oversight

Assessment of Problems at the Housing Authority of the County of Chester (HACC), West Chester, PA

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-08-31.

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

                                                       U.S. Department of Housing and Urban Development
                                                                          Wanamaker Building, Suite 1005
                                                                                    100 Penn Square East
                                                                             Philadelphia, PA 19107-3380

                                                                         District Inspector General for Audit




August 31, 2001

                                                                                    Audit Memorandum
                                                                                    No. 2001-PH-1803


MEMORANDUM FOR:                  Malinda Roberts, Director, Office of Public Housing,
                                   Pennsylvania State Office, 3APH


FROM:          Daniel G. Temme, District Inspector General for Audit, Mid-Atlantic, 3AGA


SUBJECT:       Assessment of Problems at the:
               Housing Authority of the County of Chester (HACC)
               30 W. Barnard Street, 1st Floor
               West Chester, PA 19382

                                           INTRODUCTION

HUD became aware of the financial problems of HACC when the staff of the Office of Public
Housing, Pennsylvania State Office, met with representatives of HACC on October 2, 2000.
HACC requested the meeting to discuss its declining Public Housing and Section 8 reserves and
a shortfall in Hope VI funds. A HUD technical review was performed in October 2000 and the
results were discussed with the HACC on November 20, 2000. At that time HACC was advised
to immediately stop funding the private development company with Public Housing and Section
8 funds. On February 26, 2001 HACC advised HUD that it defaulted on a $500,000 line of
credit/loan, which was taken out for the private development company, and the bank seized the
$400,000 Certificate of Deposit (Comprehensive Grant Funds) that was used as collateral for the
loan. By letter dated February 28, 2001, HUD notified HACC to take several actions that
included to discontinue making payments to HACC’s development projects, its consultants and
to reimburse the Section 8 and Low Income Public Housing Programs.

On August 3, 2001 OIG assistance was requested and Management provided copies of HUD’s
Troubled Agency Recovery Center North (TARC) detail assessment report, dated June 20, 2001,
on the HACC’s operation, and KPMG’s Consulting Draft Assessment Report, dated August 10,
2001, on the nature and depth of the private developments’ problems.




     Visit the Office of Inspector General’s World Wide Web site at http://www.hud.gov/oig/oigindex.html
                                            SUMMARY

We completed a limited review of the Office of Public Housing, Pennsylvania State Office, and
TARC assessments of HACC operations. We also reviewed KPMG Consulting Draft
Assessment of HACC’s private developments problems. In brief, we found the HACC is in
substantial default of its Consolidated Annual Contribution Contracts (Low Rent and Section 8).
Specifically, contrary to Section 7 of the Annual Contribution Contract (Low Rent), HACC
pledged assets covered under its Annual Contribution Contract as collateral for loans for its
private developments. HACC defaulted on a $500,000 loan and a local bank seized a $400,000
Certificate of Deposit. It appears other collateralized loans may be in jeopardy. Also, in
violation of Section 11 of its Section 8 Annual Contribution Contract, HACC used Section 8
funds to pay interest and principal on a $4 million bond issue in June 2001. Furthermore, under
its present structure, it appears the HACC no longer has the financial resources to meet its
immediate and long-term debt obligations. Consequently, in accordance with Section 17 of the
Annual Contribution Contract (low rent) and Section 15 of the Section 8 Annual Contribution
Contract, we recommend HUD take immediate action in declaring the HACC in substantial
default of its contracts, and take appropriate actions it deems necessary to cure the substantial
default.

                           SCOPE AND PURPOSE OF REVIEW

We reviewed reports, files, and records related to HACC and interviewed appropriate HUD staff.
The following documents were included in the review.

             - Report on the Financial Technical Assistance Visit October 23-25, 2000
               transmitted to the Housing Authority of the County of Chester on February 28,
               2001

             - Report by HUD’s Trouble Agency Recovery Center North dated June 20, 2001

             - KPMG Consulting Draft Assessment Report dated August 10, 2001

             - Request for Audit dated August 3, 2001

             - Independent Auditor Report dated September 22, 2000 received by HUD on
                February 2, 2001.

                       OBSERVATIONS AND RECOMMENDATIONS

HACC pledged assets covered by the Low Income Public Housing Annual Contribution Contract
to collateralize loans in violation of Section 7 of that contract; and, paid interest and principal on
a bond issue from Section 8 funds in violation of Section 11 of the Section 8 Annual
Contribution Contract. HACC defaulted on a $500,000 line of credit/loan, which was used for
private development, held by Allied Irish Bank and the bank seized a $400,000 Certificate of
Deposit used to collateralize the loan. The Certificate of Deposit was comprised of 1999


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Comprehensive Grant Funds. In addition, HACC has additional lines of credit/loans totaling
$1,703,578 with various banks, some of which are collateralized by Annual Contribution assets
and a $4,000,000 bond issue, both used to finance non-federal subsidized development activity.
In June 2001, bond issue payments of approximately $50,000 in interest and $120,000 in
principal were improperly paid from Section 8 funds. Before the end of the Fiscal Year,
additional interest and principal payments will become due as well as the need to meet the every-
day operating expenses. In May 2001 it was reported that HACC did not have sufficient cash to
pay its accounts payable that totaled $193,489. Currently, there are no known sources of funds
available to meet the HACC’s total obligations. The HUD subsidized programs are at risk since
the HACC pledged assets covered by the Annual Contributions Contract as collateral for loans.

HUD notified HACC to take several actions including to discontinue making payments to
HACC’s development projects, its consultants and to reimburse the Public Housing and Section
8 Program. However, HACC continues to use Section 8 Program and Low Income Public
Housing Program funds to pay other program/project expenses

Based on our review, we believe that the HUD‘s Pennsylvania State Office has taken appropriate
action to identify the significant deficiencies that exist at HACC. We believe that sufficient
reviews have been made to identify and support the major non-compliance issues with the
provisions of the Annual Contributions Contracts. The following is a list of the problems that
exist in the HACC’s operation as supported by the various management and consultant reviews.
We have included the various sections of the Annual Contributions Contract that were violated.

          1. Pledged assets covered by the Annual Contributions Contract as collateral for
             private loans (Annual Contributions Contract, Part A, Section 7).

          2. Section 8 Program and Low Income Public Housing Program funds were used to
             pay other program/project expenses with the knowledge/approval of HACC’s
             Executives and staff. Three private developments were noted by KPMG Consulting
             that the “property will fail or continue to be propped up using HACC program
             funds.” This further supports the improper use and continued use of Annual
             Contribution Contract funds (Low Income Public Housing Program Annual
             Contributions Contract, Part A, Section 9; and, Section 8 Program Annual
             Contributions Contract, Section 11).

          3. Hope VI and private development funds are commingled with the Consolidated
             General Funds without an accounting system, which clearly separates receipts and
             disbursements by program (Annual Contributions Contract, Part A, Section 9).

          4. Low Income Public Housing Program funds are being advanced to Hope VI and
             private development projects without board approval and/or without expectation of
             reimbursement (Annual Contributions Contract, Part A, Section 10).

          5. HACC’s development staff members were reimbursed for expenses in excess of its
             travel policy. Travel expenses were charged to the federally assisted programs for


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            items such as, travel expenses to various parts of the country, including hotels,
            meals, and drinks for multiple persons, incurred for the private development
            enterprises, and meals and hotel costs were paid for guests while they were in
            Chester County (OMB Circular A-87, Attachment B, Para. 41).

          6. Expenses charged to the federally subsidized program are excessive. No time
             records or other evidence was available to support the amount of time spent or
             percentage charged to the various programs (OMB Circular A-87, Attachment B,
             Para. 11.h).

          7. HACC’s former Director of Development (who was also the former Executive
             Director) and the former Board Chairman were also the principals of the private
             development entities, which created a conflict of interest when deciding on the use
             of HACC funds for the development partnerships (Annual Contributions Contract,
             Part A, Section 19).

          8. HACC approved the use of Section 8 Program and Low Income Public Housing
             Program funds that were not included or were in excess of the approved budget
             (Annual Contributions Contract, Part A, Section 11).

          9. Records did not exist or were not made available for review (Low Income Public
             Housing Program Annual Contributions Contract, Part A, Section 15; and, Section 8
             Program Annual Contributions Contract, Section 14).

         10. Various questionable practices/needs were identified in the procurement of goods
             and services.

         11. HACC contributed funds to the Mixed Finance Partnerships Entities in excess of
             what was required.

         12. Although all the above problems existed during the period of time covered by the
             Independent Auditor’s Single Audit Report, the report contained no findings or
             internal weaknesses or non-compliances with laws or regulations.

We recommend the Director, Office of Public Housing, Pennsylvania State Office take
immediate action in declaring the HACC in substantial default of its contracts, and take
appropriate actions deemed necessary to cure the substantial default.

We discussed the report with the Director, Office of Public Housing, Pennsylvania State Office,
on August 30, 2001 who agreed with its content.

                                        ************

We wish to thank you and your staff for your cooperation in completing this review. If you have
any questions, please call me at (215) 656-3401 ext. 3484 or George A. Datto at ext. 3491.


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                                                                              Attachment A


                                     DISTRIBUTION

Director, Office of Public Housing, Mid-Atlantic, 3APH
Secretary’s Representative, Mid-Atlantic, 3AS
Special Agent in Charge, 3AGI
DIGA’s
Audit Liaison Officer, 3AFI
Principal Staff
Departmental Audit Liaison Officer, FM (Room 2206)
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 Dan Burton, Chairman, Committee on Government Reform, House of
  Representatives, 2185 Rayburn Building, Washington, DC 20515
The Honorable Henry Waxman, Ranking Member, Committee on Government Reform, House of
  Representatives, 2204 Rayburn Building, 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, US General Accounting Office, 441
  G Street, NW, Room 2474, Washington, DC 20548, Attn: Stanley Czerwinski
Mr. Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street,
  NW, Room 9226, New Executive Office Building, Washington, DC 20515
Ms. Sharon Pinkerton, Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug
  Policy and Human Resources, B373 Rayburn House Office Building, Washington, DC 20515
Mr. Armando Falcon, Director, Office of Federal Housing Enterprise Oversight, 1700 G Street,
   NW, Room 4011, Washington, DC 20552
Director for Special Needs Housing, Office of Housing and Community Development, 1234
  Market Street, 17th Floor, Philadelphia, PA 19107




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