On March 19, HUD’s Office of Fair Housing and Equal Opportunity sent an email to Section 3 stakeholders offering a preview of long-anticipated amendments to the interim Section 3 regulations. HUD Secretary Julián Castro has announced imminent publication of the proposed rule. The email includes a link to the proposed rule, which is expected to be published in the Federal Register shortly. In 1994, HUD published an interim rule updating the Section 3 regulations in response to changes made by the Housing and Community Development Act of 1992.
The purpose of Section 3 of the Housing and Urban Development Act of 1968 is to ensure that when HUD assists housing and community development projects, preference for some of the new jobs, training, and contracting opportunities that are created go to low income people and to the businesses that hire them “to the greatest extent feasible.”
HUD states in the preamble to the proposed rule that the experience with Section 3 since 1994 has revealed features of the interim rule that could be modified to improve effectiveness, and that efforts since 2009 to improve Section 3 oversight without changing the regulations “have not been as successful as HUD hoped.”
The preamble summarizes 11 provisions of the proposed rule that HUD considers significant:
- Establish a standard for the statutory language, “to the greatest extent feasible.” The statute uses the expression “make their best efforts” when referring to the Section 3 obligations of public housing agencies (PHAs). For other entities, such as local and state governments administering the Community Develop Block Grant (CDBG) or the HOME programs, the statute uses the expression “to the greatest extent feasible,” when referring to the Section 3 obligations of those entities. HUD considers the two expressions to be essentially the same. The proposed rule would use only “to the greatest extent feasible.” The proposed rule also lists actions PHAs and local and state governments (formally termed “recipients”) must take to demonstrate compliance with their Section 3 obligations.
- Revise the definition of “new hire.” The current rule sets a goal of having 30% of new hires at a project to be “Section 3 residents,” but the rule has no provision concerning how long the Section 3 resident should be employed. A Section 3 resident is either a public housing resident or a resident whose household income is 80% of the area median income or less. Advocates have long asserted that the rule’s lack of attention to the hours worked, as well as the duration of employment, are loopholes that allow contractors to hire Section 3 residents for a short period of time. HUD concurs, proposing to redefine a new hire as someone who works a minimum of 50% of the average hours worked for a specific job category for which the person was hired, for duration of time that the work is performed on the project. The preamble offers an example. If a typical painter works 40 hours per week, then a Section 3 new hire must work a minimum of 20 hours per week for as long as a typical painter works at the project.
- Change the dollar threshold for non-PHA recipients. For recipients of housing and community development assistance, such as cities, counties, and states receiving CDBG and HOME funds, the current rule has a $200,000 threshold that a recipient receives in a given year from all sources (CDBG, HOME, Lead Hazard Control, etc.). At that threshold, Section 3 obligations are triggered once any portion of those funds are used for any activity involving housing construction or rehabilitation, or other public construction, such as roads, water and sewerage projects. HUD notes that some recipients incorrectly apply the threshold on a per-project basis rather than on a per-recipient basis. In other words, some recipients evade Section 3 obligations at a given project that has less than $200,000 of HUD assistance.
The proposed rule would establish a new threshold. Section 3 requirements would apply to recipients of housing and community development financial assistance that plan to obligate or commit an aggregate amount of $400,000 or more in Section 3-covered housing rehabilitation, housing construction, demolition, or other public construction during a given reporting period. HUD notes that this would exempt 37% of all recipients, but these recipients receive less than 5% of all covered federal financial assistance.
- Revise the definition of “Section 3 business.” The current rule defines a Section 3 business as one that meets one of three criteria: (a) Section 3 residents own at least 51% of the business, (b) at least 30% of the employees are permanent, full-time Section 3 residents, or (c) the business commits to subcontracting at least 25% of the dollar amount of all of its subcontracts to businesses that meet either of the other two criteria.
The proposed rule would eliminate the third option because HUD found “a pattern of misuse by contractors that initially indicated they would award 25% of subcontracts to Section 3 businesses in order to receive preference for contracts, but never provided contracts to them.”
The proposed rule would add two options to the current rule’s (a) and (b). They are:
- The business meets the definition of “resident-owned business” in the public housing regulations (24 CFR 963.5).
- At least 20% of the business’s permanent, full-time employees are Section 3 residents, and either:
- The business sponsors a minimum of 10% of its current Section 3 employees to attend a U.S. Department of Labor (DOL)-recognized, or a state Apprenticeship Agency-approved, apprenticeship or pre-apprenticeship training program that meets DOL requirements; or
- At least 10% of the employees are participants or graduates of a DOL YouthBuild program.
- Give priority to Section 3 businesses at housing and community development projects that will retain a minimum of 75% of previously hired Section 3 residents and that will provide a minimum of 50% of on-the-job training or apprenticeship opportunities to Section 3 residents.
- Replace the 3% goal with a 10% goal for awarding non-construction contracts to Section 3 businesses. The current rule has a goal of awarding at least 10% of the total dollar amount of construction contracts and at least 3% of non-construction contracts, such as accounting and engineering, to Section 3 businesses. HUD states that there is no statutory basis distinguishing goals for construction and non-construction contracts. In addition, interpreting the goal has been a problem for recipients. Therefore, the proposed rule would establish the 10% goal regardless of the type of contract.
- Introduce a new term, “Section 3 local area.” Currently, a Section 3 resident or business anywhere in the nation can receive preference whether or not they live in or operate in the metropolitan area where the HUD-assisted work is carried out. The proposed rule would require the Section 3 resident or business to live in or be located in the “Section 3 local area,” defined as the metropolitan statistical area or the non-metropolitan county where the Section 3 project takes place.
- Allow recipients to accept residents or businesses who self-certify that they qualify for Section 3 preference. The proposed rule would also allow recipients to presume that residents or businesses qualify if they live in or are located in disadvantaged census tracts. Recipients must examine a sample of those who self-certify or who are presumed qualified to verify compliance.
- Monitor payroll data of developers and contractors. The proposed rule would require recipients administering Section 3 projects that are also subject to Davis-Bacon prevailing wage obligations to monitor a contractor’s payroll for changes in employment, such as terminations, retirements, transfers, and new job vacancies, in order to identify instances when Section 3 obligations are triggered. The intent is to improve contractor accountability.
- Amend agreements with labor unions. HUD comments that recipients in jurisdictions that have bargaining agreements with labor unions typically have low rates of Section 3 compliance because unions operate outside of Section 3 obligations. The proposed rule would require recipients to amend all existing agreements with labor unions to ensure that Section 3 obligations are included to prevent labor unions from obstructing recipients’ ability to achieve compliance.
- Establish penalties for recipients that fail to submit Section 3 annual reports. The proposed rule would seek penalties such as denying or withholding subsequent funds.
NLIHC will provide more details and analysis in the coming weeks, as well as provide a sample comment letter for advocates to submit to HUD.
A HUD media release is at http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2015/HUDNo_15-029
More information about Section 3 is on page 7-22 of NLIHC’s 2015 Advocates’ Guide, http://nlihc.org/sites/default/files/AG_2015_FINAL.pdf