U.S. Department of Housing and Urban Development District Office of the Inspector General Office of Audit, Box 42 Richard B. Russell Federal Building 75 Spring Street, SW, Room 330 Atlanta, GA 30303-3388 (404) 331-3369 March 9, 2000 Audit Related Memorandum No. 00-AT-201-1801 MEMORANDUM FOR: Hildamar Ortiz, Director, Public Housing Division, 4NPH FROM: Nancy H. Cooper District Inspector General for Audit-Southeast/Caribbean, 4AGA SUBJECT: Misuse of HUD Funds Puerto Rico Public Housing Administration (PHA) San Juan, Puerto Rico During our recent audit of Puerto Rico Public Housing Administration’s procurement activities, we identified several conditions regarding the PHA’s use of HUD funds. These conditions were not within the scope of the audit but warrant your immediate attention and resolution. As detailed in Attachment A, we found that the PHA: • Improperly withdrew and used Public Housing operating funds totaling about $17 million for ineligible disaster relief expenses, and • Improperly withdrew and transferred $1 million in Comprehensive Grant Program (CGP) funds to the Puerto Rico Economic Development Bank for public housing resident loans. Please reply within 60 days on each recommendation describing: (1) the corrective action taken; (2) the proposed corrective action and a planned implementation date; or (3) why action is not considered necessary. Also, please furnish us copies of any correspondence or directives issued as a result of the audit. Note that Handbook 2000.06 REV-3 requires that management decisions be reached on all recommendations within 6 months of report issuance. It also provides guidance regarding interim actions and the format and content of your reply. If you have any questions, please contact me at (404) 331-3369 or Aurora Rodriquez at (787) 766- 5540. Attachments A - Finding and Recommendations B - PHA Comments C - Distribution Attachment A The PHA Improperly Withdrew and Used HUD Funds for Ineligible Activities The PHA did not comply with Federal requirements governing management and use of HUD funds. It improperly withdrew and used over $18 million for ineligible program activities. This occurred because the PHA disregarded program requirements. As a result, the Federal Government incurred excess interest costs and program objectives may have been adversely impacted. Title 24 Code of Federal Regulations, part 85.20(b)(3) provides that grantees must have adequate controls to safeguard grant funds and ensure that they are used solely for authorized purposes. Improper Draw And Use of Public Housing Operating Funds The PHA improperly withdrew and used over $17 million in Public Housing operating funds to pay ineligible hurricane expenses. This occurred because the PHA disregarded HUD requirements. HUD’s agreement with the PHA provides that the PHA may only withdraw funds to pay project development and operating costs. We found that from September 1998 through March 1999, based on instructions from the PHA Administrator, HUD operating funds were improperly drawn down and transferred to a separate bank account established to pay for the rehabilitation and operation of emergency shelters and other costs associated with Hurricane George. MONTH AMOUNT TRANSFERRED September 1998 $ 2,400,000 October 1998 2,000,000 November 1998 4,000,000 December 1998 3,000,000 January 1999 5,250,000 March 1999 1,000,000 Total $17,650,000 As of March 1999, the PHA’s accounting records showed an accounts payable to the operating fund of $17,268,520. 2 The PHA’s Acting Associate Administrator for Finance acknowledged that HUD funds were improperly used. She said that the funds would be reimbursed to HUD when the PHA’s disaster claim was paid by Federal Emergency Management Agency. HUD program officials stated that they did not approve the PHA’s use of Public Housing operating funds to pay hurricane costs. PHA Comments The PHA stated that OIG did not specify any law, regulation or other requirement which was violated by the PRPHA using funds for the Hurricane George recovery efforts. Even if the OIG could demonstrate that the use of PRPHA funds for emergency shelters was problematic, the Government of Puerto Rico has already reimbursed the PRPHA for the cost of this program. The PHA also stated that the OIG allegations contained in this memorandum were outside of the scope of the procurement audit, and thus, violated the OIG’s own procedures. The PHA claimed that the findings included in this memorandum were mentioned, but not discussed in substance or in any detail at the exit conference for the procurement audit. Evaluation of PHA Comments The finding clearly stated that the PHA violated Title 24 CFR 85.20 (b)(3) which states that grantees must have adequate controls to safeguard grant funds and ensure that they are used solely for authorized purposes. HUD’s agreement with the PHA provides that the PHA may only withdraw funds to pay for the development and operations of projects under its Annual Contribution Contract (ACC). The PHA did not provide evidence that HUD authorized the use of its operating funds for the hurricane emergency. Additionally, OMB Circular A-87 provides guidance for cost allocation. It states that to be allowable under Federal awards, costs must be necessary and reasonable for proper and efficient performance and administration of the Federal awards. A cost is allocable to a particular cost objective if the goods and services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. The PRPHA claimed that by October 23, 1999, $18,862,167 was reimbursed to cancel the Emergency Fund for Hurricane George. To complete the funds for the reimbursement, the PHA loaned $2,881,989 from the Assets Administration of the former Puerto Rico Urban Renewal Corporation (former Trustee). Of the $2,881,989, the PHA used $1,476,623 to reimburse the funds it improperly withdrew for the emergency. The audit related memorandum disclosed a matter that required HUD’s attention and resolution. During the course of our procurement audit, we became aware that the PHA improperly used HUD funds and we reported the situation. Also during our review of the purchase orders issued by the PHA for fiscal years 1998 and 1999, we selected purchase order number 99-301 for $9,570 dated December 9, 1998. The purchase order was for the purchase of tickets to a musical show and was paid from the PHA’s operating funds. Upon our inquiry, it was determined that the purchase was charged to a special fund established for the hurricane emergency. Therefore, we became aware of the existence of the emergency fund and that it was established using PHA’s operating funds. 3 During the working session held with the PHA on November 4, 1999, the PHA officials acknowledged the audit related memorandum. The officials informed us that they were in the process of reimbursing the money. As a result, we did not have a need for any further discussions regarding the memorandum. The PHA had the opportunity to discuss the issues of the memorandum further, if they felt it was necessary. Improper Draw and Transfer of CGP Funds For Ineligible Activities On May 17, 1996, the PHA and the Puerto Rico Economic Development Bank agreed to establish a $1 million revolving fund. Its purpose was to finance loans to public housing residents for economic development projects. The agreement authorized the bank various fees including: (1) five percent of the loan amount for evaluating the application, (2) one percent of the loan for closing and disbursing the loan, and (3) three and a half percent of the unpaid principal for administering the loan. The PHA improperly transferred $1 million in CGP funds to the bank for the loans. As of June 30, 1997, the fund’s balance was $1,069,178. Our procurement audit determined that PHA officials routinely disregarded program requirements. We made several recommendations in that report to strengthen management controls. PHA Comments Despite the OIG’s allegations to the contrary, PRPHA’s establishment of a resident business development loan fund is a permitted expenditure of Comprehensive Grant Program (“CGP”) funds. Federal Regulations permit public housing authorities to expend their CGP funds on management improvements, including “residents programs and services through the coordination of the provision of social services from tribal or local government or other public and private government entities” as stated in 24 CFR 968.112(g)(2)(i). PRPHA’s coordinated effort with the Puerto Rico Economic Development Bank to establish a business development loan fund for public housing residents qualifies as such a program. Again, the OIG provides no evidence that the expenditure is not authorized. Evaluation of PHA Comments As stated in memo, the agreement was to finance loans to public housing residents for economic development projects. Revolving funds to finance loans are not a social services activity; it is an economic development activity. Title 24 CFR Part 968.310 (g),dated April 1, 1995, states a PHA’s ongoing operating expenses, including direct provisions of social services through either contract or force account labor, are ineligible management improvement costs. Also, 24 CFR Part 968.310 (g)(1) Economic development costs, states that HUD encourages PHAs to the greatest extent feasible, to hire residents as trainees or employees to carry out the modernization program under this subpart, and to contract with resident-owned business for modernization work. Therefore, the use of CGP funds for establishing a revolving loan fund is an ineligible activity. 4 We recommend that you: A. Verify the $18,862,167 reimbursement to the CGP funds by examining the respective bank statements and deposit slips. B. Request the PHA to reimburse the CGP funds the $1 million transfer to the Government Development Bank for a loan revolving fund. C. Compute and bill the PHA the amount of lost interest based on Department of Treasury borrowing costs for the amount used for the hurricane emergency and for the $1 million used for the loan revolving fund. 5 Attachment B 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Attachment C DISTRIBUTION Administrator, Puerto Rico Public Housing Administration Puerto Rico Secretary of Housing Deputy Secretary, SD (Room 10100) Chief of Staff, S (Room 10000) Special Assistant to the Deputy Secretary for Project Management, SD (Room 10100) Acting Assistant Secretary for Administration, S (Room 10110) Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120) Senior Advisor to the Secretary, Office of Public Affairs, S, (Room 10132) Deputy Assistant Secretary of Administrative Services/Director of Executive Secretariat, AX (Room 10139) Director of Scheduling and Advance, AL (Room 10158) Counselor to the Secretary, S (Room 10234) Deputy Chief of Staff, S (Room 10226) Deputy Chief of Staff for Operations, S (Room 10226) Deputy Chief of Staff for Programs and Policy, S (Room 10226) Director, Office of Special Actions, AK (Room 10226) Deputy Assistant Secretary for Public Affairs, W (Room 10222) Special Assistant for Inter-Faith Community Outreach, S (Room 10222) Executive Officer for Administrative Operations and Management, S (Room 10220) Senior Advisor to the Secretary for Pine Ridge Project, W, (Room 10216) General Counsel, C (Room 10214) Director, Office of Federal Housing Enterprise Oversight, O (9th Floor Mailroom) Assistant Secretary for Housing/Federal Housing Commissioner, H (Room 9100) Office of Policy Development and Research, R (Room 8100) Inspector General, G (Room 8256) Assistant Secretary for Community Planning and Development, D (Room 7100) Assistant Deputy Secretary for Field Policy and Management, SDF (Room 7108) Government National Mortgage Association, T (Room 6100) Assistant Secretary for Fair Housing and Equal Opportunity, E (Room 5100) Chief Procurement Officer, N (Room 5184) Assistant Secretary for Public and Indian Housing, P (Room 4100) Chief Information Officer, Q (Room 3152) Director, Office of Departmental Equal Employment Opportunity, U (Room 5128) Director, Office of Departmental Operations and Coordination, I (Room 2124) Chief Financial Officer, F (Room 2202) Director, HUD Enforcement Center, V, 451 Portals Bldg, Suite 200, Washington, DC 20140 Director, Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800 Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building Deputy Chief Financial Officer for Finance, FF (Room 2202) (2) Director, Office of Budget, FO (Room 3270) 20 Secretary's Representative, 4AS Area Coordinator, Caribbean Office, 4NS Audit Liaison Officer, 3AFI Audit Liaison Officer, Office of Public and Indian Housing, PF (Room P8202) Director, Office of Public and Indian Housing, 4NPH Departmental Audit Liaison Officer, FM (Room 2206) Acquisitions Librarian, Library, AS (Room 8141) Counsel to the IG, GC (Room 8260) HUD OIG Webmanager-Electronic Format Via Notes Mail (Cliff Jones@hud.gov) Public Affairs Officer, G (Room 8256) Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street N.W., Room 2474, Washington DC 20548 ATTN: Judy England-Joseph The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, United States Senate, Washington DC 20510-6250 The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, United States Senate, Washington DC 20510-6250 The Honorable Dan Burton, Chairman, Committee on Government Reform, United States House of Representatives, Washington DC 20515-6143 The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform, United States House of Representatives, Washington, DC 20515-4305 Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O'Neil House Office Building, Washington, DC 20515-6143 Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW, Room 9226, New Executive Office Bldg., Washington, DC 20503 Sharon Pinkerton, Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy and Human Resources, B373 Rayburn House Office Bldg., Washington, DC 20515 Administrator, Office of Federal Procurement Policy, Office of Management and Budget, Old Executive Office Building, Room 352, Washington, DC 20503 21 22
Misuse of HUD Funds, Puerto Rico PHA, San Juan, Puerto Rico
Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-03-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)