2010-28170. Notice of Certain Operating Cost Adjustment Factors for 2011

AGENCY:

Office of the Assistant Secretary for Housing—Federal Housing Commissioner, HUD.

ACTION:

Notice.

SUMMARY:

This notice establishes, for 2011, operating cost adjustment factors (OCAFs). OCAFs are annual factors used to adjust Section 8 rents renewed under section 524 of the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA).

DATES:

Effective Date: February 11, 2011.

FOR FURTHER INFORMATION CONTACT:

Stan Houle, Housing Program Manager, Office of Housing Assistance and Grant Administration, Department of Housing and Urban Development, 451 7th Street, SW., Washington, DC 20410; telephone number 202-402-2572 (this is not a toll-free number). Hearing- or speech-impaired individuals may access this number through TTY by calling the toll-free Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. OCAFs

Section 514(e)(2) of MAHRA requires HUD to establish guidelines for rent adjustments based on an OCAF. The statute requiring HUD to establish OCAFs for LIHPRHA projects and projects with contract renewals or adjustments under section 524 of MAHRA is similar in wording and intent. HUD has therefore developed a single factor to be applied uniformly to all projects utilizing OCAFs as the method by which renewal rents are established or adjusted.

LIHPRHA projects are low-income housing projects insured by the Federal Housing Administration (FHA). LIHPRHA projects are primarily low-income housing projects insured under section 221(d)(3) below-market interest rate (BMIR) and section 236 of the National Housing Act, respectively. Both categories of projects have low-income use restrictions that have been extended beyond the 20-year period specified in the original documents, and both categories of projects also receive assistance under section 8 of the U.S. Housing Act of 1937 to support the continued low-income use.

Additionally, MAHRA gives HUD broad discretion in setting OCAFs—referring, for example, in sections 524(a)(4)(C)(i), 524(b)(1)(A), 524(b)(3)(A) and 524(c)(1) simply to “an operating cost adjustment factor established by the Secretary.” The sole limitation to this grant of authority is a specific requirement in each of the foregoing provisions that application of an OCAF “shall not result in a negative adjustment.” Contract rents are adjusted by applying the OCAF to that portion of the rent attributable to operating expenses exclusive of debt service.

OCAFs for FY2008, FY2009, and FY2010 were calculated as average percentage changes in OCAF-covered operating costs using FHA Annual Financial Statement (AFS) data. Unit-weighted, project-level operating cost percentage changes were calculated at the State level using the most recent two years of data available. Three years of experience with this method have revealed the following weaknesses:

• The relatively common practice of expensing major repairs and improvements in a single year produces large percentage changes in project operating costs when compared with the previous or subsequent years. These projects have a disproportionate impact on the OCAFs calculated, which occurs even when what would normally be considered a large percentage of the highest and lowest changes are excluded.
• Because there are variations in projects that submit AFS from year to year, a different set of projects is used to calculate OCAFs for each of the past three years. It has been found that the multiplicative sum of annual estimates calculated in this manner differs significantly from results based on changes for the same group of projects over a given time interval.
• The project-weighted percentage change method has been found to have an upward bias. This normally occurs because one-time large expense increases followed by a similar dollar decrease are not off-setting when calculated as percentages.

Because of these problems, for FY2011 HUD is reverting to the pre-FY2008 methodology with limited changes that are subsequently noted. The Department continues to be interested in using actual FHA data for cost component categories, and it may make additional adjustments in the coming years based on further analysis.

FY 2011 OCAFs are calculated as the sum of weighted average cost changes for wages, employee benefits, property taxes, insurance, supplies and equipment, fuel oil, electricity, natural gas, and water/sewer/trash using publicly available indices. The weights used in the pre-FY2008 OCAF calculations for each of the nine cost component groupings have been updated using current percentages attributable to each of the nine expense categories. Average expense proportions were calculated using the most recent three years of audited Annual Financial Statements from projects covered by OCAFs. The expenditure percentages for these nine categories have been found to be very stable over time, but using three years of data increases their stability. The nine cost component weights were calculated at the state level, which is the lowest level of geographical aggregation at which there is enough projects to permit statistical analysis. No data were available for the Western Pacific Islands, so data for Hawaii were used as the best available indicator of OCAFs for these areas.

The best current price data sources for the nine cost categories were used in calculating annual change factors. State-level data for fuel oil, electricity, and natural gas from Department of Energy surveys are relatively current and continue to be used. Data on changes in employee benefits, insurance, property taxes, and water/sewer/trash costs are only available at the national level and also remain unchanged from the pre-2008 methodology. Although State level data on wages is available through BLS's Quarterly Covered Employment and Wage survey (QCEW), it is not used here because of the lag in availability and because QCEW wage changes include both the change in wages and the change in job classifications. Instead, HUD continues to use national Employment Cost Index (ECI) data on wage changes. Consumer Price Index data on goods and equipment have replaced a similar Producer Price Index (PPI) measure, because the PPI excluded the large percentage of such items that were not domestically produced. The data sources for the nine cost indicators selected used were as follows:

• Labor Costs—First quarter, 2010 Bureau of Labor Statistics (BLS) ECI, Private Industry Wages and Salaries, All Workers (Series ID CIU2030000000000I) at the National Level.
• Property Taxes—2008-2009 Census Quarterly Summary of State and Local Government Tax Revenue—Table 1. Annual taxes are computed as the total of four quarters of tax receipts. Total annual taxes are then divided by number of households to arrive at average annual tax per household. Number of households is taken from the estimates program at the Bureau of the Census. http://www.census.gov/​popest/​housing/​HU-EST2009.html
• Goods, Supplies, Equipment: April 2009 to April 2010 Bureau of Labor Statistics (BLS) Consumer Price Index, All Items Less Food, Energy and shelter (Series ID CUUR0000SA0L12E) at the national level.
• Insurance: April 2009 to April 2010 Bureau of Labor Statistic (BLS) Consumer Price Index, Tenants and Household Insurance Index (Series ID CUUR0000SEHD) at the national level.
• Fuel Oil: Energy Information Agency, 2008 to 2009 Retail Price of No. 2 Fuel Oil to Residential Consumers cents per gallon excluding taxes. Department of Energy multi-state fuel oil grouping averages used for the States with insufficient fuel oil consumption to have separate estimates. http://www.eia.gov/​dnav/​pet/​pet_​sum_​mkt_​a_​EPD2_​PRT_​cpgal_​a.htm.
• Electricity: Energy Information Agency, March 2010 “Electric Power Monthly” report, Table 5.6.B. http://www.eia.doe.gov/​cneaf/​electricity/​epm/​epm_​sum.html.
• Natural Gas: Energy Information Agency, Natural Gas, Residential Energy Price, 2008-2009 annual prices in dollars per 1,000 cubic feet at the state level. http://www.eia.doe.gov/​dnav/​ng/​ng_​pri_​sum_​a_​EPG0_​PRS_​DMcf_​a.htm.
• Water and Sewer: April 2009 to April 2010 Consumer Price Index, All Urban Consumers, Water and Sewer and Trash Collection Services (Series ID CUUR0000SEHG) at the national level.

The sum of the nine cost component percentage weights equals 100 percent of operating costs for purposes of OCAF calculations. To calculate the OCAFs, state-level cost component weights developed from AFS data are multiplied by the selected inflation factors. For instance, if wages in Virginia comprised 50 percent of total operating cost expenses and increased by 4 percent from 2008 to 2009, the wage increase component of the Virginia OCAF for 2011 would be 2.0 percent (50% * 4%). This 2.0 percent would then be added to the increases for the other eight expense categories to calculate the 2006 OCAF for Virginia. FY 2011 OCAFs are included as an Appendix to this Notice.

II. MAHRA and LIHPRHA OCAF Procedures

MAHRA, as amended, created the Mark-to-Market Program to reduce the cost of federal housing assistance, enhance HUD's administration of such assistance, and ensure the continued affordability of units in certain multifamily housing projects. Section 524 of MAHRA authorizes renewal of Section 8 project-based assistance contracts for projects without restructuring plans under the Mark-to-Market Program, including projects that are not eligible for a restructuring plan and those for which the owner does not request such a plan. Renewals must be at rents not exceeding comparable market rents except for certain projects. As an example, for Section 8 Moderate Rehabilitation projects, other than single room occupancy projects (SROs) under the McKinney-Vento Homeless Assistance Act (42 U.S.C. 11301 et seq.), that are eligible for renewal under section 524(b)(3) of MAHRA, the renewal rents are required to be set at the lesser of: (1) The existing rents under the expiring contract, as adjusted by the OCAF; (2) fair market rents (less any amounts allowed for tenant-purchased utilities); or (3) comparable market rents for the market area.

LIHPRHA (see, in particular, section 222(a)(2)(G)(i), 12 U.S.C. 4112(a)(2)(G) and the regulations at 24 CFR. 248.145(a)(9)) requires that future rent adjustments for LIHPRHA projects be made by applying an annual factor, to be determined by HUD to the portion of project rent attributable to operating expenses for the project and, where the owner is a priority purchaser, to the portion of project rent attributable to project oversight costs.

III. Findings and Certifications

Environmental Impact

This issuance sets forth rate determinations and related external administrative requirements and procedures that do not constitute a development decision affecting the physical condition of specific project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6), this notice is categorically excluded from environmental review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Catalog of Federal Domestic Assistance Number

The Catalog of Federal Domestic Assistance Number for this program is 14.187.

Dated: November 2, 2010.

David H. Stevens,

Assistant Secretary for Housing-Federal Housing Commissioner.

Appendix

Operating Cost Adjustment Factors for 2011

Alabama	2.4
Alaska	1.1
Arizona	2.6
Arkansas	2.1
California	1.8
Colorado	1.7
Connecticut	0.1
Delaware	1.5
District of Columbia	1.7
Florida	2.7
Georgia	2.2
Hawaii	0.0
Idaho	3.0
Illinois	0.1
Indiana	2.0
Iowa	1.7
Kansas	2.2
Kentucky	2.2
Louisiana	0.8
Maine	0.0
Maryland	2.2
Massachusetts	1.6
Michigan	2.2
Minnesota	1.1
Mississippi	2.1
Missouri	1.9
Montana	0.4
Nebraska	1.8
Nevada	2.8
New Hampshire	1.3
New Jersey	1.8
New Mexico	1.1
New York	0.3
North Carolina	2.4
North Dakota	1.3
Ohio	2.1
Oklahoma	1.4
Oregon	2.6
Pacific Islands	0.0
Pennsylvania	2.0
Puerto Rico	2.1
Rhode Island	1.1
South Carolina	2.5
South Dakota	0.5
Tennessee	2.5
Texas	1.9
Utah	2.4
Vermont	0.6
Virgin Islands	3.0
Virginia	2.4
Washington	2.7
West Virginia	3.2
Wisconsin	1.7
Wyoming	1.9
U.S. Average	1.7