AUDIT REPORT HOUSING AUTHORITY OF THE CITY OF UVALDE SECTION 8 AND LOW RENT PROGRAMS UVALDE, TEXAS 01-FW-203-1003 DECEMBER 18, 2000 OFFICE OF AUDIT, SOUTHWEST DISTRICT FORT WORTH, TEXAS Issue Date December 18, 2000 Audit Case Number 01-FW-203-1003 TO: Diana Armstrong Director, Office of Public Housing, 6JPH SIGNED FROM: D. Michael Beard District Inspector General for Audit, 6AGA SUBJECT: Section 8 and Low Rent Programs Housing Authority of the City of Uvalde Uvalde, Texas As requested by your office, we conducted an audit of the Section 8 and Low Rent Programs of the Uvalde Housing Authority. Before the audit, your office had already identified significant Annual Contributions Contract violations and the severe financial condition of the Authority. Specifically, the Authority had over-requisitioned Section 8 funds and had incurred excessive administrative expenses over what they had earned. During this audit, we focused on the concerns you identified. This audit contains one finding. Within 60 days, please furnish this office, for each recommendation in this report, a status on: (1) corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why action is not considered necessary. Also, please furnish us copies of any correspondence or directives issued related to the audit. If you have any questions, please contact Jerry Thompson, Assistant District Inspector General for Audit, at (817) 978-9309. Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 01-FW-203-1003 Page ii Executive Summary We have completed an audit of the Housing Authority of Uvalde, Texas. The objectives of the audit were to: (1) identify the purposes for which the Authority used unearned Section 8 administrative fees; (2) determine whether the Authority complied with its Annual Contribution Contracts (ACC) in the use of certain Section 8 and Low Rent funds; (3) determine whether the Authority used its Low Rent or Comprehensive Improvement Assistance Program (CIAP) funds for other purposes; and (4) determine whether the Authority duplicated payments of certain travel or other administrative expenses in the Section 8 or Low Rent Programs that may have been paid by the Authority’s affiliate, the Uvalde Housing Development Corporation. We found the Authority violated provisions of the ACCs by spending unearned Section 8 funds and Low Rent funds for other purposes. The former Executive Director ignored HUD’s instructions The former Executive and violated HUD requirements by using $563,702 in HUD Director spent $563,702 Program funds to pay for excessive and questionable in HUD funds on expenses. The Authority incurred $375,552 in excessive questionable costs. administrative costs in the Section 8 Program and $188,150 in questionable costs in the Low Rent Program. The excessive or questionable costs are: (1) $188,284 used to undertake various projects not related to the operation of these programs, including the construction of an affiliate’s apartment complex; (2) $85,012 paid in excessive salaries; (3) $167,960 in Low Rent funds transferred to Section 8; (4) $38,023 in unsupported costs; and (5) $84,423 in additional administrative expenses in excess of the amount earned. The former Executive Director had an objective to develop properties not related to the Section 8 and Low Rent Programs. To do this, he manipulated the Section 8 requisition process. The former Executive Director was also the Secretary/Treasurer of the affiliate from which he arranged to receive a rent-free apartment. Therefore, a conflict of interest appears to be evident. However, the former Executive Director of the Authority, acting as the Executive Director of the Authority and the Secretary/Treasurer of the affiliate, severed the affiliate from the Authority in 1999. As a result, the Authority is currently in a severe financial condition. The Authority has reimbursed $224,194 to the Section 8 and Low Rent Programs, but the Authority still owes HUD $262,925 in unearned Section 8 funds and $76,583 to the Low Rent Page iii 01-FW-203-1003 Executive Summary Program for the excessive administrative expenses and questionable costs. We are making recommendations for corrective actions, including a recommendation for HUD to consider taking administrative sanctions against the former Executive Director. We also looked for duplicative payments from the Section We did not find 8, Low Rent, HOME, and CIAPs that the Authority’s duplicated payments for affiliate may have paid. Our review did not disclose such administrative or travel duplicative payments. costs We provided a copy of this report to the interim Executive Director of the City of Uvalde Housing Authority on September 26, 2000, and they issued their response on October 13, 2000. We had an exit conference with current Authority Officials on October 19, 2000. We also requested a response to our preliminary findings from the former Executive Director, which we received on December 22, 1999, while he was still employed by the Authority. The responses generally agreed that the Authority used HUD program funds for other purposes. The former Executive Director attributed the Authority’s severe financial condition to an embezzlement that occurred prior to his employment. The Authority’s current management said they are taking action to improve the efficiency of the operations and to collect the funds owed to HUD programs. The complete responses are contained in Appendix B. 01-FW-203-1003 Page iv Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Finding 1 The Former Executive Director Ignored HUD’s 5 Instructions and Spent $563,702 in Excessive and Questionable Costs Management Controls 21 Appendices A Schedule of Questioned Costs 23 B Auditee Comments 25 C Distribution 37 Page v 01-FW-203-1003 Table of Contents Abbreviations ACC Annual Contributions Contract CIAP Comprehensive Improvement Assistance Program CFR Code of Federal Regulations HOME HOME Investment Partnerships Program HUD U.S. Department of Housing and Urban Development OIG Office of Inspector General OMB Office of Management and Budget TDHCA Texas Department of Housing and Community Affairs UHDC Uvalde Housing Development Corporation 01-FW-203-1003 Page vi Introduction The City of Uvalde established the Housing Authority of Background. Uvalde, Texas, in 1971. From 1971 through 1999 the mayor appointed a five-member Board of Commissioners to govern the Authority. Because of changes to the state law in 2000, the mayor now appoints 11 members to the Board. The Board hires an Executive Director to manage the Authority’s day-to-day operations. The Board appointed Virginia Limon as interim Executive Director on February 14, 2000. The Authority has 48 Low Rent units occupied and 193 Section 8 units leased. The Authority keeps its records at its office, 1700 Garner Field Road, Uvalde, Texas. The Authority hired the former Executive Director on February 22, 1993, and fired him by unanimous vote on February 10, 2000. Board minutes state various reasons for his termination. The most significant reasons stated are for “mismanagement” and “non compliance with the HUD Annual Contribution Contracts” during his tenure. During Fiscal Years 1993 through 1999, HUD provided $4,104,804 to provide assistance under the Authority’s Section 8 Programs and $290,894 in subsidy to the Low Rent Program. HUD also provided $861,309 in CIAP grant funds to improve the Low Rent units. In June 1994, the Authority created the Uvalde Housing Development Corporation (UHDC) to operate exclusively for the benefit of the Authority and to act as an instrumentality of the Authority. The UHDC’s mission is to provide decent and affordable housing for lower income residents in Uvalde. The Board of Directors of UHDC, at any point in time, would be the serving Board of Commissioners of the Authority. The former Executive Director was the Secretary-Treasurer of UHDC in 1994. In November 1997, the Texas Department of Housing and Community Affairs (TDHCA) awarded the Authority $208,000 in HUD HOME funds. Under the HOME Buyer's Assistance Program, the Authority is to provide, 40 qualifying homebuyers, up to $5,000 in assistance to purchase a home. In September 1997, TDHCA approved a $200,000 HOME loan to the Granada Apartments, Ltd. for the construction of 100 apartments in Uvalde, Texas. The Page 1 01-FW-203-1003 Introduction Authority was the original limited partner and the UHDC is still the general partner of the Granada Apartments, Ltd. The objectives of the audit were to: (1) identify the Audit Objectives. purposes for which the Authority used unearned Section 8 administrative fees; (2) determine whether the Authority complied with its Annual Contribution Contracts in the use of certain Section 8 and Low Rent funds; (3) determine whether the Authority used its Low Rent or Comprehensive Improvement Assistance Program funds for other purposes; and (4) determine whether the Authority duplicated payments of certain travel or other administrative expenses in the Section 8, Low Rent, CIAP, or HOME Programs that may have been paid by the Authority’s affiliate, the Uvalde Housing Development Corporation. To accomplish the audit objectives, we: Scope and Methodology. • Reviewed the Audit Request and Supporting Documentation. • Reviewed the HUD approved reports and Independent Public Accountant Audit Reports submitted by the Authority for Fiscal Years ending June 30, 1993, through June 30, 1999, for the Low Rent and Section 8 Programs. • Interviewed HUD Program Staff; Authority Staff, Fee Accountants, Granada Apartments’ Manager, UHDC Board Members and Officers, TDHCA Staff, and current and past serving Board members of the Authority. • Reviewed the Section 8 Annual Contributions Contract and Public and Indian Housing (PIH) Notices to identify the requirements for the: (1) estimates and requisitions and (2) maintenance and use of the Administrative Fee Reserves for housing purposes. • Reviewed the Low Rent Annual Contributions Contract to identify the requirements and definitions for: (1) operating receipts; (2) operating expenditures; and (3) projects. • Reviewed the Code of Federal Regulations (CFR) and OMB Circular A-87, Cost Principles to identify the requirements: (1) costs eligibility and (2) cost allocation. • Reviewed HUD and Authority correspondence files. 01-FW-203-1003 Page 2 Introduction • Reviewed Authority Board minutes, personnel and general policies, bank statements, canceled checks, check vouchers and other supporting documents from July 1, 1993, through April 2000. • Reviewed the UHDC: board minutes, bank statements, canceled checks, check vouchers, contracts, and other supporting documents from September 1994 through January 2000.1 • Reviewed the documents provided by the Authority’s General Counsel and Fee Accountant. • Reviewed the HOME grant and loan applications and contracts to identify the program requirements. • Interviewed the developer and the general contractor of the Granada Apartments. • Reviewed the Authority’s bank statements, canceled checks, check vouchers for the HOME Buyers Assistance Program account from January 1998 through April 2000. • Review the Granada Apartments’ Ltd., the Project Developer’s and the Project General Contractor’s: bank statements, canceled checks, invoices, contracts, and other supporting documents for the HOME Construction Loan from January 1998 through April 1999. We conducted the audit from November 1999 through Audit Period and Sites. August 2000 in accordance with generally accepted government auditing standards. The audit covered the Authority’s operations from July 1, 1992, through April 30, 2000. 1 Various bank statements and canceled checks were missing for the period reviewed. The former Executive Director is the Secretary/Treasurer of the UHDC and the custodian of records. He stated that the missing bank statements and canceled checks were lost. Page 3 01-FW-203-1003 Introduction THIS PAGE LEFT BLANK INTENTIONALLY 01-FW-203-1003 Page 4 Finding The Former Executive Director Ignored HUD’s Instructions and Spent $563,702 in Excessive and Questionable Costs The former Executive Director ignored HUD’s instructions and used $563,702 in HUD Program funds to pay for excessive administrative expenses and questionable costs not directly related to the HUD Programs. He violated provisions of the Annual Contribution Contracts by spending Section 8 funds requisitioned from HUD but not earned and Low Rent funds for non-Low Rent purposes. He manipulated the requisitioning process of the Section 8 Programs. From July 1992 through November 1999, the Authority incurred $375,552 in excessive administrative expenses in the Section 8 Programs2 and $188,150 in questionable expenses in the Low Rent Program. The excessive or questionable costs are: (1) $188,284 used to undertake various projects not related to the operation of these programs, including the construction of an affiliate’s apartment complex; (2) $85,012 paid in excessive salaries; (3) $167,960 in Low Rent funds transferred to Section 8; (4) $38,023 in unsupported costs; and (5) $84,423 in additional administrative expenses in excess of the amount earned. The former Executive Director had an objective to develop properties not related to the Section 8 and Low Rent Programs. Also, because the former Executive Director arranged to receive a rent-free apartment from the affiliate, a conflict of interest appears to be evident. As a result, the Authority is currently in a severe financial condition. The Authority has reimbursed $224,194 to the Section 8 and Low Rent Programs, but the Authority still owes HUD $262,925 in unearned Section 8 funds and $76,583 to the Low Rent Program for the excessive administrative expenses and questionable costs. The Low Rent Annual Contribution Contract (ACC) Requirements. between HUD and the Authority incorporates by reference the regulations for Public and Indian Housing Authorities contained in Title 24 of the Code of Federal Regulations (CFR). Title 24 of the CFR, part 85, establishes the uniform administrative rules for federal grants and cooperative agreements and sub-awards to State, local and Indian tribal governments. This part also establishes OMB Circular A-873 as the cost principles for housing authorities to follow when determining allowable costs to federal programs. 2 Section 8 Programs refers to the Section 8 Voucher and Section 8 Certificate Programs of the Authority. 3 Cost Principles for State and Local Governments. Page 5 01-FW-203-1003 Finding Section 11 of the Section 8 ACC provides the requirements for the use of program receipts. The Authority: • Must use program receipts only to pay program expenditures; and • Must not make any program expenditures, except in accordance with the HUD-approved budget estimate and supporting data for a program. Section 12 of the Section 8 Programs’ ACC provides the requirements of the establishment and use of the administrative fee reserve. The Authority: • Must maintain an administrative fee reserve for a program. The Authority must credit to the administrative fee reserve the total of the amount by which program administrative fees paid by HUD for a fiscal year exceed the Authority’s administrative expenses and • Must use funds in the administrative fee reserve to pay administrative expenses in excess of program receipts. If any funds remain in the administrative fee reserve, the Authority may use the administrative reserve funds for other housing purposes. Section 2 of the Low Rent Program ACC provides the definition of terms. The following definitions are relevant to this audit: • “Act” means the United States Housing Act of 1937, as amended. • “Operating Receipts” shall mean all rents, revenues, income, and receipts accruing from, out of, or in connection with the ownership or operation of such project. • “Operating Expenditures” shall mean all costs incurred by the Authority for administration, maintenance, and other costs and charges that are necessary for the operation of the project. 01-FW-203-1003 Page 6 Finding • “Project” means public and Indian housing developed, acquired, or assisted by HUD under the Act, other than Section 8 of the Act, and the improvement of such housing. Section 11 of the Low Rent Program’s ACC states the Authority shall not incur any operating expenditures except pursuant to an approved operating budget. Regarding conflicts of interest, the Low Rent Program ACC, Part A, Section 19, Subsection (A)(1), provides that neither the Authority nor any of its contractors or their subcontractors may enter into any contract, subcontract, or arrangement in connection with a project under this ACC, in which any employee of the Authority who formulates policy or who influences decisions with respect to the projects(s), has interest, direct or indirect, during his tenure or for one year there after. OMB Circular A-87, Attachment A, Part C, Basic Guidelines, requires costs to be necessary, reasonable, and adequately documented for proper and efficient performance and administration of federal awards. The Circular also provides that costs are allocable to a particular cost objective if the goods or services involved are chargeable to such cost objectives according to the relative benefits received. In addition, any cost allocable to a particular award or cost objective may not be charged to other federal awards to overcome fund deficiencies, to avoid restrictions imposed by law or terms of the federal awards, or for other reasons. Every year the Authority requisitions Section 8 funds from HUD to make housing assistance payments, cover audit costs, hard to house fees, and their Administrative Fee Earned.4 HUD requires the requisitions to be based on reasonable estimates of units authorized and leased. At the end of each fiscal year the Authority submits a yearend settlement statement showing the actual amount of annual HUD contributions earned. At this time, HUD adjusts the amount paid during the year to the actual amount the Authority earned. If the Authority has requisitioned too much, funds are due HUD, and if not enough, funds are due 4 The Administrative Fee is published yearly in the Federal Register. The fee rate is multiplied by the number of actual units leased to determine the total of the Administrative Fees Earned for the fiscal year. Page 7 01-FW-203-1003 Finding the Authority. The Authority earns an Administrative Fee for administering the Section 8 Program based on the number of units leased monthly. HUD pays the administrative fee to cover the administrative costs. It’s the Authority’s responsibility to operate within the limits of the administrative fee earned and to put into reserve any amounts earned in excess of its administrative costs. Beginning January 1, 1995, HUD Notice PIH 94-64 required housing authorities to review, no later than 90 days into the fiscal year, their estimate of Section 8 annual contributions required. HUD requires housing authorities to revise their estimates if it appears that they will receive 5 percent more in total annual contributions than required. As of January 31, 2000, the Authority had spent $262,9255 The Authority owes of unearned Section 8 funds. From July 1992 through HUD $262,925 of Section January 2000, the Authority requisitioned $944,632 more 8 funds it spent but had than it earned for its Administrative Fee and program costs. not earned. HUD was only able to offset $681,707 of the over- requisitioned amount because at various times when the authority had submitted yearend settlement statements, the Authority had already spent all it had over-requisitioned on other projects or on excessive administrative expenses. The table below shows the over-requisitioned amounts, the funds offset by HUD and the amounts due at the time of settlement for each fiscal year. Fiscal Section 8 HUD Amount Funds Current Year Funds Scheduled Over- Offset Amount End Required Payments Requisitioned by HUD Due HUD 06/30/1993 $ 628,940 $ 698,877 $ -69,937 $ 69,937 $ 0 06/30/1994 596,765 617,492 -20,727 -16,944 37,671 06/30/1995 588,432 607,841 -19,409 0 19,409 06/30/1996 516,260 710,649 -194,389 37,669 156,720 06/30/1997 517,037 710,649 -193,612 177,660 15,952 06/30/1998 485,690 710,290 -224,600 107,004 117,596 06/30/1999 452,793 596,810 -144,017 172,479 -28,462 01/31/2000 323,076 401,017 -77,941 133,902 -55,961 Totals $4,108,993 $5,053,625 ($944,632) $681,707 $262,925 5 This figure is correct through 1/31/2000. The Authority has not submitted the Year End Settlement Statements for 6/30/2000 which were due to the FMC on August 15, 2000. The FMC still has to process and approve the statements to determine the final amount “Due HUD” through the date of this report. 01-FW-203-1003 Page 8 Finding The former Executive Director used $188,284 in Section 8 The former Executive and Low Rent funds on various other housing related Director over- projects. He spent $181,176 in unearned Section 8 funds requisitioned Section 8 and $7,108 in Low Rent funds for these other projects. funds, ignored HUD’s Although, the Section 8 ACC allows any funds remaining instructions, and spent in the administrative fee reserve to be used for other $188,284 on housing housing purposes, the Authority had no administrative fee projects in violation of reserve or the Authority owed HUD the amounts it over- contract provisions. requisitioned. HUD’s Low Rent contract provisions and applicable cost principles require the Authority to use Low Rent funds on costs that are necessary for the operation of the Low Rent project. The Authority’s use of $7,108 in Low Rent funds did not benefit the Low Rent project. The former Executive Director ignored HUD’s instructions and continued to approve and use the Section 8 and Low Rent funds for those other projects. The former Executive Director undertook these housing projects with Board approval. He used Section 8 and Low Rent funds to obtain Low Income Housing Tax Credits for the Granada Apartments, Ltd. This project, as mentioned earlier, is owned by the UHDC. He tried to obtain HUD HOME funds from the TDHCA. Also, he attempted to obtain funds from Rural Development, formerly Farmer’s Home Administration under the United States Department of Agriculture (USDA). However, his primary goal was to build the Granada Apartments using Tax Credits and HUD HOME funds from the State. The table below shows the amount of Section 8 and Low Rent funds used for the UHDC and other housing projects. Housing Projects Section 8 Low Rent Totals UHDC Expenses $137,376 $2,785 $140,161 UHDC Salaries 19,692 4,323 24,015 Subtotal UHDC $157,068 $7,108 $164,176 Other Housing Projects 24,108 24,108 Totals $181,176 $7,108 $188,284 Of the $188,284 used for other housing projects, the Authority used $164,176 to fund UHDC and the Granada Apartments. Of this $164,176, the Authority used $140,161 of the funds for travel, legal fees, land, consulting fees, application fees, training, and seminar costs. The Authority used $24,015 in salaries for the benefit of UHDC. The former Executive Director traveled 141 days Page 9 01-FW-203-1003 Finding on UHDC business. For calendar years 1994 through 1999, the Low Rent Program paid for 23 days of travel and the Section 8 Program paid for 81 days of travel. UHDC paid for his travel covering a period of 37 days. Although UHDC paid his travel costs, the Authority paid his salary during those 37 days. His salary is paid with Low Rent and Section 8 funds. The Low Rent and Section 8 Programs did not benefit from his travel for UHDC. As of November 30, 1999, the UHDC had reimbursed the Authority $115,033 for the costs the Authority incurred. The Authority applied $112,627 to the Section 8 Programs and $2,406 to the Low rent Program, leaving the Corporation still owing $44,441 to the Section 8 Program as part of the $262,925 owed HUD and $4,702 to the Low Rent Program. Therefore, the Authority needs to collect an additional $49,143 from the UHDC and repay the HUD Programs in this amount. The Authority also used $24,108 of unearned Section 8 money on other housing projects besides the Granada Apartments. Most of these expenses were for travel to attend training seminars or workshops related to and to apply for Farm Labor, USDA, and TDHCA HOME housing programs. We are recommending the Authority repay the $24,108 to HUD from nonfederal funds as part of the $262,925 it over-requisitioned from HUD. From October 1998 through February 2000, the Granada The Granada Apartments provided a "rent free" apartment to the former Apartments provided a Executive Director. He lived in a three-bedroom apartment rent-free apartment to from October 1998 through September 1999 when the the Director. average rent charged was $440. He later moved to a two- bedroom apartment from October 1999 through February 2000 when the average rent charged was $395. The Granada Apartments also provided UHDC a “rent-free” and “utility-free” office. The former Executive Director uses this office for UHDC business. This situation appears to be a direct conflict of interest for the former Executive Director. One of the reasons the Authority had no funds to repay the The Authority paid amount of Section 8 funds over-requisitioned from HUD $85,012 in excessive was that the Authority used $85,012 in unearned Section 8 salaries with Section 8 funds to pay excessive salaries from 1995 through 1999. funds. 01-FW-203-1003 Page 10 Finding The Authority exceeded the HUD approved salaries from 1995 through 1997. Several times, HUD specifically modified the approved budgeted salaries to reflect the salary comparability information and the financial condition of the Authority. HUD did not require approval and did not approve the operating budgets for 1998 and 1999 because the Authority had passed the Public Housing Management and Performance financial indicators. We estimated the excessive salaries using the highest salaries HUD had previously approved. The excessive salaries are allocated between the Low Rent and Section 8 Programs. HUD Approved Salaries Excessive Excessive Salaries for Paid by Salaries Salaries Calendar Authority Authority Per Paid Chargeable to Year Employees W2 Forms by Authority Section 8 1995 $ 95,490 $ 96,588 $ 1,098 $ 900 1996 76,775 99,834 23,059 18,908 1997 97,490 109,496 12,006 9,845 1998 97,490 136,349 38,859 31,865 1999 97,490 126,141 28,651 23,494 Totals $464,735 $568,408 $103,673 $85,012 The former Executive Director ignored HUD’s instructions and paid the excessive salaries anyway. Consequently, the Authority paid $85,012 in excessive salaries with unearned Section 8 funds when they did not have any Administrative Fee Reserves to cover these costs. We are recommending the Authority repay the $85,012 to HUD from nonfederal funds as part of the $262,925 in unearned funds the Authority still owes HUD. The Authority used $38,023 program funds on unsupported The Authority records expenditures. The Authority spent $24,941 in unearned lack adequate support Section 8 funds and $13,082 of Low Rent funds on these for $38,023 in expenditures. The Authority records did not contain administrative expenses. adequate supportive documentation to show that these costs were eligible or necessary for the operation of the Section 8 and Low Rent Programs. For example, we found instances where payments had: no invoices, no purpose stated on the check voucher, no names of the individual traveling on the check voucher, and no supporting documents for the amount of the check. OMB Circular A-87 says that all costs must be necessary, reasonable, and adequately documented for proper and efficient performance and Page 11 01-FW-203-1003 Finding administration of federal awards. Since the Authority could not provide adequate support for these costs, we are recommending the Authority repay the $13,082 to the Low Rent Program from nonfederal funds. The Authority needs to repay HUD $24,941 as part of the $262,925 in unearned Section 8 funds they spent on these unsupported costs from nonfederal funds. The Authority spent $84,423 in unearned Section 8 funds The Authority paid on other miscellaneous administrative expenses in the $84,423 for operating Section 8 Programs. These expenses represent the amount costs with funds they of administrative expenses incurred and paid with money had not earned. they over-requisitioned and spent during the period. The $84,423 does not include costs identified for the various housing related projects, excessive salaries, and unsupported costs. These administrative expenses would be considered program operating costs and could have been paid with Section 8 Administrative Fees Earned if the Authority had any. We are recommending the Authority repay HUD the $84,423 from nonfederal funds as part of the $262,925 in unearned Section 8 funds they spent on these miscellaneous administrative expenses. The former Executive Director authorized and approved the The Authority transfer of $167,960 of Low Rent funds to the Section 8 transferred $167,960 in Programs during the period beginning July 1993 through Low Rent funds to cover February 2000. The Low Rent funds covered the shortfalls Section 8 shortfalls. in the Section 8 Program. According to the interim Executive Director, they needed the funds to make housing assistance payments. The Authority has reimbursed the Low Rent Program $109,161 from Section 8 funds and currently owes the Low Rent Program $58,799. OMB Circular A-87 says funds from one federal award cannot cover fund deficiencies in other federal awards. Also, the Low Rent ACC definition of a “project” specifically excludes any project under Section 8 of the Act. We are recommending the Authority repay the Low Rent Program $58,799 from nonfederal funds. HUD staff responsible for processing Section 8 yearend HUD could not offset the settlement statements said HUD could not offset the entire entire amount because over-requisitioned amount for several reasons including a the Authority had spent HUD system conversion that occurred during 1995 and the money. 1996. HUD did not process the offset for the over- 01-FW-203-1003 Page 12 Finding requisitioned amount for Fiscal Year 1994 until during the fiscal year ended June 30, 1996. By the time HUD processed and approved the Year End Settlement Statements, HUD could not offset the entire amount that was over-requisitioned. The main reason they could not offset the entire amount due for each fiscal year was because the Authority had already spent the over- requisitioned funds. If HUD had offset the entire amounts, the Authority would not have had enough money in the bank to pay Section 8 landlords the remaining housing assistance payments during each fiscal year. The Fee Accountant that prepared the 1993 through 1997 The Fee Accountant and Section 8 estimates and requisitions said that the former HUD increased Section 8 Executive Director said several times that the Authority requisitions with would be fully leased up in the next fiscal year. The former information provided by Executive Director said the Authority was getting Low the former Executive Income Housing Tax Credits. He said the tax credits would Director. allow UHDC to construct the Granada Apartments and this would increase the housing stock in Uvalde for Section 8 applicants. The fee accountant, relying on the statements by the former Executive Director, estimated more leased units than necessary during 1993 through 1997. On one occasion, the former Executive Director did not agree with the Fee Accountant’s 1999 estimate and requisition. The former Executive Director contacted a HUD Financial Management Specialist and told her that the Fee Accountant’s estimate was too low. He said the Authority would be fully leased up by October 1998 because the Granada Apartments would be in operation. The HUD Financial Management Specialist, also relied on his statements and revised and increased the 1999 fiscal year estimate and requisition. However, the completion of the Granada Apartments did not increase the number of units leased in the HUD Section 8 Programs. The Authority had leased 170 Section 8 units as of June 30, 1998, and only leased 158 units by June 30, 1999, including 33 units at the Granada Apartments. The Authority actually leased 12 less units than the prior fiscal year. We interviewed various Authority Commissioners that The former Executive served from 1993 through 1999. The Commissioners Director did not inform acknowledged that they approved the housing related Commissioners of HUD projects, including the Granada Apartments, initiated by the requirements. Page 13 01-FW-203-1003 Finding former Executive Director. They also recall positive reports and comments from HUD saying that the Authority went from a “Troubled” agency to a “High Performer”6 during the tenure of the former Executive Director. The former Executive Director told the Commissioners that they could use Section 8 funds for those housing projects. However, the Commissioners said that the former Executive Director did not fully inform the Board about the problems with: • Over-requisitioning Section 8 funds; • Spending more than administrative fees earned; • Negative Section 8 Administrative Fee Reserves; • Spending Section 8 funds for “housing related purposes” when the Authority had no Administrative Fee Reserves, violating the ACC requirements; and • Spending Low Rent funds on non Low Rent housing projects violating the ACC requirements. They believe the former Executive Director should have informed them of the serious financial condition of the Authority and the ACC violations. Commissioners also said they would have followed HUD’s instructions and not undertaken the housing projects if he had adequately informed them. Collecting the $49,143 due from the UHDC may present a The former Executive problem because neither the UHDC nor the Granada Director severed the Apartments are now affiliated with the Authority. When Uvalde Housing the Authority established the UHDC, the Authority Development Commissioners also served on the UHDC Board of Corporation from the Directors. When they created the limited partnership, the Authority. Granada Apartments, Ltd., in December 1996, the Authority was a limited partner with 99 percent interest. The UHDC was the general partner with a 1 percent interest. In December 1997, the former Executive Director, representing both entities as the Secretary/Treasurer of UHDC and the Executive Director of the Authority, signed and executed an amendment to the original partnership agreement. The amendment withdrew the Authority from the partnership and admitted a new limited partner, THOF III, whose general partner is the Texas Housing Finance 6 The terms “Troubled” and “High Performer” relate only to HUD’s assessment of the Low Rent Program and not to Section 8. During that period HUD used the Public Housing Management and Assessment Program to assess the Authority’s performance in the Low Rent Program. 01-FW-203-1003 Page 14 Finding Corporation. The Authority Board minutes do not reflect any record of a vote to withdraw their interest from the Granada Apartments, Ltd. Thus, it appears the former Executive Director acted on his own to withdraw the Authority from the partnership. On February 23, 1999, the UHDC Directors adopted resolutions to amend the By-laws of the Corporation, terminate the terms of and replace certain Directors, and to not require the Directors to be Authority Board members. The resolutions passed by a 60 percent vote, although, based on the original By-laws, such resolutions would have required a 66 percent favorable vote for passage. Currently no Authority Commissioners serve on the Board of Directors of UHDC. The former Executive Director of the Authority remained the Secretary/Treasurer of the UHDC and has control of the bank accounts and custody of the UHDC records. The resolutions that passed on February 23, 1999, did not have the required two-thirds votes by the Directors as required by the original UHDC Corporate By-laws. Therefore, the resolutions that severed the relationship with the Authority may not be valid. The Authority may need to consider legal action against UHDC to collect the $49,143, regain control of the UHDC Board of Directors, and recover its interest in the Granada Apartments, Ltd. Whatever the outcome, we are recommending the Authority repay HUD $44,441, as part of the $262,925 in unearned Section 8 funds requisitioned, and $4,702 to the Low Rent Program from nonfederal funds for funds the UHDC used and still owes the Authority. As previously noted, the excessive administrative expenses Authority travelers did in the Section 8 Program and the questioned costs in the not follow its Board Low Rent Program included travel. The travel was for the approved travel policies. former Executive Director, Commissioners, and employees. The expenses relating to UHDC, other housing projects, and unsupported costs include $40,490 of the travel costs. Not only did the Authority violate HUD regulations they also did not follow their own travel policies regarding advances. The Authority issued 183 travel advances during the audit period. The travelers in only eight instances filed a travel voucher to reconcile the differences between the advance and actual costs. The Authority personnel policies Page 15 01-FW-203-1003 Finding allow travel advances for officials and employees for traveling out-of-town. The policies require the traveler to submit a travel voucher no later than 30 days after the travel is completed. If the traveler does not submit a voucher, the traveler is abusing the advance system and can be placed on a reimbursable basis only. We are recommending the Authority ensure that all travel is eligible under the program requirements and that they follow their own travel policies. The former Executive Director’s actions have placed the The Authority is in Authority in severe financial distress and have bankrupted severe financial the Authority’s Section 8 Program. The Authority has condition. consistently increased the deficit in its Section 8 Program since 1993. Now it owes HUD $262,925 in over- requisitioned funds and the Low Rent Program $76,583 for excessive administrative expenses and questionable costs. At the end of the 1994 fiscal year, the Authority’s Section 8 Programs had a combined deficit of $51,859. This is because the Authority has consistently charged administrative expenses to the programs in excess administrative fees earned. The current financial condition has affected the Authority’s ability to provide future housing opportunities for the citizens of Uvalde. The table below shows the Authority’s expenditures have exceeded its administrative fee earned each year since 1993 by $15,000 to $74,000 to reach the current deficit of $370,747 in the Section 8 Programs. Administrative Total Excessive Administrative Fee Administrative Administrative Fee Reserve FYE Earned Expenses Expenses Balance7 06/30/1993 $ 61,721 $ 87,310 ($ 25,589) $47,884 06/30/1994 64,120 107,299 (43,179) ($51,859) 06/30/1995 75,608 90,762 (15,154) ($53,997) 06/30/1996 74,656 106,092 (31,436) ($116,133) 06/30/1997 74,204 118,010 (43,806) ($218,308) 06/30/1998 68,818 92,699 (23,881) ($297,859) 06/30/1999 66,902 140,466 (73,564) ($370,747) TOTALS $486,029 $742,638 ($256,609) HUD requested the Authority to submit a workout plan and rejected the first one the Authority submitted. It called for a pay back period of 10 years. The workout plan should 7 HUD adjusts the Authority’s Administrative Fee Reserve Balance when they approve the Year End Settlement Statements. 01-FW-203-1003 Page 16 Finding show how the Authority plans to bring the Section 8 Administrative Fees Reserve into a positive balance and how they plan to reimburse the Low Rent Program for the funds they used to pay Section 8 housing assistance payments. They also say it is difficult to gage how long it will take the Authority to pay back HUD and the Low Rent Program. Comments by Former Executive Director Auditee Comments The former Executive Director in a written response dated December 22, 1999, attributes the current financial situation to a $200,000 embezzlement by his predecessor (see Appendix B). In addition to the theft, the Authority paid unpaid vendors, delinquent federal payroll taxes and penalties, and large amounts of bank overdraft fees. The Authority also paid the bank $5,000 to reproduce canceled checks related to the investigation. The former Executive Director also said that the over- requisitioning of Section 8 funds was due to the lack of affordable housing stock in Uvalde. Section 8 customers had a difficult time finding rental units in Uvalde causing the Authority to be under leased. The Authority incurred excessive administrative expenses over administrative fees earned because of the under leasing of units. To address the lack of affordable housing in Uvalde, the former Executive Director used Section 8 and Low Rent funds. The former Executive Director said HUD told the Authority to diversify by seeking funding from other agencies. Thus, the Board and Authority used Section 8 and Low Rent funds to apply for funding for the various housing projects including the Tax Credits used to construct the Granada Apartments owned by UHDC. UHDC borrowed Section 8 funds from the Authority to purchase the site for the construction of the Granada Apartments. Comments by Interim Executive Director The interim Executive Director provided a tentative response to the finding on October 13, 2000 (see Appendix Page 17 01-FW-203-1003 Finding B). She said the Authority Board of Commissioners and the former Executive Director responsible for overseeing the operations during the period of the questionable expenditures are no longer serving or working for the Authority. The Board of Commissioners fired the former Executive Director on February 10, 2000, and appointed Ms. Virginia Limon as the interim Executive Director. As the interim Executive Director she increased Section 8 leasing by 23 percent to maximize income and has initiated several cost cutting measures to immediately reduce operating cost. The measures have: • Reduced administrative office and travel expenses to keep within budgets; • Reduced staff salaries to agree with HUD approved amounts; and • Eliminated unnecessary expenses that have been identified. The interim Executive Director is working closely with the Board of Commissioners and HUD to keep them informed of the financial condition of the Authority. She: • Provided each Commissioners with the appropriate HUD Contracts, Regulations, Handbooks and OMB Circulars; • Instructed the Fee Accountant to monthly prepare for HUD and the Board reports showing a detailed income, expense, balance and status for each program; and • Is working closely with the Fee Accountant and HUD to establish an acceptable budget and timeline for the reimbursement of funds to HUD and the Low Rent Program. The interim Executive Director will be proposing additional corrective actions to the Board of Commissioners concerning the legal action against UHDC including the collection of the funds owed Authority. A recommendation will also be made to the Board to revise the current travel polices to clarify procedures on the issuance of travel funds. The complete responses from the former and the interim Executive Director are contained in Appendix B. 01-FW-203-1003 Page 18 Finding Evaluation of Comments by Former Executive Director OIG Evaluation of Comments The response by the former Executive Director does not change our position in the report. The former Executive Director agreed the Authority used over-requisitioned Section 8 funds and Low Rent funds for other housing purposes and spent more money than they had earned. We reviewed all available documentation relating to the embezzlement including the United States District Court Judgment and Independent Audit Reports of the Authority. The results of our review did not show that the embezzlement by the prior Executive Director caused the current financial condition of the Authority. Evaluation of Comments by Interim Executive Director Comments by the interim Executive Director appear responsive and indicate the Authority has begun taking positive corrective actions to reduce administrative costs, increase administrative fees earned, and operate within program budgets. We recommend the Office of Public Housing: Recommendations 1A. Require the Authority repay HUD $262,925 from nonfederal funds for the Section 8 funds they over- requisitioned and spent. Also, identify other additional funds “Due HUD” following HUD’s approval and revision of the Year End Settlement Statements for June 30, 2000; 1B. Require the Authority to recover $49,143 from UHDC for expenses paid on their behalf. The Authority should reimburse $44,441 to the Section 8 account and $4,702 to the Low Rent account (We consider the $44,441 that UHDC owes the Section 8 Programs as part of the $262,925 the Authority owes HUD and included under recommendation 1A.); 1C. Require the Authority to repay the Low Rent Program $58,799 from nonfederal funds for ineligible transfers Page 19 01-FW-203-1003 Finding that have not been reimbursed by the Section 8 Program. The Authority should also reimburse the Low Rent Program for any transfers that have occurred from April 2000 to the report date; 1D. Require the Authority to provide support for $13,082 in unsupported costs charged to the Low Rent Program for the audit period and any subsequent unsupported costs from the cut-off date in the audit report. For the amounts the Authority cannot support, those costs should be considered ineligible and be repaid from nonfederal funds; 1E. Require the Authority to follow its own travel policies; 1F. Monitor the administrative expense levels until satisfied that the Authority is complying with HUD budgets and program requirements by obtaining monthly income and expense reports for Section 8 and Low Rent Programs from the Board of Commissioners; 1G. Monitor the Section 8 estimates and requisitions until satisfied that the Authority is not over-requisitioning more annual contributions than is required by obtaining monthly reports on the amount of Section 8 Administrative Fees Earned and Expended and lease- up activity; and 1H. Consider taking appropriate administrative sanctions against the former Executive Director for violations of the Annual Contribution Contracts that have affected the integrity of the Section 8 and Low Rent Programs. 01-FW-203-1003 Page 20 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 decided the following management controls were Relevant Management relevant to our audit objectives: Controls. • Section 8 Estimates and Requisitions Process • Program Contracts and Administrative Costs • Cost Eligibility We assessed all the relevant control categories identified above, to the extent they impacted on our audit objectives. A significant weakness exists if management controls do Significant Weaknesses. 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 were significant weaknesses: • The former Executive Director violated the Section 8 Annual Contribution Contract requirements and spent Section 8 funds they had not earned on housing related projects, excessive salaries, unsupported costs, and other excessive administrative costs (finding). • The former Executive Director manipulated the Section 8 Estimates and Requisitions process to access additional Section 8 funds (finding). Page 21 01-FW-203-1003 Management Controls • The former Executive Director violated the Low Rent Annual Contribution Contract requirements and program regulations and spent Low Rent funds on ineligible housing projects, ineligible transfers, and other unsupported costs (finding). 01-FW-203-1003 Page 22 Appendix A Schedule of Questioned Costs Type of Questioned Costs Issue Ineligible 1/ Unsupported 2/ 1A Section 8 Funds “Due HUD” $262,925 1B Low Rent (Due from UHDC) 4,702 1C Low Rent (Ineligible Transfers) 58,799 1D Low Rent (Unsupported Costs) $13,082 Totals $326,426 $13,082 1 Ineligible costs are costs charged to a HUD-financed or insured program or activity that the auditor believes are not allowable by law, contract, or federal, state, or local policies or regulations. 2 Unsupported costs are costs questioned by the auditor because the eligibility cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a future decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of Departmental policies and procedures. Page 23 01-FW-203-1003 Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 01-FW-203-1003 Page 24 Appendix B Auditee Comments Page 25 01-FW-203-1003 Appendix B 01-FW-203-1003 Page 26 Appendix B Page 27 01-FW-203-1003 Appendix B 01-FW-203-1003 Page 28 Appendix B Page 29 01-FW-203-1003 Appendix B 01-FW-203-1003 Page 30 Appendix B Page 31 01-FW-203-1003 Appendix B 01-FW-203-1003 Page 32 Appendix B Page 33 01-FW-203-1003 Appendix B 01-FW-203-1003 Page 34 Appendix B Page 35 01-FW-203-1003 Appendix B 01-FW-203-1003 Page 36 Appendix C Distribution Secretary's Representative, 6AS Comptroller, 6AF Director, Accounting, 6AAF Director, Office of Public Housing, 6JPH Secretary, S (Room 10000) Deputy Secretary, SD (Room 10100) Assistant Deputy Secretary for Field Policy & Mgmt, SDF (Room 7108) Acting Assistant Secretary for Administration, A (Room 10110) Deputy Chief of Staff for Programs & Policy, S (Room 10226) Deputy Asst. Secretary for Public Affairs, S (Room 10222) Special Asst. for Inter-Faith Community Outreach, S (Room 10222) Executive Officer for Admin Operations & Management, S (Room 10220) General Counsel, C (Room 10214) Director, Office of Federal Housing Enterprise Oversight, O, 9th Floor Mailroom Assistant Secretary for Housing/FHA, H (Room 9100) Office of Policy Development & Research, R (Room 8100) Assistant Secretary for CPD, D (Room 7100) Government National Mtg. Assoc., T (Room 6100) Assistant Secretary for Fair Housing & Equal Opportunity, E (Room 5100) Chief Procurement Officer, N (Room 5184) Assistant Secretary for Public & Indian Housing, P (Room 4100) Chief Information Officer, Q (Room 3152) Director, Office of Departmental Operations & Coordination, I (Room 2124) Chief Financial Officer, F (Room 2202) Director, Enforcement Center, V, 200 Portals Bldg., D.C. 20024 Director, REAC, X, 1280 Maryland Ave., SW (Ste.800), D.C. 20024 Director, Office of MF Assistance Restructuring, Y, 4000 Portals Bldg., D.C. 20024 Deputy Chief Financial Officer for Operations, FF (Room 2202) David Gibbons, Director, Office of Budget, FO (Room 3270) FTW ALO, 6AF (2) Public Housing ALO, PF (Room P8202) (2) Dept. ALO, FM (Room 2206) (2) Acquisitions Librarian, Library, AS (Room 8141) Page 37 01-FW-203-1003 Appendix C DISTRIBUTION (Cont’d) Director, Hsg. & Comm. Devel. Issues, US GAO, 441 G St. NW, Room 2474 Washington, DC 20548 Attn: Judy England-Joseph Henry A. Waxman, Ranking Member, Committee on Govt Reform, House of Rep., Washington, D.C. 20515 The Honorable Fred Thompson, Chairman, Committee on Govt Affairs, U.S. Senate, Washington, D.C. 20510 The Honorable Joseph Lieberman, Ranking Member, Committee on Govt Affairs, U.S. Senate, Washington, D.C. 20510 Cindy Fogleman, Subcomm. on Gen. Oversight & Invest., Room 212, O'Neill House Ofc. Bldg., Washington, D.C. 20515 The Honorable Dan Burton, Chairman, Committee on Govt Reform, House of Representatives, Washington, D.C. 20515 Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human Resources, B373 Rayburn House Ofc. Bldg., Washington, D.C. 20515 Steve Redburn, Chief, Housing Branch, Office of Management and Budget 725 17th Street, NW, Room 9226, New Exec. Ofc. Bldg., Washington, D.C. 20503 Inspector General, G Uvalde Housing Authority Texas State Auditor Texas Department of Housing and Community Affairs Mayor, Uvalde, Texas Board Chairman of Authority Board Chairman of Uvalde Housing Development Corporation 01-FW-203-1003 Page 38
Housing Authority of the City of Uvalde Section 8 and Low Rent Programs
Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-12-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)