Special Community Disaster Loans Program, 2800-2820 [2010-925]

Agencies

• Federal Emergency Management Agency
• DEPARTMENT OF HOMELAND SECURITY

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


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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

[Docket ID FEMA-2005-0051]

44 CFR Part 206

RIN 1660-AA44


Special Community Disaster Loans Program

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Final rule.

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

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

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

[[Page 2801]]

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

FOR FURTHER INFORMATION CONTACT: James A. Walke, Disaster Assistance 
Directorate, Federal Emergency Management Agency, 500 C Street, SW., 
Washington DC 20472-3300, or call (202) 646-2751, or e-mail 
james.walke@dhs.gov.

SUPPLEMENTARY INFORMATION:

I. Background

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

[[Page 2802]]

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

II. Changes From the Proposed Rule

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

[[Page 2803]]

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

III. FEMA's Process for Reviewing Applications

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

IV. Discussion of the Public Comments Received

A. The 2005 Interim Rule

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

B. The 2009 Notice of Proposed Rulemaking

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

[[Page 2804]]

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

[[Page 2805]]

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

[[Page 2806]]

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

[[Page 2807]]

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

[[Page 2808]]

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

[[Page 2809]]

unreimbursed disaster-related expenditures may not be reflected in the 
official financial statements, specifically, FEMA will ask applicants 
to identify such detailed information in the accounting system that may 
be eligible for consideration during the Special CDL cancellation 
process.
    When making cancellation determinations, three commenters urged 
FEMA to also consider the revenue projections and other materials that 
were reviewed and accepted during the loan application process (5 year 
budgets, etc.), to take into account the overall loss of revenues that 
the applicant incurred as a result of the hurricanes.
    Although FEMA based eligibility for the Special CDLs on revenue 
projections, it did so only because actual data were not available. Now 
that the statutorily-mandated three-fiscal-year period has passed, 
actual data exist. The official financial statements show the actual 
operating results, which will show whether or not the applicant 
actually experienced a loss of revenues and incurred an operating 
deficit. Because FEMA is limited to evaluating the data from the three 
full fiscal years after the disaster, projected data for that period 
would be less accurate and the consideration of projected data for a 
period thereafter is outside the scope of the authority provided in 
section 417 of the Stafford Act. Further, revenue losses as a result of 
the hurricane are part of the basis for determining an operating 
deficit. It is possible that other revenues not affected by the 
hurricane could offset the losses of revenues affected by the disaster, 
but if that were true, then there would be no operating deficit unless 
expenditures increased dramatically and the applicant had unreimbursed 
disaster-related expenses great enough to offset the loan. Therefore, 
FEMA made no change to this final rule based on the commenter's 
request.
    One commenter noted that some cities are required by their state 
constitution to have a balanced budget. The commenter advised that this 
may have resulted in loan recipients reducing expenditures to match 
their decreased revenues. FEMA's acceptance of actual financial 
statements without a review of reduced expenditures that were made to 
match revenues would, the commenter stated, result in a distorted 
picture of the financial condition of the applicant. To remedy this, 
the commenter recommended that expenditures have a component of 
expenses not incurred, and therefore services not provided, as a result 
of the reduced revenues.
    The Special CDL program was intended to provide loans that