Notice of Certain Operating Cost Adjustment Factors for 2006

AGENCY:

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

ACTION:

Publication of the 2006 Operating Cost Adjustment Factors (OCAFs) for Section 8 rent adjustments at contract renewal under section 524 of the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA), as amended by the Preserving Affordable Housing for Senior Citizens and Families into the 21st Century Act of 1999, and under the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA) Projects assisted with Section 8 Housing Assistance Payments.

SUMMARY:

This notice establishes annual factors used in calculating rent adjustments under section 524 of the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) as amended by the Preserving Affordable Housing for Senior Citizens and Families into the 21st Century Act of 1999, and under the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA).

Effective Date:

February 11, 2006.

FOR FURTHER INFORMATION CONTACT:

Regina Aleksiewicz, Housing Project Manager, Office of Housing Assistance and Grant Administration, Department of Housing and Urban Development, Office of Multifamily Housing, 451 Seventh Street, SW., Washington, DC 20410-8000; telephone (202) 708-3000; extension 2600 (This is not a toll-free number). Hearing or speech-impaired individuals may access this number via TTY by calling the toll-free Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Operating Cost Adjustment Factors (OCAFs)

Section 514(e)(2) of MAHRA, requires HUD to establish guidelines for rent adjustments based on an operating cost adjustment factor (OCAF). The legislation requiring HUD to establish OCAFs for LIHPRHA projects and projects with contract renewals 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 rents are adjusted.

Additionally, section 524 of the Act gives HUD broad discretion in setting OCAFs—referring simply to “operating cost factors established by the Secretary.” The sole exception to this grant of authority is a specific requirement that application of an OCAF shall not result in a negative rent adjustment. OCAFs are to be applied uniformly to all projects utilizing OCAFs as the method by which rents are adjusted at the issuance of or during the term of any contract entered into pursuant to MAHRA. OCAFs are applied to project contract rent less debt service.

An analysis of cost data for FHA-insured projects showed that their operating expenses could be grouped into nine categories: Wages, employee benefits, property taxes, insurance, supplies and equipment, fuel oil, electricity, natural gas, and water and sewer. Based on an analysis of these data, HUD derived estimates of the percentage of routine operating costs that were attributable to each of these nine expense categories. Data for projects with unusually high or low expenses due to unusual circumstances were deleted from analysis.

States are the lowest level of geographical aggregation at which there are enough projects to permit statistical analysis. Additionally, no data were available for the Western Pacific Islands. Data for Hawaii was therefore used to generate OCAFs for these areas.

The best current measures of cost changes for the nine cost categories were selected. The only categories for which current data are available at the State level are for fuel oil, electricity, and natural gas. Current price change indices for the other six categories are only available at the national level. The Department had the choice of using dated State-level data or relatively current national data. It opted to use national data rather than data that would be two or more years older (e.g., the most current local wage data are for 2003).

The OCAFs for 2006 differ from previous years' OCAFs in that they replace the overall Consumer Price Index change used as a surrogate for property tax increases with the Residential Property Tax Index from the Census Consumer Expenditure Survey (CES). Property taxes have started to increase faster than overall consumer prices, and the CES now provides statistically reliable data. State-level data are available from the Census Survey of Local and State Governments, but it includes tax revenues from non-residential sites, which are significant, and does not adjust for changes in the number and types of properties taxed.

The data sources for the nine cost indicators selected used were as follows:

Labor Costs. 3/2004 to 3/2005 Bureau of Labor Statistics (BLS), “Employment Cost Index, Private Sector Wages and Salaries Component at the National Level.”

Employment Benefit Costs. 3/2004 to 3/2005 Bureau of Labor Statistics (BLS) “Employment Cost Index, Employee Benefits at the National Level.”

Property Taxes. 2002-2003 Census Consumer Expenditure Survey (CES), “Residential Property Taxes.”

Goods, Supplies, Equipment. 3/2004 to 3/2005 Bureau of Labor Statistics (BLS) “Producer Price Index, Consumer Goods Less Food and Energy.”

Insurance. 3/2004 to 3/2005 Bureau of Labor Statistics (BLS) “Consumer Price Index, Tenant and Household Residential Insurance Index.”

Fuel Oil. Energy Information Agency, 2003 to 2004 consumption-weighted annual average State prices for #2 residential fuel oil (Department of Energy multi-state fuel oil grouping averages used for the States with too little fuel oil consumption to have values).

Electricity. Energy Information Agency, March 2004 “Electric Power Monthly” report, Table 5.6.B.

Natural Gas. Energy Information Agency, Natural Gas, Residential Energy Price, 2000-2004 annual cost in dollars per 1,000 cubic feet (monthly data are so erratic that annual averages offer a more reliable measure).

Water and Sewer. 3/2004 to 3/2005 Consumer Price Index, “All Urban Consumers, Water and Sewer and Trash Collection Services.”

The sum of the nine cost components equals 100 percent of operating costs for purposes of OCAF calculations. To calculate the OCAFs, the selected inflation factors are multiplied by the relevant State-level operating cost percentages derived from the previously referenced analysis of FHA insured projects. For instance, if wages in Virginia comprised 50 percent of total operating cost expenses and wages increased by 4 percent from March 2004 to March 2005, the wage increase component of the Virginia OCAF for 2006 would be 2.0 percent (4% × 50%). This 2.0 percent would then be added to the increases for the other eight expense categories to calculate the 2006 OCAF for Virginia. These types of calculations were made for each State for each of the nine cost components, and are included as the Appendix to this Notice.

II. MAHRA and LIHPRHA OCAF Procedures

MAHRA, as amended by the Preserving Affordable Housing for Senior Citizens and Families into the 21st Century Act of 1999, created the Mark-to-Market Program to reduce the cost of Federal housing assistance, enhance HUD's administration of such assistance, and to 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 renewals that are not eligible for Plans and those for which the owner does not request Plans. Renewals must be at rents not exceeding comparable market rents except for certain projects. For Section 8 Moderate Rehabilitation projects, other than single room occupancy projects (SROs) under the McKinney-Vento Homeless Assistance Act (McKinney 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.

The Low-Income Housing Preservation and Resident Homeownership Act of 1990 (“LIHPRHA”) (see, in particular, section 222(a)(2)(G)(i) of LIHPRHA, 12 U.S. 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 the Secretary 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).

Executive Order 13132, Federalism

This notice does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt State law within the meaning of Executive Order 13132 (entitled “Federalism”).

Catalog of Federal Domestic Assistance Number

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

APPENDIX

Operating Cost Adjustment Factors for 2006 (percent)

ALABAMA—3.3

ALASKA—5.0

ARIZONA—3.9

ARKANSAS—3.6

CALIFORNIA—3.0

COLORADO—5.2

CONNECTICUT—4.4

DELAWARE—5.9

DIST. OF COLUMBIA—3.6

FLORIDA—3.6

GEORGIA—3.9

HAWAII—3.8

IDAHO—3.8

ILLINOIS—4.0

INDIANA—4.0

IOWA—5.5

KANSAS—4.2

KENTUCKY—4.2

LOUISIANA—3.4

MAINE—3.9

MARYLAND—4.1

MASSACHUSETTS—5.2

MICHIGAN—4.4

MINNESOTA—4.2

MISSISSIPPI—3.4

MISSOURI—3.6

MONTANA—5.4

NEBRASKA—3.9

NEVADA—3.8

NEW HAMPSHIRE—5.7

NEW JERSEY—4.1

NEW MEXICO—3.5

NEW YORK—4.5

N. CAROLINA—3.4

N. DAKOTA—3.9

OHIO—3.9

OKLAHOMA—3.7

OREGON—3.5

PENNSYLVANIA—4.2

RHODE ISLAND—3.4

S. CAROLINA—3.6

S. DAKOTA—4.2

TENNESSEE—3.4

TEXAS—4.1

UTAH—3.6

VERMONT—4.0

VIRGINIA—3.6

WASHINGTON—3.5

W. VIRGINIA—3.8

WISCONSIN—4.2

WYOMING—4.2

PACIFIC ISLANDS—3.4

PUERTO RICO—2.9

VIRGIN ISLANDS—3.6

U.S. AVERAGE—4.0