Revisions to the Public Housing Operating Fund Program, 54984-55008 [05-18624]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 70, Number 180 (Monday, September 19, 2005)]
[Rules and Regulations]
[Pages 54984-55008]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-18624]



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Part II





Department of Housing and Urban Development





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24 CFR Part 990



Revisions to the Public Housing Operating Fund Program; Final Rule

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

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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

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

ACTION: Final rule.

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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 well-run 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 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 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:
    1. The adjustment in Sec.  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 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 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 non-profit 
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 non-profit 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 non-profit 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 non-profit coefficient. 
Furthermore, the final rule adopts the Cost Study's recommendation of a 
ten percent non-profit 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 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 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 
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 two-year 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 tenant-based 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 Sec. Sec.  
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 
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 https://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 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 Sec.  990.255(b) that 
provides that ``HUD recognizes that appropriate changes in its 
regulatory and monitoring programs will be needed to support

[[Page 54989]]

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 
Sec.  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 Sec.  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 Sec.  990.110(c), which provides 
that, for certain secondary elements that will be used in the formula, 
HUD will provide information in various forms of non-codified 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 
time-consuming 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 
asset-repositioning fee is described in detail in Sec.  990.190(h), it 
has not been added to the definitions section at Sec.  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 Sec.  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.

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 Sec.  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 Sec.  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 Sec.  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 Sec.  990.140 of this final rule, a 
unit that is under lease to a public housing-eligible family is 
considered to be occupied.

[[Page 54990]]

    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 Sec.  
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-by-project 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 Sec.  
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 vacant during 
this reconfiguration, then the unit may be eligible for subsidy under 
Sec.  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 Sec.  990.165(g), which grandfathers 
existing mixed-finance 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 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 add-on 
to cover the cost of replacement reserves that are established in 
mixed-finance 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 mixed-finance 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 Sec.  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 Sec.  990.235.
    HUD Response. The provision in Sec.  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

[[Page 54991]]

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 Sec.  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 Sec.  
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 Sec.  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 12-month period, which includes both a 
heating and cooling season and will 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 
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 Sec.  990.185.

Comments Regarding Subpart C--Add-ons

    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 Sec.  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-

[[Page 54992]]

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 self-sufficiency 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 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 well-managed 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 Sec.  990.190(a), and resident 
participation, as described in Sec.  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 Sec.  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 Sec.  990.190(e).
    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 Sec.  990.190(h)(4). One commenter submitted this observation.
    HUD Response. The language in Sec.  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 sugges