposed rule revises the 
current regulations by removing the discussion of those provisions that 
pertain to the Virgin Islands, Puerto Rico, Guam, and Alaska PHAs. 
These PHAs had previously received operating subsidy funding outside of 
the Operating Fund formula but are now included within the formula.

Subpart B--Eligibility for Operating Subsidy; Computation of Eligible 
Unit Months

    Subpart B 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 the PHA will be calculated from July 
1 to June 30 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 
unit 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.

Subpart C--Calculating Formula Expenses

    New subpart C describes how formula expenses will be calculated 
under the revised Operating Fund Formula. The rule provides a detailed 
description with respect to the computation of the PEL. The PEL 
replaces the existing AEL methodology pursuant to the recommendations 
contained in the Cost Study. As more fully detailed in the proposed 
regulatory text, the specific PEL for a given property consists of the 
sum of nine variable coefficients added to a formula constant. The 
exponent of that sum is then multiplied by a percentage, to reflect the 
nonprofit ownership of the property and an annual inflation factor is 
then applied to the resulting PEL. This nonprofit ownership adjustment 
is based on the conclusions contained in the Cost Study. The Cost Study 
found three basic property ownership types were available for 
benchmarking--nonprofit, for profit, and limited dividends. The Cost 
Study designated PHAs as nonprofit, upon concluding that this 
classification related closest to the ownership and operation of public 
housing properties.
    This subpart also describes the Utilities Expense Level (UEL), 
including the computation of the current

[[Page 19862]]

consumption level and the rolling base consumption level. A PHA that 
undertakes energy conservation measures financed by an entity other 
than HUD may qualify under this rule for financial incentives with HUD 
approval. In addition, this subpart describes add-ons to the subsidy 
calculation (e.g., funding of resident participation activities, 
information technology, asset repositioning, and asset management).

Subpart D--Calculating Formula Income

    Subpart D describes the calculation of formula income, which will 
be derived from a PHA's year-end audited financial information 
contained in HUD's information systems. Formula income is an estimate 
of a PHA's non-operating subsidy revenue and is calculated by 
multiplying the per unit month (PUM) income amount by the eligible unit 
months (EUMs), as defined in the rule. The rule provides for different 
PHA fiscal year-ends within 2004. After a PHA's formula income is 
calculated, it will not be recalculated nor inflated for fiscal years 
2006 through 2008, unless a PHA can show a severe local economic 
hardship affecting its ability to maintain some aspect of its formula 
income. No later than FY 2008, HUD will analyze the effects of freezing 
formula income and, based on that analysis, determine whether to extend 
the applicability of this provision for future fiscal years or to 
modify the income component of the formula. HUD will issue this policy 
determination through handbook, Federal Register notice, or other non-
regulatory means, and offer the public an opportunity to comment before 
the policy determination takes effect.

Subpart E--Determination and Payment of Operating Subsidy

    Subpart E describes, among other things, the amount of operating 
subsidy for which a PHA is eligible, as well as the procedures HUD will 
follow to make operating subsidy payments to PHAs. Subpart E also 
addresses the fungibility of operating subsidy between projects. 
Specifically, the proposed rule provides that operating subsidy will 
remain fully fungible between Annual Contribution Contract (ACC) 
projects until operating subsidy is calculated by HUD at a project 
level. After subsidy is calculated at a project level, operating 
subsidy can only be transferred to another ACC project if a project's 
financial information reveals excess cash flow and only in the amount 
up to those excess cash flows. Under the rule, the PHA shall submit 
timely data to ensure accurate calculation under the formula. Failure 
to do so may result in sanctions. Also, if HUD determines that a PHA is 
not in compliance with all of the income reexamination requirements, 
HUD shall withhold payments to which the PHA may be entitled.

Subpart F--Transition Policy and Transition Funding

    Because of the elimination of AEL, the introduction of the PEL, and 
other formula differences, many PHAs will experience changes in the 
calculation of their operating subsidies. This subpart provides 
policies on such transitions.
    For PHAs that will experience a reduction in their operating 
subsidy calculated under the current regulations, such reductions will 
occur over a five year period. In the first year of the effect of this 
rule, the decrease will be limited to 24 percent of the difference 
between the two funding levels. The decrease will be limited to 43 
percent of the difference in the second year, 62 percent of the 
difference in the third year, and 81 percent of the difference in the 
fourth year. The full amount of the reduction in the operating subsidy 
shall be realized in the fifth year of the effect of this rule.
    For PHAs that will experience a subsidy increase in their operating 
subsidy, such increases will occur over a four year period. In the 
first year of the effect of this rule, the increase will be limited to 
20 percent of the difference between the two levels. The increase will 
be limited to 40 percent in the second year of effect of this rule, and 
60 percent in the third year. The full increase in subsidy will be 
realized in the fourth year of the effect of this rule.

Subpart G--Appeals

    Among other changes to the Operating Fund Formula, the revised 
formula procedures will involve new methods for determining formula 
expenses and require the asset-based management of PHA properties. 
Given the significant changes to the current Operating Fund Formula, 
the Committee determined that it would be appropriate to provide PHAs 
with the opportunity to appeal subsidy amounts under certain specified 
circumstances. These appeals procedures will assist PHAs to transition 
to the new methods for calculating operating subsidies, and help ensure 
that accurate data is used in the new formula calculations.
    Subpart G describes the different types of appeals available to 
PHAs, and the requirements applicable for each appeal. HUD will provide 
up to a two percent hold-back of Operating Fund appropriations for 
FY2006 and FY2007 to fund appeals that are filed during each of these 
two fiscal years. Hold-back funds not utilized will be added back to 
the formula within each of the affected fiscal years. Appeals are 
voluntary and must cover an entire portfolio, not single properties. 
However, the Assistant Secretary for Public and Indian Housing has the 
discretion to accept appeals of less than an entire portfolio for PHAs 
with greater than 5,000 units.

Subpart H--Asset Management

    This rule states that PHAs shall manage their properties according 
to an asset management model, consistent with management norms in the 
broader multifamily management industry. PHAs shall also implement 
project-based management, project-based budgeting, and project-based 
accounting, defined in the rule, which are essential components of 
asset management. The rule provides that PHAs that own and operate 250 
or more dwelling rental units are required to operate using an asset 
management model consistent with this subpart. PHAs that own and 
operate fewer than 250 dwelling rental units may treat their entire 
portfolio as a single project, but will not receive the add-on for the 
asset management fee. Similarly, PHAs with only one project will not be 
eligible for an asset management fee. The rule further provides that a 
PHA is considered in compliance with asset management requirements if 
it can demonstrate that it is managing substantially in accordance with 
this subpart H. This subpart also provides that HUD may impose 
sanctions for PHAs that are not in compliance with asset management by 
FY 2011.

Subpart I--Operating Subsidy for Properties Managed by Resident 
Management Corporations (RMCs)

    This subpart describes how the operating subsidy will be calculated 
for RMCs including direct-funded RMCs, and lists several factors that 
will affect the calculation of the subsidy, including changes in 
inflation, utility rates and consumption, and changes in the number of 
units in the resident management project. The rule indicates other 
factors and exclusions and inclusions that will affect the amounts to 
be provided a project managed by an RMC. Subpart I also contains 
detailed provisions regarding the preparation of an RMC's operating 
budget and the retention of excess revenues.

Subpart J--Financial Management Systems, Monitoring, and Reporting

    Subpart J describes requirements regarding financial management

[[Page 19863]]

systems, as well as on the monitoring of PHA program and financial 
performance. These requirements are mostly unchanged from the current 
regulatory provisions.

VI. Findings and Certifications

Information Collection Requirements

    The information collection requirements contained in this proposed 
rule have been approved by the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and 
assigned OMB Control Numbers 2577-0026, 2577-0029, 2577-0066, and 2577-
0072. In accordance with the Paperwork Reduction Act, HUD may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a currently 
valid OMB control number

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
for this rule has been made 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 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, Room 
10276, 451 Seventh Street, SW., 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 
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, who 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. Notwithstanding HUD's determination that this rule will not 
have a significant effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the executive order. This 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 the 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. Any changes made to this proposed rule as a result of that 
review are identified in the docket file, which is available for public 
inspection between 8 a.m. and 5 p.m. weekdays in the Office of 
Legislation and Regulations, Office of the General Counsel, Room 10276, 
451 Seventh Street, SW., Washington, DC 20410-0500.
    The Economic Analysis prepared for this rule is also available for 
public inspection at the same location and on HUD's Web site at https://
www.hud.gov. A summary of the findings contained in Economic Analysis 
follows.
    A. Rulemaking Goals and Focus of Economic Analysis. As noted above, 
the proposed regulatory changes contained in this proposed rule reflect 
the recommendations made by the Committee on ways to improve and 
clarify the current regulations governing the Operating Fund Program, 
and take into consideration the recommendations of the Cost Study on 
the cost of operating well-run public housing. The proposed rule would 
make some modifications to the Committee recommendations to more 
accurately compare the costs of operating public housing and subsidized 
market-based units, as well as to better reflect Administration 
policies and budgetary priorities. More specifically, the rule attempts 
to achieve three objectives:
    1. Provide more explicit guidance on the expected outcomes 
contained in the operating subsidy formula.
    2. Streamline and simplify the operating subsidy calculation to: 
(i) Determine appropriate subsidy amounts for each PHA by project; (ii) 
distribute those amounts in a timely and accurate manner; (iii) use 
effective administrative control of funds; and (iv) reduce reporting 
errors and facilitate more efficient and robust data collection.
    3. Improve the operating subsidy estimation process by placing more 
emphasis on actual or historical data rather than on forecasted 
information.
    The Economic Analysis discusses the economic impact of the 
implementation of the proposed rule.
    B. Basis for Economically Significant Determination Under E.O. 
12866. HUD determined that the proposed rule would be an economically 
significant rule under E.O. 12866 because the rule would results in 
transfers of funding levels to and among PHAs of more than $100 million 
a year.
    C. Findings. This Economic Analysis finds that, with more efficient 
transfers through better incentives, there will be a net increase in 
societal benefits. The net increase was not quantified. The Economic 
Analysis also finds that the full implementation cost of the proposed 
rule is approximately $74 million in 2003 dollars in increased 
operating subsidy eligibility. The transition funding provisions, which 
are intended to provide a transition period for PHAs with subsidy 
changes, would result in varying costs over a five year period when 
compared to the fully phased in subsidy change, which would occur in 
year 5 of rule implementation. The proposed rule would alter the flow

[[Page 19864]]

of transfers to PHAs, as such, would have a direct financial 
consequence on the federal budget and on individual PHAs and their 
tenants.
    The Economic Analysis concludes that the two immediate consequences 
of the proposed rule would be as follows:
    1. Using FY 2003 dollars and assuming funding at 100 percent of 
eligibility, public housing program funding eligibility for operating 
subsidies would increase by $83 million over the 5-year period and by 
about $74 million a year in 2003 dollars when fully implemented.
    2. Changes in operating subsidy allocations resulting from the 
proposed rule would be phased in over four years for PHAs having 
subsidy eligibility increases and over five years for those with 
subsidy eligibility decreases; thus the increase in Operating Fund 
eligibility and the change in distribution of funds will be less during 
the transition than in the full implementation of the proposed rule in 
the fifth year.

Congressional Review of Major Proposed Rules

    This rule is a ``major rule'' as defined in Chapter 8 of 5 U.S.C. 
At the final rule stage, the rule will be 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 stated in the preamble, HUD proposes 
to amend 24 CFR part 990 as follows:

PART 990--THE PUBLIC HOUSING OPERATING FUND PROGRAM

    1. Revise 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.
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.
990.155 Addition and deletion of units.
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.
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.
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 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.

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

Subpart A--Purpose, Applicability, Formula, and Definitions


Sec.  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 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 a 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.


Sec.  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 Fund payments previously, but are eligible for such 
payments 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.


Sec.  990.110  Operating fund formula.

    (a) General formula. (1) The amount of annual contributions 
(operating

[[Page 19865]]

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 month (PUM) amounts and are converted 
into whole 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 Operating Fund 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 Fund equal to its most recent 
actual audit cost.
    (3) Operating Fund will be limited to the availability of funds as 
described in Sec.  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.


Sec.  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 contribution contract (ACC) is a contract in the form 
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 property 
management as well as long term and strategic planning.
    Current consumption level is the amount of each utility consumed at 
a project during the one-year 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.
    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 
the Operating Fund according to the Operating Fund Formula.
    Operating fund is the account/program authorized by section 9 of 
the 1937 Act for making assistance available to PHAs for the operation 
and managements of public housing.
    Operating fund formula (Formula) means the data and calculations 
used under this part to determine a PHA's amount of the 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 month (PUM) is an expression of Project Expense Level, 
Utility Expense Level and formula income. It describes a cost or an 
amount on a monthly basis per unit.
    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 are 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 per unit 
per month 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 18 months prior to 
the beginning of the applicable funding period.
    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 per unit month dollar amount.
    Utility rate (rate) means the actual average rate for any given 
utility for the latest 12 months 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 one-year period ending June 30.


Sec.  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


Sec.  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

[[Page 19866]]

housing inventory during a specified period of time. The unit months 
eligible for operating subsidy in a one-year 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.


Sec.  990.125  Eligible units.

    A PHA is eligible to receive operating subsidy for public housing 
units under an ACC for:
    (a) Occupied dwelling units as defined in Sec.  990.140; and
    (b) A dwelling unit with an approved vacancy (as defined in Sec.  
990.145).


Sec.  990.130  Ineligible units.

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


Sec.  990.135  Eligible unit months (EUMs).

    (a) A PHA's total number of eligible unit months will be calculated 
for the 12-month period from July 1 to June 30 that is prior to the 
first day of the applicable funding period, and will consist of 
eligible units as defined in Sec.  990.140 and Sec.  990.145.
    (b)(1) The determination of whether a public housing unit satisfies 
the requirements of Sec.  990.140 or Sec.  990.145 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, and will not be subsidized by, the 
Operating Fund.


Sec.  990.140  Occupied dwelling units.

    A PHA is eligible to receive operating subsidy for public housing 
units for each unit month they are under an ACC and occupied by a 
public housing eligible family under lease.


Sec.  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 they are under 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:
    (i) The unit is undergoing modernization (i.e., the modernization 
contract has been awarded or force accounting 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 HUD-approved PHA Annual Plan, but 
the time period for placing the vacant unit under construction has not 
yet expired. The PHA shall place the vacant unit under construction 
within 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 HUD-approved 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, HUD-approved 
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).


Sec.  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, PHA 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 
housing-eligible family during the prior reporting period for the one-
year funding period, but have not been included in the previous 
eligible unit months' 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 Sec.  990.190(h).
    (b) Revised eligible unit month 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 Sec.  
990.175(h) are not to be included in the calculation of eligible unit 
months. Funding for these units is provided under the conditions 
described in Sec.  990.190(h).

Subpart C--Calculating Formula Expenses


Sec.  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 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 
Sec.  990.165);

[[Page 19867]]

    (2) The utilities expense level (UEL) (calculated in accordance 
with Sec. Sec.  990.170, 990.175, 990.180, and 990.185); and
    (3) Other formula expenses (add-ons) (calculated in accordance with 
Sec.  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 a