The following are PHADA's official comments on the Capital Fund Allocation proposed rule which was published on September 14. Refer to the August 16 Advocate for more information on the final agreement by the negotiated rulemaking panel.

PHADA, which represents 1,710 housing authorities nationwide, is pleased to comment on the above-referenced proposed rule. The association actively participated in the negotiated rulemaking sessions, having three representatives on the panel.

PHADA recognizes the shift mandated by the Quality Housing and Work Responsibility Act (QHWRA) from the CIAP/CGP competitive/formula split to one Capital Fund allocated by formula to all agencies as extremely important and positive. CIAP agencies, many of which are PHADA members, have for too long been forced to compete among themselves for very limited funds. Too often, only emergency funding was available. The backlog and accrual needs continued to build at a disproportionate and unacceptable rate. QHWRA, and in significant respects this proposed rule, go a long way to address this inequity.

It should be said at the outset, however, that while PHADA is pleased with folding formerly CIAP agencies into a single Capital Fund, and even though PHADA agreed to consensus on this proposed rule in the negotiated rulemaking process, the association has serious concerns over a number of issues.

These include the needs study upon which the system is based, the method for determining the formula share for agencies, the unspecified nature of accumulation of funds for small agencies, the performance award based on an unproven PHAS, issues related to the timely expenditure of replacement housing funds, and additional rulemaking regarding resident involvement.

The Abt Associates Needs Study
PHADA is most concerned with the inadequacies of the needs study, commissioned by HUD to Abt Associates. The reader should be aware that the association's concerns have nothing to do with the quality and competency of Abt, but rather, with the limitations placed upon Abt in conducting the study.

It was very clear throughout the negotiated rulemaking sessions that the data collected by the Abt study was, at best, inadequate and, at worst, grossly misrepresentative of the true capital needs of housing authorities nationwide. This is a serious situation since the entire formula is based upon this study.

Some of the specific problems of the study include:

1. The study did not look at true capital needs but only at the cost of restoring items to their original condition. Some properties restored to their original condition would qualify for HOPE VI, or for example, would require the replacement of open flame space heaters. The fact is, that no local government would permit the "original condition" under modern codes and standards. For agencies with older buildings particularly, which are striving to become more competitive with the private market, Section 202, and project based Section 8, this standard is woefully inadequate and needs modern updating.
2. The study only looked at observable conditions. Very expensive repairs to infrastructure and other non-observable conditions were overlooked.
3. The study did not adequately take into account different housing types. Single family scattered-sites were largely ignored.
4. No information was collected on lead-based paint or asbestos abatement.
5. No uniform effort was made to interview executive directors or modernization coordinators.
6. The accrual information is badly understated by using overly optimistic building component life cycles.

The committee understood the Department spent $8 million on the study and would not have negotiated anything without using it, but the net result was very likely a serious underestimate of the real modernization need. The Abt study estimated that there was approximately $16 billion in unmet need. When inflation is taken into account, the study appears to indicate that there has been a dramatic decrease in need from the time of the mid-1980s study. This is obviously inaccurate when one considers the chronic underfunding of modernization.

Parenthetically, PHADA is concerned about an important inaccuracy in the notes of the committee meetings. The record indicates that the members of the committee adopted and endorsed the Abt study. This is not true. In fact, the committee spent many hours debating the study and was almost universally critical of it.

These factors necessitated that committee members estimate, extrapolate, and compensate for inadequate data. Considering what the committee was dealing with, it did a good job.

The six percent hold harmless
Key among the decisions reached by the committee was to insure that no agency would get less than 94 percent of its formula share based on the current year. This was a crucial compromise between the large and small agency members of the committee. Taken together with formula factors that are responsive to the fact that the modernization backlog of small HAs is generally higher than that of larger HAs, the committee, as well as PHADA, is generally satisfied with the compromise.

Determining the formula share
The proposed rule describes two methods of determining the actual formula share. The first is used when "statistically reliable" data are available (the NY and Chicago amendment), the second when it is not available. Given the inadequacies of the Abt study, PHADA strongly urges HUD to accept that statistically reliable data generally are not available.

At the agency's option, therefore, the second method should be used. The factors described in that method, i.e., objectively measurable data including bedroom size, units, age of units, the rolling three-year average of the cost index, rural versus metropolitan location, and geographical location, appear valid to us and would, we believe, yield real and accurate numbers closer to actual need than data based on an inadequate study.

Accumulation of funding
When referring to obligation and expenditure deadlines under the replacement housing factor, the proposed rule references that such deadlines could be applicable, "with specific HUD approval," from the date that the PHA accumulates adequate funds to undertake the activity. This begs the question of who determines the adequacy of the funds, HUD or the PHA?

In fact, small agencies may need to accumulate capital funds in order to ensure that adequate funds are available to undertake any capital fund activity. The rule should include a "floor" at the 500-unit PHA level to automatically permit accumulation (and save the Department a blizzard of paperwork). PHADA strongly encourages the Department to specifically recognize this situation in the final rule. In addition, rather than seeking HUD's specific and, presumably separate, approval for accumulating funds, such approval should be received as part of the Capital Fund submission in the Agency Plan.

Alternatively, PHADA recommends that a loan program similar to the Section 108 fund be established so that housing authorities under a reasonable threshold, set by HUD, be able to borrow against their future allocations.

Performance bonus
The proposed rule indicates that, in response to QHWRA's mandate to include performance in the formula, those agencies recognized as high performers under PHAS will receive a 3 percent performance bonus for the first five years and a 5 percent bonus subsequently. Also, no agency would receive more than a 5 percent reduction of funding due to the performance bonuses of others.

PHADA recognizes that this issue was a difficult one to negotiate and, at the very end of the process, threatened to doom the entire endeavor. The association is pleased that an acceptable compromise was reached.

However, PHADA must again state its very serious and sustained reservations about using a troublesome assessment system for any financial bonus. Reports continue to come in of truly outrageous incidents involving PHAS. This is true particularly, but not exclusively, regarding the physical conditions indicator. In addition, as of this writing a final rule has yet to appear. Indeed, binding inspections were occurring in September even before the original final rule indicated the start date of such inspections.

While this proposed rule is not directly related to PHAS, PHADA feels compelled to again state, in the strongest possible terms, that there are systemic problems with PHAS that result in obvious and serious distortions of the conditions and operational quality of agencies. It is premature to implement PHAS at this time and, therefore, it is premature to implement a capital fund bonus based on PHAS.

Finally on this topic, it is not clear in the proposed rule that the 5 percent "hold harmless" would be inclusive or exclusive of the overall 6 percent hold harmless referred to earlier, i.e. could the PHA receive the 6 percent reduction for hold harmless, then an additional 5 percent off the top for performance awards going elsewhere? It is PHADA's position that no agency should receive a cut of more than 6 percent of its formula share for any reason, including performance bonuses to others.

Replacement housing factor
PHADA is generally supportive of the replacement housing provisions. However, some items should be clarified.

Qualifying housing authorities would be eligible for the replacement housing factor initially for five years, and up to an additional five years provided they receive "a firm commitment" of "substantial" additional funds "as determined by HUD." This is too vague for a rule. What will HUD determine? What is a firm commitment? What are substantial additional funds? It is unfortunate that the Department has not defined these terms in the proposed rule so that the public could offer comment. In any case, these terms should be defined in the final rule. Absent such definitions, the process is too loose and subject to change without adequate review and comment.

When an agency that receives replacement funding fails to provide such housing, the proposed rule says that the Department "may recapture and reallocate the funds." Given the history of the use of modernization and HOPE VI funds by some agencies, and the resulting political fallout for all agencies, PHADA strongly recommends that "may" be replaced with "shall." Unfortunately, the Department does not have a good record on recaptures. HUD representatives on the committee admitted that only two agencies had ever had funds recaptured, even with a sizeable number of public and egregious examples of non-performance. Agencies that do not use the money for its designated purpose should not benefit from the funds in any way.

Similarly, the proposed rule indicates that agencies that have received replacement funding but have not obligated and expended the funds within the required timeframe, will have their funding "reduced" during the second five-year period. It appears to us that an agency that has not complied with the obligation/expenditure requirements should not have their future funding reduced, but eliminated. Not doing so rewards non-performance and mismanagement and leaves the entire industry open to continuing criticism.

PHADA is supportive of the proposed rule's provision of making replacement housing activities part of the Agency Plan as part of the Capital Fund five-year plan.

Resident participation
As the Department is aware, the issue of resident participation was visited frequently and, at times, contentiously, during the committee meetings. PHADA supports the active participation of residents in all capital fund activities. The association also agrees that the regulations regarding such participation should be revisited to ensure that residents are given the maximum opportunities to take part in this important activity.

PHADA is pleased, however, that both the committee and the Department refrained from mandating such things as mandatory set-asides of funding and specific mandatory requirements for such participation.

The resident advocates presented their case well. However, they appeared not to sufficiently recognize the very diverse situations of individual housing authorities and the residents that live in housing provided by them. PHADA rejects the notion that many housing authorities do not care about their residents and do not want them to participate with them in not only Capital Fund activities, but in a host of other initiatives as well. The association looks forward to HUD's review of the current resident participation regulations to ensure greater opportunity, where possible, for resident involvement.

"Test" allocations
In the course of the committee's meetings, the Department representatives were able to conduct several "test" runs of what allocations would be for the PHAs participating under various configurations. PHADA strongly believes that few if any housing authorities can apply the formula to their situations or make informed comments on the proposed rule without having at least estimates of what the formula would mean to them.

At this writing, there is agreement on the FY 2000 funding levels and a new act should be forthcoming soon. It would be invaluable for the Department to use the best numbers they have and run estimates of how each PHA is affected by the new formula. We further recommend that the deadline for response to the proposed rule be extended or suspended until such numbers can be made public, whether by amendment or by separate notice.

In conclusion, PHADA is generally supportive of the outcome of the process, if not with the data that laid the basis for the process. Both the Departmental representatives and the other committee members labored long and hard on this important new fund and should be congratulated for their effort. It evidences that diverse groups can work together and produce an acceptable product, even when the differences often appear irreconcilable. Such a process should give all the participants hope that other difficult situations can be resolved successfully.

PHADA FRONT