oversight

VHDA Section 8 Certificate and Voucher Programs, Richmond, VA

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-02-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Management Memorandum




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00-PH-203-1003                Page ii
Executive Summary
We conducted an audit of Virginia Housing Development Authority (VHDA) Section 8 Certificate
and Voucher Programs. The purpose of our review was to determine if VHDA was managing its
Section 8 Program efficiently and effectively. Specific audit objectives were to determine
whether VHDA:

       •   established procedures and provided adequate monitoring and oversight of its
           administrative agents in the areas of Housing Quality Standards (HQS), rent
           reasonableness, financial management, tenant income verification, family composition,
           and waiting list administration;
       •   fully utilized Section 8 resources;
       •   charged administrative fees according to HUD guidelines;
       •   had an accounting system that adequately tracked costs associated with its Section 8
           programs; and
       •   provided tenant utility allowances according to HUD requirements.

Generally, we found VHDA effectively manages its Section 8 programs and provides adequate
oversight and direction to its 83 administrative agents. However, in our review, we did identify a
number of areas in the VHDA’s administration of its Section 8 Program that needed to be
improved. These areas are summarized below and detailed in the finding section of this report. At
the end of our audit, VHDA was in the process of procuring a consultant to perform a
comprehensive evaluation of its Section 8 programs to address audit recommendations and areas
needing improvement.



 VHDA Can Improve Its                We found VHDA can improve its administration of the
 Administration of the               Section 8 Program along with its compliance with related
 Section 8 Program                   requirements in the areas of: HQS; rent reasonableness;
                                     financial management; tenant waiting list administration; and
                                     tenant income verification. We observed problems in these
                                     areas because VHDA’s monitoring of sub-recipients did not
                                     identify existing problems and provide for the uniform and
                                     consistent application of program requirements among sub-
                                     recipients.

                                     VHDA did not utilize $30 Million of available Section 8
 VHDA Did Not Utilize                resources. Until recently, VHDA has measured its
 Available Section 8                 occupancy based on ACC unit allocations even though HUD
 Resources                           revised its Section 8 procedures in 1995, requiring housing
                                     authorities to budget resources based on dollars instead of
                                     units. VHDA was conservative in its interpretations of HUD
                                     budget guidelines, and did not change its leasing benchmarks
                                     to recognize dollars instead of units as the relevant leasing
                                     measure. Budgeting Section 8 resources based on available
                                     dollars as required, would have provided the VHDA with

                                                   Page iii                       00-PH-203-1003
Executive Summary


                         the opportunity to house significantly more families since it
                         allows a Housing Authority to lease as many units as
                         possible without regard to ACC unit limitations. As a result,
                         VHDA did not fully utilize its Section 8 resources, and HUD
                         recently recaptured over $30 Million that could have
                         otherwise provided additional rental subsidies to families
                         on VHDA waiting lists.

                         The VHDA needs to improve its recertification procedures.
 VHDA Needs to Improve   A computer match of tenants reported income with 1997
 Its Recertification     Internal Revenue Service (IRS) and Social Security
 Procedures              Administration (SSA) information for over 7,000
                         households reported in HUD’s Multifamily Tenant
                         Characteristics System (MTCS) identified over 300
                         households with potential income discrepancies exceeding
                         $10,000 and 1,900 households with potential income
                         discrepancies between $1,000 and $10,000.

                         Detailed analysis of 138 active households of the 300
                         households with potential income discrepancies exceeding
                         $10,000 appeared to validate the overpayment of Section 8
                         subsidies in 116 of the cases. The VHDA’s recertification
                         procedures contributed to subsidy overpayments because
                         they did not provide for interim recertifications of
                         significant income changes unless the tenant did not report
                         any income on the last certification.         Additionally,
                         administrative agents were not always obtaining third party
                         income verifications.

                         VHDA did not follow existing policies and procedures in
 VHDA Did Not Follow     establishing tenant utility allowances. It did not:
 Utility Allowance
 Procedures
                         •      obtain tenant utility consumption data in analyzing
                                utility allowances;
                         •      ensure utility allowances were sufficient to cover
                                minimum provider charges; and
                         •      ensure utility allowance schedules provided to
                                localities were correct.

                         As a result, VHDA tenants incurred total housing payments
                         in excess of program requirements, since utility allowances
                         were not sufficient to pay actual utility costs. VHDA staff
                         commented that one locality’s utility allowances were not
                         raised because gross rents would exceed fair market rents.



00-PH-203-1003               Page iv
                                                        Executive Summary


                  We recommend VHDA implement quality control
Recommendations   procedures to improve its administration of the Section 8
                  program. VHDA needs to improve monitoring of localities
                  in the areas of        HQS,    financial management, rent
                  reasonableness, waiting list administration, and tenant
                  income verification. We also recommend VHDA change its
                  tenant recertification procedures to reduce tenant’s under
                  reporting of income, ensure HQS violations disclosed in our
                  review are corrected, and revise utility allowance schedules
                  accordingly when it completes its ongoing utility study.

                  The findings were discussed with the VHDA during the
                  course of the audit and at an exit conference on January 19,
                  2000. The VHDA was also given draft findings for
                  comment. VHDA’s written comments are contained in
                  Appendix A and summarized elsewhere in the report.




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Executive Summary




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00-PH-203-1003                   Page vi
Table of Contents

Management Memorandum
i


Executive Summary                                                   iii


Introduction
1

Findings

1    VHDA Needs to Improve Its Administration and Monitoring
     of the Section 8 Program                                        5


2    VHDA Did Not Utilize $30 Million of Available Section 8
     Resources
     17


3    The VHDA Needs to Improve Its Recertification Procedures
     21


4    VHDA Did Not Properly Establish Section 8 Utility
     Allowances
     25



Management Controls
29


Follow Up On Prior Audits
31

Appendices

                                   Page vii              00-PH-203-1003
Table of Contents


        A Audit Comments
33

        B Distribution
45




Abbreviations
AAF              Annual Adjustment Factor
ACC              Annual Contributions Contract
CFR              Code of Federal Regulations
FMR              Fair Market Rent
HA               Housing Authority
HQS              Housing Quality Standards
HUD              Housing and Urban Development
IRS              Internal Revenue Service
OIG              Office of Inspector General
OMB              Office of Management and Budget
PHA              Public Housing Authority
PIH              Public and Indian Housing
SSA              Social Security Administration
VHDA             Virginia Housing Development Authority
VSO              Virginia State Office




00-PH-203-1003                          Page viii
Introduction
The Virginia Housing Development Agency (VHDA), is governed by a ten-member Board of
Commissioners, chaired by Sam Kornblau. The Executive Director is Susan Dewey. Hunter L.
Jacobs is the Director of Multifamily Special Programs which administers the Section 8 Program.
The VHDA’s offices are located at 601 South Belvidere Street, Richmond, VA 23220.

The VHDA’s Section 8 Program has been operating since 1977. A mission of VHDA is to make
the Section 8 Subsidy Program available to all localities in Virginia who wish to participate.
During Fiscal Year 1998, the VHDA’s Section 8 Program administered 86 localities contracting
with 83 administrative agents. The HUD’s Virginia State Office and the Washington, DC field
office contracted with VHDA through an Annual Contribution Contracts (ACC) to provide Section
8 funding. As of June 30, 1998, VHDA administered 9,716 units and expended $46,233,168 for
these units in Fiscal Year 1998.


                                    The purpose of our audit was to determine whether the PHA
 Audit Objectives                   was complying with the provisions of its Section 8 ACC
                                    contracts with HUD, as well as applicable regulations, and
                                    to determine if they are administering their Section 8
                                    Program efficiently and effectively. The specific objectives
                                    were to determine whether VHDA: established procedures
                                    and provided adequate monitoring and oversight of its
                                    administrative agents in the areas of Housing Quality
                                    Standards (HQS), rent reasonableness, financial
                                    management, tenant income verification, family composition,
                                    and waiting list administration; fully utilized Section 8
                                    resources; charged administrative fees according to HUD
                                    guidelines; had an accounting system that adequately tracked
                                    costs associated with its Section 8 programs; and provided
                                    tenant utility allowances according to HUD requirements.

                                    The audit was conducted between December 1998 and
 Audit Scope and                    December 1999, and covered the period July 1, 1997
 Methodology                        through June 30, 1998. The audit period was extended where
                                    necessary. To accomplish the audit objectives, we reviewed
                                    procedures and tested compliance as follows:

                                    At VHDA we reviewed:

                                    •         administrative fees to determine if the fees were
                                              supported.

                                    •         disbursements including salaries and indirect costs
                                              charged to the Section 8 Program to determine if
                                              costs were reasonable.


                                     Page 1                                00-PH-203-1003
Introduction


                 •      monitoring reports of administrative agents to
                        determine if monitoring was adequate.

                 •      utility allowances to determine if allowances were
                        analyzed adequately.

                 •      Section 8 Voucher Payment Standards to determine if
                        standards were established properly.

                 We judgmentally selected four of the largest administrative
                 agents for review of VHDA’s administration of its Section 8
                 Program. The four agents were: Prince William County;
                 City of Virginia Beach; City of Martinsville; and
                 Shenandoah/Page County Department of Social Services. At
                 these localities we:

                 •      conducted physical inspections of 63 units to ensure
                        compliance with HQS. During the inspection, we
                        asked the tenants about their utility costs to determine
                        if utility allowances were adequate.

                 •      examined tenant files to verify: tenants qualified as a
                        family; tenants’ income were within income limits;
                        and annual recertifications were performed properly.

                 •      reviewed the use of administrative fees provided by
                        VHDA.

                 •      reviewed rent reasonableness to determine if rents
                        were reasonable and in accordance with regulations.

                 •      reviewed waiting lists to determine if agents
                        maintained lists and selected applicants properly.

                 We reviewed utilization of Section 8 resources by
                 reviewing documents from VHDA and HUD. Also, with the
                 assistance of HUD Headquarters, we performed a computer
                 match of tenant’s income. We used audit related software to
                 analyze computer data maintained by VHDA. During the
                 audit, we interviewed applicable staff from HUD, VHDA,
                 and the administrative agents.

                 Our audit was conducted in accordance with generally
                 accepted government auditing standards.



00-PH-203-1003       Page 2
         Introduction




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Introduction




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00-PH-203-1003                Page 4
                                                                                    Finding 1



VHDA Needs to Improve Its Administration and
   Monitoring of the Section 8 Program
VHDA can improve the administration of its Section 8 Program along with its compliance with
related requirements in the areas of: housing quality standards; rent reasonableness; financial
management; tenant waiting list administration; and tenant income verification. We observed
problems in these areas because VHDA’s monitoring of administrative agents did not identify
existing problems and provide for the uniform and consistent application of program requirements
among its administrative agents. As a result VHDA does not have assurance that:

       •   tenants are occupying units that meet Housing Quality Standards (HQS);
       •   administrative agents are adequately documenting circumstances regarding rent
           reasonableness determinations, tenant income verification and over housed tenants;
       •   administrative agents are efficiently utilizing Section 8 resources; and
       •   tenants are selected from waiting lists according to HUD requirements.


                                    Chapter 5-12 of the Public Housing Authority
 VHDA Did Not Perform               Administrative Practices Handbook (7420.7) requires
 Supervisory Inspections            housing authorities to establish procedures for reviewing a
 According to HUD                   sample of the completed Section 8 unit inspections.
 Requirements                       Supervisory re-inspection of a random sample of five
                                    percent of the approved units is required.

                                    Our review of VHDA’s 1998 locality monitoring reports
                                    disclosed that VHDA inspected only 2.72 percent, or about
                                    half as many units as provided for in the administrative
                                    practices handbook, and inspected at least five percent of the
                                    units in only 21 of 72 of its monitoring reviews during 1998.

                                    As illustrated below, VHDA inspected five percent of the
                                    housing units in only one of the five localities that we
                                    sampled.




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Finding 1



                Quality Control Inspections Percentage

   7%
                                                     5.95%
   6%

   5%                   5 % Requirement                        Prince William County

   4%                                                          Henry & Patrick Counties

                                                               Martinsville
   3%
            1.88%    1.69%     1.89%                           Virginia Beach
   2%
                                                               Shenandoah & Page Counties
                                          0.94%
   1%

   0%




                                       VHDA did not inspect five percent of its units because it
                                       erroneously believed quality control requirements were
                                       satisfied using a combination of quality control inspections
                                       and tenant confirmations. VHDA revised this policy in
                                       December 1998 and the number of inspections in a locality
                                       will now be based on the following sliding scale:

                                                    Number                        Number of
                                                    of Units                      Inspections
                                                       0-100                          5
                                                    101-150                           6
                                                    151-200                           8
                                                    201-250                          10
                                                      251+                           12

                                       However, even with this new policy, there is still no
                                       assurance the five percent thresholds will be met, especially
                                       in larger jurisdictions that have significantly more than 251
                                       units.

                                       In order to determine if VHDA units met HQS, we
 Units Did Not Meet HQS
                                       judgmentally selected and then inspected 63 of 2,325 leased
                                       units in the four localities, and found that 50 units failed
                                       HQS. Inspections of the 50 units were provided to VHDA
                                       and each applicable locality. Of note was that nine units
                                       which previously failed VHDA, HUD and locality
                                       inspections were subsequently passed without making sure


00-PH-203-1003                             Page 6
                                                                      Finding 1


                      the deficiencies were corrected, as we found similar
                      deficiencies during our inspections.

                      24 CFR, Part 982.401, states that Section 8 housing must
                      comply with HQS, both at initial occupancy of the dwelling
                      unit, and during the term of the assisted lease. To meet HQS,
                      units must :

                      •      be structurally sound;
                      •      provide an alternative means of exit in case of fire;
                      •      provide adequate space and security for each
                             resident and their belongings;
                      •      be free of pollutants in the air at levels that threaten
                             the health of residents;
                      •      provide sanitary facilities that are in proper
                             operating condition;
                      •      have adequate heating and/or cooling facilities;
                      •      have adequate illumination and electricity;
                      •      be maintained in sanitary condition; and
                      •      include a smoke detector on each occupied level.

                      Our review of the four localities disclosed that a database
Rent Reasonableness   for establishing rent reasonableness was lacking at one
                      locality and rent increases were based on an owner’s
                      willingness to accept the Annual Adjustment Factor (AAF).
                      We also noted several instances where administrative agent
                      files did not adequately document circumstances when:
                      comparable properties were not used to support rent
                      reasonableness determinations; and tenants were leasing
                      units exceeding their allowable bedroom size.

                      24 CFR, Part 882.106(b) states that the HA shall certify for
                      each unit for which it approves a lease that the Contract Rent
                      for such unit is:

                      (i) Reasonable in relation to rents currently being charged
                      for comparable units in the private unassisted market, taking
                      into account the location, size, type, quality, amenities,
                      facilities and management and maintenance service of such
                      unit, and

                      (ii) Not in excess of rents currently being charged by the
                      Owner for comparable unassisted units.




                          Page 7                                    00-PH-203-1003
Finding 1


                        24 CFR, Part 882.108(a), provides that owners can request
                        the HA to annually adjust rents based on the AAF.
                        Paragraph (b) provides that AAF adjustments shall not result
                        in material differences between the rents charged for
                        assisted and comparable unassisted units.               Part
                        982.402(c)(1), provides that the gross rent under the
                        certificate program should not exceed FMR for a bedroom
                        size determined by HA subsidy standards. Paragraph (b)(1)
                        provides that subsidy standards must provide for the
                        smallest number of bedrooms needed to house a family
                        without overcrowding.

                        In reviewing rent reasonableness determinations at the
                        localities, we selected units that were above the FMRs and
                        checked these units to ensure the number of bedrooms did
                        not exceed the number allowed for the family composition.
                        There was no indication that VHDA’s monitoring reviews
                        examined this aspect of rent reasonableness.

                        In Virginia Beach, the rental database was insufficient to
                        establish the rent reasonableness of some units since it did
                        not include comparables for single-family homes or
                        townhouses. Also the manner in which Virginia Beach
                        provided rent increases to apartment owners was flawed.
                        Virginia Beach asked owners each year if they wanted a rent
                        increase. If the owner said yes, then Virginia Beach would
                        process the rent increase based on the AAF, without any
                        assurance the new rent was reasonable and did not exceed
                        rents charged to unassisted units in the same apartment
                        complex.

                        VHDA did not reconcile amounts budgeted to its Section 8
 Financial Management   program to reflect actual expenditures.      Additionally,
                        VHDA did not review the localities accounting of Section 8
                        funds during its monitoring visits.

                        Paragraph 1a of OMB Circular A-87 Part C states that costs
                        under Federal awards must be necessary and reasonable for
                        the proper and efficient performance and administration of
                        Federal awards.

                        Also the ACC, paragraph 11d, provides that program
                        receipts in excess of current needs must be invested. Our
                        review of the Section 8 accounting systems of VHDA and
                        the four localities disclosed the following:


00-PH-203-1003              Page 8
                                                       Finding 1



Agency             Deficiency

VHDA         Its system used budgeted amounts in charging
             indirect costs to the Section 8 Program and did
             not adjust the amounts to actual costs. For
             example, Fiscal Year 1998 telephone expense
             was based on a budgeted amount of $363,193.
             Actual costs were $282,513. VHDA included
             the cost of installing a new phone system in the
             budgeted amount. The actual cost was less
             because the phone system was not installed
             causing the Section 8 telephone expense to be
             overcharged. VHDA officials stated that the
             overcharging was offset by computer, legal, and
             furniture costs not charged to Section 8 Program.
Prince       PWC did not earn interest on its Section 8 funds.
William      As of July 1, 1998, Prince William had Section
County (PWC) 8 funds totaling $217,964 on hand which were
             not earning interest income.
Virginia     Virginia Beach did not maintain separate
Beach        accounting records for Section 8 units funded by
             VHDA and directly by HUD. Virginia Beach
             complained to VHDA that its administrative fee
             was not sufficient to administer the VHDA units.
             However, Virginia Beach did not have a system
             to determine the administration costs of the
             VHDA units.

Martinsville       Martinsville staff working less than 100% of
                   their time on Section 8, did not prepare time
                   sheets. Additionally, Martinsville commingled
                   funding for Section 8 and Community Planning
                   and Development activities.
Shenandoah         Shenandoah County did not account for receipts
County             from VHDA totaling $6,963. County staff stated
                   that the receipts were used for expenses incurred
                   during October 1997. The staff did not provide
                   us an accounting for these expenses.

      Since the VHDA did not monitor its administrative agents
      financial accountability, it is unclear how VHDA determined
      whether the administrative agents were using their fees to
      administer the program efficiently.



          Page 9                                     00-PH-203-1003
Finding 1


                  We reviewed waiting lists maintained at the four localities
 Waiting List     and determined Virginia Beach and Martinsville did not
 Administration   administer their waiting lists properly and VHDA’s
                  monitoring of these localities did not disclose some of the
                  waiting list problems. Handling waiting lists improperly
                  could lead to improprieties in the admission of tenants into
                  the State’s Section 8 Program.

                  24 CFR 982.204(b) states that the HA will select applicants
                  from the waiting list in accordance with their admission
                  policies. The waiting list at a minimum must contain the
                  following information:

                  (1)      applicant’s name;
                  (2)      number of bedrooms required based on the family
                           size and make up;
                  (3)      date and time of the application;
                  (4)      federal preference qualifications;
                  (5)      local preference qualifications; and
                  (6)      ethnic or racial designation of the Head of
                           Household.

                  Part 982.204(d) states that the order of admission from the
                  waiting list may not be based on family size. In addition
                  VHDA Policy 486, Method of Selection, states that: “The
                  method for selecting applicants from preference categories
                  must have a clear audit trail that can be used to verify that
                  each applicant has been selected in accordance with the
                  method specified.” In the following instances the tenant
                  selection process was not documented on the waiting lists.

                  Virginia Beach

                  Our review of Virginia Beach’s administration of its waiting
                  list disclosed the following:

                  •        No explanations were given for selecting applicants
                           before others who were on the waiting lists longer.

                  •        Two applicants were still on the waiting list even
                           though they were being assisted in the Virginia
                           Beach Section 8 Program.

                  •        One applicant appeared twice on the waiting list.



00-PH-203-1003          Page 10
                                                               Finding 1


                •       Virginia Beach had a waiting list containing one
                        Federal Preference; however, it did not document the
                        date when the applicants requested the preference.

                In 1998, the VHDA monitoring report documenting the
                review of the waiting list only disclosed that Virginia Beach
                did not verify Federal Preferences.

                Martinsville

                Martinsville did not maintain waiting lists that documented
                how selections were made. According to an administrative
                agent, she selected applicants needing a one bedroom
                voucher over other applicants even though the other
                applicants were on the waiting list longer. The agent stated
                that she was told by a Housing Management Officer from
                VHDA that these selections from the waiting list were
                acceptable. The Housing Management Officer denied telling
                the agent to make selections from waiting list based on
                bedroom size. The 1998 monitoring reports did not disclose
                any problems with the way Martinsville was administering
                its waiting list.

                Three out of four localities did not obtain third party
Tenant Income   verifications of tenant income, another problem which was
Verification    not disclosed by VHDA monitoring. These deficiencies
                were provided to VHDA and each applicable locality.
                Tenant recertification procedures are discussed in more
                detail in finding three of this report.

                HUD Handbook 7420.7, Chapter 4, paragraph 4-5d.(1)
                states that the tenant’s income must be verified by third
                parties. Third-party contacts must be transmitted through the
                mail rather than handled directly by the tenant to ensure
                valid results.


                                      * * * **

                We discussed the preceding deficiencies with the VHDA
                and with the applicable communities during our review. We
                believe the problems need to be corrected by VHDA and
                their administrative agents. Further monitoring efforts need
                to be improved to make sure these types of problems are
                identified when they exist so that corrective action can be


                    Page 11                                  00-PH-203-1003
Finding 1


                    taken and VHDA can provide housing opportunities as
                    efficiently as possible.



 Auditee Comments   HQS Inspections

                    VHDA acknowledged that additional improvements are
                    needed in HQS compliance and enforcement. In that regard,
                    VHDA said it has recently provided its administrative
                    agents with HQS training and will require administrative
                    agents to confirm in writing that repairs have been made and
                    also require photographs and tenant confirmations. VHDA
                    did not agree that it needed to conduct quality control
                    inspections for 5% of units in each administrative agent
                    locality or that units that failed OIG inspections exposed
                    tenants to imminent health and safety hazards. VHDA said
                    its supervisory inspection procedures are in compliance
                    with current HUD requirements. Additionally, VHDA asked
                    the OIG to provide additional support for its position that
                    units were subsequently passed without assurance that
                    deficiencies were corrected.

                    Rent Reasonableness

                    VHDA agreed that Virginia Beach did not follow its
                    guidelines for rent reasonableness and that it intends to
                    provide administrative agents with rent reasonableness
                    training. VHDA did not agree that comparable properties
                    were not used to support rent reasonableness determinations
                    since its administrative policies allow for a $25 - $50
                    variance in determining rent reasonableness. Additionally,
                    VHDA said units identified by the OIG as over FMR were
                    allowed pursuant to Over Fair Market Tenancy Option
                    (OFTO), and over housed tenants were paying rents within
                    lesser bedroom FMR guidelines.

                    Financial Management

                    VHDA agreed that it needs a financial system that accurately
                    reflects its Section 8 program expenditures and is in the
                    process of implementing an activity based management
                    system which will accurately allocate costs across its
                    programs.     However, VHDA did not agree that its
                    administrative agents needed to comply with OMB Circular
                    A-87 since they are paid a predetermined fee, and to require

00-PH-203-1003         Page 12
                                                                     Finding 1


                    administrative agents to comply with OMB Circular A-87
                    will only increase their operating costs and serve as a
                    disincentive to support the Section 8 program. Further,
                    VHDA said OMB encourages agencies to test fee for service
                    alternatives to reduce the burden associated with
                    maintaining systems for charging administrative costs.

                    Waiting List

                    VHDA agreed with the discrepancies noted in the finding
                    and will ensure administrative agents maintain file
                    documentation to ensure its ability to determine correct
                    placement and tenant selection.

                    Tenant Income Verification

                    VHDA agreed that obtaining independent third party income
                    verification is required and has implemented procedures to
                    confirm appropriate third party verification in its initial and
                    annual reviews.



OIG Evaluation of   VHDA is to be commended for its commitment towards
Auditee Comments    implementing training and procedures to improve areas of its
                    Section 8 program. Additionally, we have taken VHDA
                    responses into consideration and provided VHDA with
                    additional support and clarification regarding HQS
                    deficiencies and made appropriate revisions to the finding.




                    Regarding areas of disagreement we respond as follows:

                    HQS Inspections

                    We evaluated VHDA’s compliance with HUD guidelines for
                    quality control inspections that were in effect during our
                    review and noted the discrepancies accordingly.
                    Additionally, VHDA indicated in its written response, that
                    its supervisory quality inspections will now be based on
                    current HUD regulations, which only requires supervisory
                    quality inspections based on percentages of the total number
                    of units administered by the VHDA and does not distinguish

                       Page 13                                     00-PH-203-1003
Finding 1


                         between its 83 localities. Even though this procedure would
                         meet HUD’s new requirement we do not believe it is in the
                         best interest of VHDA’s Section 8 programs, as HUD
                         requirements do not consider that State agencies manage
                         Section 8 programs administered by many sub-recipients and
                         therefore, it would not ensure VHDA is providing
                         supervisory quality inspections consistently throughout the
                         State.

                         Rent Reasonableness

                         Regarding issues of rent comparability, OFTO tenancy, and
                         over housing, our findings were based on appropriate
                         documentation not being included in the files to justify
                         administrative agents determinations of allowability. The
                         VHDA’s policy of allowing a $25 - $50 variance in rent
                         reasonableness determinations is appropriate as long as the
                         tenant files contain adequate documentation to support the
                         determination. Regarding Virginia Beach tenants identified
                         as being over housed, we do not agree that their rents were
                         within the applicable FMRs for the bedroom size they were
                         eligible for, as indicated in the VHDA response.

                         The VHDA did not address other rent reasonableness and
                         over housing discrepancies noted during our review. We
                         will provide the HUD VSO and the VHDA with a complete
                         listing of these discrepancies for their continued review and
                         determination.

                         Financial Management

                         We agree it is VHDA’s responsibility to ensure its program
                         is operating as efficiently as possible and administrative
                         agents do not necessarily need to maintain financial systems
                         according to OMB Circular A-87. However, VHDA needs
                         to include some level of financial monitoring and assurance
                         that administrative agents are using fees to administer the
                         Section 8 program efficiently.


 Recommendations         We recommend that HUD require VHDA to:

                   1A.   Ensure HQS violations are corrected at properties
                          that failed HQS inspections during our review.




00-PH-203-1003               Page 14
                                               Finding 1


1B.   Establish and implement quality control procedures
      to improve its administration of the Section 8
      Program. Specifically:

      •     assure that quality control HQS inspections
            include a representative sample of units from all
            of its administrative agents.
      •     ensure HQS inspections are performed according
            to HUD requirements, and units failing HQS
            inspections are performed to ensure cited
            deficiencies are corrected; and
      •     provide all localities with HUD guidelines for
            the assessment of rent reasonableness; family
            composition; financial management; tenant
            selection and maintaining waiting lists; and
            verification of tenant income, and determine if
            the guidelines are being followed during
            monitoring visits.




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Finding 1




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00-PH-203-1003               Page 16
                                                                                      Finding 2



VHDA Did Not Utilize $30 Million of Available
          Section 8 Resources
Until recently, VHDA has measured its occupancy based on ACC unit allocations even though
HUD revised its Section 8 procedures in 1995, requiring housing authorities to budget resources
based on dollars instead of units. Budgeting Section 8 resources based on available dollars as
required, would have provided the VHDA with the opportunity to house significantly more
families since it allows a Housing Authority to lease as many units as possible without regard to
ACC unit limitations. VHDA was conservative in its interpretations of HUD budget guidelines,
and did not change its leasing benchmarks to recognize dollars instead of units as the relevant
leasing measure. VHDA said its interpretations of HUD guidelines were prudent since HUD has
now revised its guidelines going back to using units as the relevant leasing measure. Additionally,
HUD budget reviews and program guidance did not effectively communicate the significant
program changes, as VHDA budgets were approved even though it was not fully utilizing its
resources. As a result, VHDA did not fully utilize its Section 8 resources, and HUD recently
recaptured over $30 Million that could have otherwise provided additional rental subsidies to
families on VHDA waiting lists.


                                      In November 1997, HUD recaptured Section 8 reserves
 HUD Recaptured $30.7                 based on Public Law 105-18. The Public Law instructed
 Million From VHDA                    HUD to recapture $5.8 Billion in Section 8 reserves to
                                      provide funding for disaster relief activities from the spring
                                      floods. $30.7 Million was recaptured from unused VHDA
                                      resources.

                                      In a Federal Register dated July 3, 1995, HUD required the
                                      Housing Authorities (HA) to manage Section 8 Program
                                      funds based on dollars instead of units. Also, the Register
                                      stated that HUD cannot guarantee that the funding that is
                                      appropriated by Congress and obligated by HUD to a
                                      specific HA’s admission of families without regard to unit
                                      size.

                                      VHDA continued to use ACC unit allocations as its leasing
                                      benchmark and was conservative in its leasing of Section 8
                                      units because:




                                      •   HUD guidelines overemphasized penalties associated
                                          with over utilizing Section 8 resources (PIH Notice 97-

                                          Page 17                                   00-PH-203-1003
Finding 2


                                                59 states, The cost of over-leasing must be absorbed by
                                                the HA through the Section 8 operating reserve or other
                                                funding sources. The Section 8 Certificate and Voucher
                                                programs will not absorb the cost of HA over-leasing.);
                                                and

                                           •    Although, HUD budget reviewers encouraged VHDA to
                                                lease additional units, they still approved budgets that
                                                VHDA anticipated spending significantly less than
                                                authorized.

                                           As shown below, VHDA Section 8 resources continued to
                                           increase until they were recaptured in 1997.



                         Funding - Virginia State Office Section 8 Certificates
                 $60,000,000


                 $50,000,000


                 $40,000,000
     $ Amounts




                 $30,000,000
                                                                                     Available Funding
                                                                                     Total Requisition
                 $20,000,000


                 $10,000,000


                         $0
                           1992    1993        1994        1995    1996       1997

                                               Fiscal Years

                                           The HUD Virginia State Office (VSO) did not support
                                           VHDA’s request for additional administrative fees and
                                           considered the agency to be “at risk” based on its under-
                                           utilization of program resources. The VHDA protested these
                                           actions and HUD Headquarters overturned the earlier
                                           determination and VHDA was awarded $600,000 of
                                           additional administrative fees. It appears the VSO actions
                                           were ultimately effective in getting the VHDA to initiate a
                                           more rapid leasing strategy.

                                           Since July 1998, VHDA has responded to VSO
                                           recommendations and successfully leased over 2,400


00-PH-203-1003                                   Page 18
                                                                                                 Finding 2


                                                 additional Section 8 units, and significantly improved its
                                                 utilization of Section 8 resources as shown below.


                     Increase in Units Under Leased for the Virginia State Office Programs



                   9000
                   8000
                   7000
 Number of Units




                   6000
                   5000         6559      8584
                                                                                             FY 1998
                   4000                                                                      FY 1999
                   3000
                   2000
                   1000                                      1789      2171

                      0
                                 Certificates                    Vouchers




                                                                            * * * * * *

                                                 In our opinion, better communication between the VHDA
                                                 and HUD’s Virginia State Office (VSO) can increase
                                                 housing opportunities for needy families and result in a more
                                                 efficient use of program resources. The VHDA should
                                                 continue to seek clarification and guidance to ensure its
                                                 program is operating as efficiently as possible and meeting
                                                 its mission of providing low-income housing for needy
                                                 families in Virginia.


                                                 VHDA indicated the recapture of program resources
Auditee Comments                                 represented only one half of one percent (.00529) of the
                                                 National recapture, and was due in large part to: HUD’s
                                                 methodology for calculating renewal funding; a HUD
                                                 internal reconciliation that added $9.5 Million in subsidy
                                                 after the end of Fiscal Year 1996; and FMR reductions in
                                                 1993 and 1994.



                                                 VHDA said the recaptured funds were used as a contingency
                                                 reserve to be used in the event of unforeseen economic
                                                 events, and in funding shortfalls, such as VHDA faces this
                                                       Page 19                                00-PH-203-1003
Finding 2


                     year. Further VHDA said the fact that HUD has returned to
                     its old policy of funding the Section 8 program on the basis
                     of ACC unit allocations makes a strong argument that PHA’s
                     should use prudence in managing these programs.



 OIG Evaluation of   As stated in the finding narrative, we acknowledge Section 8
 Auditee Comments    resources were recaptured throughout the Nation, and HUD
                     regulations could have contributed to VHDA’s conservative
                     leasing approach. However, we do not agree that VHDA’s
                     leasing strategy was prudent considering HUD guidelines
                     have mandated using program dollars as the relevant leasing
                     measure since 1995. Clearly, the VHDA continued to use
                     units as the relevant leasing measure and could have
                     provided additional rental subsidies to Virginia households
                     as demonstrated by its recent success in increasing program
                     utilization.



 Recommendations     We recommend the:

                     2A.         VHDA administer its Section 8 Programs
                              according to the most current HUD guidelines.

                     2B.      VHDA fully budget the Section 8 resources provided
                              by HUD, and monitor its administrative agents to
                              ensure full leasing is maintained.




00-PH-203-1003             Page 20
                                                                                      Finding 3



The VHDA Needs to Improve Its Recertification
              Procedures
We compared the income tenants reported to the VHDA with income they reported to the IRS and
SSA and found significant discrepancies. The discrepancies resulted in the potential overpayment
of Section 8 subsidies, in 116 of 138 tenant cases in our review. The VHDA’s recertification
procedures contributed to income reporting discrepancies since its requirements did not provide
for interim recertifications of significant income changes unless the tenant did not report any
income on the last certification. Additionally, administrative agents did not always obtain third
party income verifications.

24 CFR 982.516 states, Housing Authorities are responsible for reexamination (recertification)
and interim examinations of tenant income. The Housing Authority must obtain third party
verification of income and adopt policies identifying the time and the circumstances under which
tenants must report a change in family income or composition.

Our computer matching project consisted of comparing tenant income data for over 7,000
households reported in HUD’s MTCS with the tenants’ 1997 IRS and SSA information. This
automated comparison identified over 300 households with potential income discrepancies
exceeding $10,000 and 1,900 households with potential income discrepancies between $1,000 and
$10,000.

We performed a detailed analysis of 138 households that were still active in VHDA’s program, of
the 300 households with computer generated discrepancies greater than $10,000 to determine why
they existed. Detailed analysis of 138 active households appeared to validate the overpayment of
Section 8 subsidies in 116 of the cases. As detailed below, many of the discrepancies existed
because of weaknesses in VHDA’s tenant income recertification and verification procedures. This
warranted tenant and VHDA notification according to PIH computer matching procedures.
Additionally, we also referred 11 egregious cases to HUD-OIG’s Office of Investigations.



 Income Recertification              We noted numerous instances where the tenant reported
 Procedures                          child support or public assistance on the annual
                                     recertification, but shortly after obtained a job with a
                                     material increase in income.              However, VHDA’s
                                     recertification procedures do not require any interim
                                     recertification for changes in a tenants’ income as long as the
                                     tenant had reported some income on the previous
                                     certification. These procedures are too lenient and could
                                     encourage tenants to avoid paying their share of rent by
                                     manipulating their employment schedules around annual
                                     recertifications.


                                        Page 21                                    00-PH-203-1003
Finding 3


                       VHDA’s sub-recipient agencies were not always obtaining
 Income Verification   third party income verifications to support annual
 Procedures            recertifications. Instead, they relied on pay stubs to verify
                       tenant income. VHDA’s verification requirements only
                       allow sub-recipients to use pay stubs as a last resort.
                       However, it appears that the sub-recipients used them too
                       frequently and they did not adequately document their
                       calculation of annual income. For example, in some cases
                       sub-recipients incorrectly calculated frequency of pay which
                       caused the potential income discrepancies. Additionally,
                       sub-recipients did not have adequate documentation that
                       could verify if certain tenants were live-in aides or whether
                       the head of households’ children were full-time students.

                                            * * * * * *

                       In summary, the VHDA could reduce Section 8
                       overpayments and improve tenant income reporting by
                       strengthening its interim recertification requirements and
                       ensuring its sub-recipient agencies obtain independent
                       income verifications and maintain complete file
                       documentation.


                       VHDA said it has redesigned its compliance monitoring
 Auditee Comments      protocol and is more closely monitoring administrative
                       agents to ensure they properly calculate tenant income and
                       obtain third party verifications. VHDA did not agree its
                       interim recertification procedures were too lenient since the
                       requirement to report interim increases in income imposes a
                       strong disincentive upon participating families to improve
                       their financial status and places an additional administrative
                       burden on the VHDA and its administrative agents.


                       Notwithstanding the disincentives of earning additional
 OIG Evaluation of     income and the extra paperwork associated with interim
 Auditee Comments      recertifications, the VHDA’s recertification procedures in
                       our opinion are too lenient. By requiring tenants to report
                       material income changes the VHDA could ensure tenants are
                       paying their share of rent and limited Section 8 resources are
                       used more efficiently.



 Recommendations       We recommend the VHDA:


00-PH-203-1003             Page 22
                                            Finding 3


3A.   Change its interim reporting requirements.
      Specifically, require tenants to report all material
      increases or changes in source of income within 30
      days of receiving the income regardless of whether
      they reported income or not on the prior
      recertification.

3B.   Implement procedures that will closely monitor sub-
      recipients to ensure they properly calculate tenant
      income.




      Page 23                             00-PH-203-1003
Finding 3




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00-PH-203-1003               Page 24
                                                                                       Finding 4



    VHDA Did Not Properly Establish Section 8
             Utility Allowances
VHDA did not follow existing policies and procedures in establishing tenant utility allowances. It
did not:

       •       obtain tenant utility consumption data in analyzing utility allowances;
       •       ensure utility allowances were sufficient to cover minimum provider charges; and
       •       ensure utility allowance schedules provided to localities were correct.

As a result, VHDA tenants incurred total housing payments in excess of program requirements,
since utility allowances were not sufficient to pay actual utility costs. VHDA staff commented that
one locality’s utility allowances were not raised because gross rents would exceed Fair Market
Rents.

24 CFR 882.214(a) states that, at least annually, the PHA shall determine whether there has been a
substantial change in utility rates or other charge of general applicability, and whether an
adjustment is required in the allowance of utilities and other services. If the PHA determines that
an adjustment should be made, the PHA shall establish a schedule of adjustments taking into
account size and type of dwelling units and other pertinent factors. Paragraph (c) provides that if a
PHA finds that utility cost changes are causing substantial difficulties in leasing decent, safe and
sanitary housing within the existing Fair Market Rent limitations, then the PHA shall furnish
appropriate documentation to HUD with a request for consideration of the need for a change in the
Fair Market Rents.

We tested utility allowances by asking tenants what their average utilities were costing during
HQS inspections, and verifying monthly minimum charges with utility providers. We compared
this information with the VHDA utility allowances. It appears the utility allowances were
inadequate in two of the four localities reviewed as follows:


                                      Prince William County
 Tenant Utility Costs
 Exceeded Utility                     Tenant utility costs exceeded utility allowances in 25 of 25
 Allowances                           tenants interviewed. Water and sewer utility allowances for
                                      Manassas Park, Virginia, did not even cover minimum
                                      monthly service charges. Additionally, VHDA made an
                                      error in preparing Prince William County’s utility allowance
                                      for heating a unit with two exposed walls as shown below:




                                            Page 25                                  00-PH-203-1003
Finding 4


                     Exposed              Monthly Dollar Allowances
                      Walls
                                  0 BR 1 BR       2 BR    3 BR     4 BR    5 BR
                         1         17    19         21      22      24      25
                         2         10    11         12      15      18      21
                         3         22    24         27      28      30      33

                    Logically, utility allowances for units with two exposed
                    walls should have been between the allowances for one and
                    three exposed rates, not less than the one exposed rate.
                    VHDA agreed to correct these rates and sent the revised
                    rates to Prince William County. VHDA instructed Prince
                    William County to adjust the tenant rent retroactively for the
                    applicable tenants.

                    Virginia Beach

                    Tenant utility costs exceeded allowances for 17 of 18
                    tenants’ accounts we tested. Based on tenant surveys it
                    appears actual water and sewer costs significantly exceeded
                    the utility allowances provided.

                    VHDA updated its utility allowance schedules effective July
                    1, 1998 by analyzing changes in utility rates without
                    considering tenant utility consumption data or utility
                    provider minimum charges. VHDA’s policy for updating
                    utility allowance schedules did not require VHDA to obtain
                    utility consumption data or use utility minimum charges.
                    Without using consumption data or utility minimum charges,
                    VHDA did not update utility allowance schedules
                    adequately.

                                             ******

                    VHDA is in the process of updating its utility allowances to
                    follow HUD guidelines by obtaining actual utility data from
                    tenants. VHDA sent a memorandum dated January 25, 1999
                    to all of its administrative agents requesting tenant releases
                    so that VHDA can request tenant’s utility records including
                    consumption data for the past 12 months. VHDA
                    expects to complete this study shortly and will use this data
                    to revise their utilities’ allowances.
                    The VHDA reiterated its commitment to updating its utility
 Auditee Comments   allowance schedules based on actual tenant consumption
                    data by March 2000.

00-PH-203-1003          Page 26
                                                               Finding 4




Recommendations   We recommend HUD to:

                  4A.   Monitor the progress of VHDA in updating their
                        utility allowances to ensure that the allowances meet
                        HUD guidelines.




                        Page 27                              00-PH-203-1003
Finding 4




                 (THIS PAGE LEFT BLANK INTENTIONALLY)




00-PH-203-1003               Page 28
Management Controls
In planning and performing our audit, we obtained an understanding of the management controls
that were relevant to our audit. Management is responsible for establishing effective management
controls. Management controls, in the broadest sense, include the plan of organization, methods,
and procedures adopted by management to ensure that its goals are met. Management controls
include the processes for planning, organizing, directing, and controlling program operations. They
include the systems for measuring, reporting, and monitoring program performance.


                                      We determined the following management controls were
 Relevant Management
                                      relevant to our audit objectives:
 Controls
                                      •   utilizing Section 8 budget authority fully

                                      •   calculating administrative fees properly

                                      •   implementing a financial management system to
                                          administer the Section 8 Program

                                      •   monitoring of administrative agents by VHDA

                                      •   updating utility allowances adequately

                                      •   determining payment standard and rent reasonableness of
                                          Section 8 units adequately

                                      •   complying with Section 8 requirements including income
                                          verification

                                      •   maintaining units under Housing Quality Standards
                                          (HQS)

                                      •   selecting applicants from waiting lists properly

                                      We assessed all of the relevant controls identified above.

                                      It is a significant weakness if internal controls do not give
                                      reasonable assurance that resource use is consistent with
                                      laws, regulations, and policies; that resources are
                                      safeguarded against waste, loss, and misuse; and that
                                      reliable data are obtained, maintained, and fairly disclosed
                                      in reports.

                                      Based on our review, we believe the following items are
 Significant Weaknesses               significant weaknesses:

                                           Page 29                                     00-PH-203-1003
Management Controls



                      •   VHDA did not administer and monitor Section 8
                          program properly in the areas of (1) HQS, (2) Financial
                          Management System, (3) rent reasonableness, (4)
                          waiting lists, and (5) tenant income verification

                      •   VHDA did not fully utilize Section 8 resources

                      •   VHDA did not adequately update utility allowances




00-PH-203-1003            Page 30
Follow Up On Prior Audits
This was the first Office of Inspector General’s audit of VHDA Section 8 Certificate and Voucher
Programs.




                                           Page 31                                00-PH-203-1003
Follow Up On Prior Audits




                      (THIS PAGE LEFT BLANK INTENTIONALLY)




00-PH-203-1003                    Page 32
                             Appendix A


Auditee Comments




                   Page 33   00-PH-203-1003
Auditee Comments




00-PH-203-1003     Page 34
          Auditee Comments




Page 35      00-PH-203-1003
Auditee Comments




00-PH-203-1003     Page 36
          Auditee Comments




Page 37      00-PH-203-1003
Auditee Comments




00-PH-203-1003     Page 38
          Auditee Comments




Page 39      00-PH-203-1003
Auditee Comments




00-PH-203-1003     Page 40
          Auditee Comments




Page 41      00-PH-203-1003
Auditee Comments




00-PH-203-1003     Page 42
          Auditee Comments




Page 43      00-PH-203-1003
Auditee Comments




00-PH-203-1003     Page 44
                                                                           Appendix B


Distribution
Executive Director, Virginia Housing Development Authority, 601 South Belvidere Street,
 Richmond, VA 23220-6504
Secretary’s Representative, Mid-Atlantic, 3AS (2)
Virginia State Coordinator, 3FS
Director, Office of Public Housing, Virginia State Office, 3FPH
Director, Office of Public Housing, Maryland State Office, 3BPH
Audit Liaison Officer, 3AFI
Audit Liaison Officer, Office of Public and Indian Housing, PF (Room 5156)
Departmental Audit Liaison Officer, FM (Room 2206) (2)
Deputy Chief Financial Officer for Finance, FF (Room 2202)
Director, Office of Budget, FO (Room 3270)
Acquisitions Librarian Library, AS (Room 8141)
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 Dirksen
 Senate Office Building, US Senate, Washington, DC 20510
The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706
 Hart Senate Office Building, US Senate, Washington, DC 20515
The Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn
 Building, House of Representatives, Washington, DC 20515
The Honorable Henry Waxman, Ranking Member, Committee on Government Reform, 2204
 Rayburn Building, House of Representatives, Washington, DC 20515
Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House
 Office Building, Washington, DC 20515
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street N.W., Room
 2474, Washington, DC 20548, Attn: Judy England-Joseph
Mr. Steve Redburn, Chief, Housing Branch, Office of Management & Budget, 725 17th Street,
 N.W., Room 9226, New Executive Office Building, Washington, DC 20503
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 & Intergovernmental Relations, J (Room 10120)
Senior Advisor to the Secretary, Office of Public Affairs, S (Room 10132)
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)
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)

                                                  Page 45                  00-PH-203-1003
Distribution


Office of Policy Development and Research, R (Room 8100)
Assistant Secretary for Community Planning and Development, D (Room 7100)
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 Operations and Coordination, I (Room 2124)
Chief, Financial Officer, F (Room 2202)
Director, Enforcement Center, V, 200 Portals Building, Washington, DC 20024
Director, X, Real Estate Assessment Center, 1280 Maryland Avenue, SW, Suite 800, Washington,
 DC 20024
Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building, Washington,
 DC 20024
Assistant Deputy Secretary for Field Policy and Management, SDF (Room 7108)
Office of the Deputy General Counsel, CB (Room 10220)




00-PH-203-1003                          Page 46