E6-11282. Public Housing Assessment System; Financial Condition Scoring Process

AGENCY:

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

ACTION:

Final notice.

SUMMARY:

This final notice provides 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 revised threshold values and associated points/scores for the expense management component of the Financial Condition Indicator based on available data for PHAs with fiscal years ending March 31, 2004, June 30, 2004, September 30, 2004, and December 31, 2004. The data analyzed is based on generally accepted accounting principles (GAAP) information submitted by PHAs as part of the financial data schedule submission.

FOR FURTHER INFORMATION CONTACT:

Contact the Office of Public and Indian Housing, Real Estate Assessment Center (REAC), Attention: Wanda Funk, Department of Housing and Urban Development, Real Estate Assessment Center, 550 12th Street, SW., Suite 100, Washington, DC 20410; telephone the PIH-REAC Technical Assistance Center at [phone] (this is 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 [phone]. Additional information is available from the PIH-REAC Internet site at http://www.hud.gov/​reac/​.

SUPPLEMENTARY INFORMATION:

I. Background

HUD published the first Public Housing Assessment System; Financial Condition Scoring Process notice in the Federal Register on May 13, 1999 (64 FR 26222). HUD republished the notice to coincide with the June 22, 1999, publication of the PHAS proposed rule. Subsequently, HUD revised the notice twice to reflect additional changes to the financial scoring process. The third notice was published on June 28, 2000 (65 FR 40008), and the fourth notice was published on December 21, 2000 (65 FR 80685). This notice is an update of the financial condition scoring process notice published on December 21, 2000. In the December 21, 2000, notice HUD stated that any changes to the scoring process and any modifications to the thresholds would be communicated through a subsequent Federal Register notice. Accordingly, this notice updates the December 21, 2000, notice and provides information on the revisions made to the financial condition scoring process. HUD revised the thresholds based on a full year's worth of unaudited and available audited financial information.

This change has been made in accordance with the threshold revaluation schedule set forth in the December 21, 2000, notice. The December 21, 2000, notice stated that the thresholds established in that notice would remain in effect for all unaudited and audited PHA financial submissions for PHAs for a three year period, unless REAC found a need for revisions. In October 2001, July 2003, November 2004, and May 2005, REAC conducted an analysis of the thresholds established in the December 21, 2000, notice and determined not to revise the established thresholds. In August 2005 another analysis was conducted of the threshold established in the December 21, 2000, notice and it was determined that a revision to the expense management component was warranted.

II. Discussion of Public Comments

There were three comments received on the May 2, 2006, notice, two from public housing industry groups and one from a PHA. Several of the issues addressed in the comments pertained to future Financial Condition Indicator changes as a result of asset management and project based accounting and budgeting, as well as related changes to PHAS. Those comments that were not directly related to the revision of the expense management component as set forth in the May 2, 2006, notice are not addressed in this final notice.

Comment: One commenter suggested that the entire Financial Condition Indicator be suspended until a new, project-specific indicator is developed. Until that time, REAC may wish to continue providing scores on the indicator but these scores should be advisory only.

HUD Response: HUD disagrees that the Financial Condition Indicator should be suspended until a new indicator is developed that addresses project based accounting and budgeting, and asset management. With HUD's focus on asset management and project based accounting and budgeting, HUD realizes that there is a need for property based assessments and will develop a revised Public Housing Assessment System (PHAS) to accommodate asset management. Until that time, HUD will continue to score the Financial Condition Indicator, and the indicator score will be part of the overall PHAS score.

Comment: One commenter stated that the thresholds for the expense management component, published on May 2, 2006, demonstrates that these have not been revised frequently enough over the past several years, and felt that more frequent reevaluations will be even more critical when the new funding formula is put in place beginning in 2007. Another commenter stated that the revision to the expense management component is long overdue, and these thresholds should be analyzed and indexed on an annual basis.

HUD Response: The financial indicator scoring thresholds have been reevaluated in October 2001, July 2003, November 2004, May 2005 and August 2005. HUD determined that there was a need for revision as a result of the August 2005 analysis. HUD will continue to evaluate the thresholds and provide revisions as needed, at a maximum of every three years.

Comment: One commenter stated that the proposed rule calls for the use of total units available to determine the size category, but HUD's automated system appears to utilize total units leased instead.

HUD Response: Peer groupings are established according to the size of the PHA, based on the total number of units operated by the PHA, for all programs and activities. Accordingly, the Financial Condition Indicator of PHAS calculates the peer groupings based on the PHA's financial data schedule (FDS) input for line 1120, units months available. FDS line 1120 is defined as the number of months available for all low rent, Section 8, and other subsidized units except those unit months vacant due to demolition, conversion, ongoing modernization, and units approved for non-dwelling purposes. After the PHA's peer group size has been determined, scoring for the six financial components of the Financial Condition Indicator are based on the threshold value for the PHA's size as discussed, above. Expense management/utility consumption measures the PHA's ability to manage key areas of its annual expenditures at a level relative to its peers, adjusted for size and geographic location. This component compares summary expenditures to unit months leased for the fiscal year for the Low-Rent Public Housing Program only. Total routine expenses measured include the following six expense categories: Administrative, tenant services, utilities, ordinary maintenance and operation, protective services, and general expenses. The summed number is compared to the threshold for the PHA's size as discussed, above, and regional peer group. This component enables PHA management to determine if the per unit cost is reasonable or if unnecessary operating expenditures should be reduced and/or further analyzed.

III. Appendix 2, Expense Management, Revision

The analysis of the thresholds conducted in August 2005 is based on the financial information submitted by PHAs with fiscal years ending March 31, 2004, June 30, 2004, September 30, 2004, and December 31, 2004. As a result of this analysis, it was determined that a revision to the expense management thresholds was warranted, but not to the remaining component thresholds for current ratio, months expendable fund balance, tenants receivable outstanding, occupancy loss and net income and loss. The thresholds for the five financial condition components that will not be changed are included in Appendix 2, Thresholds for Entity-Wide GAAP Scoring, of the December 21, 2000, Public Housing Assessment System; Financial Condition Scoring Process. The table, below, includes the new thresholds for expense management.

The revised expense management thresholds included in this notice, and the remaining five component thresholds included in the December 21, 2000, financial condition notice, which are based on a full year of unaudited and audited financial data based on GAAP, will remain in effect for all unaudited and audited PHA financial submissions for PHAs with fiscal year end on or after September 30, 2006, for a three year period, unless the REAC finds a need for revisions. Any revisions to the thresholds will be communicated through a notice.

The expense management table can be interpreted in the following manner:

• Identify a size category for expense management;
• The rows under that size category identify ranges of possible values for expense management; and
• The column to the right labeled “Points/Score” identifies the points/scores that is awarded to each expense management value for that size category.

The thresholds presented here have been rounded for presentation purposes, whereas those used to calculate scores at the REAC are not rounded.

Expense Management (EM)

Region	Very small and small	Low medium and high medium	Large and extra large	Points/score
	EM<$112.39	EM<$108.52	EM<$128.15	1.5
0	EM≥$112.39	EM≥$108.52	EM≥$128.15	0
1	EM<$114.12	EM<$107.69	EM<$112.87	1.5
1	EM≥$114.12	EM≥$107.69	EM≥$112.87	0
2	EM<$94.59	EM<$118.23	EM<$117.07	1.5
2	EM≥$94.59	EM≥$118.23	EM≥$117.07	0
3	EM<$89.22	EM<$86.68	EM<$101.71	1.5
3	EM≥$89.22	EM≥$86.68	EM≥$101.71	0
4	EM<$91.51	EM<$97.55	EM<$103.73	1.5
4	EM≥$91.51	EM≥$97.55	EM≥$103.73	0
5	EM<$86.66	EM<$95.36	EM<$110.68	1.5
5	EM≥$86.66	EM≥$95.36	EM≥$110.68	0
6	EM<$79.96	EM<$82.36	EM<$122.17	1.5
6	EM≥$79.96	EM≥$82.36	EM≥$122.17	0
7	EM<$99.87	EM<$71.81	EM<$86.02	1.5
7	EM≥$99.87	EM≥$71.81	EM≥$86.02	0
8	EM<$111.02	EM<$133.50	EM<$97.86	1.5
8	EM≥$111.02	EM≥$133.50	EM≥$97.86	0
9	EM<$120.96	EM<$109.90	EM<$136.55	1.5
9	EM≥$120.96	EM≥$109.90	EM≥$136.55	0

Dated: June 29, 2006.

Orlando J. Cabrera,

Assistant Secretary for Public and Indian Housing.