Public Housing Evaluation and Oversight: Changes to the Public Housing Assessment System (PHAS) and Determining and Remedying Substantial Default, 10136-10163 [2011-2659]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 76, Number 36 (Wednesday, February 23, 2011)]
[Rules and Regulations]
[Pages 10136-10163]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2659]



[[Page 10135]]

Vol. 76

Wednesday,

No. 36

February 23, 2011

Part III





Department of Housing and Urban Development





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24 CFR Parts 901, 902, and 907



Public Housing Evaluation and Oversight: Changes to the Public Housing 
Assessment System (PHAS) and Determining and Remedying Substantial 
Default; Interim Rule

Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / 
Rules and Regulations

[[Page 10136]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 901, 902, and 907

[Docket No. FR-5094-I-02]
RIN 2577-AC68


Public Housing Evaluation and Oversight: Changes to the Public 
Housing Assessment System (PHAS) and Determining and Remedying 
Substantial Default

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

ACTION: Interim rule.

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SUMMARY: The changes implemented by this interim rule are intended to 
enhance the efficiency and utility of HUD's Public Housing Assessment 
System (PHAS). The interim rule makes 2 sets of amendments to improve 
evaluation and oversight of the Public Housing Program. First, it 
amends the PHAS regulations for the purposes of: Consolidating the 
regulations governing assessment of public housing in one part of the 
Code of Federal Regulations (CFR); revising certain PHAS regulations 
based on HUD's experience with PHAS since it was established as the new 
system for evaluating a public housing agency (PHA) in 1998; and 
updating certain PHAS procedures to reflect recent changes in public 
housing operations from conversion by PHAs to asset management. Second, 
this interim rule establishes new regulations that specify the actions 
or inactions by which a PHA can be determined to be in substantial 
default, the procedures for a PHA to respond to such a determination or 
finding, and the sanctions available to HUD to address and remedy 
substantial default by a PHA.

DATES: Effective date: March 25, 2011.
    Comment due date: April 25, 2011.

ADDRESSES: Interested persons are invited to submit comments on this 
interim rule 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.
    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 Seventh Street, SW., Room 10276, 
Washington, DC 20410-0500.
    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. Changes to PHAS

A. Background on PHAS

    The PHAS regulations codified in 24 CFR part 902 were established 
by a final rule published on September 1, 1998 (63 FR 46596). Prior to 
1998, a PHA was evaluated by HUD with respect only to its management 
operations. PHAS expanded assessment of a PHA to four key areas of a 
PHA's operations: (1) The physical condition of the PHA's properties; 
(2) the PHA's financial condition; (3) the PHA's management operations; 
and (4) the residents' service and satisfaction assessment (through a 
resident survey). On the basis of these four indicators, a PHA receives 
a composite score that represents a single score for a PHA's entire 
operation and a corresponding performance designation. PHAs that are 
designated high performers receive public recognition and relief from 
some HUD requirements. PHAs that are designated standard performers may 
be required to take corrective action to remedy identified 
deficiencies. PHAs that are designated substandard performers are 
required to take corrective action to remedy identified deficiencies. 
PHAs that are designated troubled performers are subject to remedial 
action.

B. Public Housing Operating Fund Program

    The regulations governing the Public Housing Operating Fund program 
are of key relevance to the proper operation of PHAs and, consequently, 
to PHAS. Operating Funds are made available to a PHA to provide 
assistance to a PHA for the operation and management of public housing; 
therefore, the regulations applicable to a PHA's operation and 
management of public housing must be considered in any changes proposed 
to PHAS. The regulations for the Public Housing Operating Fund program 
are found at 24 CFR part 990.
    Subpart H of the part 990 regulations (Sec. Sec.  990.255 to 
990.290) establishes the requirements regarding asset management. Under 
Sec.  990.260(a), PHAs that own and operate 250 or more dwelling rental 
units must operate using an asset management model consistent with the 
subpart H regulations. PHAs with fewer than 250 dwelling rental units 
may elect to transition to asset management, but are not required to do 
so. Recent HUD appropriations acts have provided through an 
administrative provision that PHAs that own or operate 400 or fewer 
public housing units may elect to be exempt from any asset management 
requirement imposed by HUD in connection with

[[Page 10137]]

HUD's Operating Fund rule, with one exception--a PHA seeking 
discontinuance of a reduction of subsidy under the operating fund 
formula shall not be exempt from asset management requirements.\1\ 
Since requirements in appropriations acts, unless otherwise indicated, 
apply only to the fiscal year to which the appropriations act is 
directed, HUD's proposed rule to revise PHAS does not reflect this one-
year provision.
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    \1\ See, for example, section 225 of Title IV of Division K of 
the Consolidated Appropriations Act, 2008 (Pub. L. 110-161, approved 
December 26, 2007); section 225 of the Omnibus Appropriations Act, 
2009 (Pub. L. 111-8, approved March 11, 2009); and section 223 of 
the Consolidated Appropriations Act, 2010 (Pub. L. 111-117, approved 
December 16, 2009).
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    The asset management model emphasizes project-based management, as 
well as long-term and strategic planning. For public housing, this 
represents a shift from a PHA-centric management model to a model 
consistent with the norms in the broader multifamily industry. Under 
this model, PHAs must implement project based management, project based 
budgeting, and project based accounting. Similarly, HUD funds and 
monitors PHAs at the project level. A project can be a reasonable 
grouping of buildings under an Annual Contributions Contract (ACC). One 
of the major shifts, then, in this interim rule (as opposed to the 
current rule) is to isolate the performance of individual projects. The 
current regulation, for example, provides Management Operations only at 
the PHA level, which can hide problem properties. The essential 
components of asset management are defined in the regulations in 24 CFR 
part 990, subpart H.

C. Proposed Amendments to PHAS

    On August 21, 2008, at 73 FR 49544, HUD proposed amendments to its 
PHAS regulations. HUD proposed to retain the basic structure of PHAS 
and to require PHAs to be scored on performance based on evaluation of 
four indicators: physical condition, financial condition, management 
operations, and the PHA's management of its Capital Fund program. The 
organization of the four indicators differed from the original PHAS 
indicators in that PHA's management of its Capital Fund program, 
originally part of the management operations indicator, was proposed to 
replace the resident satisfaction indicator. HUD proposed that resident 
services and satisfaction be assessed as part of the management 
operations indicator. The August 21, 2008, proposed rule also retained 
the principle that evaluation under the PHAS indicators would continue 
to rely on information that is verifiable by a third party, wherever 
possible.
Overview of Proposed Changes to PHAS
    The August 21, 2008, rule proposed to modify PHAS primarily to 
conform to the new regulations on the Public Housing Operating Fund 
program and the conversion by PHAs to asset management, including 
project-based budgeting, project-based accounting, and project-based 
performance evaluation. Highlights of some of the major changes 
proposed to each of the four current PHAS indicators are as follows:
    Physical. The physical inspection indicator would have remained 
largely unchanged. Independent physical inspections would have 
continued to be conducted on each public housing project, although the 
frequency of inspections would have depended on the scores of 
individual projects, not the score for the entire PHA. For example, if 
a specific project scored below 80 points, it would be inspected the 
following year, regardless of whether the overall physical score for 
the PHA, based on all projects, was 80 points or higher (as is the case 
in the currently codified PHAS regulations). If a PHA's overall 
physical score were less than 80 points, and one or more projects 
scored 80 points or above, those projects that scored 80 points or 
above would be inspected every other year.
    Financial. The financial assessment system would have been modified 
to include an assessment of the financial condition of each project. A 
PHA would have continued to submit an annual Financial Data Schedule 
(FDS) to HUD that contained financial information on all major programs 
and business activities. However, for purposes of PHAS, the PHA would 
have been scored on the financial condition of each project, and these 
scores would be the basis for a program-wide score.
    Management. The current management operations assessment system 
relies on PHA submission of a range of information that is self-
certified. Under the proposed rule, this current system would have been 
replaced with management reviews conducted of each project by HUD staff 
(or, where applicable, HUD's agents). Preferably, such reviews would 
have been conducted annually, consistent with the standards for HUD's 
subsidized housing programs. As part of this project management review 
process, HUD would have examined a PHA's performance in the area of 
resident programs and participation, thereby eliminating a separate 
resident satisfaction survey.
    Resident Satisfaction Surveys. A PHA's performance in the area of 
resident programs and participation would have been evaluated as part 
of the project management review, thus eliminating the need for a 
separate indicator on resident satisfaction and, therefore, a separate 
satisfaction survey. The project management review would have included 
a subindicator that would measure efforts to coordinate, promote, or 
provide effective programs and activities to promote economic self-
sufficiency of residents, and measure the extent to which residents are 
provided with opportunities for involvement in the administration of 
the public housing. This subindicator would have included all of the 
elements regarding economic self-sufficiency and resident participation 
that are included in the U.S. Housing Act of 1937 (42 U.S.C. 1437 et 
seq.) (1937 Act) at section 6(j) of the 1937 Act (42 U.S.C. 1437d(j)).
    HUD agrees that resident input into the assessment process is 
important. HUD is committed to exploring resident satisfaction, 
participation, and self-sufficiency measures in the final rule that 
will follow this interim rule. Accordingly, HUD seeks input from the 
public in the form of comments to this interim rule on establishing 
more meaningful measures in these areas.
    Capital Fund program. HUD proposed to establish a new indicator, 
previously part of the management operations indicator, which would 
have measured a PHA's performance with respect to the obligation and 
expenditure of Capital Fund program grants. This Capital Fund program 
indicator can only be measured at the PHA level. This Capital Fund 
program indicator, based on a requirement of section 6(j) of the 1937 
Act (42 U.S.C. 1437d(j)(1)(I)(2)), is required by statute to be 
assessed at that level. HUD believes that this is a separate subject 
from the management indicator and therefore is more appropriate as a 
separate indicator. In addition to the changes in the four indicators, 
discussed above, the August 21, 2008, rule proposed to modify the score 
adjustment for physical condition and neighborhood environment. This 
adjustment would have been applied to the management operations 
indicator on a project-by-project basis rather than to the physical 
condition indicator. The statutory language at 42 U.S.C. 
1437d(j)(K)(I)(2) states that HUD shall reflect in the weights assigned 
to the various indicators the differences in the difficulty in managing 
individual projects that result from their physical condition and 
neighborhood

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environment. The application of the adjustment to the management 
operations indicator would specifically address the difficulty in 
managing individual projects, and would also result in a true physical 
condition score without any adjustments outside of the physical 
condition inspection results.
    The proposed rule also included, as appendices, scoring notices for 
the PHAS indicators that provided more detail on how each indicator and 
subindicator would have been scored. Additional proposed changes to 
PHAS included:
     Corrective Action Plans would replace current Improvement 
Plans, addressed in detail at 24 CFR 902.73.
     References to the Troubled Agency Recovery Center (TARC), 
a program office within HUD to which troubled PHAs were referred for 
oversight, monitoring, or other remedial action, would be removed, 
since the TARC no longer exists. The duties and responsibilities of the 
TARCs have been transferred to and assumed by HUD's field offices.
    Finally, the August 21, 2008, rule proposed to establish, in new 
part 907, the regulations governing the determination of, and remedies 
for, substantial default. The regulations applicable to substantial 
default are currently codified in HUD's PHAS regulations. However, a 
determination of substantial default is not limited to troubled 
performance or violation of PHAS requirements. Accordingly, HUD 
determined that it was more appropriate for substantial default 
regulations to be codified in a separate CFR part.

II. Differences Between This Interim Rule and the Proposed Rule

    This interim rule adopts the changes proposed in the August 21, 
2008, proposed rule with the exception of provisions identified in this 
Section II.
    One of the key changes to PHAS proposed by the August 21, 2008, 
rule was to replace the system of PHA self-certification for the 
management operations indicator with onsite management reviews, 
consistent with monitoring practices in HUD's multifamily housing 
programs. Many commenters expressed concern over: (1) Whether HUD would 
have the resources and/or capacity to conduct management reviews of all 
public housing projects every several years; (2) possible issues of 
subjectivity in the scoring of these management reviews; and (3) the 
weights and measures assigned to the scored components of the 
management review.
    In response to these concerns, and to provide both PHAs and HUD 
more time to develop and implement a more objective management review 
tool, this interim rule does not include this proposed change. This 
interim rule provides that the management review will be used as a 
diagnostic and feedback tool. In turn, three components that were part 
of the management review--relating to tenant accounts receivable, 
occupancy rate, and accounts payable--will be derived from the PHA's 
annual FDS. These three items represented 60 percent of the scored 
items on the management review. By relying on the FDS for these three 
items, HUD can issue an annual (or bi-annual, where applicable) overall 
PHAS score for each PHA. In the case where low PHAS scores indicate 
potential management problems, the management review can aid in 
diagnosing the nature of the problem and determining appropriate 
corrective actions.
    As in the proposed rule, this interim rule contains three items--
tenant accounts receivable, occupancy rate, and accounts payable--under 
the management operations indicator. Because other proposed elements 
are not adopted by this interim rule, HUD has rebalanced the scoring 
for the remaining indicators. The proposed management elements not 
adopted here are utility consumption, turnaround time, work orders, 
security, the components based on unit inspections, economic self-
sufficiency, and resident involvement. The physical condition indicator 
has increased from 30 to 40 points; the financial condition indicator 
has increased from 20 to 25 points; and the management operations 
indicator has decreased from 40 to 25 points. The overall value of the 
Capital Fund program indicator (10 points) remains unchanged.
    However, the Capital Fund program indicator itself has been 
restructured in a manner that HUD believes better tracks actual 
performance in respect to the use of Capital Funds for capital 
activities, whereas the proposed rule simply tracked statutory 
compliance. The proposed Capital Fund Program Indicator gave full 
points for timely obligation and expenditure of funds under the 
statute, a metric that does not necessarily measure the actual use of 
capital funds for modernization and capital needs; for example, a PHA 
can transfer a portion of its Capital Fund grant to PHA operations. HUD 
believes that success in addressing capital needs will be reflected in 
higher occupancy rates. This interim rule, therefore, while similarly 
providing 5 points for timely obligation, introduces a new measure 
based on a PHA's occupancy rate. In order to receive the full 5 points, 
a PHA's adjusted occupancy rate (that is, adjusted for HUD-approved 
vacancies) must be 96 percent or more. In recognition of the impact of 
these changes to the Capital Fund subindicators, this interim rule 
revises the definition of Capital Fund-troubled. The new definition 
indicates that a PHA must achieve a score of at least five points, or 
50 percent.
    Small deregulated PHAs with fewer than 250 units will receive a 
PHAS assessment as follows:
     High performers will receive PHAS assessments every 3 
years;
     Standard and substandard performers will receive PHAS 
assessments every other year; and
     Overall troubled and Capital Fund-troubled PHAs will 
receive PHAS assessments every year.
    All projects that score 90 points or higher on their physical 
condition inspections will be inspected every 3 years, consistent with 
HUD's multifamily housing programs. Projects that score at least 80 
points but fewer than 90 points will receive a physical condition 
inspection every other year. Projects that score less than 80 points 
will receive a physical condition inspection every year. All projects 
in overall troubled and Capital Fund-troubled PHAs will receive a 
physical condition inspection every year.
    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 for the physical condition inspections and the 3-2-1 
inspection schedule, as well as a baseline year for the small 
deregulated PHAs.
    In addition to these more significant changes, there were other 
minor changes in this interim rule from the proposed rule. These 
include:
    1. Mixed-finance projects will not receive financial or management 
scores.
    2. The rule has been amended to indicate that, for exigent health 
and safety (EHS) violations, a PHA may abate the effect of the 
violation without necessarily correcting or remedying the condition. 
For example, a PHA may move a family into a different unit until fire 
damage is repaired.
    3. The rule has been amended to modify the standards for Debt 
Service Coverage Ratio (DSCR) such that any project with a DSCR of 1.25 
or higher receives the full points.
    Specific scoring procedures that HUD uses will be published 
separately in the Federal Register for public comment.

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III. Key Differences Between This Interim Rule and Currently Codified 
PHAS Regulation \2\
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    \2\ ``Currently codified PHAS regulation'' refers to the PHAS 
regulation in 24 CFR part 902 (Government Printing Office, April 1, 
2010).
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     The current codified PHAS regulation scores the physical, 
financial condition, management operations, and resident service and 
satisfaction indicators. In this interim rule, HUD removes the resident 
service and satisfaction indicator, as well as the resident survey, 
while HUD considers better means of accurately measuring resident 
satisfaction, tenant participation, and the efficacy of resident self-
sufficiency efforts to be included in the final rule. HUD agrees that 
resident input into the assessment process is important. HUD is 
committed to exploring resident satisfaction, self-sufficiency, and 
participation measures in the final rule, which will be promulgated 
subsequent to and based on HUD's experience with, and the public 
comments on, this interim rule. Accordingly, the agency seeks input 
from the public, including PHA residents and PHAs, as well as other 
interested members of the public, on establishing more meaningful 
measures in these areas, including suggestions for what the specific 
items measured might be and methods of measurement.
     The Capital Fund indicator is added as the 4th indicator.
     Under the interim rule, HUD has removed the management 
operations certification as a scored element. Instead, the management 
operations indicator will be limited to three items in this interim 
rule--occupancy rate, accounts payable, and tenant accounts receivable, 
all drawn from a PHA's annual financial information. The onsite 
management review will not be scored for the management operations 
indicator. As a result, the overall management operations indicator has 
been reduced from 40 points to 25 points.
     The physical condition indicator has increased to 40 
points from 30 points; the financial condition indicator has been 
reduced from 30 points to 25 points; and the new Capital Fund Program 
indicator will be 10 points.
     There are changes to the adjustment for physical condition 
and neighborhood environment. In the currently codified regulation, the 
adjustment allows a total of 3 points, one point each for 3 areas (see 
Sec.  902.25(b)(1)). This interim rule provides for an adjustment of 2 
points, 1 for poor physical condition of the project and 1 for the 
economic condition of the major census tract in which a project is 
located. The physical condition adjustment in this interim rule applies 
to projects at least 28 years old; in the current CFR codification, the 
adjustment applies to 10 year old properties. The neighborhood 
environment adjustment in this interim rule applies to projects located 
in census tracts where at least 40 percent of the families are living 
below the poverty rate. In the currently codified regulation, that 
adjustment applies where 51 percent of the families in the immediately 
surrounding area live below the poverty rate.
     This interim rule provides increased incentive for 
projects that perform well on the physical inspection. Projects in PHAs 
with 250 or more dwelling units that score 90 or higher on their 
physical inspection will be inspected every 3 years under the interim 
rule, while projects that receive at least 80 points but less than 90 
points will be inspected every 2 years. All other projects will receive 
a physical condition inspection every year. All projects that are in 
overall troubled and Capital Fund-troubled PHAs will receive a physical 
condition inspection every year.
     The financial condition indicator under the currently 
codified regulation assesses the financial condition of the entire PHA. 
Under this interim rule, a financial condition score for each project 
will be calculated, as well as a composite score for the entire PHA.
     Under this interim rule, a PHA may immediately abate the 
effect of an exigent health and safety (EHS) violation and later 
correct the condition, under Sec.  902.22(f). Section 902.24(a)(2) of 
the codified regulation allows only for correction.
     References to the former Troubled Agency Recovery Center 
(TARC) are removed. Those former duties are now handled in the HUD 
field office.
    The definition of a high performer remains the same as in the 
currently codified regulation. A PHA that achieves a score of at least 
60 percent of the points available under the physical condition, 
financial condition, and management operations indicators, and at least 
50 percent under the Capital Fund indicator, and achieves an overall 
PHAS score of 90 percent or greater of the total available points under 
PHAS, shall be designated a high performer. A PHA shall not be 
designated a high performer if it scores below the threshold 
established for any indicator.

IV. Public Comments Received on August 21, 2008, Proposed Rule

    The proposed rule published on August 21, 2008, provided for the 
public comment period to end on October 20, 2008. During that comment 
period, HUD made available to the public on its Web site a scoring 
template. In order to ensure that all commenters had an equal 
opportunity to address this new information, HUD reopened the comment 
period on November 24, 2008, and solicited comments through January 8, 
2009.
    HUD received approximately 138 comments during the first comment 
period and an additional 25 comments during the reopened comment 
period. Comments were from public housing-related trade associations, 
housing authorities, advocacy organizations, and individuals. This 
section of the preamble, which addresses the public comments, organizes 
the comments by subject category, with a brief description of the 
comment and HUD's response to the comment.
    Several commenters expressed their support of the rule rather than 
raising issues to be addressed, including support for focusing on the 
performance of projects, the removal of the ``troubled'' designation 
for substandard agencies, and the elimination of both entity-wide 
scoring and self-certifications for management operations.

General Comments

    Comment: A number of commenters stated that the proposed rule was 
overly complex, burdensome, overly stringent, or contrary to the 
Department's goals of administrative streamlining.
    HUD Response: As the preamble to the proposed rule stated, a 
revised PHAS is made necessary by the transition of public housing's 
budgeting, funding, and reporting systems from one that was entity-wide 
to one that is project-based. Though the evaluation emphasis has 
shifted from the PHA as a whole to individual projects, the interim 
rule does not impose any more regulation than what has been in place. 
By eliminating the resident satisfaction survey, the management 
certification, and, in this interim rule, the management review, HUD 
has considerably streamlined the evaluation process. All of the data 
are collected from three sources--the FDS, the physical inspection, and 
the electronic Line of Credit Control System (eLOCCS). No data point in 
the interim rule requires any submission from a PHA other than what is 
already required. Since the FDS is already generated by the PHA and is 
required by

[[Page 10140]]

existing rule, by OMB A-133, and by the Annual Contributions Contract 
(ACC), using this data to evaluate a project's performance cannot be 
considered burdensome. Moreover, because HUD conducts the physical 
inspection and tallies the results, there is no PHA data submission for 
this indicator.
    Comment: Commenters expressed concern over implementation of the 
onsite management review, which, as proposed, would have accounted for 
40 percent of a PHA's overall PHAS score. Commenters expressed concern 
over the capacity of HUD staff to administer these reviews, the 
specific elements to be scored, the weights and measures associated 
with those elements, potential subjectivity, and the overall weight 
associated with this indicator.
    HUD Response: In response to public comments, HUD has removed the 
management review as a scored element in this interim rule. Instead, 
the management operations indicator will be limited to three items in 
this interim rule--occupancy rate, accounts payable, and tenant 
accounts receivable, all drawn from a PHA's annual financial 
information. As a result, the overall management operations indicator 
has been reduced from 40 points to 25 points, with the remaining points 
assigned to the physical condition indicator and the financial 
condition indicator.
    HUD still regards the onsite management review as critical to its 
task of effective oversight of the public housing portfolio, as is the 
case in multifamily housing. Under this interim rule, management 
reviews will not be scored but instead will be used for both compliance 
(not scored) and as a diagnostic instrument for performance.
    Comment: Commenters requested clarification regarding how the 
proposed rule would apply to Moving-to-Work (MTW) agencies, including 
inspection protocols, information submissions, energy conservation, 
energy audits, and capital fund.
    HUD Response: MTW agencies are subject to their respective MTW 
agreements. In most cases, the MTW agreements require MTW agencies to 
submit annual financial information and be subject to the same 
standards and protocols for physical inspections, management reviews, 
and obligation/expenditure deadlines as non-MTW agencies. However, the 
MTW agreements allow MTW agencies the option of carrying over their 
pre-MTW PHAS scores or being scored under the applicable PHAS 
regulation.
    Comment: Several commenters indicated that, by producing a program-
wide score for a PHA, the proposed rule was inconsistent with the goals 
of asset management (with the focus on project-level performance). 
Another commenter stated that PHAs should be scored at both the 
project-level and the PHA level. One commenter stated that only the 
overall score should be the PHAS score. Some commenters stated that it 
is duplicative to score individual projects on items that are PHA-wide 
responsibilities, such as energy, security, budgeting, tracking of work 
orders, and accounts payable.
    HUD Response: As a result of the Operating Fund program 
regulations, published and developed through negotiated rulemaking, 
both HUD and PHAs have been transitioning to asset management, with 
project-level budgeting, funding, accounting, management, and 
oversight. At the same time, Section 6(j) of the 1937 Act requires HUD 
to develop a system to measure the management performance of whole 
PHAs, along with processes for designating troubled PHAs. This interim 
rule balances the need to provide for measurements at the project 
level, as required for asset management, with the need to designate 
troubled PHAs, as required under the statute.
    Comment: Commenters suggested that the proposed rule should provide 
for a mechanism for adjusting scores (both overall and for particular 
components) as a result of funding shortfalls, noting that operating 
subsidy proration levels were between 84 percent and 90 percent from 
2006 to 2009. Commenters suggested various formulas for this 
adjustment.
    HUD Response: HUD's position is it was not the intent of Congress, 
in establishing section 6(j) of the 1937 Act, to make allowances for 
funding, as the statute makes no mention of funding allowances. The 
statute does, however, mention adjustments for physical condition and 
neighborhood environment (see 42 U.S.C. 1437d(1)(I)(2)), indicating 
that Congress did intend for adjustments based on those items, but did 
not intend for adjustments based on funding levels. Moreover, HUD 
believes that it is the primary intent of the system to provide an 
indication of the performance of public housing, regardless of funding 
levels, which is consistent with the current rule. Finally, it should 
be observed that a number of PHAs have achieved high performance 
ratings with current funding levels.
    Comment: Some commenters stated that performance standards based on 
multifamily housing are inappropriate for public housing, or that the 
rule otherwise uses inappropriate standards more applicable to non-
public housing multifamily projects, such as tax credit projects, which 
can have more amenities than public housing.
    HUD Response: HUD disagrees with these comments. The Operating Fund 
program regulations clearly establish that public housing shall 
transition to asset management, consistent with standards and practices 
in multifamily housing. Furthermore, the physical condition standards 
for HUD public housing and multifamily housing are the same. In 
addition, multifamily properties are assessed by project, as PHAs will 
be assessed under this interim rule.
    Comment: Several comments expressed concern that it was either too 
soon for HUD to change PHAS, overall, or that it was premature to begin 
measuring the performance of projects.
    HUD Response: HUD disagrees with this comment. The transition to 
project-based budgeting, funding, and accounting is in its 5th year, 
with full implementation expected in 2011. An appropriate mechanism is 
needed for measuring the management performance of projects. Moreover, 
it would be a burden on PHAs, which are transitioning to asset 
management, to retain the existing reporting systems established under 
the PHAS regulations, prior to amendment by this interim rule, which 
focus on entity-wide performance.
    Comment: Several commenters expressed concern over whether HUD's 
systems will be ready to implement the new scoring methodologies and 
the different data collection efforts.
    HUD Response: All data elements necessary for scoring are in place 
and currently captured through the Office of Public and Indian Housing 
information technology systems, REAC's physical inspection system, 
eLOCCS, the Public Housing Information Center (PIC), or the FDS, 
greatly simplifying administrative systems.
    Comment: Commenters requested that the implementation be postponed, 
and requested that PHAs have at least one year from date of publication 
to effective date, or some other enlarged time period.
    HUD Response: HUD has not adopted this recommendation. There is no 
adverse impact on PHAs in terms of needing to modify reporting systems 
in order to comply with the various scoring elements under this rule. 
PHAs are already subject to the independent physical inspections, and 
the information that HUD will use to score the financial condition and 
management operations indicators is already contained within the FDS 
that PHAs

[[Page 10141]]

began submitting with fiscal years ending June 30, 2008. Scoring for 
the Capital Fund program indicator is taken directly from eLOCCS and 
the PIC. Moreover, the information that HUD will be using to generate 
PHAS scores is similar to the information scored that has traditionally 
been scored under the currently codified PHAS regulations, only with an 
emphasis on project-level data.
    Comment: Many commenters recommended that the period of assessment 
for the management review conform either with the PHA's fiscal year or 
with calendar years.
    HUD Response: Under the August 21, 2008, rule, HUD proposed that 
certain elements on the management review would be assessed as of the 
most recently completed month or as of the most recent 12-month period, 
but not necessarily the most recently completed fiscal year. Commenters 
generally preferred that the assessment year always coincide with the 
PHA's fiscal year. Because HUD will not be scoring the management 
review, and because both financial and management operations data will 
be derived from the FDS and possible additional points due to the 
physical condition, neighborhood environment (or both) of a project, 
the assessment year under this interim rule will now coincide with the 
PHA's fiscal year, as is the case under the currently codified PHAS 
regulations, which is not changed by this interim rule. Also, using 
fiscal years is an accepted business practice. HUD will use the current 
fiscal year data from the FDS and eLOCCS and the latest physical 
condition score to arrive at the PHAS score.
    Comment: Several commenters requested clarification as to how the 
proposed rule would apply to mixed-finance projects or recommended that 
mixed-finance projects be exempted from PHAS, or that specific 
elements, such as financial condition or management condition scoring, 
not be applied to mixed-finance projects. With respect to financial 
condition, commenters stated that there is a conflict between generally 
accepted accounting principles (GAAP) and the way mixed-finance 
projects are funded and organized.
    HUD Response: This interim rule clarifies that mixed-finance 
projects will continue to be subject to the independent physical 
inspections. These inspection scores will then be included with other 
physical inspection scores to determine the PHA's overall physical 
condition score. However, because of the special nature of mixed-
finance projects, especially in the limited financial data submitted on 
these projects, mixed-finance projects will not receive a financial 
condition or management operations score. Mixed-finance projects are, 
by definition, owned by an entity other than the PHA. As such, PHAs 
report only ``pass-through'' activity on the FDS--essentially, the 
subsidy earned and the subsidy transferred. HUD does not receive 
detailed information on operating revenues or operating expenses on 
mixed-finance projects. Because HUD does not include detailed financial 
information on mixed-finance projects, it cannot determine occupancy, 
accounts payable, or tenant accounts receivable through the FDS. As a 
result, mixed-finance projects will also be excluded from the 
management operations indicator.
    HUD specifically seeks comment on how best to include mixed-finance 
projects under PHAS.
    Comment: A number of comments were received requesting that certain 
fair housing requirements, including accessibility requirements and 
fair housing training for PHA staff, be included as part of the 
management review. One commenter stated that existing methods of 
enforcement should suffice.
    HUD Response: Although, in the operation of public housing, PHAs 
must adhere to various fair housing requirements, the oversight of 
those requirements is the responsibility of HUD's Office of Fair 
Housing and Equal Opportunity (FHEO). Only FHEO, for example, can issue 
fair housing findings. HUD is continuing to work with FHEO, and 
solicits input from the public, to better determine what data elements, 
if any, that PIH staff can obtain during onsite reviews, and through 
other means, that can assist FHEO in its monitoring functions and to 
affirmatively further fair housing.
    Comment: Some commenters recommended that the regulations be 
changed to increase the exemption from asset management (currently 
fewer than 250 public housing units). Other commenters stated that PHAs 
that are exempt from asset management should not be subject to PHAS. 
One other commenter stated that PHAs already subject to inspection by 
other agencies should be exempt from PHAS.
    HUD Response: The regulatory exemption for small PHAs is part of 
the Operating Fund program regulation at 24 CFR part 990. Although, as 
noted earlier in this preamble, the Public Housing Operating Fund 
program regulations are relevant to changes to PHAS, this rulemaking is 
focused on changes to PHAS only, and changes to the Operating Fund 
program are outside the scope of this rulemaking (however, section 223, 
Div. A, Tit. II of the 2010 Consolidated Appropriations Act, Pub. L. 
111-117, states that PHAs ``that own and operate 400 or fewer public 
housing units may elect to be exempt from any asset management 
requirement imposed by the Secretary of Housing and Urban Development 
in connection with the operating fund rule'' (except for stop-loss 
PHAs)). Additionally, even for PHAs that are exempt from asset 
management and which treat their entire public housing portfolio as one 
project, HUD still has a responsibility for monitoring performance. 
Finally, although PHAs may also be reviewed from time to time as to 
certain criteria based on their participation in other programs, PIH 
must also do the assessment of PHAs required by statute (42 U.S.C. 
1437d(j)).
    Comment: A commenter asked for clarification as to whether the term 
``project,'' when used in the rule, also meant ``asset management 
project'' as defined under PIH Notice 2006-10. The same commenter asked 
for HUD to define ``statistically valid sample'' and ``crime-related 
problem.'' Another commenter asked to remove ``decent, safe, and 
sanitary housing'' and replace it with ``affordable.''
    HUD Response: When HUD first required conversion to asset 
management, HUD asked PHAs to identify ``asset management projects,'' 
or AMPs, so as to differentiate with ``developments'' as listed in the 
PIC (Inventory Management System (IMS)). AMPs are now simply referred 
to as ``projects'' and are identified as so in PIC. HUD has added the 
definition of ``statistically valid sample'' in Sec.  902.3 of the 
interim rule. Since the management review under this interim rule will 
not be used to score management operations, it is not currently 
necessary to define ``crime-related problem.'' This interim rule does 
not change the phrase ``decent, safe, and sanitary,'' which is a 
statutory standard for HUD-assisted housing.
    Comment: Several commenters disagreed with the proposal that a PHA 
could not be high-performing if 10 percent of its units fail the 
physical, financial, or management indicators.
    HUD Response: HUD agrees with this comment, and has determined to 
retain the definition of high performer that is in the currently 
codified regulation and not add another layer of complexity to the 
definition.
    Comment: Several commenters stated that certain classifications of 
PHAs should be subject to less frequent PHAS scoring, either because of 
their size

[[Page 10142]]

(small PHAs) or recent performance. Several comments suggested that HUD 
modify the inspection frequency for public housing, consistent with the 
standards in HUD's multifamily housing programs, or alternatively that 
the size of the PHA should not dictate the frequency of inspections, 
but rather that frequency should be based on achieving a certain score. 
With respect to the management assessment, a commenter states that if a 
PHA meets certain goals, it should be exempt from the following year's 
management assessment.
    HUD Response: HUD agrees and has changed the overall PHAS scoring 
frequency in response to these comments for physical condition 
inspections and the Deregulation for Small Public Housing Agencies (68 
FR 37664, June 24, 2003) (small public housing agencies are those with 
fewer than 250 dwelling units). With this rule, HUD is changing the 
frequency of physical inspections, adopting HUD's multifamily housing 
standard. Under the currently codified regulations, a PHA's projects 
are inspected biennially (every 2 years) if they achieve a physical 
condition score of 80 points or higher. In contrast, in HUD's 
multifamily programs, projects with a physical condition score of 90 
points or higher are inspected triennially (every 3 years). The interim 
rule has been modified to reflect HUD's multifamily score-based 
inspection frequency. As a consequence, a public housing project 
scoring 90 points and above will be inspected triennially; a public 
housing project scoring less than 90 and at least 80 points will be 
inspected biennially; and a public housing project scoring below 80 
points will be inspected annually (known as ``3-2-1''). Previously, HUD 
was concerned that extended periods between inspections resulted in 
significant declines in inspection scores; however, recent data for 
public housing properties that scored 90 points or higher does not show 
any significant drop-off in scores when those projects are inspected 
triennially. HUD will continue to monitor the interval data to 
ascertain that this change does not result in adverse effects. Further, 
if a management review or some other event (e.g., multiple Exigent 
Health and Safety (EHS) issues) should cause HUD to believe that the 
project is in need of a physical inspection, it may so schedule one at 
its sole discretion. Likewise, HUD may extend the time between 
inspections for cause as HUD determines.
    With this rule, HUD is providing additional relief to small PHAs 
that are deregulated and is basing the frequency of PHAS assessments on 
the overall PHAS score. A small PHA that is a high performer will 
receive a PHAS assessment every 3 years; a small PHA that is a standard 
or substandard PHA will receive a PHAS assessment every 2 years; and 
all other small PHAs, including overall troubled and Capital Fund-
troubled, will receive a PHAS assessment annually. All overall troubled 
projects receive a physical inspection annually.

Physical Condition Indicator

    Comment: Commenters stated that the physical inspection scoring 
process is overly complex, difficult to understand, and should be 
simplified. Another commenter suggested that the physical inspections 
be modified to capture actual physical needs. Another commenter stated 
that HUD was changing the physical inspection standards to a tougher 
standard than currently used.
    HUD Response: The physical inspection standards, established under 
24 CFR part 5, are outside the scope of this rulemaking. These 
standards are the same for public housing and HUD's multifamily housing 
programs. The physical inspection system is designed to assess the 
livability of a property to the aforementioned ``decent, safe, and 
sanitary'' standard. It is not designed to assess or evaluate the 
remaining useful life of building and property components. HUD plans to 
update its requirements related to the Physical Needs Assessment in a 
separate rulemaking, which should address the concern raised by the 
comment regarding physical needs. The standards for physical 
inspections have not been changed by this interim rule.
    Comment: Several commenters objected to PHAs being penalized when a 
tenant refuses or impedes access to a unit, thereby preventing the 
independent inspector from inspecting the unit, and indicated that 
these situations are beyond a PHA's control, or that a pattern of 
noncompliance rather than one incident should be required to warrant a 
penalty.
    HUD Response: The prior PHAS regulation at Sec.  902.24(d) and at 
Sec.  902.20(f) states that all PHAs are required by the Annual 
Contributions Contract (ACC) to provide HUD or its representative with 
access to its projects and to all units and appurtenances in order to 
permit physical inspections. This provision is now at Sec.  902.20(f) 
in this interim rule, and the substance was not changed. HUD does not 
agree that such situations are beyond a PHA's control because it is the 
responsibility of a PHA to ensure that its residents are aware of the 
physical condition inspection requirement, and if a resident does not 
comply, a PHA may initiate eviction proceedings for noncompliance with 
the lease.
    Comment: One commenter recommended that HUD eliminate the physical 
assessment subsystem (PASS) as too costly.
    HUD Response: HUD disagrees. The independent physical inspections, 
which commenced in 1998, have provided an essential tool for HUD in 
monitoring its public housing and multifamily portfolios and in raising 
the standards of operations with respect to maintaining the physical 
condition of public housing properties. The costs of HUD's physical and 
financial oversight operations amount to a little more than 0.3 percent 
of the Capital Fund appropriation, of which these costs are an 
appropriated administrative offset.
    Comment: One commenter suggested that units being used for non-
residential purposes, such as for community services, be exempt from 
the physical inspections. One commenter suggested that the site not be 
included as an inspectable area.
    HUD Response: HUD disagrees. First, 24 CFR part 5, subpart G, 
requires the inspection of common areas, the site, and dwelling units. 
Secondly, any aspect of a project that may be used by assisted tenants 
should be subject to inspection, as deterioration of any portion of the 
project, including community rooms and common areas, affects the whole 
project.
    Comment: One commenter suggested that HUD create a special 
adjustment factor due to the age of a project.
    HUD Response: The currently codified PHAS regulation provides for 
two adjustments--physical condition and neighborhood environment 
(PCNE). The PCNE adjustment is based on a statutory requirement at 42 
U.S.C. 1437d(j)(1)(I)(2). Under the currently codified regulation, PHAs 
apply for these adjustments through their management operations 
certification, which are calculated using information from HUD data 
systems applied to the physical condition score. Under this interim 
rule, PCNE will be applied to the management operations indicator 
score. Moreover, PCNE is based on: (1) Age of the property, and (2) 
location, which accommodates both the commenter's concern as well as 
HUD's statutory mandate.
    Comment: Several commenters regarded the physical inspections as 
being too subjective, citing instances of large variations in scores 
(depending on the inspector), and stated that the appeals process was 
too cumbersome.

[[Page 10143]]

    HUD Response: Over the past 12 years, HUD has invested significant 
resources to assure consistent application of established standards, 
including a team of HUD ``quality assurance'' inspectors. While always 
striving to continue to improve the accuracy of its inspections, HUD 
believes that the inspection process provides a reasonable indication 
of the physical condition at the time of inspection of each project. Of 
course, conditions can vary from year to year. Additionally, HUD has 
established a process of appeals. HUD is required by statute, 42 U.S.C. 
1437d(j)(2)(A)(iii), to establish procedures for appealing a 
designation of ``troubled.'' HUD's appeals process has been in 
existence since 1998. The appeals process is, in fact, quite 
streamlined and uses a bare minimum of procedural requirements. For 
example, an appeal is initiated by a simple written request.
    Comment: Several commenters asked that HUD modify the method of 
scheduling inspections to allow more flexibility for PHAs.
    HUD Response: The scheduling of inspections is part of the Reverse 
Auction Program that is not part of the PHAS rule. Physical inspection 
procedures call for adequate notice to the PHA. Inspectors are 
encouraged to be flexible when the PHA expresses insurmountable 
difficulties in meeting the inspection date. However, inspectors are 
not obligated to change inspection dates, and at times cannot do so 
because of their workload and the need to complete inspections in a 
timely and efficient manner. The PHAS regulations were not changed in 
response to this comment.
    Comment: Several commenters suggested that PHAs have the option to 
``abate'' EHS violations, rather than to correct or repair them within 
24 hours.
    HUD Response: HUD agrees that this is a reasonable differentiation. 
Consequently, this interim rule adopts the following language in Sec.  
902.22(f) on EHS deficiencies, ``The project or PHA shall correct, 
remedy, or act to abate all EHS deficiencies cited in the deficiency 
report * * *.''
    Comment: Commenters stated that the 72-hour deadline for non-
exigent health and safety deficiencies, and the 24-hour timeline for 
EHS, are too short. The deadline for EHS could result in a PHA having 
to do emergency procurement, which will increase costs.
    HUD Response: EHS deficiencies are, by definition, ones that pose a 
danger to tenants and so must be corrected or abated quickly. Adding 
the option to abate the deficiencies and subsequently do a final repair 
gives PHAs more flexibility, which should address the expenditure 
issue. As for other deficiencies, the 3 days for an ``A'' is the 
average, and HUD believes that this is reasonable for a high performing 
PHA.
    Comment: A commenter stated that Sec.  902.26(a)(4) (triple 
deduction for uncorrected EHS deficiencies that the PHA had certified 
were corrected) is overly harsh and seems intended to dissuade PHAs 
from availing themselves of their right to appeal and given the 
subjective nature of inspections.
    Response: The triple penalty referenced in this section is not 
related to a PHA's right to appeal; rather, it is a penalty for a false 
statement to HUD. In general, false statements to the government are 
often punished harshly in order to deter such behavior. The PHAS system 
relies heavily on PHAs correctly certifying information and on 
following through with promised repairs.
    Comment: Several commenters suggested that PHAs should be able to 
challenge EHS deficiencies.
    HUD Response: A PHA may always challenge an inspector's 
determination of what constitutes an EHS issue. However, such a 
challenge does not remove the PHA's obligation to correct or abate the 
deficiency within the time required by the regulation. EHS violations 
are scored, with the exception of smoke detectors, and, therefore, 
properly belong in the PHAS regulations. A PHA also has the option of 
requesting a technical review or submitting an appeal if the PHA 
believes that the inspector was in error.
    Comment: Several commenters stated that it is too difficult and 
time consuming to obtain database adjustments and changes. Commenters 
stated that requiring PHAs to annually file the same requests adds 
another layer of bureaucracy and HUD should be required to actually 
make a permanent adjustment to its database for items that do not 
belong to the PHA. The paperwork involved in requesting a database 
adjustment from the HUD field office can be unnecessarily time 
consuming. The inspector should be given the authority to make an 
onsite adjustment in cases that are clearly warranted. Also, because 
maintenance does not automatically stop when an inspector arrives, 
ongoing maintenance work should not reflect negatively on a PHA's 
overall rating, but should be noted as an adjustment by the inspector.
    HUD Response: There has been a mechanism in place since 1998 for 
making database adjustments. HUD notes that PHAs are required to 
present compelling evidence that deficient items noted in the physical 
inspection report are issues of ownership or code enforcement that are: 
(1) Outside of the PHA's property; (2) owned and maintained by another 
entity (such as a municipality); or (3) items normally expected to be 
code violations (e.g., window security bars) are permitted by the 
locality. These database adjustments are permanent once a PHA goes 
through the initial process and submits the justifying documentation, 
and when granted, are automatic for the next inspection. Other database 
adjustments, such as units undergoing comprehensive modernization, 
rehabilitation or conversion, are temporary. To the extent that a 
unit's status carries over from one inspection to the next, the 
temporary adjustment must be re-verified. Due to the fact that the 
field office is required to verify a PHA's request for a database 
adjustment based on a PHA's supporting documentation, the inspector 
cannot make an adjustment while on-site. Since the physical inspection 
of a unit is a snapshot in time, if maintenance work is in progress 
during the inspection of a unit, the physical condition of the unit is 
recorded in the inspection report. Accordingly the PHAS regulations 
have not been changed in this regard. However, to be consistent with 
multifamily regulations, the time frame for requesting database 
adjustments has been increased to 45 days.
    Comment: Several commenters suggested various clarifications in the 
``definitions'' related to physical inspections, such as project area 
versus building area, normalized sub-area weight, and how scattered 
sites are scored in the building area score calculation, project area 
score calculation, and property score calculation.
    HUD Response: HUD has clarified the definitions related to physical 
inspections, as appropriate, in the physical condition scoring notice.
    Comment: The physical inspection standards should be weighted more 
toward assuring major capital systems are not neglected.
    HUD Response: The elements scored by PHAS are statutory, and 
related to the ongoing physical condition and management of public 
housing projects and PHAs as a whole. Major capital systems are 
addressed in the Physical Needs Assessment (PNA).
    Comment: Several commenters disagreed with the use of contractors 
for inspection, stating that HUD field office personnel know the local 
communities and have an interest in improving the projects.

[[Page 10144]]

    HUD Response: The use of contractors is within HUD's administrative 
discretion.
    Comment: A commenter asks whether HUD is considering changing the 
understanding that smoke detectors do not affect the overall score.
    HUD Response: No, HUD is not changing that understanding.

Financial Condition Indicator

    Comment: One commenter indicated that a PHA should receive bonus 
points under the financial condition indicator for a ``clean'' 
independent audit. Another commenter stated that there was a conflict, 
in terms of timeframe for submitting audits, between the proposed rule 
and the Single Audit Act.
    HUD Response: A clean, independent audit is a minimum acceptable 
performance standard for any financial entity, including PHAs. Bonus 
points will not be awarded simply because a PHA maintains its books and 
records properly. There is no conflict between the proposed rule, and 
now this interim rule and the requirements of the Single Audit Act, 
because both require the submission of a PHA's audit within 9 months of 
a PHA's fiscal year end. HUD can waive the submission of audited 
information to HUD, but it cannot waive the PHA's submission of audited 
information to the Federal Audit Clearinghouse, which is required by 
the Single Audit Act and OMB Circular A-133.
    Comment: Several commenters requested greater clarification on the 
three scored elements, Quick Ratio (QR), Months Expendable Net Assets 
Ratio (MENAR), and the Debt Service Coverage Ratio (DSCR), under the 
financial condition indicator, whether they will only be applied to the 
public housing program, and whether scores will be based on audited or 
unaudited statements.
    HUD Response: The financial condition scoring notice provides 
further clarification as to how the subindicators under financial 
condition are scored. All PHAs will receive scores on the submission of 
the unaudited FDS. For those PHAs that expend more than $500,000 in 
federal funds and where audited information is required, financial 
condition indicator scoring may be revised based on the audited 
submission. The score based on the audited information will replace the 
score based on the unaudited FDS because audited information is more 
reliable as the audit is performed by a third party that attests to the 
information. HUD does not agree that it should ignore the audited 
financial information in computing the PHAS score, because audited 
financial information has an assurance of reliability that is important 
for those PHAs where audited information is required, as a greater 
amount of funding is involved, and such audits are required under OMB 
Circular A-133. PHAs that expend less than the A-133 threshold amount, 
currently $500,000, are not required to have an audit performed. 
However, PHAs that received operating subsidy for an audit are required 
to have a non-A-133 audit performed. Accordingly, the PHA will select a 
non-A-133 audit when submitting to Financial Assessment Subsystem--
Public Housing (FASS-PH).
    The interim rule is clear that PHAS measures the financial 
condition of projects. It does not score the Central Office Cost Center 
(COCC), the PHA's operation of a Section 8 voucher program, any other 
PHA program, or a PHA's business activities.
    Comment: One commenter stated there is a conflict between 
Sec. Sec.  902.60 and 902.62 regarding the deadlines for filing 
financial audits, with Sec.  902.60 implying that a 9-month deadline 
for audited financial statements can be deferred and Sec.  902.62 
stating that it cannot.
    HUD Response: The commenter misunderstands the waiver of deadlines 
provision. The only deadlines that may be waived are those other than 
the 9-month deadline for the audited financial statement under the 
Single Audit Act, such as the financial statements required under 24 
CFR part 5, subpart H.
    Comment: Several commenters believed that the financial condition 
standards should be modified. Others commented that the standards for 
the DSCR were too high (a project would need a DSCR of 2.0 to receive 
full points). One commenter stated that MENAR and QR should be prorated 
to account for underfunding, and provided examples. One commenter 
questioned the fact that bad debt is removed as a separate element in 
this interim rule.
    HUD Response: The QR and the MENAR are very similar to the Current 
Ratio and the Months Expendable Fund Balance that are used in the 
currently codified regulation, with the major change being made by this 
interim rule is that they are applied to public housing projects and