Management Memorandum (THIS PAGE LEFT BLANK INTENTIONALLY) 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. Page v 00-PH-203-1003 Executive Summary (THIS PAGE LEFT BLANK INTENTIONALLY) 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 Page 3 00-PH-203-1003 Introduction (THIS PAGE LEFT BLANK INTENTIONALLY) 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. Page 5 00-PH-203-1003 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. Page 15 00-PH-203-1003 Finding 1 (THIS PAGE LEFT BLANK INTENTIONALLY) 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 (THIS PAGE LEFT BLANK INTENTIONALLY) 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
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)