[Federal Register Volume 75, Number 11 (Tuesday, January 19, 2010)]
[Rules and Regulations]
[Pages 2800-2820]
[FR Doc No: 2010-925]

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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

[Docket ID FEMA-2005-0051]

44 CFR Part 206

RIN 1660-AA44

Special Community Disaster Loans Program

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Final rule.

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SUMMARY: The Federal Emergency Management Agency (FEMA) is amending its
Special Community Disaster Loan Program regulations to establish loan
cancellation provisions. The Special Community Disaster Loan Program,
and these cancellation provisions, apply to communities in the Gulf
Coast region who received Special Community Disaster Loans following
Hurricanes Katrina and Rita. The period for new Special Community
Disaster Loan eligibility closed at the end of fiscal year 2006. This
final rule establishes procedures and requirements for Special
Community Disaster Loan recipients to apply for cancellation of their
loan as authorized by the U.S. Troop Readiness, Veterans' Care, Katrina
Recovery, and Iraq Accountability Appropriations Act, 2007. This final
rule does not cancel all Special Community Disaster Loans, nor does it
apply to loans made under FEMA's Community Disaster Loan program which
is governed under separate regulations. This rule also finalizes the
2005 Special Community Disaster Loan Program interim rule.

DATES: This final rule is effective March 22, 2010.

ADDRESSES: Copies of this final rule, the 2005 interim Rule, the 2009
notice of proposed rulemaking, all public comments received, and
supplementary information (if any) are available electronically on the
Federal

eRulemaking Portal at www.regulations.gov in Docket ID: FEMA-2005-0051.
The regulatory docket is also available for inspection at the Office of
Chief Counsel, Federal Emergency Management Agency, Room 835, 500 C
Street, SW., Washington, DC 20472.

FOR FURTHER INFORMATION CONTACT: James A. Walke, Disaster Assistance
Directorate, Federal Emergency Management Agency, 500 C Street, SW.,
Washington DC 20472-3300, or call<PHONE_NUMBER>, or e-mail
<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. Background

    The Federal Emergency Management Agency's (FEMA) Community Disaster
Loan (CDL) Program for local governments began in 1974. The program
provides funding to help communities that, due to a presidentially-
declared disaster, have incurred a significant loss in revenue that
hinders the community's ability to provide essential municipal services
such as public schools, sanitation, fire and police services. The CDL
program is governed by regulations at 44 CFR part 206 subpart K. See 44
CFR 206.360.
    After the catastrophic damage caused by Hurricanes Katrina and Rita
in 2005, communities in Louisiana, Texas, Mississippi, and Alabama
experienced severely depleted tax bases, but a remaining need to
provide essential services such as a police force, medical care, public
education, and firefighting. The costs to provide these services are
not eligible for funding from FEMA under the Public Assistance Program
or any other FEMA grant or assistance program.
    Due to the unusual circumstances facing these communities, Congress
passed the Community Disaster Loan Act of 2005, Public Law 109-88 (Oct.
7, 2005) (2005 Act). The 2005 Act authorized FEMA to loan up to $1
billion to communities that had sustained revenue losses due to the
disaster. Loans that FEMA issued under the 2005 Act are referred to as
``Special Community Disaster Loans'' (Special CDLs). Special CDLs and
FEMA's regulations governing the issuance of Special CDL's, (44 CFR
206.370-206.377), only apply to communities affected by Hurricanes
Katrina and Rita.
    The eligibility requirements and procedures for Special CDLs
provided under the 2005 Act are similar to those of the CDL program.
Special CDLs, however, are different in three aspects: (1) The $5
million limit on individual loans found in the CDL program was removed;
(2) the Special CDLs could only be used to assist local governments in
providing essential service[s]; and (3) the loan cancellation provision
of section 417(c)(1) of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (Stafford Act), which was applicable to CDLs,
was not applicable to Special CDLs. On October 18, 2005, FEMA published
an interim rule to implement the provisions of the 2005 Act. See 70 FR
60443; also 44 CFR 206.370-206.377. The interim rule took immediate
effect and only authorized FEMA to approve Special CDLs during fiscal
year (FY) 2005 or FY 2006. Accordingly, FEMA is no longer authorized to
grant new Special CDLs.
    After FEMA published the interim rule, Congress passed the
Emergency Supplemental Appropriations Act for Defense, the Global War
on Terror, and Hurricane Recovery, 2006, Public Law 109-234 (June 15,
2006) (2006 Act), which appropriated funds to support $371,733,000 in
loan authority in addition to the loans authorized under the 2005 Act.
Special CDLs provided under the 2006 Act included three additional
limitations: (1) The maximum loan amount was increased to 50 percent of
the applicant's operating budget during the fiscal year of the disaster
(FY 2005); (2) the loan analysis could only consider ``tax revenue''
losses and not ``other revenues'' as permitted in the 2005 Act; and (3)
applicants were required to demonstrate actual loss in tax revenues of
25 percent or greater. Like the 2005 Act, the 2006 Act also
specifically stated that the loan cancellation provision of section
417(c)(1) of the Stafford Act did not apply. Under the authority of the
2005 and 2006 Acts, FEMA approved 152 Special CDLs, totaling
$1,270,501,241, to 109 eligible applicants in Mississippi and
Louisiana.
    On May 25, 2007, Congress passed The U.S. Troop Readiness,
Veterans' Care, Katrina Recovery, and Iraq Accountability
Appropriations Act, 2007, Public Law 110-28, section 4502(a), Public
Law 110-28, section 4502(a), 119 Stat. 2061 (2007 Act). The 2007 Act
provided FEMA the discretionary authority to cancel Special CDLs, but
that authority is limited by the language in section 417(c)(1) of the
Stafford Act. See 42 U.S.C. 5184. FEMA's discretionary authority to
cancel Special CDLs is identical to the agency's authority to cancel
loans issued under the CDL program. FEMA's procedures and criteria for
cancellation of CDLs are set forth at 44 CFR 206.366. FEMA has found
these provisions to be successful in providing the information
necessary to determine whether cancellation of a CDL is appropriate.
FEMA similarly has determined that these processes and criteria should
apply to the process for cancellation of Special CDLs. Therefore, on
April 3, 2009, FEMA published a notice of proposed rulemaking that
proposed to revise the regulations established in the interim rule to
include the same cancellation requirements and procedures for the
Special CDL program as FEMA has been using for the CDL program. See 74
FR 15228.
    Pursuant to FEMA's statutory authority under the 2007 Act, FEMA may
cancel ``* * * all or any part of [a Special CDL] to the extent that
revenues of the local government during the three full fiscal year
period following the major disaster are insufficient to meet the
operating budget of the local government, including additional
disaster-related expenses of a municipal operation character.'' 42
U.S.C. 5184(c). As required by statute, FEMA's decision must be based
on the revenues of the local government during the three-full-fiscal-
year period following the major disaster. In the proposed rule, FEMA
established that the Federal government's ``fiscal year'' typically
runs from October 1 to September 30, and that FEMA would modify the
three-year period to reflect the 36 calendar months following the
disaster for governments that operate under a different fiscal year.
FEMA also proposed to define the term ``operating budget'' as actual
revenues and expenditures of the local government as published in the
official financial statements of the local government.
    Furthermore, since the purpose of the Special CDL program is not to
underwrite pre-disaster budget or deficits of the local government,
FEMA proposed that such deficits carried forward would reduce any
amounts otherwise eligible for loan cancellation. Therefore,
expenditures would be reduced accordingly for purposes of evaluating
any request for loan cancellation if the transfer is from an operating
funds account to a capital funds account, or if operating funds are
used for other than routine maintenance purposes, or non-disaster
related expenditures are increased (except increases due to inflation,
the annual operating budget or operating statement). Additionally, FEMA
proposed that the tax and other revenue rates or the tax assessment
valuation of undamaged property in effect at the time of the disaster
would be used without reduction for purposes of computing revenues
received.
    As the statute authorizes FEMA to cancel ``all or any part'' of a
Special CDL,

FEMA proposed to cancel a part of a loan as opposed to the entire loan
where the application for cancellation reflects that the applicant's
revenues are insufficient to repay the entire loan but sufficient to
repay a portion of the loan. If FEMA were to determine that all or a
part of an applicant's Special CDL should be cancelled, the proposed
rule stated that the amount of principal would be cancelled and the
related interest forgiven. FEMA further proposed that the determination
concerning loan cancellation would specify that any uncancelled
principal and related interest must be repaid according to the terms
and conditions of the promissory note; if repayment would constitute a
financial hardship, then the local government would be required to
submit a repayment schedule to FEMA for review, providing a plan for
settling the indebtedness on a timely basis.
    FEMA also proposed that, although a loan or cancellation of a loan
would not reduce or affect other disaster-related grants or other
disaster assistance, FEMA would not approve any Special CDL
cancellation that would result in a duplication of benefits to the
applicant. Finally, as proposed, if FEMA denies an Application for Loan
Cancellation, in whole or in part, the applicant would be allowed to
appeal and to submit any additional information in support of the
application within 60 days of the date the application is denied. The
decision of the Assistant Administrator on appeal would be final.

II. Changes From the Proposed Rule

    FEMA made five substantive changes to the regulatory text in
response to the 68 comments received by FEMA on the proposed rule. (A
discussion of the comments received on the proposed rule, the 2005
interim rule, and FEMA's responses to those comments, is in section IV
below.) Further, as a result of these five substantive changes, FEMA
redesignated the paragraphs in 44 CFR 206.376 to accommodate the new
regulatory text.
    First, FEMA has revised 44 CFR 206.376(c)(4) to allow the transfer
of ad valorem property tax revenues under certain conditions. The
proposed rule contained a restriction that a transfer from an operating
fund for debt service (i.e., principal and interest payment on bonded
indebtedness, capital leases, or other debt for capital expenditures
which is paid for through property tax levies) would be excluded from
allowable expenditures in the operating budget calculation. This
exclusion was proposed because the use of the loan funds was limited to
the provision of essential services, and the regulations clearly
prohibited the use of the funds for capital expenses under the
regulations. See 44 CFR 206.371(f). However, one commenter noted that
the loss of tax revenue in non-operating funds will require the
reallocation of ad valorem tax resources from operations to debt
service and retirement obligation funding. In evaluating this comment,
FEMA realized that this type of transfer may be legitimate if required
by law. Excluding the transfers from expenditures in the operating
budget calculation may result in an operating surplus instead of a
deficit (when making a loan cancellation determination) if such
transfers were allowed as a legitimate expenditure.
    To account for this situation, in this final rule, FEMA has revised
44 CFR 206.376(c)(4) to allow the transfer of ad valorem property tax
revenues under certain conditions. If a local government or other
entity that received a Special CDL has property tax revenues affected
by the disaster, FEMA will consider the impact of the loss of property
tax revenue in Debt Service or Pension Funds (non-operating funds) if
all of the following conditions are met: (1) The entity experienced a
loss of property tax revenue as a result of the disaster and the
assessed value during the three years following the disaster, in the
aggregate, is less than the pre-disaster assessed value; (2) the entity
has a property tax cap limitation on the ability to raise property
taxes post-disaster; and (3) the property taxes are levied through the
General Operating Fund and transfers for obligations mandated by law
are made to fund Debt Service or Pension Obligations which result in
the entity experiencing a reduction of property tax revenues in the
General Fund. If all three conditions are met, the amount of property
taxes that are transferred to other funds for Debt Service or Pension
Obligations funding will not be excluded from the calculation of the
operating budget or from expenditures in calculation of the operating
deficit, to the extent that the property tax revenues in the General
Fund are less than the property tax revenues were pre-disaster.
    Third, FEMA added definitions for the terms ``revenues'' and
``operating expenses'' which were critical, but undefined, terms in the
proposed rule. See 44 CFR 206.376(b). For cancellation purposes, these
definitions will be used to determine if the applicant experienced a
deficit during the three full fiscal years following the disaster. For
additional guidance, non-governmental applicants may choose to refer to
the standards established by the Financial Accounting Standards Board
(FASB). Governmental applicants may choose to refer to the general
accounting standards established by the Government Accounting Standards
Board (GASB) and published by the Government Finance Officers
Association (GFOA). The FASB and GASB provide general accounting
principles that are not controlled or required by FEMA.
    Fourth, the language in the proposed rule at 44 CFR 206.376(d)(4)
proposed that the initial review of an application for cancellation was
to be conducted by the Assistant Administrator of the Disaster
Assistance Directorate or designee. The proposed rule also stated that
should the local government seek reconsideration, it could submit
additional information in support of the application within 60 days.
The reconsideration was to be made by the Assistant Administrator for
the Disaster Assistance Directorate. Although, in practice, the
Assistant Administrator for the Disaster Assistance Directorate had
delegated the initial determination responsibility for CDL cancellation
to the Director of the Public Assistance Division, this delegation was
not apparent in the proposed regulation. As a result, FEMA received
comments requesting that a different person determine the appeal than
the person who makes this initial decision. In response to those
comments, FEMA revised the regulatory text to specify that the Director
of the Public Assistance Division makes the initial determination.
Although a revision to the regulatory text will not change FEMA's
actual procedure for reviewing and adjudicating appeals of cancellation
determinations, in this final rule the language at 44 CFR 206.376 (f)
clearly places the initial determination decision with the Director of
the Public Assistance Division.
    Fifth, FEMA received a comment noting that the proposed rule lacked
a timeline for the review and processing of applications for
cancellation. The commenter requested a time period in which FEMA will
conduct its review and make its initial determination regarding loan
cancellation. In response to this request, FEMA revised 44 CFR
206.376(f), to add a new paragraph (f)(1) which provides that once all
required and requested information has been provided by the applicant
including un-reimbursed disaster related expenses, the Director of the
Public Assistance Division will complete the initial evaluation within
60 days.
    Finally, FEMA realized that the language of the proposed regulatory
text did not align with the language of the

preamble of the proposed rule with respect to how the three-fiscal-year
period in 44 CFR 206.376(a)(3) is calculated. Compare the proposed 44
CFR 206.376(a)(3) at 74 FR 15235 with 74 FR 15230, bottom of first
column. The 36-month period referenced in the proposed regulatory text
was intended to prevent communities from revising their fiscal years
during the evaluation period to artificially extend their evaluation
period beyond the traditional 36-month period of three fiscal years.
However, the explanation in the preamble describing how FEMA would
calculate the three-full-fiscal-year period did not make it into the
proposed regulatory text. The preamble explained that the Federal
fiscal year begins on October 1st and for those governments that
operate under a different fiscal year, FEMA would modify the three-year
period to reflect the 36 calendar months following the disaster. To
align the regulatory text with the preamble, language has been added to
paragraph 206.376(b)(3) to clarify that at the local government's
discretion, the three-fiscal-year period following the disaster is
either a 36-month period beginning on September 1, 2005 or the 36
months of the local government's fiscal year as established before the
disaster.

III. FEMA's Process for Reviewing Applications

    When reviewing the comments received on the proposed rule, FEMA
realized that applicants for cancellation would benefit from a concise
explanation of the steps FEMA will follow in its internal review
process. When reviewing applications, FEMA will review the operating
budgets for the three full fiscal years following the disaster. The
budgets of the General Fund, Special Revenue Funds of an operating
nature, and Enterprise Funds of an operating nature will be reviewed.
Revenues from the Special CDL will be excluded from the revenues
considered in this analysis. Further, debt service payments and capital
expenditures will be excluded from the operating budget calculations
per the regulations. Next, revenues will be compared to expenses for
all funds noted above to determine if there is an operating deficit. If
there is no operating deficit, then loan cancellation will not be
approved. If there is an operating deficit for the three full fiscal
years following the disaster, then revenue losses will be reviewed. If
the revenue losses are great enough to offset the entire amount of the
Special CDL, then no further work will be done, and the loan will be
canceled and all accrued interest forgiven. If the revenue losses are
not enough to offset the loan, then FEMA will review the applicant's
unreimbursed disaster-related expenses. If the revenue loss and
unreimbursed disaster related expenses do not offset the entire amount
of the loan, then any remaining principal that is not offset, and the
associated accrued interest will be due at the end of the five-year
term of the loan. The amount of the loan that is offset will be
canceled, and the related interest forgiven.
    For these cancellation procedures to provide the greatest benefit,
loan recipients should submit their Application for Loan Cancellation
before the expiration date of their loan. This will allow FEMA to
cancel all or part of the loan if appropriate, and to forgive all
related interest before loan repayment commences. If the loan recipient
applies for and is granted cancellation before the expiration date of
its Special CDL, then all interest on the amount of the loan that is
cancelled would be forgiven regardless of the date that the loan amount
was dispersed or the date that loan cancellation is granted.

IV. Discussion of the Public Comments Received

A. The 2005 Interim Rule

    FEMA published an interim rule in 2005 which created the Special
CDL program. FEMA solicited public comment on those interim regulations
and received one comment. The commenter questioned FEMA's determination
that recreation districts did not provide ``essential services'' as
provided for in the 2005 Act, and therefore would not be eligible to
receive a loan under the 2005 Act. The commenter stated that since
recreation districts were considered subdivisions of a State, they
should qualify as ``essential services.''
    Upon review of this comment, FEMA re-evaluated the eligibility of
recreation districts under the 2005 Act in light of the limited funding
available to address priority needs of local governments. The 2005
funds were limited to $1 billion, and all $1 billion was provided to
eligible applicants with many of the applicants receiving only a
portion of the funds for which they were eligible due to a lack of
available funds. In making its award determinations, FEMA prioritized
services, finding the needs of a police force, medical care, public
education, and firefighting, as examples, to be more ``essential'' than
the services provided by a recreation district. Because there were more
than enough applicants who met the eligibility criteria to utilize the
complete amount of the limited available funding, FEMA did not grant
loans to recreation districts under the 2005 Act. The 2006 Act, on the
other hand, provided additional available funds, but the eligibility
requirements were more restrictive. Only a small fraction of those
eligible for the 2005 Act funds were eligible for the 2006 Act funds.
No recreation districts applied for the 2006 Act funds. Had they
applied and been eligible for the 2006 Act funds, FEMA would have
considered them for funding.

B. The 2009 Notice of Proposed Rulemaking

    FEMA published a notice of proposed rulemaking on April 3, 2009
that proposed to revise the interim rule by adding cancellation
procedures. See 74 FR 15228. The proposed rule also included a proposed
Paperwork Reduction Act collection of information. Comments on the
proposed rule were due on or before June 2, 2009. FEMA received 68
comments on the proposed rule from a wide and diverse representation of
the public affected by the proposed rule. Commenters included members
of Congress, States, cities, parishes, public and private non-profit
service providers, public and private organizations, utilities, a
school board, and individual citizens. The substantive comments
received, and FEMA's responses thereto, are as follows:
1. General Comments
    Nearly every comment expressed general support for the cancellation
of Special CDLs. Commenters see the action as aiding in disaster
recovery by reducing the tax burden on the local population. Further,
the commenters recognized that relieving this financial burden would
increase communities' ability to provide vital services to the
communities' residents. Only one commenter opposed the rule. However,
the opposing commenter's rationale alleged an improper use of funds for
cars, boats and trips in lieu of repairing one's property and
referenced disapproval of FEMA's activities related to the housing of
individuals for almost four years after the disaster. Based on this
rationale, FEMA believes this commenter misconstrued the intent of the
proposed rule, which does not provide assistance to individuals and
households.
2. Small Business Administration Loans
    Twenty-nine comments sought cancellation of Small Business
Administration (SBA) loans and/or mortgages for individual homeowners
or business owners. These requests are

outside the scope of this rulemaking and FEMA's authority. FEMA has
forwarded these comments to the SBA.
3. Increase in Market Values
    After the disaster, the Gulf region realized severe inflation in
costs to maintain a workforce (increased salaries and employee
benefits); obtain materials, insurance, and equipment; and house
evacuees from other areas. Had the disaster not occurred, these costs
would likely not have been incurred to the extent that existed in the
post-Katrina environment. One hospital representative commented that
they experienced a 695 percent increase in the cost of nursing contract
labor in calendar year 2006 as compared to 2005 because of the loss of
staff. Five commenters requested that FEMA consider the increased costs
of workforce maintenance, obtaining materials, insurance and equipment,
and housing evacuees as disaster-related expenses, thereby considering
increased expenditures on regular and disaster-related budget items
when evaluating loan cancellation.
    Although non-disaster related expenses may not be considered, the
three-year operating budget used for calculation purposes takes into
account any increase in expenditures based upon local labor and other
economic conditions. Expenditures will be reviewed for reasonableness
and FEMA may request demonstration by the local authority that
conditions existed to cause an increase in expenditures above the
normal inflation rate as a result of the disaster. As proposed in 44
CFR 206.376(a)(4), increases due to inflation will not be reduced for
purposes of evaluating a loan cancellation request. Therefore FEMA will
apply disaster-related costs at their actual incurred expense.
    Two commenters stated that loan recipients are experiencing post-
event needs and incurring non-reimbursable expenses which, while not
directly covered by the Stafford Act, are a result of post-effect
conditions such as increased homelessness, and law enforcement/code
enforcement issues. The commenters recommended that all post-Katrina
and Rita expenditures be considered disaster-related under proposed 44
CFR 206.376(a)(4) because of the nature of the disaster and its scope
of devastation.
    The examples provided by the commenters would be characterized as
disaster-related expenses of a municipal operation character, and
therefore eligible for consideration. Unless otherwise indicated, all
expenditures in the adopted operating budgets will be assumed to be
related to carrying out the essential services of the local government,
and would therefore be considered disaster-related expenses of a
municipal operation character.
    One commenter stated that applicants were required to have at least
a 25 percent decrease in operating revenues to receive the Special CDL
funds, but that operating expenditures were not considered. Another
commenter noted that it experienced a growth in some specific revenues,
but the growth was strictly attributable to the significant purchases
made by its citizens to recover their losses, and the commenter has
seen its operating expenditures grow roughly 24 percent. These
commenters requested that FEMA take into consideration the gap between
a decrease in operating revenues with a limited decrease or even an
increase in operating expenditures.
    The Special CDL Program was designed to provide loans based upon
post-disaster estimated revenue losses, not expenditures. Therefore,
the first test for cancellation of a Special CDL is to determine
whether there is an operating deficit. If expenditures exceeded
revenues during the three-full-fiscal-year period (which would create
an operating deficit), then loan cancellation may be possible. If a
cumulative three fiscal year operating deficit exists, FEMA will
consider revenue losses and/or unreimbursed disaster-related
expenditures in determining how much of the loan may be cancelled.
4. Treatment of Property Values
    Three commenters were concerned that the proposed rule would create
an unnecessary burden on the applicants to determine which properties
were or were not physically damaged by the storms. They noted that
properties which may not have been physically damaged by the storms may
have experienced a drop in property value in revenue evaluation. One
city requested an agreement by FEMA that the entire city was damaged or
destroyed, and recommended the creation of a threshold for establishing
that an entire community has been damaged, rather than going from
structure to structure. Another commenter suggested that FEMA not seek
to determine if revenue decreases are associated with assessed property
value decline related to the disaster, or to general market conditions.
    Revenue loss calculations will use actual property taxes collected.
See 44 CFR 206.374(b)(2). Property tax revenues are considered on an
aggregate basis, not an individual property assessment basis, so FEMA
expects the impact on the revenues will be properly reflected in the
financial statements, based upon actual property tax collection.
Furthermore, because property tax revenues are considered on an
aggregate basis, applicants will not need to make a property by
property determination as feared by the commenters. Finally, unless
provided information to the contrary, FEMA will assume that any
assessed property value decline during the three full fiscal years
after the disaster was related to the disaster, and not to general
market conditions, as market conditions themselves were severely
affected by the disaster during that period of time.
    One commenter alleged that the use of post-disaster reassessment of
property values will show a false economic increase to property
assessment values. However, if one is using actual tax revenues
collected, and applying them to actual expenditures incurred, FEMA does
not agree that there would be a false increase. For purposes of
determining loan cancellation, FEMA uses actual tax revenues collected,
and the actual inability of an applicant to meet its operating budget.
The post-disaster reassessment of property values is not used to
determine eligibility for cancellation. It is the taxes received based
on those revised property values, along with all other revenues,
compared to the expenses incurred in the operating budget which then
results in either an operating surplus or deficit.
    Finally, one commenter stated that some State constitutions provide
for the mandatory reappraisal and valuation at least every four years
of all property that is subject to taxation. According to the
commenter, that reappraisal and valuation requirement is designed to
result in local governments receiving the same amount of ad valorem
taxes received before the reassessment. The commenter advised that
rates are therefore established to yield the same amount of tax revenue
collected in the prior year. So, although rates may go down, actual tax
revenues may not decrease.
    FEMA uses actual tax revenues in making its determination of an
operating deficit. FEMA expects the reassessment will have no impact on
the calculation of the operating deficit since no revenues will be lost
as a result of this process. Regardless of whether the applicant's
revenues remained constant, increased, or decreased, if those revenues
were insufficient to meet its operating expenses during the three full
fiscal years after the event, then the applicant may be eligible for
cancellation.

5. Appeals Process
    FEMA proposed in the NPRM, 44 CFR 206.376(d)(4), that if the
Assistant Administrator of the Disaster Assistance Directorate, or
designee disapproved, in whole or in part, an Application for Loan
Cancellation, the applicant could submit additional information in
support of its application within 60 days of the date of the
disapproval notice. The application and any new information would then
be considered by the Assistant Administrator for the Disaster
Assistance Directorate (Assistant Administrator) on appeal. Any
decision made by the Assistant Administrator on the additional
information would be final. Four commenters requested that this process
be revised so that a different person determines the appeal than the
person who makes the initial decision.
    In response to these comments, FEMA has revised the regulatory text
explaining the appeals process. The proposed language mirrored the CDL
cancellation appeal text and said that the Assistant Administrator or
designee could make the initial decision. In practice, the Director of
the Public Assistance Division has been fulfilling this duty. The
Director of the Public Assistance Division therefore makes the initial
decision, and the Assistant Administrator reviews the Director of the
Public Assistance Division's decision, and any additional information,
to make the final agency decision on the request. Although a revision
to the regulatory text will not change FEMA's actual procedure for
reviewing and adjudicating appeals of cancellation determinations, the
revised language at 44 CFR 206.376(f) clearly vests the initial
determination decision with the Director of the Public Assistance
Division.
6. Extent of Cancellation
    The proposed rule explained that the cancellation authority
provided to FEMA in the 2007 Act authorized FEMA to cancel all or a
part of a Special CDL if a certain threshold is met. Congress did not
provide FEMA with the blanket authority to cancel all Special CDLs.
Seven commenters, however, requested blanket cancellation. Several
noted that it would be the least complicated and most beneficial
method; others opined that since FEMA considered it as an alternative
in the rule FEMA therefore has implied authority to do so; and another
asserted that because of the differences in the funding and eligibility
requirements between the CDL and Special CDL programs, there should be
a difference in the requirements for cancellation.
    FEMA does not have the legal authority to unilaterally cancel all
Special CDLs. As some commenters noted, FEMA did consider whether it
had the authority to cancel all loans when drafting the proposed rule,
but after careful consideration, concluded that it lacks the statutory
authority to issue a blanket cancellation. Furthermore, it is not in
FEMA's discretion to apply a different threshold for cancellation of
Special CDLs than CDLs. The 2007 Act clearly noted that the
cancellation provisions of section 417 of the Stafford Act were to
apply to the cancellation of Special CDLs. Section 417 of the Stafford
Act only allows FEMA to cancel all or a part of a community's loans if
``revenues of the local government during the three-full-fiscal-year
period following the major disaster are insufficient to meet the
operating budget of the local government, including additional
disaster-related expenses of a municipal operation character.'' See 42
U.S.C. 5184(c)(1).
    Therefore, when considering requests for cancellation, each loan
will be considered on a case-by-case basis. FEMA will cancel all or a
part of an applicant's Special CDL based on a review of actual losses
and/or increased expenditures, and will cancel all or a part of a
Special CDL if that applicant's budget results in an operating deficit.
    One commenter noted that if blanket forgiveness is not possible,
FEMA should amend the program to offer further deferrals, forgiveness
of interest accrual in the meantime, and/or individual consideration
for partial forgiveness or further deferral if justified.
    FEMA does provide for deferral. If an applicant does not qualify
for full or partial cancellation, the remaining debt may be paid over
the remaining five-year period in accordance with the terms and
conditions of the Promissory Note. See 44 CFR 206.376(f). The
regulations also provide that if repayment will constitute a financial
hardship, the applicant can submit a repayment schedule to FEMA for
review. That time schedule would establish the applicant's plan for
settling the indebtedness on a timely basis. See Id. Further, the term
of a Special CDL may be extended by the Assistant Administrator for the
Disaster Assistance Directorate, and he or she may defer payments of
principal and interest for up to five years. See 44 CFR 206.377(b)(1)
and (4). If such deferment should occur, however, interest will
continue to accrue. See 44 CFR 2006.377(b)(4). Also, in unusual
circumstances involving financial hardship, the Assistant Administrator
for the Disaster Assistance Directorate may also provide an additional
period of time, beyond the extension allowed in 44 CFR 206.377(b), to
repay the indebtedness. The conditions on this hardship extension are
contained in 44 CFR 206.377(c).
    Finally, one commenter noted that some communities prudently spread
out the use of their eligible loan amounts. As a result, the commenter
alleged that forgiveness should be for the total loan amount for which
the jurisdiction qualified, regardless of any remaining balances which
may be available at the time the application for forgiveness is
submitted.
    Although FEMA applauds wise financial management by communities, it
finds that accommodating the commenter's suggestion would not be wise
financial management by the Federal Government. A loan recipient may
only use the loaned funds to assist in providing essential services,
not to finance capital improvements or the repair or restoration of
damaged facilities, or to pay the nonfederal share of any Federal
program. See 44 CFR 206.371(f). To ensure that the level and frequency
of periodic payments are justified, and to ensure that funds are
appropriately received and disbursed, all loan recipients must show a
need and must establish necessary accounting records before they may
draw down funds. See 44 CFR 206.375. As communities continue to
recover, at some point they are not going to be able to show a need to
draw down additional funds.
    To ensure appropriate management of funds, forgiveness of loans
will be based on the amounts qualified for, and actually drawn down,
and for which the applicant qualifies for cancellation of the loan
under these regulations. Any outstanding principal and interest balance
on a Special CDL after the review for cancellation will still be due
and payable within the five-year time frame, unless extended by FEMA if
requested by the applicant. Cancellation will not prevent a loan
recipient from continuing to draw down funds, however. If a loan
recipient has unused loan funds available, and they ultimately draw
down those funds after the initial cancellation review, a separate
cancellation review will be required before the Promissory Note expires
(including any extensions provided under the authority of these
regulations). If cancellation of those additional funds is not
requested, or if FEMA does not deem those additional

funds eligible for cancellation, the new loan amount will have to be
repaid.
7. Time Period Considered
    As previously noted, section 417 of the Stafford Act allows for all
or a part of a Special CDL to be canceled if the revenues of the local
government ``during the three-full-fiscal-year period following the
major disaster'' are insufficient to meet its operating budget. FEMA
received nine comments requesting that FEMA adjust the three-fiscal-
year period. See 44 CFR 206.371(h).
    One commenter requested that the three-year period (or longer)
commence after the last FEMA appeal from the disaster is complete or
after the last Project Worksheet is closed out, whichever is later. Not
only does FEMA lack the legal authority to make the change as
requested, but to do so would significantly delay any cancellation
determination. The current approach allows loan recipients to more
quickly request and receive cancellation of their loans, if they have
an operating deficit caused by disaster-related revenue losses or
increases in expenditures due to unreimbursed disaster-related
expenditures. Disasters often remain open for many years, (e.g., the
Northridge Earthquake declaration has been open since January 1994) and
it is not expected that the disasters declared as a result of
Hurricanes Katrina and Rita will close faster than the norm. Requiring
loan recipients to wait the several years for all Project Worksheets to
close or all appeals to be resolved would pose an undue hardship on
those who seek cancellation of their Special CDL. FEMA believes the
three-year period is adequate and, in most cases, will be more
favorable to applicants.
    Noting the long duration of disasters, one commenter stated that
the full economic impact of public assistance work may not be known
until the storm is closed out. The commenter advised that their sales
tax revenues, which are a part of the General Fund receipts, declined
nearly 17 percent this year and are predicted to fall another 10
percent in the coming fiscal year. Although the rule focuses only on
the three full fiscal years immediately following the event, the
commenter asserted that the effects are only now being felt, in the
fourth year, and the commenter predicts that it will worsen in the
fifth and possibly sixth year, before a stabilization of revenues is
realized. Four commenters asserted that in the initial two years after
the storm, sales tax revenues were extraordinarily inflated because of
replacement and rebuilding purchases. As sales tax diversions normalize
in the coming years, commenters fear future operating deficits that
were initially offset by these replacement purchases might ensue.
Further, several commenters suggested a six-year or simply ``longer''
evaluation period be considered. Another commenter sought a longer
evaluation period while allowing for immediate application for
cancellation for those local governments who can document adequate
revenue shortfalls at this time.
    If sales tax revenues are declining as significantly as suggested,
it is likely that an operating deficit occurred within the three-year
period, which will result in an evaluation of all revenue losses and a
review of unreimbursed disaster-related expenditures, if applicable.
Even if FEMA had the legal authority to extend the period, which it
does not, the longer it is extended, the greater the likelihood that
the loss would be unrelated to the disaster (e.g., due to the
nationwide economic downturn).
    Similarly, one commenter noted that some states' ad valorem taxes
are paid in arrears, meaning that tax revenues may not have been
impacted in 2005 or 2006, but may have reduced significantly in 2007
and following. The commenter found three years to be insufficient.
Although FEMA recognizes the impact that the ad valorem tax structure
of some states could put them at a disadvantage, FEMA has attempted to
apply as liberal an interpretation of its statutory authority as
possible, and determined that it does not have the authority to shift
the three-year period. The statutory language states ``during the three
full fiscal year period following the major disaster.'' See 42 U.S.C.
5184(c)(1). The language of the statute explicitly requires FEMA to
consider only the three full fiscal years immediately after the major
disaster, therefore FEMA cannot revise the regulation in response to
this comment.
    Two commenters asserted that because of the difference in
applicants' fiscal years, some may be at a disadvantage if FEMA
automatically applies a 36-month period for calculating the three full
fiscal years. As an example, one commenter's fiscal year is from July 1
to June 30, so the commenter asserted that their review period would
commence July 1, 2006; 10 months after the disaster. The commenters
expressed concern that at that point some improvement in financial
conditions should have already occurred beyond the conditions that
existed immediately after the disaster. The commenters requested that
an applicant be given the option of basing its cancellation request
upon its fiscal year or a 36-month period commencing on the first full
month after the disaster.
    In reviewing the proposed rule in light of this comment, FEMA
realized that the proposed language of the regulatory text does not
align with the language in the preamble of the proposed rule. Compare
proposed 44 CFR 206.376(a)(3) at 74 FR 15235 with 74 FR 15230, bottom
of first column. The 36-month period referenced in the proposed
regulatory text was intended to prevent applicants from revising their
fiscal years during the evaluation period to artificially extend their
evaluation period beyond the traditional 36-month period of three
fiscal years. However, the explanation in the preamble describing how
FEMA would calculate the three-full-fiscal-year period did not make it
into the proposed regulatory text. The preamble explained that the
Federal fiscal year begins on October 1st and for those applicants that
operate under a different fiscal year, FEMA would modify the three-year
period to reflect the 36 calendar months following the disaster. Since
Hurricane Katrina made landfall on August 29, 2005, allowing a 36-month
period to begin immediately thereafter would place the beginning of the
calculation on September 1, 2005.
    Both of these commenters noted that allowing applicants to start
with September 1, 2005, instead of their fiscal year start, would
ensure that the extraordinary expenses and lost revenue incurred
immediately after the event are fully taken into consideration. The
regulatory text that would implement this change, however, was
unintentionally omitted from the proposed rule. As a result, language
has been added to paragraph 206.376(b)(3) to clarify that at the local
government's discretion, the three-fiscal-year period following the
disaster is either a 36-month period beginning on September 1, 2005, or
the 36 months of the local government's fiscal year as established
before the disaster. Should applicants elect the 36-month period
beginning September 1, 2005, FEMA will prorate the revenues and
expenses for the partial years. For example, if a city's fiscal year
runs from January 1 through December 31, FEMA will apply one third of
the city's fiscal year 2005 budget, all of its fiscal years 2006 and
2007 budgets, and two thirds of its fiscal year 2008 budget.
8. Rules for Cancellation--General
    Three commenters requested that FEMA align the accounting methods
for the consideration of revenues and expenditures for the purpose of
loan cancellation with the accounting

methods for loan eligibility to reduce subjective interpretations
during the evaluation process and prevent any extreme changes in FEMA
determinations.
    FEMA will apply the same accounting methods in its review of
applications for cancellation of Special CDLs as it applied to
applications for the loans themselves. To provide clarity, in this
final rule FEMA added definitions for the terms ``revenues'' and
``operating expenses'' to 44 CFR 206.376(b). In addition, for further
guidance, non-governmental applicants may choose to refer to the
standards established by the FASB and governmental applicants may
choose to refer to the general accounting standards established by the
GASB. These standards boards provide general accounting principles that
are not controlled or required by FEMA.
    Although FEMA will apply the same accounting methods, it will not
apply the same criteria to applications for cancellation as applied to
loan applications. This is because unlike the application stage where
estimates are made because actual future budget data are not available,
actual expenditures are known during the cancellation stage. The actual
expenditure data provide a much more accurate presentation of a
community's budget than estimates.
    Further, FEMA is unable to use the same criteria for eligibility
for the loan, as the criteria established by statute were not the same
for all Special CDLs. To qualify for the Special CDLs issued under the
authority of the 2005 Act, applicants were required to demonstrate that
they had suffered substantial loss (i.e., 5 percent) of tax and other
revenues, whereas the 2006 Act further defined ``substantial'' by
requiring at least a 25 percent loss of only tax revenues. The Special
CDL issuance criteria also differed. The 2005 Act established loan
amounts based upon the lesser of 25 percent of the operating budget, or
the projected revenue loss and unreimbursed disaster-related expense.
The Special CDLs issued under the 2006 Act, however, established loan
amounts at 50 percent of the operating budget.
    Just showing a loss, however, does not prove that a local
government's revenues are insufficient to meet its operating budget as
required by section 417 of the Stafford Act. To make this
determination, the cancellation reviewer will first determine if there
is an operating deficit, regardless of the projected revenue losses at
the time the Special CDL was issued. The accounting procedures for
cancellation use the same governmental accounting principles, but the
calculation of the operating deficit is expanded to include all revenue
sources affected by the disaster so that the full picture of the
financial condition of the local government is considered. This
computation may result in revenue losses being realized that are
greater than what was initially projected at the time of loan
application. Reviewing all revenues affected by the disaster is
expected to generally favor the applicant during the loan cancellation
review process.
    Two commenters were in favor of the rule as proposed and encouraged
FEMA to provide equal treatment to the Gulf Coast communities and
forgive Special CDLs under the same rules as CDLs are forgiven in other
States for other storms. Three commenters, however, recommended that
FEMA create new, different regulatory requirements for cancellation of
Special CDLs because of the special circumstances related to this
disaster. One of those commenters asserted that Special CDLs are not
contemplated under section 417(c)(1) of the Stafford Act, so FEMA has
the discretion to choose other methods for cancellation. All three
commenters asserted that new, more flexible regulatory requirements
should be established that maximize the possibility for cancellation
for each individual recipient.
    FEMA agrees that it should be as flexible and least restrictive as
possible when establishing the procedures for cancellation. However,
contrary to the one commenter's assertion, the 2007 Act explicitly
ordered FEMA to apply section 417 of the Stafford Act when considering
Special CDLs for cancellation. See 42 U.S.C. 5184. Therefore, the
underlying statutory requirement that FEMA only forgive all or a part
of those loans if, during the three-full-fiscal-year period following
the event, revenues of the local government are insufficient to meet
its operating budget, applies. The Special CDL program was created to
assist communities in providing essential functions to their residents.
Therefore, forgiveness should not be provided because a community would
be inconvenienced by the requirement to repay the debt, but because it
actually cannot do so and continue to provide those essential
functions. This need is apparent when a community's revenues are
insufficient to meet its operating budget.
    As discussed throughout this preamble, FEMA has attempted to
broadly construe its statutory authority and provide as much
flexibility in the process as possible. However, FEMA has been using
the existing procedures for CDL cancellation since 1990, and has found
them to be an efficient and accurate method of determining when
revenues of a local government are insufficient to meet its operating
budget. These procedures were successfully applied after other major
hurricanes, including but not limited to hurricanes Andrew (1992) and
Marilyn (1995).
    Since each jurisdiction was not equally impacted by hurricanes
Katrina and Rita, each loan cancellation application should be
considered on its own merits. To ensure fairness, each applicant's
request for cancellation will be reviewed individually to determine if
the loan may be cancelled. Since each application for cancellation is
considered individually, the evidence for cancellation eligibility will
be unique to each applicant. If the magnitude of damage resulting from
hurricanes Katrina and Rita resulted in a cumulative operating deficit
during the three-full-fiscal-year period following the disaster, then
Special CDL applicants will receive loan forgiveness based upon the
revenues actually lost, up to the amount of the loan. If the revenue
loss is not sufficient to cancel the entire loan, then FEMA will
consider unreimbursed disaster-related expenses to offset the loan. If,
after considering both revenue losses and unreimbursed disaster-related
expenses, the entire loan is not cancelled, any remaining principal
that was not cancelled along with associated accrued interest must be
repaid at the end of the loan term, including any extensions, if
approved.
    One commenter asserted that FEMA should apply all expenses of the
applicant in its evaluation, and not assess whether the expense is
disaster-related. The commenter explained that all expenditures were
made in accordance with local and state law governing the use of public
funds, thus they were necessary and appropriate to meet the needs of
the citizenry and/or constituents of the local government. While that
may be true, the purpose of the Special CDL was to help local
governments recover from losses associated with Hurricanes Katrina and
Rita. Therefore, any losses due to an increase in expenditures must
also be related to Hurricanes Katrina or Rita.
    Three commenters suggested that FEMA provide cancellation in those
situations where a cumulative operating deficit is not realized, or
consider the operating deficit as a secondary criterion if an
applicant's cumulative post-disaster revenue shortfall is less than the
outstanding balance of the loan. One commenter encouraged FEMA to
compare pre-storm revenue

projections to post storm actual revenues as the primary criteria for
determining eligibility for partial or complete cancellation. In
particular, the commenter requested that FEMA use the schedule of
historic and projected revenues provided by loan recipients when they
applied for the Special CDL.
    FEMA's statutory authority only allows loans to be canceled if the
local government's revenues are insufficient to meet its operating
budget. See 42 U.S.C. 5184(c)(1). When actual operating revenues are
not sufficient to meet actual operating expenditures, an operating
deficit occurs. Therefore, for FEMA to cancel a loan, the applicant
must first have an operating deficit. FEMA does not have the authority
to waive this requirement.
    If a local government has the financial ability to maintain its
operating budget, the surplus should go to repay its debts. To the
extent possible, Federal funds which were provided with the expectation
of repayment should be repaid if the borrower has the assets available
to repay them. Further, projected revenues versus actual revenues
should not be used in lieu of actual revenues applied to actual costs
because the latter provides a more accurate representation of an
applicant's true financial status. The purpose of cancellation is to
assist those communities that, due to the disaster, have incurred a
revenue loss of such a magnitude that they no longer have sufficient
funds to operate. These loans were provided to ensure that essential
services would continue to be provided in the aftermath of the
disaster. Therefore, cancellation should be provided when repayment of
the debt would cause the community to no longer have the budget
available to provide these essential services; not simply to provide a
replacement for lost revenue.
    Finally, one commenter was concerned that any increase in
expenditures for the Special CDL recipients will be benchmarked to pre-
Katrina levels. However, FEMA already reviewed the pre-Katrina
operating budgets at the time the loan was made. When considering
applications for cancellation, FEMA will review post-Katrina budgets
for reasonableness but will assume that any costs in the operating
budget are disaster-related unless otherwise noted.
9. Today's Economy
    Four commenters noted that loan recipients are now finding
themselves in a deep recession, although 2009 figures will not be
considered for cancellation. They stated that a three-year qualifying
snapshot as outlined in the proposed rule might unfairly disqualify
certain loan recipients for loan cancellation. Another commenter
asserted that requiring loan recipients to repay is in direct conflict
with what President Obama and Congress are trying to accomplish with
the economic stimulus package. Finally, another commenter urged FEMA to
consider the effectiveness of simultaneously collecting Special CDL
repayments from recovering communities and distributing funds
appropriated by the American Recovery and Reinvestment Act of 2009
(ARRA) (Pub. L. 111-5) to the same communities. The commenter
encouraged FEMA to consider forgiveness as a component of the Nation's
economic recovery effort.
    The Special CDL Program was established to help communities
affected by Hurricanes Katrina and Rita recover from revenue losses due
to the disaster, not revenue losses for any other reason. The operating
deficit and revenue loss/increased expenditures must be related to
Hurricanes Katrina or Rita as required by 44 CFR 206.371(h). Further,
unlike the ARRA, the Special CDL program was designed to replace lost
revenues to continue essential services of an operating character, not
provide capital funding for public works projects. The ARRA stimulus
funding is provided for different reasons under separate authority, and
is generally used for capital projects, which are not eligible costs
under the Special CDL program. Therefore, these comments are outside
the scope of this rulemaking.
10. Documentation for Consideration
    The proposed rule in 44 CFR 206.376(c), set out specific documents
and data that are to be submitted in a community's Application for Loan
Cancellation. Four commenters encouraged FEMA to allow for the
submittal of additional documentation, above and beyond what is
required by regulation, to support an application for loan forgiveness.
One commenter specifically cited the GAO report: ``Hurricane Katrina:
Trends in Operating Results of Five Hospitals in New Orleans Before and
After Hurricane Katrina.'' One commenter mentioned the value of
original revenue projections, and said that FEMA should allow
applicants to file this information with the application, not only
during an appeal. Another argued that the rule should not limit
information source documents to the publicly available financial
statements of the local government. That commenter asserted that all
sources of data should be considered in the local government's
application for cancellation as there is a great deal of variation
among the local governments.
    Applicants may submit any supporting documentation they believe
supports an operating deficit, a disaster-related loss in revenue, or
an increase in disaster-related unreimbursed expenditures. Furthermore,
the application may include a narrative presentation to supplement the
financial material accompanying the application and to present any
extenuating circumstances for FEMA's consideration. See 44 CFR
206.376(e)(2). However, FEMA suggests that applicants not submit
additional supporting documentation, outside of that required initially
by FEMA, until they are notified by FEMA that they do not qualify for
cancellation of all or part of the loan. Such notification is provided
to each applicant in writing after FEMA has reviewed the financial
statements, budgets, revenues, and if applicable, the unreimbursed
disaster-related expenditures of the applicant; and made a
determination that they do or do not qualify for cancellation under the
regulations. If the applicant wishes to appeal that decision,
additional supporting documentation may be submitted to FEMA at that
time.
    With respect to the audited financial statements and operating
budgets of the local government, these are used because they will
reflect the financial condition of the local government and its ability
to repay the loan. Should a community choose to do so, it may submit
other underlying documentation to support the information in the
audited financial statements, provided it can be tracked into the
financial system that was audited.
11. Use of Official Financial Statements
    Six commenters were concerned with FEMA's use of official financial
statements. One was concerned that ``additional disaster-related
expenses of a municipal operation character'' might not be reflected in
official financial statements. Another was concerned that using
official financial statements instead of actual cash expenditures might
overstate the actual financial health of an applicant in the aftermath
of a disaster.
    Assuming the entity accounts for all expenditures through their
accounting system, the official financial statements reflect the
financial health of the applicant in accordance with generally accepted
accounting principles; therefore their use is most appropriate. All
expenses of an applicant should be included in the official financial
statements. Although details of

unreimbursed disaster-related expenditures may not be reflected in the
official financial statements, specifically, FEMA will ask applicants
to identify such detailed information in the accounting system that may
be eligible for consideration during the Special CDL cancellation
process.
    When making cancellation determinations, three commenters urged
FEMA to also consider the revenue projections and other materials that
were reviewed and accepted during the loan application process (5 year
budgets, etc.), to take into account the overall loss of revenues that
the applicant incurred as a result of the hurricanes.
    Although FEMA based eligibility for the Special CDLs on revenue
projections, it did so only because actual data were not available. Now
that the statutorily-mandated three-fiscal-year period has passed,
actual data exist. The official financial statements show the actual
operating results, which will show whether or not the applicant
actually experienced a loss of revenues and incurred an operating
deficit. Because FEMA is limited to evaluating the data from the three
full fiscal years after the disaster, projected data for that period
would be less accurate and the consideration of projected data for a
period thereafter is outside the scope of the authority provided in
section 417 of the Stafford Act. Further, revenue losses as a result of
the hurricane are part of the basis for determining an operating
deficit. It is possible that other revenues not affected by the
hurricane could offset the losses of revenues affected by the disaster,
but if that were true, then there would be no operating deficit unless
expenditures increased dramatically and the applicant had unreimbursed
disaster-related expenses great enough to offset the loan. Therefore,
FEMA made no change to this final rule based on the commenter's
request.
    One commenter noted that some cities are required by their state
constitution to have a balanced budget. The commenter advised that this
may have resulted in loan recipients reducing expenditures to match
their decreased revenues. FEMA's acceptance of actual financial
statements without a review of reduced expenditures that were made to
match revenues would, the commenter stated, result in a distorted
picture of the financial condition of the applicant. To remedy this,
the commenter recommended that expenditures have a component of
expenses not incurred, and therefore services not provided, as a result
of the reduced revenues.
    The Special CDL program was intended to provide loans that would
replace estimated lost revenues as a result of the disaster. The loan
proceeds were to be used to provide essential services that could
otherwise not be provided due to the loss of those revenues. It would
be difficult, if not impossible, for FEMA to determine which expenses,
if any, were not incurred or services not provided as a result of the
disaster, as the decision to fund services are made by the local
authorities. In addition, the constitutional requirements for a
balanced budget of state or local governments and the allocation of
resources at the local level are outside the authority of FEMA. In
calculating the operating budget, FEMA excludes the Special CDL
proceeds which may create an operating deficit for many applicants that
otherwise may not show an operating deficit in their own financial
statements.
    One commenter noted that some applicants may be required to prepare
their budgets on a cash basis, so the budget-to-actual comparisons in
the official financial statements are presented on a cash basis, the
fund financial statements presented on a modified accrual basis and the
government-wide financial statements prepared on a full accrual basis.
In calculating the cumulative operating deficit from the official
financial statements of the local government, the commenter asked,
whether the applicant should begin with the statement of activities in
the government-wide financial statements or the statement of revenues,
expenditures, and changes in fund balance in the fund financial
statements or the statement of revenues, expenditures, and changes in
fund balances--budget and actual.
    The operating budget used in the loan cancellation calculation is
based upon the required supplementary budget schedules for all
operating funds with revenues affected by the disaster, contained in
the Comprehensive Annual Financial Report (CAFR). The operating budget
schedules will be adjusted to exclude capital expenditures, debt
service payments, or capital lease payments for equipment or buildings
for purposes of calculating the operating budget at the time of
cancellation review. Use of the statement of revenues, expenditures,
and fund balance-budget and actuals may include funds which are of a
non-operating nature. Such funds would not qualify for use of the
Special CDL proceeds, and therefore, should not be used as the basis
for Special CDL cancellation.
12. Documentation Required
    One commenter stated that in the initial months after the storm,
cities faced many challenges and in many cases did not track ``un-
reimbursed expenses'', which may include, for example, police
protection to FEMA trailer parks. Because of this, the commenter
requested that FEMA consider expenses without supporting documentation.
    If an applicant needs to identify unreimbursed disaster-related
expenditures in order to cancel more of the loan, FEMA will work with
the applicant to develop methods to identify and calculate unreimbursed
disaster-related expenditures. However, without documentation, FEMA
will not consider such undocumented unreimbursed disaster-related
expenses for purposes of loan cancellation. FEMA applies the
requirements of Office of Management and Budget (OMB) Circular A-129
``Policies for Federal Credit Programs and Non-Tax Receivables'' to the
management of its loan programs. OMB Circular A-129 is available
electronically at http://www.whitehouse.gov/omb/rewrite/circulars/a129/a129rev.html. Although OMB Circular A-129 does not specifically address
the unusual circumstance of the cancellation of Federal loans, it does
require Federal Departments (including the Department of Homeland
Security, of which FEMA is a component) to ``follow sound financial
practices in the design and administration of their credit programs,''
and loan documentation is required for the extension of credit. See OMB
Circular A-129, Appendix A, paragraphs II.2 and III.A.2. Further, FEMA
and government-wide regulations such as those at 44 CFR Part 13 and 2
CFR Part 215 require cost documentation to support reimbursement of
funds in its grant programs, including documentation to support
reimbursement of costs incurred for the response to and recovery from
hurricanes Katrina and Rita under the Public Assistance program.
Requiring the documentation of costs and revenues to justify the
cancellation of a loan is a sound financial practice, is consistent
with management of other programs, and is not changed in this final
rule.
13. Definition of ``Revenues''
    The proposed rule contained no definitions for the terms
``revenues'' or ``operating expenses.'' Two commenters sought
definitions for these terms, and further, requested that FEMA define
these terms to have the meaning

ascribed to them by the GASB and as discussed in the ``Blue Book'' by
the GFOA except to the extent expressly modified in these regulations.
Another commenter stated that the proposed rule focused only on
property assessments and related taxes; the commenter encouraged FEMA
to allow revenues from all sources, including sales taxes and in some
cases, the relationship between local revenues and state revenues.
    The individual comment highlighted the need for the definitions
sought by the other two commenters. All sources of revenues will be
considered in FEMA's cancellation calculation procedures, provided the
entity has a cumulative operating deficit. To ensure applicants and
FEMA apply consistent professional standards and common terminology to
these words, the regulation has been revised to add definitions for
these terms at 44 CFR 206.376(b). These definitions align with the
usage of those terms by the GASB and GFOA.
    Three commenters requested that one-time funds such as grants,
awards, waivers, settlements and insurance proceeds, which are non-
recurring, not be considered revenue when FEMA reviews a community's
budget for loan cancellation. These one-time income surges, the
commenters asserted, could overstate the run-rate of revenues to the
local government.
    Revenue calculations for cancellation review will use actual post-
disaster revenue minus actual post-disaster expenditures to determine
if an operating deficit exists. Federal grants, for example, received
to fund operating programs are offset by expenditures for those grants,
and should have no impact on the operating deficit. Grants and other
one-time revenues received by the community that are not related to the
Special CDL program, will be included if they represent revenues sought
by the government and received to offset expenses of an operating
character. Insurance proceeds directly related to the disaster must be
included as revenue if they are reimbursing expenses of an operating
character, or disaster-related expenses. Special CDL proceeds, however,
will be excluded. By matching such revenues against operating expenses,
FEMA expects the net effect will have no impact on the operating
deficit.
    Another commenter requested that FEMA clarify the term ``revenues''
to include revenues from traditional sources existing before the
disaster. The commenter provided the example of a prison facility whose
closing resulted in the loss of revenue to a sheriff and tax
collector's office, and requested that revenues after the disaster be
compared to revenues before the disaster, including the consideration
of the loss of its traditional revenue sources.
    In response to this comment, FEMA added a definition of the term
``revenue'' in 44 CFR 206.376(b)(2). During the cancellation review
process, all revenues during the three-full-fiscal-year period will be
reviewed, including those from traditional sources existing before the
disaster. These actual revenues will be compared to the actual
expenditures during that period to determine eligibility for
cancellation.
    Two commenters noted that many loan recipients have pledged their
revenues as the security for bonds. They encouraged FEMA to exclude
from ``revenues'' those that are received by a local government, but
are not available for the payment of operating expenses by law or
contract.
    Any revenues that are dedicated to non-operating expenditures, such
as debt service or capital expenditures are excluded on both the
revenue and expenditure side of the budget calculation to determine the
net eligible operating budget. As for whether the entity has these
funds available for the repayment of the loan, each entity knew of
commitments of operating revenues that were pledged at the time the
loan was made. Further, each applicant signed a collateral security
agreement at the time it was granted the Special CDL, pledging future
revenues to be used to repay the loan, if necessary.
    Two commenters requested that FEMA consider pre-disaster budgets
and/or financial statements to determine base revenue and expenditure
levels for comparison against post-disaster levels to establish a more
realistic and accurate shortfall. Although FEMA does consider the pre-
disaster budgets and financial statements in base revenues at the time
the loan is made, the shortfall, if any, must be from actual revenues
lost.
    One commenter requested that the ``revenues'' included in the
``operating budget'' submitted for cancellation consideration be
adjusted to remove any increased tax revenues resulting from a
voluntary increase in millage rates or other fees (ex: An airport's
airline fees) during the applicable three-full-fiscal-year period
following the disaster. FEMA uses actual tax and other revenues
received during the three-full-fiscal-year period in calculating the
operating deficit and ultimately possible cancellation of the Special
CDL. Further, property tax revenues are considered in the aggregate for
purposes of calculating the cumulative three-year operating deficit. To
ensure an accurate review of the entity's ability to meet its operating
budget, if the local government increases taxes or adds new fees or
raises existing fees, the actual revenues received during the three-
full-fiscal-year period following the disaster will be included in the
loan cancellation calculation of operating revenues.
    Finally, one commenter asked if the terminal and landing fees of a
regional airport will have an impact on the forgiveness of its loan. If
the regional airport qualified for a Special CDL, those revenues will
be considered in the calculation for cancellation. If the regional
airport was part of a larger governmental entity and treated as an
enterprise fund, the impact fees will still be considered. The impact
on the loan forgiveness will be determined by whether or not there is
(1) a cumulative operating deficit; (2) whether there was a loss of
revenues during the three-year period; and (3) if there are any
unreimbursed disaster-related expenditures which offset all or part of
the loan.
14. Definition of ``Disaster-Related Expenses''
    In the proposed rule at 44 CFR 206.376(b)(1), FEMA defined
disaster-related expenses of a municipal operation character as those
expenses incurred ``for general government purposes, including but not
limited to police and fire protection, trash collection, collection of
revenues, maintenance of public facilities, flood and other hazard
insurance.'' Because of the insertion of new definitions at new (b),
and the expansion of the regulatory text on revenue calculation
procedures in new (c), the subparagraph on disaster-related expenses
was re-designated to 44 CFR 206.376(d) The redesignation is not a
substantive change.
    Several commenters sought revisions to this definition to include
additional expenditures. Two commenters sought to include expenditures
associated with debt service. One of those commenters stated that
operating losses incurred because of Hurricane Katrina caused it to
default on its debt covenant compliance. As a result, its covenant
compliance threshold was increased; it was required to engage
consultants to conduct a review of operations and make recommendations
to improve operations; and was required to file a mortgage on all of
the entity's equipment and properties. Another commenter requested that
FEMA revise the definition of expenses not only to include debt
service, but also major repairs, rebuilding, replacement or
reconstruction of public facilities or

other capital projects, intra-governmental services, special
assessments, trust and agency fund operations.
    Another commenter urged FEMA to also consider the following
expenses when evaluating an application for cancellation: The cost of
maintaining a workforce, the cost of drainage work and the replacement
of streets and roadways for which communities had to borrow or use
their own funds, code enforcement expenditures (additional staffing,
legal costs, and demolitions needed to accommodate the code enforcement
department), insurance expenses, and finally legal and consultant fees
incurred to deal with FEMA appeals and FEMA paperwork processing. Two
other commenters inquired as to the eligibility of legal fees,
asserting that such fees are not eligible for reimbursement under
project applications or any other Federal program.
    For the reasons explained below, FEMA made no changes to the
disaster-related expenses at 44 CFR 206.376(d) based on these comments.
Labor costs for code enforcement and insurance expense increases due to
the disaster are reflected in an applicant's post-disaster operating
budgets and actual expenditures. The Special CDL program is intended to
cover expenses of an operating nature in the budget. Therefore, capital
expenditures for drainage work and street repairs are ineligible uses
for Special CDL funds but may be eligible for reimbursement under
another Federal program. Debt service is also generally incurred for
capital expenditures. Although debt service is not considered an
operating expense which provides essential government services, if the
applicant can demonstrate that the debt service is related to debt
assumed to cover normal operating expenditures, then the applicant may
include the related interest on the debt as an unreimbursed disaster-
related expenditure. Debt service used for capital expenditures,
however, is not eligible for consideration.
    Major repairs, rebuilding, replacement or reconstruction of public
facilities damaged by the disaster are likely to be eligible under the
Public Assistance program, which is a FEMA grant program separate from
the Special CDL program. Eligible applicants should have applied for
and received grant funds to reimburse these costs under the Public
Assistance program. Intra-governmental services, (i.e., an Internal
Service Fund such as a Fleet Maintenance Fund or Central Purchasing
Services), of an operating character were eligible for consideration in
the original loan application and will be included in the subsequent
review for loan cancellation. See 44 CFR 206.376(d)(2).
    With respect to legal fees, if the expenditure is disaster-related,
and not reimbursable through any other Federal or State program, or not
covered by insurance, FEMA may consider such expense as an unreimbursed
disaster-related expenditure. If the attorneys' fees are incurred as a
regular operating expenditure, the attorneys' fees will be included in
the operating budget and will be part of the calculation of an
operating deficit or surplus.
    Disaster-related expenses that are not reimbursed through any other
program will be included to determine if the entity incurred an
operating deficit for the three-full-fiscal-year period following the
disaster. If revenue losses are insufficient to offset the full amount
of the loan at the time of loan cancellation review, unreimbursed
disaster-related expenses that are of a municipal operating character
as defined in the regulations may be used to offset principal of the
loan. If there is any balance of the loan after revenue losses and
unreimbursed disaster-related expenses are considered, the remaining
balance will remain due in accordance with the terms and conditions of
the Promissory Note.
    One commenter sought inclusion of the local government's cost share
of assistance provided by FEMA under the Stafford Act's Public
Assistance program. The Federal cost share for both Louisiana and
Mississippi for the disasters declared as a result of Hurricanes
Katrina and Rita was adjusted to 100 percent See 70 FR 70086 (November
21, 2005) for Louisiana; and 71 FR 41228 (July 20, 2006) and 72 FR
34704 (June 25, 2007) for Mississippi. Therefore there should have been
no cost share incurred by the local governments during that time.
    Finally, one commenter requested that unfunded needs to basic
services be taken into consideration as the reduction in operating
budgets after Hurricane Katrina demanded that expected services were
cut but still left a void that needed to be filled. The Special CDL
program is not intended to supplant the decisions of the local
government in determining what constitutes ``basic services.'' However,
unless applicants indicate that revenues were lost or expenses
increased due to other non-Hurricane Katrina or Rita related factors,
FEMA will assume that any operating deficit occurred during the three-
year period is related to Hurricanes Katrina or Rita.
15. Definition of ``Operating Budget''
    For loan application, the ``operating budget'' is that document or
documents approved by an appropriating body, which contains an estimate
of proposed expenditures, other than capital outlays for fixed assets
for a stated period of time and the proposed means of financing the
expenditures. See 44 CFR 206.374(b)(2). Two commenters recommended that
the operating budget consist of a pro forma budget constructed from the
revenues of the character and to the extent permitted by law to be used
to pay operating expenses and not otherwise required by contract to be
used for another purpose, and expenditures actually incurred during the
applicable period, together with an adjustment to expenditures
(increase) to reflect the level of expenditures required during the
applicable period to allow for adequate performance of its governmental
functions at the levels reflected in the last full fiscal year before
the disaster.
    The Special CDL Program was not designed to fund estimated
expenditures, but rather the loan amounts were based on estimated lost
revenues, established by historical data three years prior to the
disaster and a projection of lost revenues three years after the
disaster. Any revenues that are dedicated to non-operating
expenditures, such as debt service or capital expenditures are excluded
on both the revenue and expenditure side of the budget calculation to
determine the net eligible operating budget. As for repayment of the
loan, each loan recipient knew of commitments of operating revenues
that were pledged at the time the loan was made. Further, each
applicant signed a collateral security agreement pledging future
revenues to be used to repay the loan, if necessary.
    Another commenter noted that some revenue streams may be dedicated
to specific purposes by the taxpayers and may not be spent in other
areas. As a result, revenue growth in one area cannot be used to
supplement losses in other areas. The commenter encouraged FEMA to take
this into account when reviewing applications for cancellation. Another
commenter requested that FEMA allow a cancelled debt requirement to
substitute for lost revenues that will never be replaced.
    Any revenues that are dedicated to non-operating expenditures, such
as debt service or capital expenditures are excluded on both the
revenue and expenditure side of the budget calculation to determine the
net eligible operating budget, so FEMA expects

there will be no effect on the calculation of the operating deficit.
However, if the debt service or pension payments are mandated by law
and the entity has a property tax cap limitation by law, FEMA has
modified the regulations to review that situation and its impact on the
calculation of the operating deficit. See 44 CFR 206.376(c)(4)(ii).
Debt payments, whether cancelled or paid, are not included in the
operating budget calculation.
    One commenter asserted that FEMA's interpretation of the term
``operating budget'' basically eliminates most, if not all, local
governments from consideration for any sort of loan cancellation
because, unlike the Federal Government, local governments are
prohibited by law from operating at a deficit. The commenter stated
that they reduce expenditures to the extent of incoming revenues
regardless of pre-disaster revenue levels or the revenue amounts
budgeted at the time of the disaster.
    The purpose of cancellation is to assist those communities that
have incurred a loss due to the disaster to ensure that they can
continue providing essential services; that loss must first be evident
in an operating deficit. FEMA understands that some states require
balanced budgets, but that issue is outside the scope of FEMA's
authority with regard to loan cancellation. In calculating the
operating budget FEMA excludes the Special CDL itself, which may result
in an operating deficit for many communities who otherwise were
required by law to have a balanced budget, if other revenues were not
adopted to cover either the loss of revenues or increased expenditures
as a result of the disaster.
    Another commenter advised that before the disaster, cities had
planned for infrastructure repair and improvement projects that were
put on hold. The commenter noted that in the mean-time these projects
have been continually deteriorating, and the costs to complete the work
have increased. In addition, the number of households decreased,
resulting in lower annual revenues, while the amount of waste produced
per consumer has increased, causing an additional strain on the budget.
The commenter requested that FEMA focus on cash flow, as opposed to a
supposed surplus indicated on the city's published financial
statements. One commenter stated that operating budgets and audits
(which are generally modified accrual audits) may not show the unfunded
and deferred maintenance issues communities continue to struggle with
as a result of Hurricane Katrina. Another commenter simply requested
that FEMA consider expenditures that were deferred by local governments
because money was not available.
    The Special CDL program is not intended to provide funding for
unfunded or deferred maintenance issues, but rather to replace lost
revenues as a result of the disaster. Capital expenditures have
traditionally been excluded costs for the CDL program. The Special CDL
program was created to assist those who demonstrated a need for Federal
financial assistance to provide essential services. Because capital
projects are not part of the Special CDL program, the impact of
deferring projects is unrelated, and the timing and funding of projects
is a local decision outside the scope of FEMA's authority. The official
financial statements should reflect all costs of the entity. The
operating budget used in the calculation is the required supplementary
budget schedule, excluding capital expenditures, debt service payments,
or capital lease payments for equipment or buildings.
    Finally, one commenter advised that accounting adjustments required
by the advent of GASB 34 are on the full accrual basis, but one of the
major distortions created by the entity-wide accrual basis is that
capital projects are not expensed, but cost is allocated over time. The
commenter sought clarification that the term ``operating budget as
shown on our published financial statements'' means the Budgetary
Comparison Schedule included in the Required Supplementary Information
of its published financial report.
    The operating budget used in the loan cancellation calculation is
the required supplementary budget schedule, found in the Supplementary
Information Section of the Comprehensive Annual Financial Report (CAFR)
which is the official financial statement of the government. The
calculation, for purposes of loan cancellation, excludes capital
expenditures, debt service payments, or capital lease payments for
equipment or buildings.
16. Statutory Criteria for Cancellation
    Several commenters sought changes to FEMA's statutory authority for
cancellation. Although FEMA is unable to provide cancellation outside
the authority provided in the 2007 Act, FEMA has attempted to interpret
its authority in as broad and flexible manner as possible.
    One commenter stated that if a local government's deficit is
retained as an eligibility criterion, the unfunded need of the local
government should be included for the purpose of determining deficits.
If unmet needs are not considered, the commenter said, the local
government's reward for conservative management would be to repay their
Special CDL, while less fiscally conservative local governments would
be rewarded with cancellation. To reward conservative financial
management, the commenter encouraged FEMA to look solely at revenues in
determining eligibility for cancellation.
    FEMA's authority is to cancel the loans of communities whose
revenues are insufficient to meet their operating expenses, not simply
those who have experienced a loss in revenue. Further, such a
calculation may not be in the community's best interest. If an
operating deficit exists, then revenue losses may offset only part of a
loan. If FEMA looked solely at revenues, then the cancellation may not
be total because unreimbursed disaster-related expenditures would not
be included in the calculation. When reviewing applications for
cancellation, unless applicants indicate that revenues were lost or
expenses increased due to other non-Hurricane Katrina or Rita related
factors, FEMA will assume that any operating deficit occurred during
the three-year period is Hurricane Katrina or Rita related.
    Along the same line, another commenter stated that sound fiscal
policy before the disaster that allows a community to retain good
reserves should not be compromised and reserves depleted to fund the
payback of this loan. With respect to reserve balances, these do not
play a role in the calculation of the loan cancellation. Further, local
governments pledged their future revenues to pay the loan. This pledge
was not contingent upon the retention of a certain amount of reserve.
    Another commenter declared that organizations that effectively
manage expenditures could potentially be adversely impacted, while
those that are less effective at managing expenses could enjoy the
benefits of full forgiveness. Without proper actual documentation of
revenues and expenditures for a particular applicant, FEMA cannot
confirm the accuracy of the commenter's statement. Each loan
cancellation application will be evaluated independently and this
cannot be assumed. According to one commenter, the proposed rule said
that for communities that have not exhibited reasonable financial
recovery after three years, cancellation may be appropriate subject to
the limitations of section 417(c) of the Stafford Act. However, FEMA
disagrees with the commenter

because section 417 reiterates the aforementioned three-full-fiscal-
year rule. The commenter suggested that a more appropriate determining
factor may be whether or not a local government can prove that it has
not ``exhibited reasonable financial recovery'' after three years even
if it did not actually meet the requirement of cumulative operating
deficits in the first three years after recovery. Two other commenters
reiterated this position, but added that FEMA should require the
community to also demonstrate that repayment of the loan will adversely
impact the community's long-term recovery.
    The authority in section 417 of the Stafford Act authorizes FEMA to
cancel loans of communities who are able to show an operating deficit
``during the three full fiscal year period following the major
disaster.'' As a result, the Special CDL regulations require that the
entity have a cumulative operating deficit during the three full fiscal
years following the disaster to qualify for cancellation of all or part
of the loan. If no operating deficit exists, then FEMA determines that
the community has exhibited reasonable financial recovery for purposes
of this program. The statute does not authorize FEMA to cancel loans
based on the finances of a community after that three-fiscal-year
period.
17. Reimbursement
    In the proposed rule at 44 CFR 206.376(a)(4), any transfers from
operating accounts to capital fund accounts (for other than routine
maintenance purposes) will be reduced from the operating budget for
purposes of evaluating any request for loan cancellation. In this final
rule, proposed 44 CFR 206.376(a)(4) was re-designated as 44 CFR
206.376(c)(3) without further change. One commenter requested that
there be some recognition for capital expenditures that cannot be
recovered through the FEMA Public Assistance grant program project
worksheet damage assessments or other revenue sources. As an example,
the commenter stated that the project worksheet includes the
anticipated insurance proceeds an organization would receive from
property insurance. These insurance proceeds are often tied up in
litigation for long periods of time and recoveries reduced by the cost
of litigation. To cover these gaps pending settlement of litigation,
the commenter explained, organizations may need to transfer resources
from operating funds to capital funds.
    Transfers from operating accounts to capital fund accounts are not
allowed by FEMA as part of the operating budget calculation because
Special CDL funds may not be used for capital expenditures. See 44 CFR
206.371(a). However, interest paid on money borrowed to pay amounts
FEMA does not advance towards completion of approved projects under the
Public Assistance grant program is an eligible unreimbursed disaster-
related expenditure.
    Another commenter noted that FEMA Public Assistance grants
reimburse governments for expenses, meaning that the expenses must
first be paid by the community before they can receive FEMA funds. So,
although they will eventually receive these expenditures, the commenter
asserted, the costs are a drain on the General Fund operating budget
and cripple continuing essential operations. The commenter believes
that repaying Special CDLs will further worsen the situation.
    Although the commenter is correct that the Public Assistance grant
program works on a system of reimbursements, FEMA reimburses approved
funds on project worksheets within a short period of time. Entities do
not languish for long periods of time with reimbursable expenses on
their books. If an entity borrowed money while waiting for FEMA
reimbursement, the accrued interest related to that loan is an eligible
unreimbursed disaster-related expenditure. While it would be easier for
communities to pay their expenses without being required to repay their
Special CDL, each applicant signed a collateral security agreement at
the time the initial loan was made stating they would utilize resources
of the local government to ensure repayment of the loan. Such
commitment extends until the loan is either cancelled or repaid.
    Finally, one commenter asked if a Special CDL recipient would be
penalized for moving funding from a pertinent operating expenditure to
another. In response, if an expense is an operating expense budgeted
for one purpose, but utilized for another operating purpose, there is
no ``penalty'' for such transfer.
18. Loss of Tax Revenue
    One commenter requested that FEMA consider the loss of tax revenue
in non-operating funds, as they may require the reallocation of ad
valorem tax resources from operations to debt service and retirement
obligation funding.
    As proposed in 44 CFR 206.376(c)(3), a transfer from an operating
fund for debt service (i.e., principal and interest payment on bonded
indebtedness, capital leases, or other debt for capital expenditures
which is paid for through property tax levies) is generally excluded
from allowable expenditures in the operating budget calculation.
However, such a transfer could be appropriate for inclusion in a loan
cancellation determination if the transfer is required by law.
Excluding such a transfer from expenditures in the operating budget
calculation may result in an operating surplus instead of a deficit.
    To account for this situation, FEMA has revised the rule to allow
the transfer of ad valorem property tax revenues. See 44 CFR
206.376(c)(4). If a Special CDL recipient has property tax revenues
affected by the disaster, FEMA will consider the impact of the loss of
property tax revenue in Debt Service or Pension Funds (non-operating
funds) if all of the following conditions are met: (1) The entity
experienced a loss of property tax revenue as a result of the disaster
and the assessed value during the three years following the disaster,
in the aggregate, is less than the pre-disaster assessed value; (2) the
entity has a property tax cap limitation on the ability to raise
property taxes post-disaster; and (3) the property taxes are levied
through the General Operating Fund and transfers for obligations
mandated by law are made to fund Debt Service or Pension Obligations
which result in the entity experiencing a reduction of property tax
revenues in the General Fund. If all three conditions are met, the
amount of property taxes that are transferred to other funds for Debt
Service or Pension Obligations funding will not be excluded from the
calculation of the operating budget or from expenditures in calculation
of the operating deficit, to the extent that the property tax revenues
in the General Fund are less than they were pre-disaster.
    Another commenter asked simply what impact the ad valorem tax would
have on the forgiveness of one's loan. In response, if a loss of
revenues from reduced property taxes results in a cumulative operating
deficit, then it is possible that all or part of the loan may be
cancelled.
19. Form 90-5
    One commenter requested that if the Application for Loan
Cancellation Form 90-5 (the form used for cancellation applications for
CDLs) is used, FEMA should ask for budget revenue in line 6 and actual
revenue in line 7 instead of one entry combining the two. The commenter
explained that this is because the language in proposed 44 CFR
206.376(a)(1) references a budget, which is a forward projection, as
opposed to actual revenues and

expenditures. The commenter does not believe that both of these can be
addressed in a single line.
    FEMA re-designated proposed 44 CFR 206.376(a)(1) as 44 CFR
206.376(a) in this final rule for ease in reading. FEMA has not revised
the application form in response to this comment. When filling out the
form, applicants should enter on line 6 the annual operating budget for
each of the years specified on line 6. This form should be completed
for each operating fund that had revenues affected by the disaster
(i.e., General Operating Funds, Special Revenue Funds of an operating
nature, and Enterprise Funds), and then summarized on one form in
total. On line 7, enter the total actual revenues including the
proceeds of the Special CDL. FEMA will subtract the Special CDL funds
received from the actual revenues in determining the operating deficit.
Actual expenditures are required to be entered on line 8 for ``normal''
non-disaster related expenditures (i.e., regular operating costs), and
line 9 is for disaster-related expenses. This method should result in
the submission of four forms at the maximum: 1 for General Fund, 1 for
Special Revenue Funds, 1 for Enterprise Funds and 1 summary.
    Another commenter requested that when developing and evaluating the
application form, FEMA take into consideration that local government
entities and private non-profit entities operate differently. Further,
the commenter encouraged FEMA to recognize that some entities may
properly enter ``not applicable'' relative to some inquiries, such as
levying or collecting taxes, so that those entities are not unfairly
disadvantaged.
    FEMA will consider the operating differences between a local
government and a non-governmental entity, such as a hospital, in the
cancellation evaluation. If no property taxes are levied or collected
by a non-profit entity, there will be no impact to the applicant if
they enter ``not applicable'' to the question on property taxes, in
determining loan cancellation eligibility.
20. Other Sources of Funds
    School districts benefitted from an influx of Federal funding after
Hurricane Katrina using aid from the Department of Education to get
schools back in operation. According to one commenter, now that those
funds are no longer available, school districts are only now realizing
the full extent of their revenue shortfalls. Further, State education
funding to these districts is also decreasing because of decreased
enrollments. The commenter alleged that requiring school districts to
repay these loans could create budget deficits.
    The effect of funding from the Department of Education (DOEd) on
the Special CDL Program is outside the scope of FEMA's authority. If
the DOEd funding is not adequate to cover all revenues affected by the
disaster during the three-year period following the disaster, and the
school district has an operating deficit as a result of other revenue
losses or reduced enrollment resulting in revenue losses, then it may
qualify for loan cancellation. As for repayment of the loan, each
entity knew of commitments of operating revenues that were pledged at
the time the loan was made. Further, each applicant signed a collateral
security agreement pledging future revenues to be used to repay the
loan, if necessary.
    Two commenters asked, when calculating a cumulative operating
deficit, whether FEMA-reimbursed expenses should be deducted from the
actual revenues and expenditures of the local government as published
in the official financial statements of the local government.
    FEMA does not believe FEMA-reimbursed expenses should be deducted
from the actual revenues and expenditures of the local government as
published in the official financial statements of the local government.
The expenditures incurred that are of an operating nature, even if
reimbursed by FEMA through the Special CDL program, the Public
Assistance Program, or some other program should not be excluded.
However, FEMA staff will exclude the Special CDL proceeds from the
revenues as part of the calculation. Further, funds received from a
FEMA program that were applied to operating costs should not hurt the
applicant's bottom line as those revenues should be canceled out by the
incurred cost.
    Finally, one commenter asked if insurance proceeds could be
excluded from calculation of the operating deficit. Insurance proceeds
that were received to address business interruption or to reimburse the
entity for expenditures of an operating nature must be included as
revenue since the insurance proceeds were used to cover expenses of an
operating nature.
21. Deadlines
    One commenter noted that the proposed rule does not provide a
timeline for FEMA to conduct its reviews and make determinations for
loan cancellation. The commenter requested that the final rule include
such timelines as well as FEMA's timeline for reviewing appeals.
    As has traditionally been done in the CDL program, once an
applicant submits an application for cancellation, FEMA performs an
initial review and either approves the request or informs the applicant
that the application is insufficient, and provides applicants an
opportunity to provide additional documentation to support its request
for cancellation. In this initial determination, FEMA attempts to be as
flexible as possible in considering additional documentation to support
cancellation. However, the timeline for review is not indefinite, and
applicants must provide the information as quickly as possible during
the appeals process so the loan cancellation determination can be
finalized. Limiting the applicant's time during which it can provide
additional supporting information and engage in a dialogue with FEMA
staff would provide a disservice to the applicant.
    To protect the applicant's flexibility, while ensuring that FEMA
will issue its determination in a timely manner, in response to the
comment, FEMA revised 44 CFR 206.376(f) to provide that once all
required and requested information has been provided by the applicant
including un-reimbursed disaster related expenses, the Director of the
Public Assistance Division will make a cancellation determination
within 60 days. The term ``required'' represents that information
explicitly required by the regulations (e.g., financial reports, and
tax rates established in 44 CFR 206.376(e)). The term ``requested''
relates to information such as invoices and purchase orders FEMA may
seek from the applicant in support of the applicant's stated
unreimbursed disaster-related expenditures.
22. Outside the Scope
    FEMA received several comments that, although substantive, were
outside the scope of this rulemaking. One commenter encouraged FEMA to
incorporate a formula in the Stafford Act for the designation of a
``catastrophic disaster'' to differentiate those disasters of more
devastating impact from the existing category of major disaster.
Another commenter requested that the CDL program revert to a grant
program as it was when it originated in 1970. Finally, one commenter
felt that rather than singling out one area or local jurisdiction,
there should be a loan cancellation program for all taxpayers who
suffer hardship from floods and storms. This commenter stated that
forgiveness should not be limited to the debts of cities, towns,
counties and parishes, but provided to the individuals as well, and
should

alleviate mortgage and SBA debt. Each of these comments is outside the
scope of this rulemaking and would require a change to the Stafford Act
to implement. FEMA does not have the authority to change the Stafford
Act.

IV. Statutory and Regulatory Review

A. Executive Order 12866

    In the April 2009 proposed rule, FEMA stated that this rule is an
economically significant regulatory action because it is expected to
have an annual effect on the economy of more than $100 million, and
materially alter the budgetary impact of the Special CDL Program. 74 FR
15231. The purpose of this final rule is to address comments and
finalize the 2005 interim rule that established the Special CDL
program, and further revise those regulations to implement cancellation
provisions that were proposed in the April 2009 notice of proposed
rulemaking. Those cancellation provisions are authorized by the U.S.
Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq
Accountability Appropriations Act, 2007, Public Law 110-28, section
4502(a), Public Law 110-28, section 4502(a), 119 Stat. 2061 (2007 Act).
Pursuant to that authority, FEMA shall cancel ``* * * all or any part
of [a] Special Community Disaster Loan to the extent that revenues of
the local government during the three full fiscal year period following
the major disaster are insufficient to meet the operating budget of the
local government, including additional disaster-related expenses of a
municipal operation character.'' See 42 U.S.C. 5184. The cancellation
provisions apply only to Special CDLs. CDLs, which are issued as a
separate program, are not affected by this rule. Consequently, this
rule will only affect those local governments in the Gulf Coast region
who received Special CDLs following Hurricanes Katrina and Rita and
will not have any impact on local governments that do not have a
Special CDL.
    In this rule, FEMA is establishing the application requirements
communities would be required to follow to apply for cancellation of
their Special CDL. Although it also finalizes the application
requirements for the issuance of loans, these loans are statutorily
limited to communities affected by hurricanes Katrina and Rita, and
FEMA was only authorized to approve loans during fiscal years 2005 and
2006. Therefore, FEMA is no longer authorized to grant new Special
CDLs, and the only substantive change effected by this final rule is
the establishment of cancellation procedures.
    In establishing cancellation procedures, FEMA used the procedures
established for the CDL program. The Special CDL program and the CDL
program share the same cancellation authority (Section 417 of the
Stafford Act), and FEMA has been using the cancellation procedures for
the CDL program since 1990. FEMA has found the cancellation procedures
for the CDL program to be successful in providing the information
necessary to determine whether cancellation is appropriate. Based on
this success, FEMA proposed to apply the same provisions for the
Special CDL program.
    In response to the proposed rule, FEMA received several comments
seeking blanket cancellation of the loans, with no application
required. The blanket cancellation of loans is outside the scope of
FEMA's authority. The text of the authorizing statute shows that
Congress did not automatically cancel these loans, but allows for
partial or full forgiveness of community disaster loan repayments if,
after three years, local revenue remains insufficient to meet operating
expenses.
    Among other suggestions for revision of the regulations, FEMA
received comments seeking the consideration of additional costs (such
as the increase in market values) and exclude certain sources of
revenue (such as insurance proceeds). Commenters also sought the
consideration of estimated expenses and revenues, in lieu of the
proposed method of reviewing an applicant's actual expenses and
revenues to determine if it experienced an actual operating deficit in
the three full fiscal years after the event. FEMA evaluated these
comments and discusses each of them in the discussion of the comments
section, Section III of this final rule. In the end, FEMA has revised
the rule as a result of public comments, to make five substantive
changes.
    First, transfers from an operating fund for debt service are
allowed for the transfer of ad valorem property tax revenues under
certain conditions See 44 CFR 206.376(c)(4). Second, FEMA added
definitions for the terms ``revenues'' and ``operating expenses.'' See
44 CFR 206.376(b). Third, the title of the individual who makes FEMA's
initial determination on the application for cancellation has been
clarified to remove the appearance that the same individual who makes
the initial determination also makes the determination on appeal See 44
CFR 206.376(f). Fourth, FEMA revised 44 CFR 206.376(f), to add a new
paragraph (f)(1) which provides that once all required and requested
information has been provided by the applicant including un-reimbursed
disaster related expenses, the Director of the Public Assistance
Division will complete the initial evaluation within 60 days. And,
finally, FEMA added language that at the local government's discretion,
the three-full-fiscal-year period following the disaster is either a
36-month period beginning on September 1, 2005, or the 36 months of the
local government's fiscal year as established before the disaster. See
44 CFR 206.376(c)(2).
    These revisions create no change in the overall impact of this
rule. The overall impact of this rule is the cost to the applicant to
apply for the cancellation, as well as the impact on the economy of
potentially forgiving all Special CDLs and any related interest and
costs. The burden on the public is low with respect to new
administrative requirements associated with submitting the Application
for Loan Cancellations. As explained in the proposed rule, FEMA
estimates that the annual estimated cost to submit the Application for
Loan Cancellation will be $4,850.32. FEMA issued 152 Special CDLs
totaling $1,270,501,241 to 109 eligible applicants in Mississippi and
Louisiana. The application period for these loans has closed, so no new
loans can be granted under this program. If all 152 loan recipients
apply for and are found eligible for full cancellation under this rule,
up to $1,270,501, 241, plus any applicable interest and costs, could be
forgiven.
    The maximum total economic impact of this rule, therefore, is
approximately $1.3 billion (conservatively assuming that all funds
awarded will be drawn down, and exclusive of any interest that may also
be forgiven). However, without knowing the dollar amounts or even the
number of loans that will be cancelled, it is impossible to predict the
amount of the economic impact of this rule with any precision. Although
the impact of the rule could be spread over multiple years as
applications are received, processed, and loans cancelled, the total
economic effects of a specific loan cancelation would only occur once,
rather than annually.

B. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (5 U.S.C. 601-612), FEMA has
considered whether this final rule would have a significant economic
impact on a substantial number of small entities. The term ``small
entities'' comprises small businesses, not-for-profit organizations
that are independently owned and operated and are not dominant in their
fields, and

governmental jurisdictions with populations of less than 50,000.
    FEMA certifies under 5 U.S.C. 605(b) that this final rule would not
have a significant economic impact on a substantial number of small
entities. Section 601(5) defines small governmental jurisdictions as
governments of cities, counties, towns, townships, villages, school
districts, or special districts with a population of less than 50,000.
This final rule would affect the following entities, some of which
might be small entities: The 109 eligible applicants devastated by
Hurricanes Katrina and Rita located in Mississippi and Louisiana that
received Special CDLs authorized in the 2005 and 2006 Acts. This final
rule will not impose any additional requirements on local governments
that do not have Special CDLs.
    As stated previously, the potential for loan cancellation under the
proposed procedures would not have a negative impact on any loan
applicant as any funds cancelled will have a positive beneficial effect
on the State and local governments by reducing ongoing operating
expenses and debt related to the loan. FEMA previously explained that
State and local governments that choose to seek loan cancellation
consideration will need to spend a minimal amount of staff time
preparing the required application. Such a minimal staffing burden is
not considered to be a significant economic impact. Consequently, this
final rule would not have a significant economic impact on a
substantial number of small entities.

C. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995, 2 U.S.C.
1531-1538, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments, and on the private sector. This rule is excluded from the
Unfunded Mandates Reform Act as provisions in proposed or final Federal
regulations that require compliance with accounting and auditing
procedures with respect to grants or other money or property provided
by the Federal Government, and those that provide for emergency
assistance or relief at the request of any State, local, or tribal
government or any official of a State, local, or tribal government. See
2 U.S.C. 1503.

D. Federalism

    Pursuant to Executive Order 13132, FEMA has determined that this
action will not have a substantial direct effect on the States, or the
relationship between the Federal Government and the States, or on the
distribution of power and responsibilities among the various levels of
government, and, therefore, does not have federalism implications.
Eligible applicants who applied for Special CDLs, or who received
Special CDLs and choose to apply for loan cancellation do so
voluntarily. State policymaking discretion is not affected.

E. National Environmental Policy Act

    FEMA's regulations implementing the National Environmental Policy
Act of 1969 (42 U.S.C. 4321 et seq.) at 44 CFR 10.8(d)(2)(ii)
categorically exclude the preparation, revision, adoption of
regulations, directives, manuals, and other guidance documents related
to actions that qualify for categorical exclusions. The changes in this
final rule constitute actions that qualify for the following
categorical exclusions: the enforcement of existing Federal
regulations, and the involvement in emergency and disaster response and
recovery activities under section 417 of the Stafford Act. See 44 CFR
10.8(d)(2)(iv) and 10.8(d)(2)(xix)(K). This rulemaking will not have a
significant effect on the human environment and, therefore, neither an
environmental assessment nor an environmental impact statement is
required.

F. Paperwork Reduction Act of 1995

    In the October 19, 2005 Interim Rule (at 70 FR 60442; also 44 CFR
206.370-206.377), FEMA determined that implementation of the Interim
Rule would be subject to the Paperwork Reduction Act of 1995 (PRA) (44
U.S.C. 3501-3520). FEMA submitted with the interim rule two information
collection requests to OMB for review and clearance in accordance with
the review procedures of the PRA. OMB approved the requested revision
of the collection entitled ``Application for Community Disaster Loan
(CDL) Program and the Special Community Disaster Loan (SCDL) Program,''
which was assigned OMB Control Number 1660-0083 and expires on June 30,
2012. This final rule does not contain any changes that would affect
that currently approved collection.
    In this final rule, FEMA is finalizing the Special CDL regulations
published in the Interim Rule and implementing the cancellation
provisions outlined in the 2007 Act as applied to loans issued under
the 2005 and 2006 Acts. As previously stated, FEMA intends to apply the
cancellation procedures already existing under the CDL program as
outlined in 44 CFR 206.360 through 206.367. It is intended that
applicants seeking cancellation of a Special CDL will use the
Application for Loan Cancellation and its associated forms, if
applicable, already approved by OMB under OMB Control Number 1660-0082,
which expires on January 31, 2010.
    Collection 1660-0082 uses FEMA Form 90-5, Application for Loan
Cancellation, which has an annual number of respondents of one (the
number of communities who apply for cancellation of a Community
Disaster Loan under the existing procedures in 44 CFR 206.366). With
this Final Rule, applicants seeking cancellation of a Special Community
Disaster Loan will use the same form submitted for Community Disaster
Loans. FEMA therefore seeks to amend that existing collection to
increase the number of respondents to 153. This number reflects the one
Community Disaster Loan cancellation application already received
annually under the Community Disaster Loan program, and the potential
152 applications for cancellation of Special Community Disaster Loans
allowed in this rule.
    Accordingly, in the proposed rule, FEMA published a 60-day notice
seeking a revision to the already existing collection of OMB Control
Number 1660-0082, FEMA Form 90-5, to include the cancellation of
Special CDLs. FEMA received no public comments in response to the 60-
day notice. Section 3507(d) of the PRA and 5 CFR 1320.11 require
Federal agencies to submit new and revised collections of information
to OMB for review. FEMA will submit the appropriate request to OMB for
approval, with a copy of this rule. FEMA invites the general public to
comment on the collection of information.
    Collection of Information:
    Title: Application for Community Disaster Loan Cancellation.
    Type of Information Collection: Revision of a currently approved
collection.
    OMB Number: 1660-0082.
    Form Numbers: FEMA Form 90-5.
    Abstract: Local governments may submit an Application for Loan
Cancellation through the Governor's Authorized Representative to the
FEMA Regional Administrator prior to the expiration date of the loan.
FEMA has the authority to cancel repayment of all or part of a
Community Disaster Loan or a Special Community Disaster Loan to the
extent that a determination is made that revenues of the local
government during the three fiscal years following the disaster are
insufficient to meet the operating budget of that local government
because of disaster-related

revenue losses and additional unreimbursed disaster-related municipal
operating expenses. Operating budget means actual revenues and
expenditures of the local government as published in the official
financial statements of the local government.
    Affected Public: State, local or tribal governments.
    Number of Respondents: 153.
    Frequency of Response: 1 per year.
    Hour Burden per Response: 1 hour.
    Estimated Total Annual Burden Hours: 153 hours.

                                                 Table A-12--Estimated Annualized Burden Hours and Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Number of   Avg. burden     Total                     Total
                                                                             Number of    responses       per         annual    Avg. hourly     annual
           Type of respondent                    Form name/form No.         respondents      per        response   burden  (in   wage rate    respondent
                                                                                respondent   (in hours)     hours)                     cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
State, local and Tribal Government......  Application for Loan                        1            1            1            1       $31.91       $31.91
                                           Cancellation/FEMA Form 90-5
                                           (under 44 CFR 206.366 as
                                           currently approved by OMB).
State, local and Tribal Government......  Application for Loan                      152            1            1          152        31.91     4,850.32
                                           Cancellation/FEMA Form 90-5
                                           (under 44 CFR 206.376, the
                                           change associated with this
                                           rule).
                                                                           -----------------------------------------------------------------------------
    Total...............................  ................................          153  ...........  ...........          153  ...........     4,882.23
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated Cost: $0. There are no start-up, operational or other
costs associated with this information collection in addition to the
burden hour cost noted in the table above.
    Comments: Written comments are solicited to (a) evaluate whether
the proposed data collection is necessary for the proper performance of
the agency, including whether the information shall have practical
utility; (b) evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used; (c) enhance the
quality, utility, and clarity of the information to be collected; and
(d) minimize the burden of the collection of information on those who
are to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses.
    Interested persons are invited to submit written comments on the
proposed information collection to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer, Department of Homeland Security/FEMA, and sent via electronic
mail to<EMAIL_ADDRESS>or faxed to<PHONE_NUMBER>.
Comments must be submitted on or before February 18, 2010.You may
contact the Records Management Branch for copies of the proposed
collection of information at facsimile number<PHONE_NUMBER> or e-mail
address<EMAIL_ADDRESS>
G. Executive Order 12630, Taking of Private Property

    This rule will not effect a taking of private property or otherwise
have taking implications under Executive Order 12630, Governmental
Actions and Interference with Constitutionally Protected Property
Rights.

H. Executive Order 12988, Civil Justice Reform

    This rule meets applicable standards in sections 3(a) and 3(b)(2)
of Executive Order 12988, Civil Justice Reform, to minimize litigation,
eliminate ambiguity, and reduce burden.

I. Executive Order 13175, Consultation and Coordination With Indian
Tribal Governments

    Because no Special Community Disaster Loans were made to Indian
Tribal Governments, this rule does not have tribal implications under
Executive Order 13175, Consultation and Coordination with Indian Tribal
Governments. This rule would not have a substantial direct effect on
one or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.

List of Subjects in 44 CFR Part 206

    Administrative practice and procedure, Coastal zone, Community