HUD Proposes Major Changes to Section 3 Rule Regarding Employment Opportunities for Low-Income People

HUD published the long-awaited update to the 1994 interim Section 3 rule on April 4. Several potential improvements are proposed, such as using “labor hours worked” instead of “new hires” in many situations; adding to the cascade of priority categories of “Section 3 workers and businesses” residents with a Section 8 voucher or project-based assistance; and adding a “Targeted Section 3 worker” to consideration of an entity’s Section 3 obligations. A potential adverse change includes removing the monitoring and enforcement of Section 3 from the Office of Fair Housing and Equal Opportunity (FHEO) and transferring that responsibility to the HUD program offices responsible for the funding program that triggers Section 3, such as the Office of Public and Indian Housing (PIH) and the Office of Community Planning and Development (CPD). Another potential harmful change is establishing a $200,000 per-project threshold before an entity has to comply with Section 3.

The purpose of Section 3 of the Housing and Urban Development Act of 1968 is to ensure that, when HUD funds are used to assist housing and community development projects, “to the greatest extent feasible” preference for some of the jobs, training, and contracting opportunities that are created go to low-income people and to businesses owned or controlled by low-income people or to businesses that hire them. Public housing agencies (PHAs) and jurisdictions using Community Development Block Grant (CDBG), HOME Investment Partnerships program, and other HUD funds must comply with Section 3 and ensure that contractors and subcontractors comply.

During the Obama administration, FHEO staff proposed significant changes to the interim rule. Many of those changes reflected input from advocates, including NLIHC, after numerous conference calls. That proposed rule never cleared the Office of Information and Regulatory Affairs (OIRA) at the Office of Management and Budget (OMB). The Trump administration replaced the previously proposed rule with the one now open for public comment.

Some of the key changes in the proposed rule are highlighted here. Not all terms are explained because this article is intended to be a brief summary and focuses on employment-related features, not the parallel contracting provisions. More details and analysis will be forthcoming.

Tracking and Reporting “Labor Hours”

The 1994 interim rule required PHAs and jurisdictions to have goals of 30% of “new hires” be so-called Section 3 residents. As advocates had long observed, some contractors would hire Section 3 residents for a short time so that they would “count” toward the 30% goal but lay them off in short order. In other cases, a Section 3 resident would be given only 20 hours or less of work per week. Some contractors would shift some of their existing workforce to a Section 3 project so that the contractor could claim that they did not need to hire anyone new for the Section 3 project.

As HUD rightly notes in the preamble to the proposed rule, a focus on labor hours worked instead of new hires will measure total actual employment by Section 3 workers and the proportion of that total employment performed by Section 3 workers. Using labor hours worked also emphasizes continued employment. HUD observes that with a new-hires standard, hiring five new workers for one or two months would be counted as more valuable than hiring one person for a full year. A full-time job sustained over a long period provides a Section 3 worker with the potential to gain skills that can lead to greater self-sufficiency.

Although HUD proposes moving to labor hours worked, some PHAs have said they prefer reporting new hires. HUD is consequently considering allowing PHAs use a new-hires as an alternative.  (This alternative will be described in more detail in a future NLIHC summary.)

Section 3 Employment Priorities

The proposed rule would reflect the statute’s requirements for prioritizing categories of Section 3 workers.

A PHA must make “best efforts” to employ Section 3 workers in the following order of priority:

1. Residents of the project(s) funded with public housing money;
2. Residents of a PHA’s other public housing projects, or residents assisted with Section 8 project-based rental assistance or vouchers (the addition of Section 8 residents would be an improvement over the existing rule);
3. YouthBuild participants; and
4. People in the metro area with incomes less than 80% of the area median income (AMI).

Jurisdictions must “to the greatest extent feasible” ensure that Section 3 workers who live in the metro area are employed at projects assisted by funds that trigger Section 3. The proposed rule adds that “where feasible” jurisdictions “should” provide employment to Section 3 workers who live in a project’s “service area” or neighborhood and to YouthBuild participants. The existing rule is an improvement because it gives first priority to Section 3 residents living in the service area or neighborhood, second priority to YouthBuild participants, third priority to homeless people in the service area or neighborhood, and then consideration to other Section 3 residents in the metro area.

Targeted Section 3 Worker

The proposed rule defines a “Section 3 Worker” as someone who meets one of the following criteria:

1. The worker’s income is less than the income limit set by HUD for the program(s) triggering Section 3.
2. The worker lives in a “qualified census tract” (QCT), a term created for the Low Income Housing Tax Credit program. A QCT is a census tract with a poverty rate of 25% or more or with at least 50% of the households having incomes less than 60% of AMI. HUD officially designates QCTs each year.
3. The worker is employed by a Section 3 business (NLIHC will explain in a future summary.)

The proposed rule also would establish a “Targeted Section 3 Worker,” a subset of the “Section 3 Worker.”

For public housing a Targeted Section 3 Worker would be:

1. An employee of a Section 3 business; or
2. A resident of any of the PHA’s public housing projects, or residents assisted with a voucher or living in Section 8 project-based rental assistance or other projects the PHA manages that receive funds triggering Section 3, or a YouthBuild participant.

For other HUD programs, such as CDBG and HOME, a Targeted Section 3 Worker would be:

1. An employee of a Section 3 business; or
2. Someone with income less than 80% of AMI living in the service area or neighborhood the HUD-assisted project (for instance, a CDBG-assisted road improvement project), or a YouthBuild participant.

Section 3 Benchmarks

PHAs and jurisdictions will be considered in compliance with the Section 3 statute if they follow the employment priorities (listed above) and meet the Section 3 “benchmark.”

HUD proposes a benchmark of:

• 25% of the total number of hours worked by all Section 3 workers, divided by the total number of hours worked by all workers, plus
• 5% of the total number of hours worked by all Targeted Section 3 workers, divided by the total number of all workers.

Comments on the proposed rule are due June 3. NLIHC urges public housing resident organizations and other advocates to submit comments. To assist, NLIHC will provide sample letters they can use to tailor to their priorities and situations. NLIHC will also provide a more complete summary and more detailed analysis in the near future.

The proposed rule is at: https://bit.ly/2IcFIkv

The proposed benchmark is at: https://bit.ly/2YP8td5

An easier-to-read version of the proposed rule is at: https://bit.ly/2TTTsCV

An easier-to-read version of the proposed benchmark is at: https://bit.ly/2VqufBK