Changes to the Public Housing Assessment System (PHAS): Financial Condition Scoring Notice, 10047-10050 [2011-2656]
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Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / Notices
Status of the proposed information
collection: New collection of
information for HUD’s discretionary
programs.
Authority: The Paperwork Reduction Act
of 1995, 44 U.S.C. Chapter 35, as amended.
Dated: February 16, 2011.
Colette Pollard,
Departmental Reports Management Officer,
Office of the Chief Information Officer.
[FR Doc. 2011–4032 Filed 2–22–11; 8:45 am]
BILLING CODE 4210–67–P
Note: To receive consideration as public
comments, comments must be submitted
through one of the two methods specified
above. Again, all submissions must refer to
the docket number and title of the rule.
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
[Docket No. FR–5094–N–04]
Changes to the Public Housing
Assessment System (PHAS): Financial
Condition Scoring Notice
Office of the Assistant
Secretary for Public and Indian
Housing, HUD.
ACTION: Notice.
AGENCY:
This notice provides
additional information to public
housing agencies (PHAs) and members
of the public about HUD’s process for
issuing scores under the financial
condition indicator of the Public
Housing Assessment System (PHAS).
This notice includes threshold values
and associated scores for each financial
subindicator derived from generally
accepted accounting principles (GAAP)based financial information. This notice
updates and clarifies the audit flags and
tier classification chart.
DATES: Effective Date: March 25, 2011.
Comment Due Date: April 25, 2011.
ADDRESSES: Interested persons are
invited to submit comments on this
notice to the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 7th Street, SW., Room 10276,
Washington, DC 20410–0500.
Communications must refer to the above
docket number and title. There are two
methods for submitting public
comments. All submissions must refer
to the above docket number and title.
1. Submission of Comments by Mail.
Comments may be submitted by mail to
the Regulations Division, Office of
General Counsel, Department of
Housing and Urban Development, 451
7th Street, SW., Room 10276,
Washington, DC 20410–0500.
2. Electronic Submission of
Comments. Interested persons may
submit comments electronically through
the Federal eRulemaking Portal at
https://www.regulations.gov. HUD
strongly encourages commenters to
mstockstill on DSKH9S0YB1PROD with NOTICES
SUMMARY:
VerDate Mar<15>2010
18:50 Feb 22, 2011
Jkt 223001
submit comments electronically.
Electronic submission of comments
allows the commenter maximum time to
prepare and submit a comment, ensures
timely receipt by HUD, and enables
HUD to make them immediately
available to the public. Comments
submitted electronically through the
https://www.regulations.gov Web site can
be viewed by other commenters and
interested members of the public.
Commenters should follow the
instructions provided on that site to
submit comments electronically.
No Facsimile Comments. Facsimile
(FAX) comments are not acceptable.
Public Inspection of Public
Comments. All properly submitted
comments and communications
submitted to HUD will be available for
public inspection and copying between
8 a.m. and 5 p.m. weekdays at the above
address. Due to security measures at the
HUD Headquarters building, an advance
appointment to review the public
comments must be scheduled by calling
the Regulations Division at 202–402–
3055 (this is not a toll-free number).
Individuals with speech or hearing
impairments may access this number
via TTY by calling the Federal
Information Relay Service, toll-free, at
800–877–8339. Copies of all comments
submitted are available for inspection
and downloading at https://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Claudia Yarus, Department of Housing
and Urban Development, Office of
Public and Indian Housing, Real Estate
Assessment Center (REAC), 550 12th
Street, SW., Suite 100, Washington, DC
20410 at 202–475–8830 (this is not a
toll-free number). Persons with hearing
or speech impairments may access this
number through TTY by calling the tollfree Federal Information Relay Service
at 800–877–8339. Additional
information is available from the REAC
Internet site at https://www.hud.gov/
offices/reac/.
SUPPLEMENTARY INFORMATION:
I. Purpose of This Notice
The purpose of this notice is to
provide information about the scoring
process for PHAS indicator #2, financial
condition, under the PHAS. The
purpose of the financial condition
indicator is to measure the financial
condition of each public housing
project.
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Sfmt 4703
10047
II. Background
A. Financial Condition Indicator
Regulatory Background
To reflect a shift from a PHA-wide
based assessment to one that is property
based, HUD is revising the Financial
Assessment Sub-System for public
housing (FASS–PH) Financial Data
Schedule (FDS) and financial condition
scoring process. Project-based
management is defined in 24 CFR
990.115 as ‘‘the provision of property
management services that is tailored to
the unique needs of each property.’’
PHAs must also implement projectbased budgeting and project-based
accounting, which are essential
components of asset management.
Project-based accounting is critical to a
property-based assessment of financial
condition, because it mandates the
submission of property-level financial
data. Accordingly, PHAs will now be
scored at a property level, using the
already designated projects as the basis
for assessment.
HUD will assess the financial
condition of projects. Project financial
performance will be scored and
averaged across the PHA, weighted
according to unit count. The projects
within a PHA will be evaluated and
scored based on the project’s
performance relative to industry
standards.
B. Comparable Scoring Systems
The financial condition subindicators
are not unique to public housing. The
subindicators included in the financial
condition indicator scoring process are
common measurements used
throughout the multifamily industry to
rank properties and identify the
properties that require further attention.
III. Transition to Asset Management
and Frequency of Financial Condition
Submissions
The number of units in a PHA’s LowRent program and the PHAS designation
for small PHAs will determine the
frequency of financial condition
submissions during and after the
transition to asset management. PHAs
with fewer than 250 public housing
units will receive a PHAS assessment,
based on its PHAS designation, as
follows:
(1) A small PHA that is a high
performer will receive a PHAS
assessment every 3 years;
(2) A small PHA that is a standard or
substandard performer will receive a
PHAS assessment every other year; and
(3) All other small PHAs will receive
a PHAS assessment every year,
including a PHA that is designated as
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10048
Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / Notices
troubled or Capital Fund troubled in
accordance with § 902.75.
In the baseline year, every PHA will
receive an overall PHAS score and in all
four of the PHAS indicators: physical
condition; financial condition;
management operations; and Capital
Fund program. This will allow a
baseline year for the small deregulated
PHAs.
IV. Subindicators
A. Subindicators of the Financial
Condition Indicator
There are three subindicators that
examine the financial condition of each
project. The values of the three
subindicators, derived from the FDS
submitted by the PHA, comprise the
overall financial assessment of a project.
The three subindicators of the financial
condition indicator are:
• Quick Ratio (QR);
• Months Expendable Net Assets
Ratio (MENAR); and
• Debt Service Coverage Ratio
(DSCR).
B. Description of the Financial
Condition Subindicators
The subindicators are described as
follows:
Subindicator #1, QR. This
subindicator is a liquidity measure of
the project’s ability to cover current
liabilities. It is measured by dividing
adjusted unrestricted current assets by
current liabilities. The purpose of this
ratio is to indicate whether a project
could meet all current liabilities if they
became immediately due and payable. A
project should have available current
resources equal to or greater than its
current liabilities in order to be
considered financially liquid. The QR is
a commonly used liquidity measure
across the industry. Maintaining
sufficient liquidity is essential for the
financial health of an individual project.
Subindicator #2, MENAR. This
subindicator measures a project’s ability
to operate using its net available,
unrestricted resources without relying
on additional funding. It is computed as
the ratio of adjusted net available
unrestricted resources to average
monthly operating expenses. The result
of this calculation shows how many
months of operating expenses can be
covered with currently available,
unrestricted resources.
Subindicator #3, DSCR. This
subindicator is a measure of a project’s
ability to meet regular debt obligations.
This subindicator is calculated by
dividing adjusted operating income by a
project’s annual debt service payments.
It indicates whether the project has
generated enough income from
operations to meet annual interest and
principal payment on long-term debt
service obligations.
V. GAAP-Based Scoring Process and
Elements of Scoring
A. Points and Threshold
The financial condition indicator is
based on a maximum of 25 points. In
order to receive a passing score under
this indicator, a project must achieve at
least 15 points, or 60 percent of the
available points under this indicator.
B. Scoring Elements
The financial condition indicator
score provides an assessment of a
project’s financial condition. Under the
PHAS financial condition indicator,
HUD will calculate an overall score
based on the unit weighted average
score for each project. In order to
compute an overall financial condition
score, an individual project financial
condition score is multiplied by the
number of units in each project to
determine a ‘‘weighted value.’’ The sum
of the weighted values is then divided
by the total number of units in a PHA’s
portfolio to derive the overall PHAS
financial condition indicator score. The
three subindicator scores are produced
using GAAP-based financial data
contained in the FDS. The minimum
number of points (zero) and the
maximum number of points (25) can be
achieved over a range of values.
Subindicators
Measurement of
QR ...........................................................
MENAR ....................................................
DSCR ......................................................
Liquidity ....................................................................................................................
Adequacy of reserves ..............................................................................................
Capacity to cover debt .............................................................................................
12.0
11.0
2.0
Total .................................................
..................................................................................................................................
25.0
QR
A project will receive zero points
when its QR is less than 1.0. If its QR
equals 1.0, it will receive 7.2 points. If
its QR is greater than 1.0 and less than
2.0, it will receive greater than 7.2
points but less than 12.0 points, on a
proportional basis. A project will
receive the maximum of 12.0 points
when its QR is equal to or greater than
2.0.
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QR Value
<1.0 .....................................
1.0 .......................................
>1.0 but <2.0 ......................
≥2.0 .....................................
Points
0.0
7.2
>7.2 but <12.0
12.0
MENAR
A project will receive zero points
when its MENAR is less than 1.0. If its
MENAR equals 1.0, it will receive 6.6
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points. If its MENAR is greater than 1.0
and less than 4.0, it will receive greater
than 6.6 points but less than 11.0 points,
on a proportional basis. A project will
receive the maximum of 11 points when
its MENAR is equal to or greater than
4.0.
MENAR Value
Points
<1.0 .....................................
1.0 .......................................
>1.0 but <4.0 ......................
≥4.0 .....................................
0.0
6.6
>6.6 but <11.0
11.0
DSCR
A project will receive zero points
when its DSCR ratio is less than 1.0. If
its DSCR equals at least 1.0 but less than
1.25, it will receive 1 point. A project
will receive the maximum of 2.0 points
if its DSCR is equal to or greater than
1.25 or if it has no debt at all.
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Points
DSCR Value
<1.0 .......................................
≥1.0 but <1.25 ......................
≥1.25 .....................................
No Debt Service ...................
Points
0.0
1.0
2.0
2.0
VI. Audit Adjustment
Pursuant to § 902.30, HUD calculates
a revised financial condition score after
it receives audited financial
information. The revised financial
condition score, which is based on the
audited information, can increase or
decrease the initial PHA-wide score that
was based on the unaudited financial
information. The audited score reflects
two types of adjustments. The first type
is based on audit flags and reports the
result from the audit itself. Significant
deficiencies and material weaknesses
are considered to be audit flags, alerting
the REAC to an internal control
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Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / Notices
deficiency or an instance of
noncompliance with laws and
regulations. The second adjustment type
addresses significant differences
between the unaudited and audited
financial information reported to HUD
pursuant to § 902.30.
Audit Opinion and Flags
As part of the analysis of the financial
health of a PHA, including assessment
of the potential or actual waste, fraud,
or abuse at a PHA, HUD will look to the
Audit Report to provide an additional
basis for accepting or adjusting the
financial component scores. The
information collected from the annual
Audit Report pertains to the type of
audit opinion; details of the audit
opinion; and the presence of significant
deficiencies, material weaknesses, and
noncompliance.
If the auditor’s opinions on the
financial statements and major federal
programs are anything other than
unqualified, points could be deducted
from the PHA’s audited financial score.
The REAC will review audit flags to
determine their significance as it
directly pertains to the assessment of
the PHA’s financial condition. If the
flags have no effect on the financial
components or the overall financial
condition of the PHA as it relates to the
PHAS assessment, the audited score
will not be adjusted. However, if the
flags have an impact on the PHA’s
financial condition, the PHA’s audited
score will be adjusted according to the
seriousness of the reported finding.
10049
These flags are collected on the Data
Collection Form (OMB approval number
2535–0107). The PHA completes this
form for audited submissions. If the
Data Collection Form indicates that the
auditor’s opinion will be anything other
than unqualified, points can be
deducted from the financial condition
score. The point deductions have been
established using a three-tier system.
The tiers give consideration to the
seriousness of the audit qualification
and limit the deducted points to a
reasonable portion of the PHA’s total
score.
Audit Flag Tiers
Audit flags are assigned tiers, as
stated in the following chart.
AUDIT FLAGS AND TIER CLASSIFICATIONS
Tier classification
Financial Statement Audit Opinion(s):
1. Unqualified opinion(s) ................................................
2. Qualified opinion(s) ....................................................
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Audit Flags
None.
Tier 2 .........................
• Departures from GAAP not significant enough to
cause an adverse opinion(s).
• Limitations on the scope of the audit (regardless
of cause) not significant enough to cause a disclaimer of opinion.
3. Adverse opinion(s) regardless of reason(s) ..............
4. Disclaimer of opinion(s) regardless of reason(s) .......
Opinion(s) on Supplemental Information (Statement of Auditing Standard (SAS) 29 ‘‘in relation to’’ type of opinion):
1. Fairly stated ...............................................................
2. Fairly stated except for ..............................................
3. No opinion ..................................................................
4. Incomplete or missing ................................................
Report on Internal Control and Compliance and Other Matters Noted in an Audit of the Financial Statement performed in accordance with Government Auditing Standards (GAS) (Yellow Book):
1. Control deficiencies ....................................................
• Significant deficiencies.
• Material weakness.
2. Material noncompliance .............................................
3. Fraud ..........................................................................
4. Illegal acts ..................................................................
5. Abuse .........................................................................
Report on Compliance with Requirements Applicable to
Major Federal Programs and Internal Control over Compliance with OMB Circular A–133—Opinion on compliance with each major Federal program requirements:
1. Unqualified opinion(s) on compliance with Low Rent
program and Capital Fund program major federal requirements.
2. Qualified opinion(s) on compliance with Low Rent
Program program and Capital Fund program major
federal requirements (regardless of cause).
3. Adverse opinion(s) on compliance with Low Rent
program and Capital Fund program major federal requirements (regardless of cause).
4. Disclaimer of opinion(s) on compliance with Low
Rent Program and Capital Fund program major federal requirements (regardless of cause).
Internal Controls and Compliance:
1. Control Deficiencies: ..................................................
• Significant deficiencies in internal controls over
compliance with Low Rent program and Capital
Fund program requirements.
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PO 00000
comments
Tier 1.
Tier 1.
....................................
None.
Tier 2.
Tier 1.
Tier 1.
....................................
Deduction only if the departure includes the Low Rent or
Capital Fund programs.
Applies to the FDS.
Deduction applies only if the internal control deficiency
and/or noncompliance relates to the Low Rent or Capital Fund programs.
Tier 3.
Tier
Tier
Tier
Tier
3.
3.
3.
3.
None.
Tier 2.
Tier 1.
Tier 1.
Tier 3.
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23FEN1
10050
Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / Notices
AUDIT FLAGS AND TIER CLASSIFICATIONS—Continued
Audit Flags
Tier classification
• Material weakness in internal controls over compliance with Low Rent program and Capital
Fund program requirements.
2. Material noncompliance with Low Rent program and
Capital Fund program requirements.
Other Consideration:
1. Significant change penalty deduction applies only if
the significant change(s) relate to the Low Rent or
Capital Fund programs.
2. Going concern ............................................................
3. Management Discussion and Analysis ......................
and other supplemental information omitted .................
4. Financial statements using basis other than GAAP ..
comments
Tier 3.
Tier 2.
Tier 1.
Tier 2.
Tier 1.
Each tier assesses point deductions of
varying severity. The following chart
illustrates the point schedule:
Tier
PHAS points deducted
Tier 1 ...............................................
Tier 2 ...............................................
Any Tier 1 finding assesses a 100 percent deduction of the PHA’s financial condition indicator score.
Any Tier 2 finding assesses a point deduction equal to 10 percent of the unadjusted financial condition indicator score.
Each Tier 3 finding assesses a 0.5 point deduction per occurrence, to a maximum of 4 points of the financial condition indicator score.
Tier 3 ...............................................
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Review of Audited Versus Unaudited
Submission
The purposes of comparing the ratios
and scores from the unaudited FDS
submission to the ratios and scores from
the audited submission are to:
• Identify significant changes in ratio
calculation results and/or scores from
the unaudited submission to the audited
submission;
• Identify PHAs that consistently
provide significantly different data from
their unaudited submission in their
audited submission; and
• Assess or alleviate penalties
associated with the inability to provide
reasonably accurate unaudited data
within the required time frame.
This review process will be performed
only for the audited submissions.
Significant Change Penalty
HUD views the transmission of
significantly inaccurate unaudited
financial data as a serious condition.
Therefore, projects are encouraged to
assure that financial data is as reliable
as possible for their unaudited
submissions.
A significant change penalty will be
assessed for significant differences
between the unaudited and audited
submissions. A significant difference is
considered to be an overall financial
condition score decrease of three or
more points from the unaudited to the
audited submission. A significant
change penalty is considered a tier 2
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Jkt 223001
flag and will result in a reduction of 10
percent of the total audited financial
condition score.
The PHAS system automatically
deducts the significant change penalty
from the audited score, and this
reduction triggers the REAC analyst’s
review. REAC may waive the significant
change penalty if the project provides
reasonable documentation of the
significant difference in its submission.
Dated: February 1, 2011.
Sandra B. Henriquez,
Assistant Secretary for Public and Indian
Housing.
[FR Doc. 2011–2656 Filed 2–22–11; 8:45 am]
BILLING CODE 4210–67–P
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
[Docket No. FR–5094–N–05]
Changes to the Public Housing
Assessment System (PHAS):
Management Operations Scoring
Notice
This notice provides
additional information to public
housing agencies (PHAs) and members
of the public about HUD’s process for
issuing scores under the management
operations indicator of the Public
Housing Assessment System (PHAS).
DATES: Effective Date: March 25, 2011.
Comment Due Date: April 25, 2011.
SUMMARY:
PO 00000
Frm 00047
Fmt 4703
Sfmt 4703
Interested persons are
invited to submit comments on this
notice to the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 7th Street, SW., Room 10276,
Washington, DC 20410–0500.
Communications must refer to the above
docket number and title. There are two
methods for submitting public
comments. All submissions must refer
to the above docket number and title.
1. Submission of Comments by Mail.
Comments may be submitted by mail to
the Regulations Division, Office of
General Counsel, Department of
Housing and Urban Development, 451
7th Street, SW., Room 10276,
Washington, DC 20410–0500.
2. Electronic Submission of
Comments. Interested persons may
submit comments electronically through
the Federal eRulemaking Portal at
https://www.regulations.gov. HUD
strongly encourages commenters to
submit comments electronically.
Electronic submission of comments
allows the commenter maximum time to
prepare and submit a comment, ensures
timely receipt by HUD, and enables
HUD to make them immediately
available to the public. Comments
submitted electronically through the
https://www.regulations.gov Web site can
be viewed by other commenters and
interested members of the public.
Commenters should follow the
ADDRESSES:
E:\FR\FM\23FEN1.SGM
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]]>Agencies
[Federal Register Volume 76, Number 36 (Wednesday, February 23, 2011)]
[Notices]
[Pages 10047-10050]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2656]
-----------------------------------------------------------------------
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-5094-N-04]
Changes to the Public Housing Assessment System (PHAS): Financial
Condition Scoring Notice
AGENCY: Office of the Assistant Secretary for Public and Indian
Housing, HUD.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: This notice provides additional information to public housing
agencies (PHAs) and members of the public about HUD's process for
issuing scores under the financial condition indicator of the Public
Housing Assessment System (PHAS). This notice includes threshold values
and associated scores for each financial subindicator derived from
generally accepted accounting principles (GAAP)-based financial
information. This notice updates and clarifies the audit flags and tier
classification chart.
DATES: Effective Date: March 25, 2011.
Comment Due Date: April 25, 2011.
ADDRESSES: Interested persons are invited to submit comments on this
notice to the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 451 7th Street, SW., Room
10276, Washington, DC 20410-0500. Communications must refer to the
above docket number and title. There are two methods for submitting
public comments. All submissions must refer to the above docket number
and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street, SW., Room 10276,
Washington, DC 20410-0500.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
https://www.regulations.gov. HUD strongly encourages commenters to
submit comments electronically. Electronic submission of comments
allows the commenter maximum time to prepare and submit a comment,
ensures timely receipt by HUD, and enables HUD to make them immediately
available to the public. Comments submitted electronically through the
https://www.regulations.gov Web site can be viewed by other commenters
and interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments
must be submitted through one of the two methods specified above.
Again, all submissions must refer to the docket number and title of
the rule.
No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an advance appointment to review the public comments must be
scheduled by calling the Regulations Division at 202-402-3055 (this is
not a toll-free number). Individuals with speech or hearing impairments
may access this number via TTY by calling the Federal Information Relay
Service, toll-free, at 800-877-8339. Copies of all comments submitted
are available for inspection and downloading at https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Claudia Yarus, Department of Housing
and Urban Development, Office of Public and Indian Housing, Real Estate
Assessment Center (REAC), 550 12th Street, SW., Suite 100, Washington,
DC 20410 at 202-475-8830 (this is not a toll-free number). Persons with
hearing or speech impairments may access this number through TTY by
calling the toll-free Federal Information Relay Service at 800-877-
8339. Additional information is available from the REAC Internet site
at https://www.hud.gov/offices/reac/.
SUPPLEMENTARY INFORMATION:
I. Purpose of This Notice
The purpose of this notice is to provide information about the
scoring process for PHAS indicator 2, financial condition,
under the PHAS. The purpose of the financial condition indicator is to
measure the financial condition of each public housing project.
II. Background
A. Financial Condition Indicator Regulatory Background
To reflect a shift from a PHA-wide based assessment to one that is
property based, HUD is revising the Financial Assessment Sub-System for
public housing (FASS-PH) Financial Data Schedule (FDS) and financial
condition scoring process. Project-based management is defined in 24
CFR 990.115 as ``the provision of property management services that is
tailored to the unique needs of each property.'' PHAs must also
implement project-based budgeting and project-based accounting, which
are essential components of asset management. Project-based accounting
is critical to a property-based assessment of financial condition,
because it mandates the submission of property-level financial data.
Accordingly, PHAs will now be scored at a property level, using the
already designated projects as the basis for assessment.
HUD will assess the financial condition of projects. Project
financial performance will be scored and averaged across the PHA,
weighted according to unit count. The projects within a PHA will be
evaluated and scored based on the project's performance relative to
industry standards.
B. Comparable Scoring Systems
The financial condition subindicators are not unique to public
housing. The subindicators included in the financial condition
indicator scoring process are common measurements used throughout the
multifamily industry to rank properties and identify the properties
that require further attention.
III. Transition to Asset Management and Frequency of Financial
Condition Submissions
The number of units in a PHA's Low-Rent program and the PHAS
designation for small PHAs will determine the frequency of financial
condition submissions during and after the transition to asset
management. PHAs with fewer than 250 public housing units will receive
a PHAS assessment, based on its PHAS designation, as follows:
(1) A small PHA that is a high performer will receive a PHAS
assessment every 3 years;
(2) A small PHA that is a standard or substandard performer will
receive a PHAS assessment every other year; and
(3) All other small PHAs will receive a PHAS assessment every year,
including a PHA that is designated as
[[Page 10048]]
troubled or Capital Fund troubled in accordance with Sec. 902.75.
In the baseline year, every PHA will receive an overall PHAS score
and in all four of the PHAS indicators: physical condition; financial
condition; management operations; and Capital Fund program. This will
allow a baseline year for the small deregulated PHAs.
IV. Subindicators
A. Subindicators of the Financial Condition Indicator
There are three subindicators that examine the financial condition
of each project. The values of the three subindicators, derived from
the FDS submitted by the PHA, comprise the overall financial assessment
of a project. The three subindicators of the financial condition
indicator are:
Quick Ratio (QR);
Months Expendable Net Assets Ratio (MENAR); and
Debt Service Coverage Ratio (DSCR).
B. Description of the Financial Condition Subindicators
The subindicators are described as follows:
Subindicator #1, QR. This subindicator is a liquidity measure of
the project's ability to cover current liabilities. It is measured by
dividing adjusted unrestricted current assets by current liabilities.
The purpose of this ratio is to indicate whether a project could meet
all current liabilities if they became immediately due and payable. A
project should have available current resources equal to or greater
than its current liabilities in order to be considered financially
liquid. The QR is a commonly used liquidity measure across the
industry. Maintaining sufficient liquidity is essential for the
financial health of an individual project.
Subindicator #2, MENAR. This subindicator measures a project's
ability to operate using its net available, unrestricted resources
without relying on additional funding. It is computed as the ratio of
adjusted net available unrestricted resources to average monthly
operating expenses. The result of this calculation shows how many
months of operating expenses can be covered with currently available,
unrestricted resources.
Subindicator #3, DSCR. This subindicator is a measure of a
project's ability to meet regular debt obligations. This subindicator
is calculated by dividing adjusted operating income by a project's
annual debt service payments. It indicates whether the project has
generated enough income from operations to meet annual interest and
principal payment on long-term debt service obligations.
V. GAAP-Based Scoring Process and Elements of Scoring
A. Points and Threshold
The financial condition indicator is based on a maximum of 25
points. In order to receive a passing score under this indicator, a
project must achieve at least 15 points, or 60 percent of the available
points under this indicator.
B. Scoring Elements
The financial condition indicator score provides an assessment of a
project's financial condition. Under the PHAS financial condition
indicator, HUD will calculate an overall score based on the unit
weighted average score for each project. In order to compute an overall
financial condition score, an individual project financial condition
score is multiplied by the number of units in each project to determine
a ``weighted value.'' The sum of the weighted values is then divided by
the total number of units in a PHA's portfolio to derive the overall
PHAS financial condition indicator score. The three subindicator scores
are produced using GAAP-based financial data contained in the FDS. The
minimum number of points (zero) and the maximum number of points (25)
can be achieved over a range of values.
------------------------------------------------------------------------
Subindicators Measurement of Points
------------------------------------------------------------------------
QR............................ Liquidity............ 12.0
MENAR......................... Adequacy of reserves. 11.0
DSCR.......................... Capacity to cover 2.0
debt.
-----------------------------------------
Total..................... ..................... 25.0
------------------------------------------------------------------------
QR
A project will receive zero points when its QR is less than 1.0. If
its QR equals 1.0, it will receive 7.2 points. If its QR is greater
than 1.0 and less than 2.0, it will receive greater than 7.2 points but
less than 12.0 points, on a proportional basis. A project will receive
the maximum of 12.0 points when its QR is equal to or greater than 2.0.
------------------------------------------------------------------------
QR Value Points
------------------------------------------------------------------------
<1.0.................................... 0.0
1.0..................................... 7.2
>1.0 but <2.0........................... >7.2 but <12.0
>=2.0................................... 12.0
------------------------------------------------------------------------
MENAR
A project will receive zero points when its MENAR is less than 1.0.
If its MENAR equals 1.0, it will receive 6.6 points. If its MENAR is
greater than 1.0 and less than 4.0, it will receive greater than 6.6
points but less than 11.0 points, on a proportional basis. A project
will receive the maximum of 11 points when its MENAR is equal to or
greater than 4.0.
------------------------------------------------------------------------
MENAR Value Points
------------------------------------------------------------------------
<1.0.................................... 0.0
1.0..................................... 6.6
>1.0 but <4.0........................... >6.6 but <11.0
>=4.0................................... 11.0
------------------------------------------------------------------------
DSCR
A project will receive zero points when its DSCR ratio is less than
1.0. If its DSCR equals at least 1.0 but less than 1.25, it will
receive 1 point. A project will receive the maximum of 2.0 points if
its DSCR is equal to or greater than 1.25 or if it has no debt at all.
------------------------------------------------------------------------
DSCR Value Points
------------------------------------------------------------------------
<1.0.................................................... 0.0
>=1.0 but <1.25......................................... 1.0
>=1.25.................................................. 2.0
No Debt Service......................................... 2.0
------------------------------------------------------------------------
VI. Audit Adjustment
Pursuant to Sec. 902.30, HUD calculates a revised financial
condition score after it receives audited financial information. The
revised financial condition score, which is based on the audited
information, can increase or decrease the initial PHA-wide score that
was based on the unaudited financial information. The audited score
reflects two types of adjustments. The first type is based on audit
flags and reports the result from the audit itself. Significant
deficiencies and material weaknesses are considered to be audit flags,
alerting the REAC to an internal control
[[Page 10049]]
deficiency or an instance of noncompliance with laws and regulations.
The second adjustment type addresses significant differences between
the unaudited and audited financial information reported to HUD
pursuant to Sec. 902.30.
Audit Opinion and Flags
As part of the analysis of the financial health of a PHA, including
assessment of the potential or actual waste, fraud, or abuse at a PHA,
HUD will look to the Audit Report to provide an additional basis for
accepting or adjusting the financial component scores. The information
collected from the annual Audit Report pertains to the type of audit
opinion; details of the audit opinion; and the presence of significant
deficiencies, material weaknesses, and noncompliance.
If the auditor's opinions on the financial statements and major
federal programs are anything other than unqualified, points could be
deducted from the PHA's audited financial score. The REAC will review
audit flags to determine their significance as it directly pertains to
the assessment of the PHA's financial condition. If the flags have no
effect on the financial components or the overall financial condition
of the PHA as it relates to the PHAS assessment, the audited score will
not be adjusted. However, if the flags have an impact on the PHA's
financial condition, the PHA's audited score will be adjusted according
to the seriousness of the reported finding.
These flags are collected on the Data Collection Form (OMB approval
number 2535-0107). The PHA completes this form for audited submissions.
If the Data Collection Form indicates that the auditor's opinion will
be anything other than unqualified, points can be deducted from the
financial condition score. The point deductions have been established
using a three-tier system. The tiers give consideration to the
seriousness of the audit qualification and limit the deducted points to
a reasonable portion of the PHA's total score.
Audit Flag Tiers
Audit flags are assigned tiers, as stated in the following chart.
Audit Flags and Tier Classifications
----------------------------------------------------------------------------------------------------------------
Audit Flags Tier classification comments
----------------------------------------------------------------------------------------------------------------
Financial Statement Audit Opinion(s):
1. Unqualified opinion(s)........... None. ...............................
2. Qualified opinion(s)............. Tier 2............................... Deduction only if the departure
includes the Low Rent or
Capital Fund programs.
Departures from GAAP
not significant enough to cause
an adverse opinion(s).
Limitations on the
scope of the audit (regardless
of cause) not significant
enough to cause a disclaimer of
opinion.
3. Adverse opinion(s) regardless of Tier 1. ...............................
reason(s).
4. Disclaimer of opinion(s) Tier 1. ...............................
regardless of reason(s).
Opinion(s) on Supplemental Information ..................................... Applies to the FDS.
(Statement of Auditing Standard (SAS)
29 ``in relation to'' type of opinion):
1. Fairly stated.................... None. ...............................
2. Fairly stated except for......... Tier 2. ...............................
3. No opinion....................... Tier 1. ...............................
4. Incomplete or missing............ Tier 1. ...............................
Report on Internal Control and ..................................... Deduction applies only if the
Compliance and Other Matters Noted in internal control deficiency
an Audit of the Financial Statement and/or noncompliance relates
performed in accordance with Government to the Low Rent or Capital
Auditing Standards (GAS) (Yellow Book): Fund programs.
1. Control deficiencies............. Tier 3...............................
Significant
deficiencies.
Material weakness......
2. Material noncompliance........... Tier 3. ...............................
3. Fraud............................ Tier 3...............................
4. Illegal acts..................... Tier 3...............................
5. Abuse............................ Tier 3...............................
Report on Compliance with Requirements ...............................
Applicable to Major Federal Programs
and Internal Control over Compliance
with OMB Circular A-133--Opinion on
compliance with each major Federal
program requirements:
1. Unqualified opinion(s) on None.................................
compliance with Low Rent program
and Capital Fund program major
federal requirements.
2. Qualified opinion(s) on Tier 2...............................
compliance with Low Rent Program
program and Capital Fund program
major federal requirements
(regardless of cause).
3. Adverse opinion(s) on compliance Tier 1...............................
with Low Rent program and Capital
Fund program major federal
requirements (regardless of cause).
4. Disclaimer of opinion(s) on Tier 1...............................
compliance with Low Rent Program
and Capital Fund program major
federal requirements (regardless of
cause).
Internal Controls and Compliance:
1. Control Deficiencies:............ Tier 3...............................
Significant
deficiencies in internal
controls over compliance with
Low Rent program and Capital
Fund program requirements.
[[Page 10050]]
Material weakness in
internal controls over
compliance with Low Rent
program and Capital Fund
program requirements.
2. Material noncompliance with Low Tier 3...............................
Rent program and Capital Fund
program requirements.
Other Consideration:
1. Significant change penalty Tier 2...............................
deduction applies only if the
significant change(s) relate to the
Low Rent or Capital Fund programs.
2. Going concern.................... Tier 1...............................
3. Management Discussion and Tier 2...............................
Analysis.
and other supplemental information
omitted.
4. Financial statements using basis Tier 1...............................
other than GAAP.
----------------------------------------------------------------------------------------------------------------
Each tier assesses point deductions of varying severity. The
following chart illustrates the point schedule:
------------------------------------------------------------------------
Tier PHAS points deducted
------------------------------------------------------------------------
Tier 1............................ Any Tier 1 finding assesses a 100
percent deduction of the PHA's
financial condition indicator
score.
Tier 2............................ Any Tier 2 finding assesses a point
deduction equal to 10 percent of
the unadjusted financial condition
indicator score.
Tier 3............................ Each Tier 3 finding assesses a 0.5
point deduction per occurrence, to
a maximum of 4 points of the
financial condition indicator
score.
------------------------------------------------------------------------
Review of Audited Versus Unaudited Submission
The purposes of comparing the ratios and scores from the unaudited
FDS submission to the ratios and scores from the audited submission are
to:
Identify significant changes in ratio calculation results
and/or scores from the unaudited submission to the audited submission;
Identify PHAs that consistently provide significantly
different data from their unaudited submission in their audited
submission; and
Assess or alleviate penalties associated with the
inability to provide reasonably accurate unaudited data within the
required time frame.
This review process will be performed only for the audited submissions.
Significant Change Penalty
HUD views the transmission of significantly inaccurate unaudited
financial data as a serious condition. Therefore, projects are
encouraged to assure that financial data is as reliable as possible for
their unaudited submissions.
A significant change penalty will be assessed for significant
differences between the unaudited and audited submissions. A
significant difference is considered to be an overall financial
condition score decrease of three or more points from the unaudited to
the audited submission. A significant change penalty is considered a
tier 2 flag and will result in a reduction of 10 percent of the total
audited financial condition score.
The PHAS system automatically deducts the significant change
penalty from the audited score, and this reduction triggers the REAC
analyst's review. REAC may waive the significant change penalty if the
project provides reasonable documentation of the significant difference
in its submission.
Dated: February 1, 2011.
Sandra B. Henriquez,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 2011-2656 Filed 2-22-11; 8:45 am]
BILLING CODE 4210-67-P
