oversight

Northwestern Regional Housing Authority - Public Housing Program Boone North Carolina

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-01-09.

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

          AUDIT REPORT




NORTHWESTERN REGIONAL HOUSING AUTHORITY

        PUBLIC HOUSING PROGRAMS

         BOONE, NORTH CAROLINA

                2003-AT-1001

             JANUARY 9, 2003


           OFFICE OF AUDIT, REGION 4
                                                                  Issue Date
                                                                          January 9, 2003
                                                                 Audit Case Number
                                                                          2003-AT-1001




TO:            Michael A. Williams, Director, Office of Public Housing, 4FPIH



FROM:          Nancy H. Cooper
               Regional Inspector General for Audit, Region 4, 4AGA


SUBJECT:       Northwestern Regional Housing Authority
               Public Housing Programs
               Boone, North Carolina

We completed an audit of the public housing programs of the Northwestern Regional Housing
Authority in Boone, North Carolina. This report presents the results of our audit and includes
seven findings with recommendations for corrective action.

In your September 27, 2002, memorandum to me (Appendix B), you stated general concurrence
with our draft findings and recommendations. For the three recommendations in which you did
not agree, we have revised or deleted them. In accordance with the Department of Housing and
Urban Development (HUD) Handbook 2000.06 REV-3, within 60 days, please provide us, for
each recommendation without management decisions, a status report on: (1) the corrective
action taken; (2) the proposed corrective action and the date to be completed; or (3) why action is
considered unnecessary. Additional status reports are required at 90 and 120 days after report
issuance for any recommendation without a management decision. Also, please furnish us copies
of any correspondence or directives issued because of the audit.

We provided a copy of this report to the auditee.

We appreciate your cooperation during the audit. Should you or your staff have any questions,
please contact me at (404) 331-3369, or Gerald Kirkland, Assistant Regional Inspector General
for Audit, at (865) 545-4368.
Management Memorandum




                        THIS PAGE LEFT
                            BLANK
                        INTENTIONALLY




2003-AT-1001              Page ii
Executive Summary
Pursuant to a citizens’ complaint and congressional inquiry, we conducted an audit of the
Northwestern Regional Housing Authority (NRHA or Authority) in Boone, N.C. We audited
activities generally for the period July 1, 1998, to June 30, 2001. Our objectives were to
determine whether: (1) the citizens’ allegations were valid, (2) the Authority had adequate
controls to properly safeguard its assets, and (3) the Authority complied with applicable laws,
regulations, and Department of Housing and Urban Development (HUD) requirements in
operating its public housing programs.

Many of the allegations proved valid. We found the Authority repeatedly violated regulatory
requirements, its Consolidated Annual Contributions Contract (ACC) for low-income public
housing, and its Consolidated Section 8 ACC with HUD.

Management violated its ACC’s with HUD when it inappropriately pledged Authority assets as
collateral for unauthorized bank loans. The loans helped offset development cost overruns and
pay operating costs for five privately owned rental properties, pay pre-development costs for
another privately owned property, and construct a homeownership project. Management also
misused $584,858 of HUD Section 8 and public housing funds for development activities. As a
result of payments and advances by the Authority, Northwestern Housing Enterprises, Inc. (NHE)
and the developments owed the Authority at least $4,224,342. Management advanced another
$45,324 for development of a property owned by another non-profit company. Management and
the Board put the Authority at further risk by guaranteeing repayment of private development
loans and exposing the Authority to potential liabilities. These actions not only violated the
ACC’s, but also reduced funds available for public housing operations. Management and the
Board’s disregard for HUD requirements left the Authority in a precarious financial condition
and led to the selling of 18 public housing units.

The Authority incurred travel costs that were unnecessary and ineligible. It paid lavishly for
meals, hotels, and tips, made frequent out-of-region trips, and paid travel expenses for family
members of management and the Board. This violated the ACC’s and occurred because the
Authority’s travel policy did not set spending limits and was not comparable with local public
practice. Also, the Authority did not maintain adequate records to track amounts due and
reimbursements received for expenses it paid on behalf of individuals. As a result, the Authority
overspent its travel budget by $50,000 for the review period, and those funds were not available
for its programs.

The Authority incurred other unnecessary and ineligible expenses. It spent $114,302 for
miscellaneous items, half of which was for entertaining and pampering its Board members and
employees, their spouses and guests at Board meetings, a beach retreat, a Christmas party, and
with theater tickets, jewelry, bath products, libations, and other personal gifts. The Executive
Director used public money to pay for alterations of his business suit. This misuse occurred
because the Authority did not establish adequate controls to ensure expenses complied with its
low rent public housing and Section 8 ACC’s. Consequently, the programs were deprived of
needed operating funds. These actions also demonstrated the Authority’s disregard of its duty to
uphold the public trust.


                                         Page iii                                   2003-AT-1001
Executive Summary


Our inspection of the public housing units and grounds revealed health and safety concerns
needing immediate attention. We observed trash and debris around the property and playground
equipment in disrepair. Railing or fences were needed to prevent tenants from failing down
hazardous embankments. Each of the 23 units we inspected also required maintenance. The
Authority needed to improve its procedures to ensure deficiencies are promptly corrected in order
to provide decent, safe, and sanitary housing.

The Authority did not maintain accurate accounting records. Costs were not properly allocated,
accounts were out of balance, complicated journal entries were not adequately explained, and
other accounting deficiencies existed. Funds advanced to privately owned developments were
understated. An Independent Public Accountant (IPA) reported similar conditions in his audits
of the Authority’s fiscal years ended June 30, 2000, and 2001. With accounting records that
were unreliable and unauditable, the Authority could not adequately administer its programs.

The Authority did not follow Section 8 fund requisition requirements. It did not perform reviews
of its estimated annual needs and often withdrew excess funds. The Authority also did not
maintain the excess funds in an interest-bearing account as required. Rather, it used them for
other activities. As a result, it paid almost $11,000 in interest to HUD and had to borrow
$240,000 to repay its excess withdrawals because it no longer had the money on deposit.

We noted weak procedures in other areas of Authority operations. Management did not properly
segregate tenant escrow funds, adequately pursue collection of tenant rents, or follow its own
nepotism policies. This occurred because management did not implement adequate controls and
elected not to comply with its written policies. As a result, (1) tenant funds were not fully
available for disbursement, (2) the Authority could not assure it consistently enforced rent
collection efforts or assure tenants received fair and equitable treatment, and (3) the Authority
hired relatives of employees in positions that violated its nepotism policy.

We recommend HUD declare the Authority in substantial default of its ACC’s and take
possession and control of all Authority operations and assets. We also recommend HUD:

·   Take administrative actions against the Executive Director, Deputy Director, and the Board
    Chairman.
·   Instruct the Authority to discontinue using funds for development activities.
·   Seek release of encumbered Authority assets and recovery of all amounts owed.
·   Inspect the Authority’s units for structural safety.
·   Require the Authority to: (1) repay ineligible expenses of $4.3 million and provide support
    for $68,508, (2) maintain its accounting records as required, (3) revise its travel policy,
    (4) discontinue purchasing gifts, and (5) eliminate nepotism and appearances thereof.

We provided the draft audit report to the Board Chairman and Executive Director on September
10, 2002, and held an exit conference on September 18, 2002. The Chairman provided
preliminary written comments on September 27, 2002, and final written comments on October
11, 2002. The Authority’s preliminary comments were voluminous. Its final comments were
basically a summary of the preliminary comments. Thus, we did not include the preliminary

2003-AT-1001                             Page iv
                                                                           Executive Summary


comments in the report. The preliminary comments and OIG’s response to each of the comments
are available upon request. We included the Authority’s final comments within each applicable
finding and in their entirety in Appendix C. We incorporated OIG’s responses to the final
comments within the body of the Authority’s comments. The Authority disagreed with the
majority of the draft report, but did not provide supporting documentation or other evidence to
dispute the findings. We considered the Authority’s and HUD’s comments in preparing the final
report.




                                         Page v                                   2003-AT-1001
Executive Summary




                    THIS PAGE LEFT
                        BLANK
                    INTENTIONALLY




2003-AT-1001          Page vi
Table of Contents
Management Memorandum                                                    i



Executive Summary                                                      iii



Introduction                                                            1



Findings

1.   Management Inappropriately Pledged Authority Assets                5


2.   Travel Expenses Were Unnecessary and Ineligible                  19


3.   Other Expenses Were Unnecessary and Ineligible                   27


4.   Health and Safety Concerns Existed at Public Housing Sites       31


5.   The Authority Did Not Maintain Accurate Accounting Records       37


6.   The Authority Withdrew Excess Section 8 Funds                    41


7.   Mismanagement Was Apparent in Other Areas of Operation           45



Management Controls                                                   51



Follow-Up On Prior Audits                                             53




                             Page vii                        2003-AT-1001
Table of Contents




Appendices
    A.   Schedule of Questioned Costs                                   55
    B.   HUD Comments                                                   57
    C.   Authority Comments                                             65
    D.   Limited Partnership and Limited Liability Companies            83
    E.   Comparison of Budgeted and Actual Development Costs            85
    F.   White Laurel II Homeownership Project                          87
    G.   Bank Loans                                                     89
    H.   Sources and Uses of Funds Provided to the LP, LLCs, and NHE    91
    I.   Other Ineligible Expenses                                      93
    J.   Inspection Deficiencies by Category                            97
    K.   Room and Meal Cost for Six Trips                               99
    L.   Distribution Outside of HUD                                   101

Abbreviations
ACC            Annual Contributions Contract
CFR            Code of Federal Regulations
FSS            Family Self Sufficiency Program
GFCI           Ground Fault Circuit Interrupters
HUD            Department of Housing and Urban Development
IPA            Independent Public Accountant
LP             Limited Partnership
LLC            Limited Liability Company
NCHFA          North Carolina Housing Finance Agency
NHE            Northwestern Housing Enterprises, Inc.
NRHA           Northwestern Regional Housing Authority
OIG            Office of Inspector General
OMB            Office of Management and Budget
QHWRA          Quality Housing and Work Responsibility Act of 1998
REAC           Real Estate Assessment Center




2003-AT-1001                           Page viii
Introduction
The Authority was created by authority of the laws of the State of North Carolina on July 1,
1979. It serves families in a 7-county region covering Allegheny, Ashe, Avery, Mitchell,
Watauga, Wilkes, and Yancey Counties of North Carolina.




A seven-member Board of Commissioners governs the Authority with members appointed by the
Board of County Commissioners of the respective county represented. Lewis McEntyre, Jr.,
was the Board Chairman during our audit period. Edward G. Fowler, Jr., has served as the
Authority’s Executive Director since its creation. The Executive Director, Deputy Director, and
Finance Officer managed the Authority’s day-to-day operations.

The Authority administered 2 low-income housing developments, consisting of 83 public
housing units under ACC Number A-3989, and over 1,500 Section 8 vouchers/certificates. It
also administered several other programs including a Comprehensive Grant Program, a Family
Self Sufficiency (FSS), Program, and Housing Counseling Programs. HUD’s Greensboro, North
Carolina, Office of Public Housing is responsible for overseeing the Authority.




                                         Page 1                                   2003-AT-1001
Introduction


According to its budget, in fiscal year ended June 30, 2001, the Authority managed HUD grants,
fees, and operating income of about $7.3 million as follows:

         Section 8 Housing Assistance Payments                      $5,921,108
         Section 8 Administrative fees                                 746,588
         Low-income public housing funds                               253,203
         Comprehensive Grant Program                                   207,138
         Other Operating                                               137,250
         Family Self Sufficiency Program                                34,913
         Housing Counseling                                             13,492

         Total                                                      $7,313,692


In May 1995, the Authority created a non-profit organization, NHE, that partnered with
low-income tax credit syndicators to form a limited partnership (LP) and four limited liability
companies (LLCs). The Authority then developed five low-income housing developments,
which were owned by the LP or the LLCs. The Authority was the general contractor for four of
the developments and managed all five developments.

The Authority’s financial records were maintained primarily at its central office located at
869 Highway 105 Extension, Suite 10, Boone, North Carolina 28607.



                                    Pursuant to a citizens’ complaint, we reviewed activities of
 Audit Objectives                   the Authority as they related to the Authority’s
                                    administration of HUD assisted activities.              The
                                    complainants expressed many concerns including:

                                    ·   Development cost overruns;
                                    ·   Complex and questionable organizational
                                        arrangements for the developments that placed
                                        Authority assets at risk;
                                    ·   Large expenditures for travel, entertainment, and gifts;
                                    ·   Excessive Section 8 fund withdrawals;
                                    ·   Misappropriation of Authority assets; and,
                                    ·   Fictitious housing counseling files.

                                    Our objectives were to determine whether: (1) the
                                    allegations were valid, (2) the Authority had adequate
                                    controls to ensure its assets were properly safeguarded, and
                                    (3) the Authority complied with applicable laws,
                                    regulations, and HUD requirements.


2003-AT-1001                             Page 2
                                                                    Introduction


Audit Scope and   To meet our objectives, we:
Methodology
                  ·   Interviewed HUD North Carolina State Office officials.
                  ·   Interviewed Authority management, staff, tenants, an
                      IPA, and vendors.
                  ·   Reviewed Authority books and records.
                  ·   Reviewed the minutes from Board meetings.
                  ·   Reviewed disbursements for travel and miscellaneous
                      expenses.
                  ·   Inspected 23 of the Authority’s 83 public housing units.
                  ·   Reviewed Forms HUD-52663, Requisition for Partial
                      Payment of Annual Contributions.
                  ·   Reviewed nine tenant files.
                  ·   Reviewed five housing counseling files.

                  For our review of travel and miscellaneous expenses, we
                  reviewed 100 percent of the transactions for the period July
                  1, 1998, through June 30, 2001. We also reviewed one trip
                  in September 2001.

                  We selected the public housing units for inspection from
                  the tenant rental register by selecting every fifth unit from a
                  predetermined starting point. We also inspected all vacant
                  units. Our results should not be projected to the universe.

                  We reviewed five housing counseling files that were
                  alleged to contain discrepancies. We were unable to
                  substantiate the allegations, thus we did not expand our
                  review.

                  Our review generally covered the period July 1, 1998,
                  through June 30, 2001. We performed our on-site work
                  between September 2001 and May 2002. We conducted
                  our audit in accordance with generally accepted
                  government auditing standards.




                      Page 3                                       2003-AT-1001
Introduction




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2003-AT-1001     Page 4
                                                                                       Finding 1


Management Inappropriately Pledged Authority
                 Assets
Management violated its ACC’s with HUD when it inappropriately pledged Authority assets as
collateral for unauthorized bank loans. The loans helped offset development cost overruns and
pay operating costs for five privately owned rental properties, pay pre-development costs for
another privately owned property, and construct a homeownership project. Management also
misused $584,858 of HUD Section 8 and public housing funds for development activities. As a
result of payments and advances by the Authority, NHE and the developments owed the
Authority at least $4,224,342. Management advanced another $45,324 for development of a
property owned by another non-profit company. Management and the Board put the Authority at
further risk by guaranteeing repayment of private development loans and exposing the Authority
to potential liabilities. These actions not only violated the ACC’s, but also reduced funds
available for public housing operations. Management and the Board’s disregard for HUD
requirements left the Authority in a precarious financial condition and led to the selling of 18
public housing units.




 Criteria                           The Consolidated ACC for low rent public housing, Part 2,
                                    Section 401 (D), allows the Authority to withdraw monies
                                    from the general fund only for (1) public housing
                                    development costs, (2) operating expenditures, (3) purchase
                                    of investment securities as approved by the Government,
                                    and (4) other purposes specified in the contract or
                                    specifically approved by the Government. The ACC
                                    prohibits obtaining unauthorized loans and pledging or
                                    encumbering assets. The ACC specifies that any such
                                    pledges or encumbrances constitute a substantial default of
                                    the agreement. Further, the ACC does not permit use of
                                    public funds for privately owned development expenses.

                                    Section 11 of the Section 8 Consolidated ACC provides
                                    that the Authority must use program receipts to provide
                                    decent, safe, and sanitary housing for eligible families. The
                                    Authority may only use program receipts to pay program
                                    expenditures.

                                    The Authority began assisting in developing and managing
Background                          privately owned housing in 1995. Through June 2002 it
                                    had completed five developments (Appendix D). The
                                    developments were privately owned by either a LP or LLC,
                                    which were substantially owned by investors.         The

                                         Page 5                                     2003-AT-1001
Finding 1


               Authority's Executive Director created NHE, a non-profit
               corporation, in May 1995 to take a token ownership interest
               in each entity and serve as the general partner. The
               Authority sponsored NHE, but had no ownership interest in
               any of the entities. However, the Authority's Executive
               Director, Deputy Director, and Human Resource Manager
               were officers of NHE. Three Authority Board members
               were also on the Board of NHE. Other than one employee
               hired in late 2001, NHE did not have any staff. Thus,
               Authority staff performed the day-to-day business of NHE.
               Although none of the developments were operated as public
               housing, low-income tenants, whose rents are subsidized
               with HUD Section 8 funds, occupied them. Also, the
               Authority managed the completed properties through
               management contracts with each entity. The entities paid
               the Authority management fees and deferred developer fees
               when cash was available.

               According to the budgets, planned funding for the five
               completed developments included a combination of
               financing sources as shown in Appendix E. The primary
               source was proceeds from selling Low Income Housing
               Tax Credits that NHE received from the North Carolina
               Housing Finance Agency (NCHFA). The tax credits were
               provided to NHE and had no effect on Authority
               operations. Other financing sources included HOME
               Program funds provided by HUD through the State of
               North Carolina. Plans also included limited funds from the
               Authority, such as deferred developer fees. The Authority
               was not authorized to use any HUD program funds for the
               developments.

               As discussed in Appendix F, the Authority also developed
               the White Laurel II Homeownership project for NHE.
               Unlike the tax credit projects, White Laurel II was financed
               entirely by the Authority, primarily with funds the
               Authority received from a $2.48 million bank loan. The
               project had not been completed as of April 30, 2002.

               In addition to these developments, in August 2002 the
               NCHFA awarded tax credits to NHE for another privately
               owned development, Historic Elk Park School. The
               Authority planned to be the developer and renovate this
               historic school into low-income housing for the elderly.
               The budgeted cost for this development was $3,763,615.

2003-AT-1001       Page 6
                                                                             Finding 1


                          As of April 30, 2002, NHE had paid $13,335 in
                          pre-development expenses for this project.

                          Further, the Authority was developing another privately
                          owned project, Rock Haven.            Unlike the other
                          developments, Rock Haven did not involve NHE. Rather,
                          the Authority was developing it for Hospitality House of
                          the Boone Area, Inc., a non-profit that administers
                          homeless programs. The Authority’s Executive Director
                          was a Board member of the Hospitality House.

Cost overruns of almost   The Executive Director was responsible for preparing the
$5.2 million              development budgets. We found that costs for the five
                          completed developments exceeded planned budgets by a
                          total of almost $5.2 million. The overruns ranged from 4 to
                          89 percent of budgeted amounts. In addition, White Laurel
                          II will likely suffer a cost overrun of about $1 million upon
                          completion (Appendix F).

                          The Executive Director offered several explanations for the
                          cost overruns. He said he understated the budgets because
                          the NCHFA told him to understate them on the tax credit
                          applications. Otherwise, due to substantial competition
                          among applicants, NHE would not be awarded tax credits.
                          The Executive Director also said that high construction
                          costs in the area, weather delays, labor costs, unexpected
                          site problems, development oversights, and unexpected
                          regulatory requirements imposed by local government
                          contributed to the overruns. We did not verify these claims.
                          He also admitted that some overruns resulted from poor
                          planning.      The Authority, as developer and general
                          contractor, should have performed adequate research to
                          enable it to reasonably estimate the costs.

                          The Authority served as general contractor for all
                          developments except Woodland Hills, the first
                          development. Woodland Hills had the least cost overrun,
                          about $70,000. The Executive Director explained that the
                          Authority served as general contractor for the other
                          developments to save the contractor’s fees. Given the cost
                          overruns, we question whether any cost savings occurred.
                          For example, the Executive Director budgeted a per unit
                          cost of $69,900 for White Laurel. However, actual per unit
                          cost was $132,000, about 89 percent over budget.


                              Page 7                                      2003-AT-1001
Finding 1


                                            Both management and the Board knew, or should have
                                            known, there were insufficient funds to cover the inevitable
                                            budget shortfalls. Thus, they should not have proceeded
                                            with the developments.        Even though the Authority
                                            deferred its developer fees to help reduce costs, and in
                                            some cases obtained additional financing, funding was still
                                            inadequate. When this occurred, management and the
                                            Board made up the shortfalls by pledging Authority assets
                                            as collateral for loans and guaranteeing repayment of some
                                            private development loans.

                                            As of March 31, 2002, the Authority owed four banks a
    Management inappropriately              total of $2,521,518 for five loans it obtained without
    pledged assets and misused              authorization (Appendix G). In at least three cases, the
    funds                                   Executive Director and Deputy Director signed various
                                            agreements pledging Authority assets to obtain loans.

                                            ·   On June 24, 1999, management pledged three
                                                certificates of deposit to obtain a $500,000 loan. Two
                                                of the certificates, one for $134,987 and one for
                                                $100,462, represented tenant FSS funds the Authority
                                                was supposed to hold in trust.

                                            ·   In order to reduce debt, the Authority decided to
                                                rehabilitate the Valley View public housing units and
                                                sell them in the private market as condominiums. On
                                                January 22, 2001, HUD's Special Applications Center
                                                approved the Authority’s application to sell the units.
                                                In order to sell them and pledge the sales proceeds, the
                                                Authority requested HUD release the Valley View units
                                                from the Declaration of Trust.1 On September 28,
                                                2001, HUD released the units. However, on March 22,
                                                2001, prior to obtaining the release, Authority
                                                management executed an amended loan agreement
                                                whereby it pledged $522,000 of the anticipated sales
                                                proceeds as collateral for a $500,000 loan NHE
                                                obtained from the Fannie Mae Foundation. NHE
                                                obtained this loan to fund development cost overruns.




1
     The Declaration of Trust is a legal binding document that protects HUD’s interest in the public housing units.
     It prohibited the Authority from pledging or encumbering its public housing developments.



2003-AT-1001                                     Page 8
                                                                                                 Finding 1


                                        ·    Management pledged the 18 Valley View units as
                                             collateral for a $1.35 million debt consolidation loan.2
                                             In addition, management pledged some of the Valley
                                             View sales proceeds to obtain the loan and agreed to
                                             repay the loan by December 7, 2003. The Authority
                                             anticipated selling all the units by December 31, 2001,
                                             and hoped to realize $1.8 million from the sales.
                                             However, before the Authority could close any sales, it
                                             must have pre-sold at least nine. As of April 30, 2002,
                                             the Authority had not pre-sold any of the units.

                                        Monthly debt service on the loans was $18,000.

                                        Having pledged assets for the loans, management misused
                                        the loan proceeds and other Authority funds to pay for
                                        development activities. They used $310,610 of HUD
                                        Section 8 funds and $274,248 of public housing funds.
                                        Management generally provided the funds to the
                                        developments through NHE, but also paid some
                                        development expenses, and advanced some funds directly
                                        to the developments. As a result of payments and
                                        advances, NHE and the developments owed the Authority
                                        at least $4,224,342 (Appendix H). This included $503,277
                                        owed the Authority for deferred developer fees. The
                                        entities likely owed more; however, because of the
                                        Authority’s poor accounting records (Finding 5) we could
                                        not fully assess additional amounts. In any event, since
                                        NHE and the developments had few funding sources,
                                        substantial recovery of funds was unlikely. In his report for
                                        fiscal year ended June 30, 2001, the IPA reported:

                                             “The NRHA made a loan to the Northwestern Housing
                                             Enterprises, Inc. for its gap financing of Woodland
                                             Hills, LP of $25,796.00. The NRHA considers the
                                             $25,796.00 to be a permanent loan to the Northwestern
                                             Housing Enterprises, Inc. and has no intent of collecting
                                             the loan unless the Northwestern Housing Enterprises,
                                             Inc. has the available funds although the NRHA may
                                             change these terms at any time. The note carries an
                                             interest rate of 5.24% but no accrued interest expenses
                                             is calculated on this note since collection is doubtful.


2
    The Authority received $755,000 of the $1.35 million on December 7, 2001, (Appendix G). The remaining
    $595,000 had not been received, but was available. The Authority executed a Promissory Note for the full
    $1.35 million.

                                              Page 9                                         2003-AT-1001
Finding 1



                                 “The NRHA made loans to the Northwestern Housing
                                 Enterprises, Inc. for its gap loans to Boone-White
                                 Laurel, LLC of $1,034,569.00. The note carries an
                                 interest rate of 5.24% and is due and payable in full on
                                 December 31, 2017.          The Northwestern Housing
                                 Enterprises, Inc. passed the terms of this note through to
                                 Boone-White Laurel, LLC. No security has been
                                 pledged on these loans. Accrued interest receivable
                                 associated with these notes has not been recorded since
                                 collection is questionable.”

                              Further, management inappropriately advanced $45,324 of
                              Authority funds for the Rock Haven project. Repayment
                              was contingent upon the owners obtaining a construction
                              loan.

                              In at least two cases, management and the Board put the
 Management and the Board     Authority further at risk by guaranteeing repayment of
 inappropriately guaranteed   private development bank loans.          These agreements
 loans and exposed the        guaranteed NHE’s performance and gave the banks the
 Authority to potential       right to seize Authority assets should NHE fail to pay. One
 liabilities                  Guaranty Agreement, signed by the Executive Director and
                              the Board Chairman, stated: “The undersigned is Bank’s
                              debtor for all indebtedness, obligations and liabilities for
                              which this Guaranty is made, and Bank shall also at all
                              times have a lien on and security interest in all stocks,
                              bonds and other securities of the undersigned . . . Bank
                              shall also at all times have the right of set-off against any
                              deposit account of the undersigned with Bank. . . .”

                              In order to induce limited partners to invest in three
                              developments, management unconditionally exposed the
                              Authority to potential liabilities of unknown magnitude.
                              Management committed the Authority to funding cost
                              overruns and operating deficits should NHE fail to perform.
                              In two cases, it guaranteed NHE’s liability to the investors
                              for loss of tax credits, if any.

                              The Authority also agreed in one instance to buy out the
                              limited partners’ interests if necessary. Typical language
                              from guarantee agreements stated: “The liability of the
                              Guarantor (Authority) under this guarantee shall be direct
                              and immediate and not conditional or contingent upon the
                              pursuit of any remedies against the Managing Member

2003-AT-1001                      Page 10
                                                                                                   Finding 1


                                          (NHE) or any other person. . . .”3 Further, according to its
                                          June 30, 2001, audit report; NHE was responsible for any
                                          cost overruns. However, as shown in the finding, the
                                          Authority paid for a significant portion of the cost overruns.

                                          In at least three cases management signed other documents
                                          obligating the Authority to guarantee completion of private
                                          developments. These documents, also part of the private
                                          development operating agreements, obligated the Authority
                                          to unconditionally guarantee the payment of such sums as
                                          necessary to complete the projects and discharge any liens.
                                          Further, management agreed to pay any private investor
                                          legal cost involved in enforcing the agreements.4

                                          Title 24 Code of Federal Regulations (CFR), Section
    Section 8 administrative fee          982.155, under certain circumstances, permits the use of
    reserves                              Section 8 administrative fee reserves for other housing
                                          purposes. The primary purpose of administrative fee
                                          reserves is for payment of Section 8 Program administrative
                                          expenses throughout the life of the applicable contract. In
                                          the interim, both the Section 8 ACC and HUD Notice
                                          96-33 require the funds be invested in accordance with
                                          HUD requirements.         The Authority can only use
                                          administrative fee reserves for other housing purposes if it
                                          performs an analysis showing it has reserve funds in excess
                                          of what is needed to administer the applicable Section 8
                                          contracts throughout their remaining life.       Both the
                                          regulations and the Authority’s administrative plan require
                                          this determination. Both also require a separate Board
                                          resolution authorizing each disbursement of reserve funds
                                          above the amount set by the administrative plan. The
                                          Authority’s administrative plan showed the Board set that
                                          amount at $1,000.

                                          In its response to the draft report, the Authority claimed it
                                          used Section 8 administrative fee reserve funds to pay
                                          development costs. However, the Authority did not provide
                                          any documentation to support its claim. Further, we did not
                                          find any evidence the Authority performed analyses
                                          showing it had excess administrative reserves.


3
      Operating agreement between Blue Ridge Housing of Sparta, LLC and the Authority dated December 17, 1999.
      Other agreements included similar language.
4
      Unconditional Construction Completion Guarantee Agreements for Blue Ridge Housing of Sparta, LLC; Blue
      Ridge Housing of Bakersville, LLC; and, Blue Ridge Housing of Jefferson, LLC.

                                               Page 11                                         2003-AT-1001
Finding 1


                           Our review of Authority records, including IPA audits,
                           budgets, 5-year and annual plans, and Section 8 year-end
                           statements, showed no indication it expended Section 8
                           reserves for other housing purposes. Also, our review of
                           Board resolutions did not show the Board authorized each
                           disbursement over $1,000.

                           Of the $310,610, we reviewed $58,867 of Section 8 funds
                           advanced to NHE, and $26,000 of Section 8 funds
                           advanced to Blue Ridge Housing of Bakersville, LLC. The
                           advances were made between July 1, 2001, and December
                           31, 2001. We found the Authority advanced all of the
                           funds directly from monthly Section 8 payments HUD
                           deposited into the Authority’s bank account. Those funds
                           were supposed to be used for housing assistance payments
                           to Section 8 landlords and program administrative costs for
                           the following month. These disbursements clearly did not
                           come from reserve funds. In fact, we found no evidence of
                           reserve funds on deposit at any time during the audit
                           period. The general ledger did not even include the HUD-
                           prescribed reserve accounts (Accounts 7016 and 2826).

                           Interestingly, the Authority’s Section 8 settlement
                           statements (HUD-52681s) for fiscal years ended June 30,
                           2001, and June 30, 2002, showed it had $585,776 and
                           $769,850, respectively, of Section 8 administrative fee
                           reserves. However, neither the Authority’s accounting
                           records nor its cash accounts showed the funds were on
                           deposit. Further, the IPA audit reports for fiscal years
                           ended June 30, 2000, and June 30, 2001, did not show any
                           reserve funds on deposit.

                           We question both the Authority’s claims that it expended
                           Section 8 excess administrative fee reserves, and its claims
                           that it had significant reserves on deposit.

 The Authority continued   The Authority was in a precarious financial condition. It
 developing despite its    had $2.6 million in bank debt. Debt service alone was
 precarious financial      approximately $18,000 per month and the Authority had no
 condition                 funds with which to repay the principal. The Authority’s
                           financial condition led it to request HUD approval to sell
                           18 public housing units. The Authority had virtually no
                           cash reserves and very little cash with which to operate.
                           The Authority pledged tenant FSS funds for unauthorized
                           operating loans. Also, by its own admission, it owed that

2003-AT-1001                   Page 12
                                                                 Finding 1


             program another $35,000 it had used for other purposes. It
             was also carrying as an asset $4.2 million in receivables due
             from private entities for which collection was uncertain.
             During 2000 it obtained a bank loan to repay HUD
             overdrawn Section 8 funds (Finding 6). Further, it had not
             funded a separate tenant security deposit account, as
             required by HUD (Finding 7).

             In a July 25, 2000, letter to the Board Chairperson, one
             Board member questioned the Authority’s investments in
             new construction and housing projects. He recommended
             the Board propose to suspend investing in future projects
             until some of the debt and financing was more stable.
             Despite his recommendation and the Authority’s precarious
             financial condition, the Authority continued to invest in
             new development activity such as Historic Elk Park School
             and Rock Haven.

             Authority management and the Board did not fulfill their
Conclusion
             fiduciary responsibility to the residents, the public, and the
             Federal Government. Their unauthorized development
             activities took precedence over safeguarding Authority
             assets and meeting the Authority’s primary mission of
             providing decent, safe, and sanitary housing to area
             citizens. The Authority will not likely recover any
             substantial funds since neither NHE nor the developments
             had available funds.

             The National Housing Act of 1937, Section 6(j)(4)
             establishes methods for recovering diverted funds. It
             provides that HUD may terminate assistance, withhold
             allocations, reduce future assistance payments, and take
             other measures. Further, Section 6 provides that upon
             occurrence of a substantial default, HUD may take
             possession of the project. Title 24 CFR 24.305, provides
             causes for debarment. One such cause is the commission of
             an offense indicating a lack of business integrity or business
             honesty that seriously and directly affects the present
             responsibility of a person. Further, a person may be
             debarred for violating the terms of a public agreement so
             serious as to affect the integrity of an agency program.

             The actions by the Board, Executive Director, and Deputy
             Director caused the Authority to violate the terms of the
             ACC, and seriously affected the Authority’s operations.

                 Page 13                                      2003-AT-1001
Finding 1


                     Those actions warrant HUD taking steps to protect its
                     interest and prevent further risk to Authority residents, the
                     public, and the Federal Government.



                     As more specifically detailed in Appendix C, NRHA
Authority Comments
                     replies as follows:

                      1. NRHA is a North Carolina public corporation whose
                         overall activities are governed by its charter, its by-
                         laws, and the North Carolina General Statutes. Its
                         existence as a Housing Authority in no way means
                         that HUD has oversight and control over every
                         contract or other arrangement to which NRHA
                         chooses to become a party.
                      2. The only improper pledge of NRHA assets was the
                         inadvertent pledge of two CD’s containing FSS funds,
                         and the holding Bank has since agreed to release the
                         collateral.
                      3. Absent a showing of improper use of HUD program
                         funds, decisions lawfully and properly made by the
                         NRHA Board about business risk, encumbrance of
                         assets not subject to HUD’s control, and the amount
                         and type of loans and loan guarantees are not within
                         OIG’s purview.
                      4. NRHA is solvent, well-managed and at no time has it
                         been in a precarious financial position. The IPA has
                         rendered an unqualified opinion regarding NRHA’s
                         financial position and results of operations.
                      5. NRHA is not in Substantial Default of its Section 8
                         ACC in that the ACC authorizes use of excess
                         administrative fee reserve funds for any housing
                         activities otherwise lawful under state and local law,
                         which was in fact the use of the $310,610.
                      6. NRHA is not in Substantial Default of its
                         Conventional Public Housing ACC because changes
                         to the US Housing of 1937 enacted by QHWRA
                         permit the use of CPH funds in mixed finance
                         developments such as NHE’s tax credit projects. The
                         amount in question, $37,531.40 and not $274,248,
                         was used to pay a small portion of the construction
                         costs of two tax credit projects and not salaries or
                         other development costs.


2003-AT-1001             Page 14
                                                   Finding 1


  7. HUD at all times was aware of the various
     developments and related activities, provided
     extensive support and encouragement, and
     consistently and timely rendered any HUD approvals
     that NRHA required in order to complete and operate
     the projects.
  8. No loan agreement to which NRHA is a party was
     unauthorized, as all were approved by NRHA’s Board
     and by HUD, where HUD approval was required. In
     particular, HUD fully reviewed and approved the
     release of Valley View units for sale to first time low-
     income home buyers before the property was
     encumbered. The Valley View loan is current, as are
     all NRHA loans, and the sales of four Valley View
     units have closed.
  9. Of the $4.2 million that NHE owes NRHA, only the
     $347,000 in Section 8 and conventional housing
     funds are of concern to OIG, and as noted above their
     expenditure was proper. NHE owes the remaining
     $3.638 million to NRHA’s development and general
     funds, which are not within OIG’s ambit. The loaned
     funds will ultimately be recouped through payment of
     deferred developer fees to NRHA and through NHE’s
     acquistion at the end of the tax credit period of real
     estate assets likely to be valued at far more than $3.5
     million dollars.
10. The tax credit projects are solvent, cash-flow positive,
     well-managed and successful, operating precisely as
     intended. The tax credit projects regularly pay NRHA
     management fees, and the more mature projects are
     making payments on deferred developer fees
     balances.
11. The cost overrun assertions are based on the
     preliminary cost estimates generated several years
     before project completion. If one uses the standard
     industry practice of comparing actual cost against
     final budgets, the overruns are $1.327 million and not
     the $5.2 million asserted in the report.
12. The IPA did not state that collection of $1.03 million
     from NHE was questionable, only that the collection
     of the accrued interest was questionable.
13. NRHA has a formal repayment agreement with the
     Rock Haven owner, who has repaid NRHA the
     $45,324 advance.


    Page 15                                     2003-AT-1001
Finding 1


                     14. NRHA lawfully and with proper Board approval
                         entered into limited and not unbounded guaranty
                         agreements, most of which have been extinguished.
                         At no time was NRHA unconditionally exposed to
                         millions of dollars of liabilities from these guarantees.
                     15. The IPA stated that NHE and not NRHA was
                         responsible for cost overruns and loss of tax credits,
                         and this is in fact the case.
                     16. NRHA Section 8, public housing, tax credit
                         development and home ownership programs are
                         operating efficiently, serving NRHA’s clients
                         effectively, and promoting HUD’s objectives in
                         providing decent, safe and sanitary housing to
                         thousands of low income residents of western North
                         Carolina.


OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding.
                     We added a discussion on Section 8 administrative fee
                     reserves and additional information to show the Authority’s
                     precarious financial condition.      Our conclusions and
                     recommendations generally remained unchanged. Our
                     responses to each of the Authority’s comments are included
                     in Appendix C.




Recommendations      We recommend that you:

                     1A.      Declare the Authority in substantial default of its
                              Consolidated ACC for low-income public housing
                              and its Consolidated Section 8 ACC, and take
                              possession and control of all Authority operations
                              and assets.

                     1B.      Take appropriate administrative actions against the
                              Executive Director, Deputy Director and the Board
                              Chairman, including issuing Limited Denials of
                              Participation or debarment.        Also, determine
                              whether activities by other Board members warrant
                              administrative sanctions, and if so, take appropriate
                              actions.


2003-AT-1001               Page 16
                                                                                                   Finding 1


                                          1C.      Instruct the Authority to immediately discontinue
                                                   using funds for development activities.

                                          1D.      Seek release of encumbered Authority assets from
                                                   lenders and investors.

                                          1E.      Seek recovery of all amounts owed the Authority by
                                                   NHE and its related privately owned developments.
                                                   The funds should be repaid to the Authority from
                                                   non-Federal funds. (Appendix H)

                                          1F.      Seek recovery of $45,324, or the current balance
                                                   owed the Authority by Hospitality House of the
                                                   Boone Area, Inc.

                                          1G.      Review Section 8 reserve expenditures and balances
                                                   from July 1, 1998, to June 30, 2002, for accuracy
                                                   and compliance with HUD guidelines.5




5
    This would require the Authority to provide: (1) an analysis, performed prior to any disbursements, showing
    how the Authority determined it possessed excess reserves qualifying for disbursement for other housing
    purposes, (2) a copy of Board resolutions authorizing each disbursement over $1,000, (3) documentation
    showing that any authorized disbursements were used for eligible housing activities, and (4) evidence that
    reported reserves are invested, as required.



                                                Page 17                                         2003-AT-1001
Finding 1




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2003-AT-1001    Page 18
                                                                                        Finding 2


       Travel Expenses Were Unnecessary And
                     Ineligible
The Authority incurred travel costs that were unnecessary and ineligible. It paid lavishly for
meals, hotels, and tips, made frequent out-of-region trips, and paid travel expenses for family
members of management and the Board. This violated the ACC’s and occurred because the
Authority’s travel policy did not set spending limits and was not comparable with local public
practice. Also, the Authority did not maintain adequate records to track amounts due and
reimbursements received for expenses it paid on behalf of individuals. As a result, the Authority
overspent its travel budget by $50,000 for the review period, and those funds were not available
for its programs.



                                     Section 307 (A) of the Consolidated ACC for low rent
 Criteria
                                     public housing requires the Authority to adopt and comply
                                     with a statement of personnel policies comparable with
                                     pertinent local public practice. Such statement shall cover,
                                     among other things, payment of expenses of employees in
                                     travel status. Section 201 provides that the Authority
                                     should operate each project in a manner that promotes
                                     serviceability, efficiency, economy, and stability. Finally,
                                     Section 406 (B) of the ACC provides that operating
                                     expenditures must be necessary for the operation of a
                                     project. The Office of Management and Budget (OMB)
                                     Circular A-87, "Cost Principles for State, Local, and Indian
                                     Tribal Governments" establishes principles and standards
                                     for determining costs for Federal awards carried out
                                     through grants, cost reimbursement contracts, and other
                                     agreements with State and local governments and
                                     federally-recognized Indian tribal governments. OMB
                                     Circular A-87 provides "A cost is reasonable if, in its nature
                                     and amount, it does not exceed that which would be
                                     incurred by a prudent person under the circumstances
                                     prevailing at the time the decision was made to incur the
                                     cost. The question of reasonableness is particularly
                                     important when governmental units or components are
                                     predominately federally-funded." It further provides that a
                                     cost is reasonable if it is recognized as ordinary and
                                     necessary for the performance of a Federal award and if the
                                     entity acted with prudence considering its responsibilities to
                                     its employees, the taxpayers, and the Federal Government.


                                         Page 19                                     2003-AT-1001
Finding 2


    The Authority’s travel                  The Authority’s travel policy was not comparable to local
    policy was inadequate                   public practice. The City of Boone limited daily per diem
                                            to $30 in State and $36 out of State. Watauga County6
                                            limited daily per diem to $28 for all travel. The Authority’s
                                            travel policy stated it would reimburse the actual costs of
                                            travel, meals, lodging, and other expenses directly related to
                                            accomplishing business objectives.          Employees were
                                            expected to limit expenses to reasonable amounts such as
                                            standard accommodations in hotels, the cost of meals (no
                                            more lavish than would be eaten at the employee’s own
                                            expense), and tips not exceeding 20 percent of the cost of a
                                            meal or taxi fare.

                                            Following a management review, HUD issued a report
                                            dated September 30, 1988, requiring the Authority’s travel
                                            policy to be comparable with local public practice. In its
                                            response to that report, the Authority stated its policy was
                                            comparable and included a daily limit for meals. As a
                                            result, HUD cleared the finding. In 1995, even though
                                            Authority management knew the requirements, it revised its
                                            policy to eliminate the daily limit and allow actual costs.
                                            The revised policy was vague and subject to wide
                                            interpretation, which allowed Authority staff to incur
                                            unnecessary travel expenses. While the Board did approve
                                            the location of the out-of-town trips and the staff members
                                            that would go, it did not approve spending amounts for the
                                            trips.

                                            From July 1, 1998, through June 30, 2001, the Authority
    Travel expenses were
                                            spent $295,547 for travel. It charged $42,185 to its public
    unnecessary
                                            housing program and $179,966 to its Section 8 Program.
                                            This exceeded its travel budget by over $50,000.

                                                                                     Amount
                                            Fiscal                                 Over/(Under)
                                            Year        Budget          Actual        Budget      Percent
                                            1999       $ 75,000        $ 110,112      $ 35,112         47
                                            2000        102,000           99,431          (2,569)      -3
                                            2001         68,000           86,004         18,004        26
                                            Total      $245,000        $ 295,547      $ 50,547         21



6
      The Authority is located in the City of Boone, Watauga County.



2003-AT-1001                                     Page 20
                                                   Finding 2


We reviewed documents and met with the Executive and
Deputy Directors to analyze the trips. The Authority
generally classified travel expenses as “out of region” or “in
region.” Out of region travel was any travel outside the
seven counties of the Authority’s jurisdiction.

Out of Region Travel

Authority staff made 79 out of region trips costing over
$155,000 during the review period: 29, 30, and 20 trips in
fiscal years 1999, 2000, and 2001 respectively.
Twenty-two trips totaling over $23,000 were for
non-Authority business and were ineligible. The Authority
paid airfare, rental car, mileage, lodging, meals, parking,
tips, snacks, conference registration fees, and other
expenses.

We compared the cost of six of the trips to costs allowed
under Federal travel regulations as a reference for
reasonableness. The Authority spent from 37 to 223
percent more than the maximum costs allowed by the
Federal government for those trips; over $37,000 more.
While the Authority spent $160 per night on average for a
room, the maximum allowable rate under Federal
regulations was $125. Appendix K shows the room and
meal costs for the six trips.

Many meal costs were lavish. For example, 10 employees
and Board members attended a workshop in Biloxi,
Mississippi, and spent $1,500 for one dinner. Also, four
employees attended a conference in Raleigh, North
Carolina, and spent over $1,100 on one meal. The
Executive Director stated that in addition to Authority
employees, the Authority often purchased meals for
attorneys, bankers, and business partners such as
developers, development consultants and private
contributors. He considered this to be a regular cost of
doing business. However, such costs were not reasonable
or necessary for conducting Authority business; they were
attributable to the privately owned developments. For the
six trips we reviewed, the Authority spent $8,788 for meals.
Under local policies, the maximum allowed was $3,672.
The difference of $5,116 was unreasonable and
unnecessary.


    Page 21                                     2003-AT-1001
Finding 2


                              Authority policy limited payment of tips to 20 percent.
                              However, Authority travelers paid as much as 49 percent
                              for a meal tip, with an average tip of 23 percent, over
                              $1,117 more than the policy allows. Authority personnel
                              paid a tip of $100 for a meal that cost $236.

                              In Region Travel

                              The Authority appropriately paid per diem and mileage to
                              Board members to attend monthly Board meetings and to
                              employees for local travel costs. However, the Authority
                              also paid for staff lunches and the Executive Director’s
                              business lunches, which were inappropriate and
                              extravagant. Over $18,000 was spent at local restaurants
                              during the 3-year review period, much of it listed on the
                              Executive Director’s expense reports as business or staff
                              lunches. He stated these meals were for corporate
                              managers, primarily the Executive Director and Deputy
                              Director, who discussed business during lunch and for field
                              managers to attend business activities in Boone. He also
                              stated the charges included luncheon meetings with
                              business partners.

                              In violation of the ACC, the Authority paid ineligible
 Ineligible travel expenses
                              expenses on behalf of Authority staff and Board members.
                              For example, in January 2000, the Authority paid $395 for
                              a plane ticket to Washington, DC, for the Deputy Director’s
                              grandson. She repaid half the cost about 6 months later, but
                              did not repay the remainder until we questioned the cost in
                              February 2002. The Authority often paid for plane tickets
                              and other items for Board members’ and employees’
                              relatives when they accompanied them on trips. Some
                              costs were reimbursed; however, according to the Deputy
                              Director, the Authority did not maintain records to track the
                              repayments. Thus, we were unable to determine whether
                              all costs were reimbursed.

 Board member recommended     In his July 25, 2000, letter to the Board Chairman, one
 changes                      Board member recommended changes to travel procedures.
                              He recommended:

                              ·   Limited travel for staff members;
                              ·   All travel be reviewed and authorized by the Board
                                  Chairman;


2003-AT-1001                      Page 22
                                                                         Finding 2


                     ·    A complete monthly expense report for all
                          out-of-region travel;
                     ·    A complete monthly reporting to the Board of
                          in-region travel for staff; and,
                     ·    Reductions in the travel budget.

                     Although   travel    did    decline    following      the
                     recommendations, the Authority did not revise its written
                     policy.


Authority Comments   As more specifically detailed in Appendix C, NRHA
                     replies as follows:

                     1.    No NRHA program, HUD or otherwise, suffered
                           funding unavailability due to travel or           other
                           expenditures.
                     2.   The author of the 1998 HUD report agreed that “local
                          public practice” did not mean the policy of the Town of
                          Boone but of comparable North Carolina Housing
                          Authorities. According to that definition, NRHA policy
                          conforms to “local public practice.”
                     3.   Comparable North Carolina Housing Authorities
                          maintain a “reasonable and actual cost” policy similar if
                          not identical to NRHA’s.
                     4.   NRHA employees are not federal employees, and the
                          NRHA Board is not required to adopt a “GSA-style”
                          daily limit policy. The NRHA Board prefers to monitor
                          travel expense closely and allow managers and staff the
                          latitude to incur reasonable and actual costs.
                     5.   The NRHA Board approves in advance all out-of-
                          region travel.
                     6.   The OIG provides no evidence for its assertion that
                          “many of the expenditures were unnecessary for the
                          execution of HUD programs” nor that NRHA overspent
                          its budget by $50,000. NRHA disagrees with both
                          assertions.
                     7.   The OIG concludes but does not prove that HUD funds
                          paid for all travel expense or that all travel was in
                          connection with “HUD programs”.
                     8.   The OIG provides no evidence that NRHA used funds
                          provided under the Conventional Public Housing ACC
                          for travel expense.
                     9.   NRHA lawfully incurred certain of the criticized
                          expense in connection with the lawful and authorized

                          Page 23                                     2003-AT-1001
Finding 2


                         development of $15 million of affordable housing units.
                         NRHA Board and staff members incurred other
                         criticized expense for Board-approved travel to
                         conferences. Neither type of expense is unlawful, and
                         the NRHA Board is the proper arbiter of what is
                         necessary and prudent travel expense.
                     10. The NRHA staff member involved has repaid the single
                         instance of inadvertent personal travel expense.
                     11. NRHA’s since-terminated Accounting Manager did
                         keep indeed terrible records, but no evidence of non-
                         reimbursement exists. The current Finance Director
                         does keep accurate records. The Board is wholly
                         unaware of any non-reimbursed amounts that any
                         member may owe and firmly believes that no such
                         amounts exist.



OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding.
                     We added OMB Circular A-87 guidance for determining
                     whether costs are reasonable and added Appendix K to
                     show the costs of the six trips discussed in the finding. Our
                     conclusions and recommendations generally remained
                     unchanged. Our responses to each of the Authority’s
                     comments are included in Appendix C.



Recommendations      We recommend you require the Authority to:

                     2A.      Revise its travel policy to prescribe reasonable
                              maximum allowances for lodging and meals.

                     2B.      Identify payments it made for family of Board
                              members and require the Board members to
                              reimburse the Authority or provide support that all
                              amounts were repaid.

                     2C.      Provide support that the $6,233 of excessive meal
                              and tip expenses were reasonable and necessary for
                              project operations, or repay any unsupported
                              amounts to the Authority from non-Federal sources.




2003-AT-1001               Page 24
                                                Finding 2


2D.      Provide support that the $18,000 spent for local
         lunches represents reasonable and necessary
         expenses for project operations, or repay any
         unsupported amounts to the Authority from
         non-Federal sources.

2E.      Refund $23,038 of ineligible expenses from non-
         Federal funds.

2F.      Discontinue the practice of paying expenses for
         non-Authority personnel.




      Page 25                                2003-AT-1001
Finding 2




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2003-AT-1001    Page 26
                                                                                        Finding 3


        Other Expenses Were Unnecessary And
                     Ineligible
The Authority incurred other unnecessary and ineligible expenses. It spent $114,302 for
miscellaneous items, half of which was for entertaining and pampering its Board members and
employees, their spouses and guests at Board meetings, a beach retreat, a Christmas party, and
with theater tickets, jewelry, bath products, libations, and other personal gifts. The Executive
Director used public money to pay for alterations of his business suit. This misuse occurred
because the Authority did not establish adequate controls to ensure expenses complied with its
low rent public housing and Section 8 ACC’s. Consequently, the programs were deprived of
needed operating funds. These actions also demonstrated the Authority’s disregard of its duty to
uphold the public trust.



                                    Section 201 of the Low Rent Public Housing ACC provides
 Criteria                           that the Authority should operate each project to promote
                                    serviceability, efficiency, economy, and stability. Section
                                    406 (B) provides that operating expenditures must be
                                    necessary for the operation of a project.

                                    Section 11 of the Section 8 Consolidated ACC provides
                                    that the Authority must use program receipts to provide
                                    decent, safe, and sanitary housing for eligible families. The
                                    Authority may only use program receipts to pay program
                                    expenses.

                                    OMB Circular A-87 provides, “Costs of entertainment,
                                    including amusement, diversion, and social activities and
                                    any costs directly associated with such costs (such as tickets
                                    to shows or sports events, meals, lodging, rentals,
                                    transportation, and gratuities) are unallowable.”

                                    The Authority spent over $26,000 for 6 semi-annual board
 Unnecessary expenses               meetings. This included charges for food, drinks, flowers,
                                    and hotel rooms. Attendees included Authority employees
                                    and spouses/guests, Authority Board members and
                                    spouses/guests, and members of the community including
                                    bankers and County Commissioners. The functions were
                                    held at the Hound Ears Club in Blowing Rock, North
                                    Carolina. Our review noted payments for beer, wine,
                                    bourbon, whiskey, etc., totaling $3,892 for five meetings.


                                         Page 27                                     2003-AT-1001
Finding 3


                          There were between 32 and 83 attendees at these meetings.
                          The Authority only employed about 22 staff.

                          In addition to the semi-annual board meetings, during
                          calendar year 2000 the Authority spent a total of $18,275
                          for retreats and a Christmas party. It had one planning
                          retreat in April, 3 months prior to the July semi-annual
                          board meeting, and another in August, just 1 month after
                          the July meeting. The total cost for the two retreats was
                          $7,284. This included charges for food, drinks, cottage and
                          condo rentals, and conference room rentals. Further, the
                          Authority spent $1,269 for a Christmas party in December
                          2000 and $9,722 for a staff retreat in Wrightsville Beach,
                          North Carolina, in September 2001.

                          Given the Authority’s precarious financial condition and its
                          poor quality housing, we question whether these expenses
                          were reasonable and necessary.

                          In recognition of its 20-year anniversary, the Authority
 Ineligible expenses of   purchased watches for Board members, the Authority
 $11,070                  attorney, the Executive Director, Deputy Director, and other
                          staff. In addition to a watch, the Authority also purchased
                          an emerald ring for the Deputy Director. These jewelry
                          purchases totaled over $3,600.

                          The Authority also purchased other gifts for employees,
                          Board members, and a Board member’s spouse including:

                          ·   Kitchen and food products;
                          ·   Beauty supplies and cosmetics;
                          ·   Bath and body products;
                          ·   Tickets for benefit balls, $1,300;
                          ·   Theater tickets, $770, for management, Board
                              members, and spouses;
                          ·   Luggage for the Executive Director, $265;
                          ·   A sweater for a Board member’s spouse, $160 and,
                          ·   An $85 carriage ride for the Executive Director and his
                              Deputy.

                          In total, the Authority spent $11,070 for ineligible items
                          from July 1, 1998, to June 30, 2001, (Appendix I). These
                          purchases were not necessary for the operation of public
                          housing and were not used for Section 8 Program


2003-AT-1001                  Page 28
                                                                      Finding 3


                     operations. Thus, they were not in compliance with the
                     ACC’s.



Authority Comments   As more specifically detailed in Appendix C, NRHA
                     replies as follows:

                     1. Charging miscellaneous expense to public housing and
                        Section 8 results from an allocation policy for common
                        expenses that spreads them across all NRHA programs.
                        NRHA’s IPA has not objected to this practice and
                        advises that in his extensive experience the practice is
                        common among Housing Authorities.
                     2. NRHA at no time deprived its public housing and
                        Section 8 programs of essential operating funds, its
                        financial condition was not and is not precarious, and
                        no tenant resided in units other than decent, safe and
                        sanitary. See the comment to findings 1 and 4.
                     3. Appendix C provides additional details for all expenses
                        questioned as ineligible.
                     4. The vast number of questioned expenses were for
                        morale-building nominal gifts and mementos for
                        NRHA staff not able to attend conferences. NRHA
                        does not think it improper for the Board and
                        management to let employees know their leaders are
                        thinking of them and value their efforts.
                     5. NRHA agrees that a small number of questioned
                        expenses were not properly incurred, and the
                        beneficiaries of those expenses have since re-paid
                        NRHA.
                     6. The NRHA Board decided to halt the “memento
                        purchase” practice in early 2000; with one exception,
                        no expense questioned by the OIG occurred after 1999.



OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding.
                     We added a discussion showing the expenditure of $3,892
                     for beer, wine, bourbon, whiskey, etc., for semi-annual
                     board meetings. The Authority included a schedule in its
                     preliminary response that we have added as Appendix I of
                     the audit report, as it provides more detailed information
                     about the questioned expenditures. The schedule also

                         Page 29                                   2003-AT-1001
Finding 3


                  showed that expenses we originally questioned as
                  unsupported were actually ineligible. Thus, we changed the
                  finding to show expenditure of $11,070 for ineligible items.
                  We also made appropriate changes to recommendation 3E
                  and deleted recommendation 3F, which requested support
                  for $1,787.         Otherwise, our conclusions and
                  recommendations generally remained unchanged. Our
                  responses to each of the Authority’s comments are included
                  in Appendix C.




Recommendations   We recommend you require the Authority to:

                  3A.      Adopt controls to ensure that costs meet ACC
                           requirements.

                  3B.      Discontinue the practice of using Authority funds to
                           purchase gifts for staff, Board members, and others.

                  3C.      Provide support that the $26,000 spent for Board
                           meetings represents reasonable and necessary
                           expenses for project operations, or repay any
                           unsupported amounts from non-Federal funds.

                  3D.      Provide support that the $18,275 spent for retreats
                           and a Christmas party represent reasonable and
                           necessary expenses for project operations, or repay
                           any unsupported amounts from non-Federal funds.

                  3E.      Refund $11,070 of ineligible expenditures from
                           non-Federal funds.




2003-AT-1001            Page 30
                                                                                       Finding 4


 Health And Safety Concerns Existed At Public
                Housing Sites
Our inspection of the public housing units and grounds revealed health and safety concerns
needing immediate attention. We observed trash and debris around the property and playground
equipment in disrepair. Railing or fences were needed to prevent tenants from falling down
hazardous embankments. Each of the 23 units we inspected also required maintenance. The
Authority needed to improve its procedures to ensure deficiencies are promptly corrected in order
to provide decent, safe, and sanitary housing.



                                     Section 209 of its low rent public housing ACC requires the
 Criteria                            Authority to provide decent, safe, and sanitary dwellings at
                                     all times. HUD requires health and safety hazards to be
                                     corrected immediately. In October 2001, after performing
                                     property inspections of Authority units, HUD’s Real Estate
                                     Assessment Center (REAC) reported physical assessment
                                     scores of 82 for Woodland Apartments and 68 for Cub
                                     Creek Apartments. However, during our February 2002
                                     property inspections, we found serious health and safety
                                     hazards, which had existed for some time. Also, we
                                     inspected 23 of the Authority’s 83 units and found that
                                     none of them met HUD’s requirements. Some of these
                                     deficiencies were reported by REAC in October 2001, but
                                     the Authority had not corrected them.

                                     The topography behind buildings D, E, and F of Cub Creek
 Health and safety concerns
                                     Apartments is very steep and hazardous. Protective railings
 around the buildings
                                     or fences are needed to reduce the likelihood of tenants
                                     falling down the embankment. There was also excessive
                                     trash and debris, including sharp and potentially dangerous
                                     items scattered throughout the property. The playground
                                     equipment was in need of repair to prevent injury. Some
                                     areas of the concrete walkways were broken and upheaved
                                     creating serious tripping hazards.          An Authority
                                     representative accompanied us on the inspections and was
                                     made aware of the deficiencies. The debris and tripping
                                     hazards were also identified by REAC in its October 2001
                                     report. These deficiencies required immediate attention.




                                         Page 31                                    2003-AT-1001
Finding 4


               We also found the following examples of health and safety
               hazards at Woodland Apartments:

               ·    Rusted, potentially dangerous water heaters that had
                    been discarded on the property by maintenance staff.
               ·    The topography behind Building C was very steep and
                    should be protected by railings or fences.
               ·    Refuse containers were in poor condition.
               ·    Broken window at the rear of Building F.

               The following photographs were taken in February 2002.




                   Trash, garbage, and other debris behind buildings at
                   Cub Creek Apartments. This was also cited by REAC.




2003-AT-1001         Page 32
                                             Finding 4




   Rusted, potentially dangerous water heaters at
   Woodland Apartments.




   Example of steep, hazardous terrain at Woodland
   Apartments.


Page 33                                    2003-AT-1001
Finding 4


 Units were not decent, safe   The Authority performed annual unit inspections when
 and sanitary                  tenants re-certified their program eligibility.   It also
                               performed inspections when tenants moved out of their
                               units. However, it did not always prepare work orders, and
                               deficiencies were not always corrected.

                               The most prevalent deficiencies in the units we inspected
                               were electrical hazards (53) and damaged floors (18). The
                               electrical hazards included outlets near the kitchen sinks
                               that were not protected with Ground Fault Circuit
                               Interrupters (GFCI).     The damaged floors apparently
                               resulted from faulty subfloors or underlayment. We also
                               found defective kitchen cabinets and countertops in 13
                               units, including heavily marred tops and countertop corner
                               joints that were not sealed resulting in unsanitary surfaces
                               (Appendix J). We will provide HUD and the Authority
                               with a schedule of all deficiencies identified during our
                               inspection. Following are examples of deficiencies we
                               found at three units.

                               Woodland Apartments Unit C-1 - The unit had 11
                               deficiencies. These included damaged floor tiles in the
                               living room and kitchen that appeared to have resulted from
                               faulty subfloor or underlayment. Because of the conditions,
                               the tenant could not keep the floors in a sanitary condition.
                               Also, electrical outlets near the kitchen faucet, which
                               dripped excessively, were not GFCI protected. The kitchen
                               countertop was not sealed at the corner joint.

                               Woodland Apartments Unit G-2 - The unit had nine
                               deficiencies. Electrical outlets near the kitchen sink were
                               not GFCI protected and the kitchen counter joint was not
                               sealed. Globe covers were missing from ceiling fixtures in
                               three bedrooms and from an exterior light. The hall
                               laundry closet dryer vent was neither properly installed nor
                               vented to the exterior as required.

                               Cub Creek Apartments Unit E-8 - The unit had seven
                               deficiencies. These included clogged heat duct vents and a
                               water damaged ceiling in the exterior storage room. The
                               ceiling was heavily mildewed and a portion of the ceiling
                               had caved in, presenting a serious safety concern.
                               Electrical wall outlets throughout the unit were not secured
                               and electrical outlets in the kitchen were not GFCI
                               protected.

2003-AT-1001                       Page 34
                                                                        Finding 4



                     While the Authority neglected its Cub Creek and Woodland
                     Apartments units, it rehabilitated its newer, 8-year old,
                     Valley View units to ready them for sale (Finding 1).


Authority Comments   As more specifically detailed in Appendix C, NRHA
                     replies as follows:

                     1. NRHA emphatically denies that it neglected its
                        conventional public housing units.
                     2. The OIG claims to have found allegedly health and
                        safety threatening “deficiencies (that) require immediate
                        attention” during a February inspection but did not
                        advise NRHA of its finding until September.
                     3. The cited REAC scores are well within the acceptable
                        range; the same REAC survey gave NRHA a perfect
                        score for conventional public housing management.
                     4. Appendix C provides more detailed explanations
                        concerning the five specific findings, the upshot being
                        that four of them indeed have rebuttal explanations and
                        only the discarded water heaters are an NRHA stumble,
                        since corrected.
                     5. Ground Fault Circuit Interruptors were not Code-
                        required when the units were built, and although NRHA
                        is not required to retrofit, it has budgeted capital funds
                        to do so.
                     6. Subfloor and cabinet/countertop replacement programs
                        are both in the plan for capital fund expenditures, and
                        HUD approved the undertaking of the latter
                        improvements in April, 2002.
                     7. Regarding the individual unit findings, while NRHA
                        agrees that no deficiency is acceptable, it notes that
                        seven, nine, and eleven deficiencies are not an
                        overwhelming number in a protocol with several
                        hundred criteria.



OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding.
                     Our conclusions and recommendations generally remained
                     unchanged. Our responses to each of the Authority’s
                     comments are included in Appendix C.


                         Page 35                                     2003-AT-1001
Finding 4




Recommendations   We recommend you:

                  4A.      Engage a HUD engineer to inspect unit subfloors
                           and underlayment for structural safety.

                  4B.      Require the Authority to establish procedures to
                           ensure deficiencies are reported and corrected.

                  4C.      Require the Authority to immediately inspect all of
                           its units and grounds.

                  4D.      Ensure the Authority corrects deficiencies identified
                           by both OIG and REAC.




2003-AT-1001            Page 36
                                                                                      Finding 5


      The Authority Did Not Maintain Accurate
               Accounting Records
The Authority did not maintain accurate accounting records. Costs were not properly allocated,
accounts were out of balance, complicated journal entries were not adequately explained, and
other accounting deficiencies existed. Funds advanced to privately owned developments were
understated. An IPA reported similar conditions in his audits of the Authority’s fiscal years
ended June 30, 2000, and 2001. With accounting records that were unreliable and unauditable,
the Authority could not adequately administer its programs.




 Severe accounting deficiencies     The Consolidated ACC for low rent public housing, Part 2,
 existed                            requires the Authority to maintain complete and accurate
                                    books of account and records including records which
                                    permit a speedy and effective audit. To the contrary,
                                    Authority management did not ensure its books and records
                                    were complete and accurately reported all accounting
                                    transactions. We found costs were not properly allocated,
                                    accounts were out of balance, complicated journal entries
                                    were not adequately explained, and other accounting
                                    deficiencies existed.

                                    Much of the accounting information pertaining to the
                                    privately owned developments was maintained on several
                                    complicated spreadsheets. These spreadsheets were not
                                    integrated with the Authority's accounting system.
                                    Whenever the Authority advanced funds, paid expenses, or
                                    allocated costs to a development entity or NHE, inter-entity
                                    entries should have been made showing a receivable due to
                                    the Authority and a payable owed by the appropriate
                                    development entity or NHE. We found the inter-entity
                                    accounts were grossly out of balance. Also, over $500,000
                                    of development fees the entities owed the Authority was
                                    not recorded in the accounts. During our audit, the current
                                    Finance Officer recorded the development fees.

                                    Management stated that although the accounting for the
                                    privately owned developments was originally accomplished
                                    through the Authority’s accounting system, the system was
                                    not adequate to maintain the complicated multi-entity
                                    accounting. Thus, management hired a vendor to establish
                                    an accounting system for the development entities on a

                                        Page 37                                    2003-AT-1001
Finding 5


                             personal computer. As a result, Authority records and
                             development entity records were maintained separately.
                             This required transferring all of the balances for the
                             development entities from the Authority's accounting
                             system to the new system. However, according to the IPA,
                             the vendor did not transfer all of the amounts the entities
                             owed the Authority to the new system. As a result, the
                             development costs and the amounts owed the Authority
                             were understated. Subsequently, management obtained
                             cost certifications for the developments based on the
                             amounts recorded in the new system. Therefore, the costs
                             were understated on the certifications.

                             The identification, magnitude, and effect of the unrecorded
                             and/or improperly recorded transactions are unknown. The
                             IPA and Authority management attempted to resolve some
                             of the allocation discrepancies by reviewing invoices and
                             making adjustments to the accounts.

                             An IPA reported similar conditions in his audit reports for
 IPA reported records were   the Authority’s fiscal years ended June 30, 2000, and June
 unauditable                 30, 2001. The IPA reported that internal control procedures
                             failed due to a lack of trained personnel. Further, the IPA
                             reported:

                             ·   Untimely bank reconciliations;
                             ·   Detailed records out of balance with General Ledger
                                 control accounts;
                             ·   Significant transactions that remained unrecorded for
                                 several months;
                             ·   Almost all balance sheet accounts were inaccurate as
                                 were many income and expense accounts; and,
                             ·   Records were unauditable.

                             The IPA concluded the Authority could not possibly
                             administer its programs properly with such grossly
                             inaccurate records. He recommended the Authority recruit
                             and retain capable staff. The Authority recently hired a
                             new Finance Officer and a bookkeeper.

                             The IPA did not issue his audit of the Authority’s fiscal
                             year ended June 30, 2001, until May 17, 2002. The report
                             included a finding similar to the June 30, 2000, report. It
                             says that internal controls were inadequate to allow for
                             accurate and timely recording and reporting of financial

2003-AT-1001                     Page 38
                                                                            Finding 5


                          transactions. Further, journal vouchers contained little or
                          no supporting documentation.

                          During our audit, the new Finance Officer made significant
 Improvements have been
                          progress towards correcting the account balances for fiscal
 made
                          year ended June 30, 2001. He discovered that about
                          $400,000 the developments owed the Authority was not
                          recorded on the developments’ books. The IPA took the
                          position that since the cost certifications had been
                          completed for the developments, the Authority could not
                          record the payables on their books. The IPA also stated the
                          funds were likely not recoverable, and it was uncertain
                          which entities owed the funds. Thus, management wrote
                          off the $400,000 as a loss to the Authority. We questioned
                          the write-offs during our audit. Subsequently, management
                          reinstated them by recording a payable due to the Authority
                          on NHE’s books with a corresponding receivable on the
                          Authority’s books. However, management also recorded an
                          offsetting allowance because it was unlikely the receivable
                          would be collected.

                          We believe with the expertise of the current Finance
                          Officer the Authority can resolve future accounting
                          problems. However, it is unlikely, even with the current
                          expertise, the Authority will ever fully correct the prior
                          accounting records. Because of the condition of the
                          records, we have no confidence in their historical accuracy.



Authority Comments        As more specifically detailed in Appendix C, NRHA
                          replies as follows:

                          1.   NRHA agrees that its since-terminated Accounting
                               Manager was less than competent and restates that he
                               was the cause of every supportable element of this
                               Finding. As the report shows, his poor practices and
                               lack of professionalism caused short-term, since
                               corrected harm to NRHA’s accounting system.
                          2.   As the report notes, the current Finance Director is an
                               extremely capable CPA who has guided NRHA through
                               the remedial actions required to correct the former
                               Accounting      Manager’s      numerous     accounting
                               depredations.     The current Finance Director is
                               successfully continuing his efforts to maintain the

                               Page 39                                   2003-AT-1001
Finding 5


                           books and records of NRHA and its affiliates to the
                           highest professional standards.
                     3.    The IPA stated that the former problems were in the
                           accounting controls over the general ledger and in the
                           reporting function, rather than in controls over cash
                           collection or disbursement, both of which were subject
                           to good controls.
                     4.    Developments costs and amounts due NRHA were not
                           properly identified but they were correctly stated.
                     5.    As noted in Finding 1, the IPA rendered an unqualified
                           opinion regarding NRHA’s financial position and
                           results of operations for fiscal years 1999, 2000 and
                           2001.



OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding.
                     Our conclusions and recommendations generally remained
                     unchanged. However, we did revise the finding to
                     emphasize that management, not staff, is responsible for
                     ensuring its records are complete and accurate. Our
                     responses to each of the Authority’s comments are included
                     in Appendix C.



Recommendation       We recommend you:

                     5A.      Require the Authority ensure its accounting records
                              are maintained according to requirements.




2003-AT-1001               Page 40
                                                                                       Finding 6


      The Authority Withdrew Excess Section 8
                      Funds
The Authority did not follow Section 8 fund requisition requirements. It did not perform reviews
of its estimated annual needs and often withdrew excess funds. The Authority also did not
maintain the excess funds in an interest-bearing account as required. Rather, it used them for
other activities. As a result, it paid almost $11,000 in interest to HUD and had to borrow
$240,000 to repay its excess withdrawals because it no longer had the money on deposit.



                                    Annually, HUD requires an Authority to submit Form
 Criteria                           HUD-52633, Requisition for Partial Payment of Annual
                                    Contributions. The annual requisition must be submitted
                                    90 calendar days prior to the start of the Authority’s fiscal
                                    year. The requisition reflects 12 monthly payments based
                                    on the HUD approved budget. No later than 90 days
                                    following the beginning of the Authority’s fiscal year, it
                                    must review its estimated requirements for the year. If its
                                    initial estimate exceeds 5 percent of actual funding needed
                                    for the year, it must submit a revised Form HUD-52663. In
                                    addition, the Authority is required to invest any excess
                                    advances into HUD approved interest-bearing accounts and
                                    report the interest earned. The Authority must repay any
                                    excess funds at the end of each fiscal year; otherwise HUD
                                    deducts the amounts owed from future Section 8
                                    allotments.

                                    The Authority did not perform required 90-day reviews and
 The Authority did not
                                    often exceeded the 5 percent requirement for individual
 perform required reviews
                                    projects. For example, in fiscal year 1999, the Authority
                                    withdrew $106,400 for one project when only $15,757 was
                                    due, an excess of $90,643. Again in fiscal year 2000, it
                                    withdrew $427,451 for one project when only $332,889
                                    was due, an excess of $94,562.

                                    While the Authority withdrew excess for most projects, it
                                    also withdrew less than needed for some. For example, in
                                    fiscal year 2000, the Authority did not withdraw $376,359
                                    that it was due for one project.

                                    From July 1, 1999, through June 30, 2001, the Authority
                                    withdrew excess Section 8 funds totaling $636,568. As of

                                         Page 41                                    2003-AT-1001
Finding 6


                     December 31, 2001, the Authority had already withdrawn
                     another $391,429 of excess Section 8 funds for its fiscal
                     year ending June 30, 2002. The Authority had to pay HUD
                     almost $11,000 in interest for the period.

                     The Authority did not maintain the funds. Rather, it
                     deposited them into its general fund account along with
                     other funds. It then used the funds to pay other costs,
                     including ineligible private development costs (Finding 1).
                     Thus, it did not always have funds available to repay the
                     excess to HUD at the end of the fiscal year. As a result, in
                     June 2000, the Authority had to obtain a bank loan at an
                     interest rate of 9.37 percent to repay debt, including
                     excessive withdrawals of $240,000.



                     As more specifically detailed in Appendix C, NRHA
Authority Comments   replies as follows:

                     1. For the fiscal year ending June 30, 2001, HUD’s
                        Section 8 Management Assessment Plan (SEMAP)
                        awarded NRHA’s Section 8 Program a score of 96 out
                        of 100, which afforded NRHA HUD’s highest level of
                        program recognition, that of Section 8 High Performer.
                     2. NRHA agrees that the since-terminated Accounting
                        Manager did not undertake the required ninety-day
                        reviews. The current Finance Director has been doing
                        so since October, 2001, and indeed performs such
                        reviews monthly.
                     3. NRHA does in fact deposit all requisitioned funds (and
                        all other funds) in interest bearing accounts, although
                        for purposes of reconciliation of Section 8 requisitions
                        this practice is irrelevant, since HUD imputes an
                        interest rate on excess requisitions regardless of where
                        funds are deposited.
                     4. At no time did NRHA excess withdrawals approach $1
                        million, and NRHA promptly repaid in the normal
                        course of business the excess withdrawals for two of the
                        report years as part of the annual settlement process that
                        all PHA’s undertake. For the third year, the annual
                        reconciliation showed that HUD owed NRHA $376,359
                        on the NRHA voucher program.
                     5. NRHA has determined that the $391,429 figure (which
                        was as of December 31. 2001 and not within the report

2003-AT-1001             Page 42
                                                                      Finding 6


                        period) had been over-stated. The actual figure as of
                        March 31, 2002 was $224,000, well within the five per
                        cent guideline.
                     6. The cited extreme example of 575% over-requisitioning
                        involved a moderate rehabilitation program that is a
                        miniscule part of NRHA’s overall Section 8 program.
                        It was caused by the failure of landlords to keep their
                        properties fully leased. From an overall Section 8
                        program cash management perspective, NRHA has not
                        come close to exceeding the five per cent guideline.
                     7. NRHA has never deprived eligible applicants of
                        available housing and needed financial assistance. The
                        104 certificates and vouchers cited were part of a fair
                        share allocation that HUD awarded to NRHA in
                        October 2001(outside the report period) as part of the
                        FY 2002 distribution. HUD’s own regulations permit
                        PHA’s eighteen months to issue and lease up allocated
                        vouchers or certificates, in this case until March 31,
                        2003. In fact, a mere two and one half months into the
                        permitted eighteen month period, NRHA had issued
                        almost half the allocated vouchers. Thus, NRHA was
                        well ahead of HUD’s permitted schedule.



OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding
                     and recommendations.           Our conclusions and
                     recommendations      generally  remained    unchanged.
                     However, we did remove a discussion regarding the
                     Authority’s failure to issue Section 8 certificates and
                     vouchers. Our responses to each of the Authority’s
                     comments are included in Appendix C.



Recommendations      We recommend you require the Authority to:

                     6A.      Review its estimates of annual Section 8 funding
                              requirements for each program within the first 90
                              days of its fiscal year.

                     6B.      Invest any excess advances into HUD approved
                              interest-bearing accounts and report the interest
                              earned.

                           Page 43                                 2003-AT-1001
Finding 6




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2003-AT-1001    Page 44
                                                                                       Finding 7


 Mismanagement Was Apparent in Other Areas
              of Operations
We noted weak procedures in other areas of Authority operations. Management did not properly
segregate tenant escrow funds, adequately pursue collection of tenant rents, or follow its own
nepotism policies. This occurred because management did not implement adequate controls and
elected not to comply with its written policies. As a result, (1) tenant funds were not fully
available for disbursement, (2) the Authority could not assure it consistently enforced rent
collection efforts or assure tenants received fair and equitable treatment, and (3) the Authority
hired relatives of employees in positions that violated its nepotism policy.



                                     FSS is a program that aids low-income families renting
 Tenant escrows were not             under Section 8 and Public Housing Programs to achieve
 segregated                          economic independence, self-sufficiency, and eventual
                                     non-reliance upon government assistance programs. The
                                     Authority is required by 24 CFR, Subtitle B, to maintain all
                                     FSS funds in a single depository account. The total on
                                     deposit must balance to the Authority’s subsidiary ledger.
                                     Further, 24 CFR 880, requires the Authority to place tenant
                                     security deposits in a separate, interest-bearing account.
                                     The balance of that account must match the amount
                                     collected from tenants plus interest earned.

                                     The Authority did not segregate and safeguard FSS funds.
                                     It commingled the deposits with other funds and used them
                                     for other purposes. As of March 31, 2002, there were 269
                                     tenants participating in the FSS Program. They had paid
                                     $253,278 to the Authority. Only $236,791 was on deposit.
                                     However, as discussed in Finding 1, the Authority had
                                     pledged most of that ($235,448) as collateral for a loan,
                                     making it unavailable for disbursement. The Authority was
                                     unable to account for the remaining $16,487 of tenant FSS
                                     funds. According to the Authority, as of June 30, 2002,
                                     there was a shortage of $34,823.

                                     Also, the Authority did not maintain a separate
                                     interest-bearing account for public housing security
                                     deposits. It commingled those deposits with tenant rent
                                     receipts and did not credit interest earnings to tenant
                                     accounts. As of March 31, 2002, the Authority’s liability
                                     for public housing security deposits was $11,160 plus

                                         Page 45                                    2003-AT-1001
Finding 7


                                        interest. However, because the Authority did not maintain
                                        the deposits in a separate interest-bearing account, it could
                                        not assure funds, including interest due, were fully
                                        available for disbursement to tenants.

                                        The Authority’s tenant accounts receivable balance
    Tenant accounts                     significantly exceeded HUD’s guidelines. This occurred
    receivable exceeded HUD             because management did not establish written policies and
    guidelines                          procedures governing rent collections. As a result, the
                                        Authority could not assure it consistently enforced rent
                                        collection efforts or assure tenants received fair and
                                        equitable treatment. Further, the uncollected funds were
                                        not available for other housing programs or for
                                        maintenance of its housing stock.

                                        The standards and criteria for admission to and occupancy
                                        of public housing are set forth in 24 CFR 960. The criteria
                                        for lease procedures and requirements are set forth in 24
                                        CFR 966, Subpart A. The Authority is authorized to
                                        terminate tenancy only for serious or repeated violations of
                                        material terms of the lease, such as failure to make
                                        payments due under the lease. Grievance procedures are
                                        provided by 24 CFR 966, Subpart B, to assure tenants are
                                        protected from arbitrary actions.

                                        HUD rates an Authority’s ability to collect rent based on
                                        the average number of days it takes to collect its tenant
                                        accounts receivable. If the average number of days is 7 or
                                        less, an Authority receives the maximum score. If the
                                        average is more than 33 days, the Authority receives no
                                        points. As of fiscal year ended June 30, 2001, the
                                        Authority averaged 110 days to collect its tenant accounts
                                        receivable.7 This is nearly 16 times the number of days
                                        needed to obtain the maximum score and more than 3 times
                                        the level needed to receive any points. Further, during the
                                        fiscal year the Authority wrote off $12,731 as uncollectible.

                                        According to a Co-Manager of Housing, collections were
                                        handled on a case-by-case basis. The level of collection
                                        effort was based on how well a site manager knew the
                                        tenant and the tenant’s past payment experience. She said

7
      $109,128 total rent income/365 days = $299 average daily rent income.   $32,883 accounts receivable
      balance/$299 average daily rent income = 110 days.



2003-AT-1001                                 Page 46
                                                              Finding 7


           as long as a tenant cooperated and made an effort to pay,
           the Authority worked with him or her.

           We found that 34 former tenants owed the Authority
           $16,676 at June 30, 2001. In addition, 59 current tenants
           owed the Authority $19,960. One current tenant had a
           balance due of $2,611. The tenant's monthly rent was
           $165. Thus, the tenant owed about 16 months rent. One
           former tenant owed the Authority $2,371.

           Without written policies and procedures, the Authority
           cannot assure it consistently enforces rent collection efforts
           or assure tenants receive fair and equitable treatment.

Nepotism   Authority policy prohibited hiring relatives of an employee
           if they would be working directly for or supervising that
           Authority employee. The policy defined a relative as any
           person who is related by blood or marriage including
           spouse, child, parent, brother, sister, or spouse of a child,
           brother or sister of any board member or employee.

           The Authority violated its policy by hiring relatives of
           employees and Board members. The Authority hired the
           husband, son, and daughter-in-law (the son’s spouse) of a
           Co-Manager of Housing.        The Co-Manager directly
           supervised her daughter-in-law, an Assistant Contract
           Manager, and had program responsibilities for contract
           work performed by her husband and son. Another
           Co-Manager of Housing supervised her sister, a County
           Human Service Representative.        A County Contract
           Manager was the daughter-in-law of a Board member.

           Nepotism weakens internal controls needed to ensure
           integrity of operations. HUD considers the practice to be
           improper and in 1995, revised the Consolidated ACC to
           prevent it. Although HUD intended for all public housing
           authorities to convert to the revised ACC, the Authority,
           among others, did not convert. The Authority should, at a
           minimum, adhere to its written policy.




               Page 47                                     2003-AT-1001
Finding 7




 Authority Comments   As more specifically detailed in Appendix C, NRHA
                      replies as follows:

                      1.    At all times NRHA has been able to identify or
                            calculate funds that its holds on behalf of tenants or
                            program participants, and NRHA has in all cases
                            promptly paid all sums due to any tenant or program
                            participant.
                      2.   As noted in the comments to Finding 1, NRHA agrees
                           that it inadvertently but no less improperly pledged two
                           CD’s containing FSS funds as collateral for a loan, but
                           the holding Bank has since agreed to release the
                           collateral.      The report’s statement about an
                           unaccounted-for $116,948 is likely a reflection of the
                           auditors’ not noticing the second CD.
                      3.   NRHA agrees that it should take the steps required to
                           bring its depository handling of tenant security deposits
                           into conformance with HUD requirements, and it is in
                           the process of doing so. Its overall administrative and
                           tenant pay-out treatment of security deposits is proper
                           and accurate, and no tenant interests have been
                           prejudiced by NRHA’s depository practices.
                      4.   NRHA agrees that its accounts receivables are higher
                           than it would prefer, but NRHA is not ashamed of
                           trying to work with delinquent tenants rather than
                           casting them into the street. Note that the $12,731 cited
                           as a write-off covers two fiscal years. NRHA will
                           gladly entertain HUD’s assistance in crafting a policy
                           that balances sound fiscal management of tenant rent
                           accounts with the need to treat deprived and sometimes
                           desperate tenants humanely.
                      5.   NRHA did not violate its nepotism policy because a
                           violation requires circumstances that do not fall within
                           policy guidelines or circumstances where the Board
                           did not grant a waiver to a relationship that would
                           otherwise fall within the policy. As shown in
                           Appendix C, the assertions of nepotism set forth here
                           either inaccurately portray the nature of the family
                           relationship or the character of the employment
                           relationship, or do not take into account Board
                           deliberation and assent.
                      6.   NRHA has never received a copy of the 1995 ACC
                           revisions regarding nepotism policies.

2003-AT-1001               Page 48
                                                                         Finding 7




OIG Response to      We considered the Authority’s preliminary and final
Authority Comments   comments and made appropriate revisions to the finding
                     and recommendations.             Our conclusions and
                     recommendations generally remained unchanged. Our
                     responses to each of the Authority’s comments are included
                     in Appendix C.



Recommendations      We recommend you require the Authority to:

                     7A.      Establish separate interest-bearing bank accounts
                              for FSS funds and tenant security deposits and
                              deposit amounts needed to fund current balances.
                              These accounts should be free from any liens, and
                              readily available for disbursement to tenants.

                     7B.      Deposit all future amounts collected for the FSS
                              Program and tenant security deposits into the
                              designated deposit accounts.

                     7C.      Credit applicable interest earnings to each tenants’
                              subsidiary account balance.

                     7D.      Develop and implement written policies and
                              procedures governing rent collections.

                     7E.      Increase collection efforts on past due accounts and
                              determine whether they are collectible. If deemed
                              uncollectible, write off the balances.

                     7F.      Reassign staff who are supervised by relatives, or
                              whose duties or performance may be affected by a
                              relative.

                     7G.      Discontinue the practice of hiring staff who are
                              supervised by relatives.




                           Page 49                                    2003-AT-1001
Finding 7




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2003-AT-1001    Page 50
Management Controls
Management controls 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
                                   o Program Operations – Policies and procedures that
                                     management has implemented to reasonably ensure that
                                     a program meets its objectives.

                                   o Validity and Reliability of Data – Policies and
                                     procedures that management has implemented to
                                     reasonably ensure that valid and reliable data are
                                     obtained, maintained, and fairly disclosed in reports.

                                   o Compliance with Laws and Regulations – Policies and
                                     procedures that management has implemented to
                                     reasonably ensure that resource use is consistent with
                                     laws and regulations.

                                   o Safeguarding Resources – Polices and procedures that
                                     management has implemented to reasonably ensure that
                                     resources are safeguarded against waste, loss, and
                                     misuse.

                                   We assessed all of the relevant controls identified above.

                                   It is a significant weakness if management controls do not
 Significant weaknesses
                                   provide reasonable assurance that the process is for
                                   planning, organizing, directing, and controlling program
                                   operations will meet an organization’s objectives.

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

                                   o Program Operations - Because the Authority did not
                                     maintain adequate accounting records, it could not
                                     adequately administer its programs (Finding 5). The
                                     Authority did not maintain its low-income housing units
                                     in good repair and condition (Finding 4). The Authority
                                       Page 51                                     2003-AT-1001
Management Controls


                         did not follow Section 8 fund requisition requirements
                         (Finding 6). Authority management did not properly
                         segregate tenant escrow funds and did not adequately
                         pursue collection of rents (Finding 7).

                      o Validity and Reliability of Data - The Authority did not
                        maintain accurate accounting records (Finding 5).

                      o Compliance with Laws and Regulations - Authority
                        management inappropriately pledged Authority assets
                        and guaranteed repayment of development loans,
                        obtained unauthorized loans, and misused public funds,
                        which violated the ACC (Finding 1). The Authority did
                        not maintain accurate accounting records (Finding 5).
                        The Authority incurred excessive, unnecessary, and
                        ineligible travel and other costs (Findings 2 and 3). The
                        Authority did not provide decent, safe, and sanitary
                        housing (Finding 4). The Authority did not perform
                        required reviews of its estimated annual Section 8
                        requirement and did not deposit excess funds as
                        required (Finding 6).          The Authority violated
                        regulations requiring it to segregate FSS funds and
                        tenant security deposits (Finding 7).

                      o Safeguarding Resources - Authority management
                        inappropriately pledged Authority assets and guaranteed
                        repayment of development loans, obtained unauthorized
                        loans, and misused public funds (Finding 1). The
                        Authority did not keep adequate records of funds
                        advanced to privately owned developments (Finding 5).
                        The Authority incurred excessive, unnecessary, and
                        ineligible travel and other costs (Findings 2 and 3). The
                        Authority withdrew excess Section 8 funds and used
                        some of the funds for unauthorized development
                        activities (Finding 6). The Authority did not segregate
                        FSS funds and tenant security deposits (Finding 7).




2003-AT-1001              Page 52
Follow-Up On Prior Audits
This was the first Office of Inspector General audit of this Authority. The Authority’s
independent audit report for fiscal year ended June 30, 2000, included a finding that the
Authority’s control procedures failed due to a lack of trained personnel and due to the resignation
of personnel. The Authority did not implement many control procedures over its general ledgers.
As a result, the financial statements were significantly inaccurate to the point that the IPA
considered the records to be unauditable.

The IPA did not issue the report for the year ended June 30, 2001, until May 17, 2002. The
report contained three findings: (1) the Authority had not performed the required physical
inventory, (2) the Authority drew CIAP funds of $35,697 for which it was not able to identify
associated costs, and (3) the Authority's internal controls over the accumulation, recording, and
reporting of transactions were inadequate to allow for the accurate and timely recording of
financial transactions. In addition, journal vouchers contained little or no supporting
documentation and usually no explanation. The IPA considered findings two and three to be
material weaknesses.

As shown in Findings 1 and 5 of this report, we found similar conditions.




                                          Page 53                                     2003-AT-1001
Follow-Up On Prior Audits




                            THIS PAGE LEFT
                                BLANK
                            INTENTIONALLY




                             Page 54         2003-AT-1001
                                                                                                       Appendix A

Schedule of Questioned Costs

                        Recommendation                  Ineligible1          Unnecessary2

                                1E                   $ 4,224,342
                                1F                        45,324
                                2C                                           $       6,233
                                2D                                                  18,000
                                2E                          23,038
                                3C                                                  26,000
                                3D                                                  18,275
                                3E                         11,070

                               Total                 $ 4,303,774             $      68,508




1
    Ineligible costs are those that are questioned because of an alleged violation of a provision of a law, regulation,
    contract, grant, cooperative agreement, or other agreement or document governing the expenditure of funds.
2
    Unnecessary costs are those which are not generally recognized as ordinary, prudent, relevant, and/or necessary
    within established practices. Unreasonable costs exceed the costs that would be incurred by the ordinarily
    prudent person in the conduct of a competitive business.

                                                    Page 55                                            2003-AT-1001
Appendix A




               THIS PAGE LEFT
                   BLANK
               INTENTIONALLY




2003-AT-1001    Page 56
                                                                                               Appendix B

HUD Comments
                              U. S. Department of Housing and Urban Development
                                                     Greensboro Field Office
                                                  2306 West Meadowview Road
                                                  Greensboro, NC 27407-3707
                                                     www.hud.gov/local/gre



   September 27, 2002


   MEMORANDUM FOR: Nancy H. Cooper
     Regional Inspector General for Audit, Region 4, 4AGA

   FROM: Michael A. Williams, Director, Office of Public Housing, 4FPHI

   SUBJECT:          Draft Report
                     Northwestern Regional Housing Authority
                     Public Housing Programs
                     Boone, North Carolina

   We are providing the following response to the draft audit report identified above.

   Recommendation 1A:

   Declare the Authority in substantial default of its Consolidated ACC for low-income public
    housing and its Consolidated Section 8 ACC, and take possession and control of all Authority
   operations and assets.

   PIH Response:

   We concur on the audit recommendation.

   Recommendation 1B:

   Take appropriate administrative actions against the Executive Director, Deputy Director and all
   Board members, including issuing Limited Denials of Participation or debarment.

   PIH Response:

   We concur on the audit recommendation with limitations.

   Recommendation 1C:

   Instruct the Authority to immediately discontinue using funds for development activities.

   PIH Response:

   We concur on the audit recommendation.




                                           Page 57                                             2003-AT-1001
                                                                                                 Appendix B




Action Planned:

          ·   Official notification to NRHA requiring they discontinue using funds for development
              activities immediately.
          ·   Place “zero threshold” for all Capital Fund programs. This will prohibit any “draw-
              downs” without prior HUD approval.
          ·   Require prior HUD approval for utilization of any operating reserves for both Public
              Housing and Section 8 Programs.

       Recommendation 1D:

       Seek release of encumbered Authority assets from lenders and investors.

       PIH Response:

       We concur on the audit recommendation.

       Recommendation 1E:

       Seek recovery of all amounts owed the Authority by NHE and its related privately owned
       developments. The funds should be repaid to the Authority from non-federal funds.

       PIH Response:

       We concur on the audit recommendation.

       Recommendation 1F:

       Seek repayment of $45,324, or the current balance owed the Authority by Hospitality House of
       the Boone Area, Inc.

       PIH Response:

       We concur on the audit recommendation.

       Recommendation 2A:

       Revise its travel policy, making it comparable with local public practice, including maximum allowances
       for lodging and meals.

       PIH Response:

       We concur on the audit recommendation.




                                              Page 58                                            2003-AT-1001
                                                                                         Appendix B




Recommendation 2B:

Identify payment it made for family of Board members and require the Board members to
reimburse the Authority or provide support that all amounts were repaid.

PIH Response:

We concur on the audit recommendation.

Recommendation 2C:

Provide support that the $6,233 of excessive meal and tip expenses were reasonable and
necessary for project operations, or repay any unsupported amounts to the Authority. Payment
should be from non-Federal funds.

PIH Response:

We concur on the audit recommendation.

Recommendation 2D:

Provide support that the $18,000 spent for local lunches represents reasonable and necessary
expenses for project operations, or repay any unsupported amounts to the Authority. Repayment
should be from non-Federal funds.

PIH Response:

We concur on the audit recommendation.
Recommendation 2E:

Discontinue the practice of paying for non-Authority personnel.

PIH Response:

We concur on the audit recommendation.

Recommendation 3A:

Adopt controls to ensure that costs meet ACC requirements.

PIH Response:

We concur on the audit recommendation.




                                       Page 59                                           2003-AT-1001
                                                                                             Appendix B




Recommendation 3B:

Discontinue the practice of using Authority funds to purchase gifts for staff, Board members, and others.

PIH Response:

We concur on the audit recommendation.

Recommendation 3C:

Provide support that the $26,000 spent for Board meetings represents reasonable and necessary expenses
for project operations, or repay any unsupported amounts to the Authority. Repayment
should be from non-Federal funds.

PIH Response:

We concur on the audit recommendation.

Recommendation 3D:

Provide support that the $18,275 spent for retreats and a Christmas party represent reasonable
and necessary expenses for project operations, or repay any unsupported amounts to the
Authority. Repayment should be from non-Federal funds.

PIH Response:

We concur on the audit recommendation.

Recommendation 3E:

Repay $9,283 of ineligible expenditures from non-Federal funds.

PIH Response:

We concur on the audit recommendation.

Recommendation 3F:

Provide support for $1,787 of miscellaneous expenses or repay any unsupported amounts from
non-Federal funds.

PIH Response:

We concur on the audit recommendation.




                                        Page 60                                             2003-AT-1001
                                                                                             Appendix B




Recommendation 4A:

Engage a HUD engineer to inspect the Authority’s housing for structural safety.

PIH Response:

We concur on the audit recommendation.

Action Planned:

   ·   Schedule Physical Inspection to be conducted by HUD engineer. Additional travel funds
       have been requested for the first quarter of the 2003 fiscal year.
   ·   Provide written report indicating any deficiencies noted during the inspection.
   ·   Review response for approval or denial of corrective actions completed; and proposed.

Recommendation 4B:

Require the Authority to establish written procedures for performing annual inspections of its
units and grounds.

PIH Response:

We concur on the audit recommendation.

Recommendation 4C:

Require the Authority to immediately inspect all of its units and grounds.

PIH Response:

We concur on the audit recommendation.

Recommendation 4D:

Require the Authority to timely correct deficiencies identified by both our inspections and any
future inspections by the Authority or HUD.

PIH Response:

We concur on the audit recommendation.

Recommendation 5A:

Require the Authority to ensure its accounting records are maintained according to requirements.




                                        Page 61                                             2003-AT-1001
                                                                                            Appendix B




PIH Response:

We concur on the audit recommendation.

Recommendation 6A:

Review its estimates of annual Section 8 funding requirements for each program within the first
90 days of its fiscal year.

PIH Response:

We concur on the audit recommendation.

Recommendation 6B:

Invest any excess advances into HUD approved interest-bearing accounts and report the interest
earned.

PIH Response:

We concur on the audit recommendation.

Recommendation 6C:

Issue any remaining Section 8 certificates/vouchers to eligible applicants.

PIH Response:

We concur on the audit recommendation.

Recommendation 7A:

Establish separate interest bearing bank accounts for FSS funds and tenant security deposits and
deposit amounts needed to fund current balances. These accounts should be free from any liens,
and readily available for disbursement to tenants.

PIH Response:

We concur on the audit recommendation.

Recommendation 7B:

Deposit all future amounts collected for the FSS Program and tenant security deposits into the designated
deposit accounts.




                                        Page 62                                            2003-AT-1001
                                                                                               Appendix B




PIH Response:

We concur on the audit recommendation.

Recommendation 7C:

Credit applicable interest earnings to each tenants subsidiary account balance.

PIH Response:

We concur on the audit recommendation.

Recommendation 7D:

Develop and implement written policies and procedures governing rent collections.

PIH Response:

We concur on the audit recommendation.

Recommendation 7E:

Increase collection efforts on past due accounts and determine whether they are collectible.
If deemed uncollectible, write off the balances.

PIH Response:

We concur on the audit recommendation.

Recommendation 7F:

Reassign or terminate staff who are supervised by relatives, or whose duties or performance may
be affective by a relative.

PIH Response:

We concur on the audit recommendation to reassign staff; however do not concur with
terminating staff. Our concern is that this may pose an undue hardship on the individual being
terminated.

Recommendation 7G:

Discontinue the practice of hiring staff who are supervised by relatives.




                                        Page 63                                                2003-AT-1001
                                                                                             Appendix B




PIH Response:

We concur on the audit recommendation.

Recommendation 7H:

Execute the 1995 revised ACC.

PIH Response:

We do not concur on the audit recommendation due to regulatory constraints. The language
pertaining to the 1995-revised ACC specifically states its implementation is optional. Therefore,
the field office may not require them to convert as such.




                                         Page 64                                             2003-AT-1001
                                                                                                 Appendix C

Authority Comments
   October 10, 2002


   Ms. Nancy Cooper
   Regional Inspector General for Audit
   US Department of Housing and Urban Development
   75 Spring Street, SW, Room 330
   Atlanta, GA 30303-3388

   Subject: Draft Audit Report
                    NRHA Final Comments

   Dear Ms. Cooper,

   As promised, NRHA is pleased to provide its Final Comments to the subject audit report.
   Consistent with your statements at the meeting on September 18, NRHA has made every effort
   to provide comments that succinctly summarize the detailed response previously provided to
    you as the preliminary comments. NRHA further has taken great pains to frame its comments
   in a wholly professional, non-inflammatory manner. We realize the number of bullet point
   comments that accompany some findings are sizeable, but this is simply a function of the
    number of specific items that merit this auditee’s comments. NRHA has rendered no comment
   unnecessarily and has where possible consolidated various elements of a finding under the
   umbrella of a single comment. Accordingly, NRHA fully expects that the “auditee’s comments”
   sections of the Final Report will reproduce these comments without change or OIG summary.
   NRHA also expects that the Final Report will also reproduce this cover letter in connection with
   the Report’s Executive Summary.

   NRHA is confident that your staff will carefully consider the Final Comments, and more
    pertinently, the Preliminary Comments previously submitted that will be attached to the Final
   Report as Appendix C. The Board and I have every expectation that a fair and comprehensive
   reading of the Comments will lead to an accurate Final Report that will allow the cognizant
   Office of Public Housing to render an informed and impartial decision.

   For twenty years, NRHA has provided a variety of housing services and opportunities to
   thousands of low-income families in seven economically-distressed, rural counties in the
    mountains of North Carolina. NRHA has been recognized by HUD and Affordable Housing
   professionals as a national leader in the development of Affordable Housing and in the
   development and operation of housing programs, not just for rural areas but against any
   measurement. The Board was therefore mystified, shocked and dismayed by many of
   the findings in the draft report. The Board and I are convinced that NRHA’s Comments have
   completely rebutted every one of the significant findings in the draft report, and we are prepared to
   continue to offer that rebuttal wherever and whenever required. Please be assured that the
   Board and I remain fully supportive of NRHA management and staff, and fully committed to the
   successful operation and growth of the many Affordable Housing programs to which NRHA
   devotes its full energy and attention.

   As a public body, NRHA welcomes public oversight and scrutiny, and it was our privilege to host
   the OIG during the conduct of the audit. NRHA has always found the audit process to be
    illuminating and instructive, and this audit was no different. The Board and I always appreciate




                                           Page 65                                               2003-AT-1001
                                                                                             Appendix C




any advice, encouragement or suggestions that will allow the Board, management and staff of
NRHA better to discharge our important mission of providing real housing opportunities to our
 many thousands of clients.

NRHA also welcomes the opportunity to help the Greensboro Office of Public Housing better
understand the extent of our many Affordable Housing initiatives, and our many successes in
this area. We will be pleased to respond to the Final Report in whatever fashion the Office of
Public Housing requests.

With best regards,



L. J. McEntyre, Jr., Chairman

cc       HUD and OIG recipients of the OIG draft report
         NRHA counsel
         NHE counsel
         E. G. “Ned” Fowler, Executive Director




                                         Page 66                                             2003-AT-1001
                                                                                            Appendix C

EDITORIAL NOTE: In the interest of brevity, only the Finding title and the Authority
Comments heading have been reproduced from the draft report. For each Finding, beginning
with the heading Authority Comments: the bullet points for that Finding are designed to be
lifted out of this document and inserted into the appropriate Authority Comment section in the
Final Report. The OIG is free to adjust margins or tabs as required provided that the text and the
numbering format remain intact.


FINDING 1 – MANAGEMENT INAPPROPRIATELY PLEDGED AUTHORITY ASSETS

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:

1. NRHA is a North Carolina public corporation whose overall activities are governed by its
   charter, its by-laws, and the North Carolina General Statutes. Its existence as a Housing
   Authority in no way means that HUD has oversight and control over every contract or other
   arrangement to which NRHA chooses to become a party.

    OIG response
    The finding does not mention North Carolina law or the Authority’s charter or by-laws. By
    guaranteeing loans, the Authority encumbered assets in violation of the ACC. Any discussion of
    North Carolina law, charters, or by-laws is irrelevant.

    By entering into the ACC’s and receiving HUD subsidies, the Authority agreed to abide by
    regulations and HUD rules. These regulations and rules prohibit activities such as those undertaken
    by the Authority. HUD and the OIG are mandated to ensure housing authorities abide by regulations
    and rules and to report violations.

2. The only improper pledge of NRHA assets was the inadvertent pledge of two CD’s
   containing FSS funds, and the holding Bank has since agreed to release the collateral.

    OIG response
    The finding contains several examples of violations of ACC Section 313. For example, management
    pledged tenant FSS funds, real estate, and expected proceeds from the sale of real estate to obtain
    unauthorized loans. Further, in violation of Section 313 the Authority pledged its assets to guarantee
    the obligations of a private non-profit corporation. The Authority must realize that the definition of
    “project” is broad (ACC Section 312). It includes not only the physical real estate, but also personal
    property such as cash on hand, deposits, reserves, equipment, intangible personal property, etc. The
    pledge or encumbrance of any of these assets constitutes a violation of Section 313.

    We revised the finding to show the Authority pledged two CDs representing tenant FSS funds.

3. Absent a showing of improper use of HUD program funds, decisions lawfully and properly
   made by the NRHA Board about business risk, encumbrance of assets not subject to HUD’s
   control, and the amount and type of loans and loan guarantees are not within OIG’s purview.

   OIG response
   See our responses to comments 1, 2, and 6.
4. NRHA is solvent, well-managed and at no time has it been in a precarious financial
   position. The IPA has rendered an unqualified opinion regarding NRHA’s financial
   position and results of operations.


                                             Page 67                                        2003-AT-1001
                                                                                              Appendix C

   OIG response
   We believe our assessment is fair and accurate. As detailed in the report, the small Authority had
   $2.6 million in bank debt. Debt service alone was approximately $18,000 per month and the
   Authority had no funds with which to repay the principal. The Authority’s financial condition led it to
   request HUD approval to sell 18 public housing units. The Authority had virtually no cash reserves
   and very little cash with which to operate. The Authority pledged tenant FSS funds for unauthorized
   operating loans. Also, by its own admission, it owed that program another $35,000 it had used for
   other purposes. Further, it had not funded a separate tenant security deposit account, as required by
   HUD. During 2000 it obtained a bank loan to repay HUD overdrawn Section 8 funds. It was also
   carrying as an asset $4.2 million in receivables due from private entities for which collection is
   uncertain.

   The IPA rendered an unqualified opinion. However, we noted a few days before the end of the fiscal
   year, June 30, HUD wire transferred funds into the Authority’s Section 8 bank account. Thus, the
   financial statements show a large cash balance at the end of the fiscal year. This is deceptive
   because most of the cash represented short-term liabilities payable to landlords for Section 8 rents,
   which were paid shortly after the end of the fiscal year. In reality, the Authority had very little cash.

5. NRHA is not in Substantial Default of its Section 8 ACC in that the ACC authorizes use of
   excess administrative fee reserve funds for any housing activities otherwise lawful under
   state and local law, which was in fact the use of the $310,610.

   OIG response
   We removed the statements declaring the Authority in substantial default of its ACC.
   Rather, we recommended the HUD Action Official make that determination.

   We added a discussion to the finding pertaining to the requirements for using Section 8
   administrative fee reserves. We also questioned the Authority’s claims that it both expended reserves
   and yet reported to HUD that it had significant reserves on deposit. We also added a
   recommendation that the Action Official review Section 8 reserve expenditures and balances for
   accuracy and compliance with requirements.

6. NRHA is not in Substantial Default of its Conventional Public Housing ACC because
   changes to the US Housing of 1937 enacted by QHWRA permit the use of CPH funds in
   mixed finance developments such as NHE’s tax credit projects. The amount in question,
   $37,531.40 and not $274,248, was used to pay a small portion of the construction costs of
   two tax credit projects and not salaries or other development costs.

   OIG response
   As stated in our response to the preceding comment, we removed the statements declaring
   the Authority in substantial default of its ACC and recommended the action official make
   that determination.

   We disagree that the amount of misused public housing funds was $37,531.40. The questioned
   amount was $274,248. The Authority’s admission that it used over $37,000 of public housing funds
   for private development expenses is in itself, a serious matter.

   The Authority claimed that the Quality Housing and Work Responsibility Act of 1998 (QHWRA)
   changed the National Housing Act of 1937 giving housing authorities the right to finance privately
   owned Section 8 properties using public housing funds. Not only is that interpretation incorrect, it is
   a poor argument since the Authority’s early development activities actually predated QHWRA by

                                             Page 68                                         2003-AT-1001
                                                                                           Appendix C

    several years. QHWRA does provide for limited use of certain public housing funds for development
    of public housing using a mixed finance model. The Authority misrepresented what QHWHA permits
    by quoting only one sentence of Section 3(b)(1) of the United States Housing Act of 1937 as Amended
    by QHWRA. The preceding sentence of that section reads: “The term ‘public housing’ means low-
    income housing, and all necessary appurtenances thereto, assisted under this Act other than under
    Section 8.” To meet QHWRA requirements, mixed financed developments must include “public
    housing”. Authorities desiring to develop mixed finance public housing are required to follow HUD
    regulations at 24 CFR 941 Subpart F. The regulations require approvals by HUD Headquarters
    throughout the development process and require an amended ACC. The Authority did not develop
    public housing, obtain HUD approval, or obtain an amended ACC. The Authority developed
    privately owned Section 8 properties, which is specifically prohibited by QHWRA.

7. HUD at all times was aware of the various developments and related activities, provided extensive
   support and encouragement, and consistently and timely rendered any HUD approvals that NRHA
   required in order to complete and operate the projects.

    OIG response
    The Authority asserted that HUD approved the development activities and related bank loans. While
    HUD was aware the Authority developed privately owned Section 8 properties, we did not find any
    evidence that HUD was aware the Authority used Federal funds, pledged assets, or guaranteed loan
    repayments. Further, we found no evidence HUD granted any waivers allowing such activities.

8. No loan agreement to which NRHA is a party was unauthorized, as all were approved by NRHA’s
   Board and by HUD, where HUD approval was required. In particular, HUD fully reviewed and
   approved the release of Valley View units for sale to first time low-income home buyers before the
   property was encumbered. The Valley View loan is current, as are all NRHA loans, and the sales of
   four Valley View units have closed.

    OIG response
    See our response to comment 7 pertaining to HUD’s knowledge of Authority activities. We have
    concerns about the application for the sale of the Valley View units. For example, the application
    states the Authority would sell the units to develop new affordable housing. The units were sold
    primarily to pay off debts for the units that had already been improperly developed. No new units
    were developed. We will address our concerns with the application in a separate memorandum to the
    Special Applications Center.

    At completion of our fieldwork, the Authority had not sold any of the Valley View units. Further, it
    did not provide any evidence that it had since sold units.

9. Of the $4.2 million that NHE owes NRHA, only the $347,000 in Section 8 and conventional
   housing funds are of concern to OIG, and as noted above their expenditure was proper. NHE owes
   the remaining $3.638 million to NRHA’s development and general funds, which are not within OIG’s
   ambit. The loaned funds will ultimately be recouped through payment of deferred developer fees to
   NRHA and through NHE’s acquistion at the end of the tax credit period of real estate assets likely to
   be valued at far more than $3.5 million dollars.

    OIG response
    The Authority commingled funds into its general fund. These commingled funds included tenant
    rents, public housing operating funds and Section 8 funds. While the Authority may have deposited
    loan proceeds and other funds into the general fund, commingling the funds cannot obscure the
    character of the Federal funds. Further, because of the poor condition of the accounting records, the

                                            Page 69                                        2003-AT-1001
                                                                                               Appendix C

    funds cannot be distinguished. Regardless, when the Authority pledged assets as collateral for bank
    loans and commingled the loan proceeds with Federal funds, those funds became subject to HUD
    rules. Thus, OIG has a duty and responsibility to ensure proper use of the funds.

    NHE has the option of acquiring the developments when the tax credits expire after 15 years of
    operation. However, it is not clear how that would benefit the Authority. First, there is no guarantee
    NHE would acquire the developments. NHE is not the Authority. It is an independent non-profit
    corporation structured in such a way that the Authority has no guarantee of continued control.
    Further, there is no guarantee NHE would repay the Authority. Even if the agenda plays out as the
    Authority hopes, it doesn’t change the fact that all the development activities were improper. Also,
    for the Authority to loan such significant funds with no guarantee of repayment, and with little or no
    interest, shows its neglect for its fiduciary responsibilities. If NHE does not repay the Authority, what
    recourse will the Authority have?

10. The tax credit projects are solvent, cash-flow positive, well-managed and successful,
    operating precisely as intended. The tax credit projects regularly pay NRHA management
    fees, and the more mature projects are making payments on deferred developer fees balances.

    OIG response
    Since there are only 156 units, the Authority earns only limited management fees. Much of what the
    Authority classifies as management fee income is actually direct expense reimbursement. After
    payment of management expenses, including salaries of Authority staff, there could be little if any
    positive cash flow from management fees.

    Technically, the Authority earned development fees. However, it was not authorized to undertake the
    development activities. The ACC does not permit any Authority resources, including staff, to be used to
    develop privately owned housing. Even though it did develop the projects, it deferred the revenue. While
    this may have been an acceptable accounting classification, the Authority, in effect, loaned the earned
    fees to the private developments.

    While the Authority contends that the more mature projects are making payments on deferred
    development fees, this is misleading. According to an exhibit the Authority provided with its
    preliminary comments, most of the developer’s fees that were paid, were paid at closing. Based on
    the Exhibit, the total developer’s fees earned were $792,817. Of that, $229,519, or 29 percent, was
    paid at the loan closings while $563,298, or 71 percent was deferred. Following closings, some of
    which occurred several years ago, the Authority has only been paid $90,021, 16 percent, of the
    deferred fees. Interestingly, $80,021 of that was paid by Woodland Hills, which closed in 1996.
    White Laurel paid the other $10,000. The remaining $473,277 remains outstanding. If the
    developments have cash available as the Authority claims, the Authority should demand payment
    immediately.

11. The cost overrun assertions are based on the preliminary cost estimates generated several years before
    project completion. If one uses the standard industry practice of comparing actual cost against final
    budgets, the overruns are $1.327 million and not the $5.2 million asserted in the report.

    OIG response
    We stand by our numbers. While original construction budgets are estimates, they are not
    completely meaningless as the Authority implies. The Authority planned the developments
    and obtained tax credits and other financing based on the original budgets. We believe the
    original budgets are therefore most relevant for a comparison of planned versus actual
    development costs. The use of budgets prepared late in the construction process would

                                              Page 70                                         2003-AT-1001
                                                                                           Appendix C

    necessarily incorporate at least some of the cost overruns and be misleading. As the finding
    makes clear, consistent inability to complete developments without huge cost overruns is
    cause for concern.

12. The IPA did not state that collection of $1.03 million from NHE was questionable, only that the
    collection of the accrued interest was questionable.

    OIG response
    We added the IPA’s report notes verbatim regarding the collection of the loans/interest into the
    finding. The IPA told us, during discussions regarding write-off of the $400,000 in receivables, that
    additional NHE receivables should probably be written off because they would likely never be
    collected. Also, the IPA advised the Authority it could not reinstate the $400,000 of receivables
    without an allowance account because he did not think it was likely they would ever be collected.

13. NRHA has a formal repayment agreement with the Rock Haven owner, who has repaid NRHA the
    $45,324 advance.

    OIG response
    The Authority was not authorized to develop the Rock Haven project. Advancing Authority funds to
    this project violated the ACC. Thus, whether or not there is now a repayment agreement is
    immaterial. As such, we removed the statement regarding the repayment agreement from the finding.
    We also noted that the Authority’s Executive Director is also on the Board of Rock Haven, which at a
    minimum gives the appearance of a conflict of interest.

    The Authority did not provide any support that the owner of Rock Haven repaid the $45,324. It
    should provide any support of the repayment to the Action Official.

14. NRHA lawfully and with proper Board approval entered into limited and not unbounded guaranty
    agreements, most of which have been extinguished. At no time was NRHA unconditionally exposed
    to millions of dollars of liabilities from these guarantees.

    OIG response
    Since we could not be more exact in quantifying the potential liabilities to which management
    exposed the authority, we changed “millions of dollars” to “unknown magnitude” in the finding.
    However, millions of dollars were certainly involved. In fact, the actual liabilities arising out of
    cost overruns alone total over $5 million. The existence of these guarantees not only violates the
    ACC, but also shows management’s disregard for its fiduciary responsibilities. Management
    agreed, if necessary, in multiple cases and various ways to use public funds to protect the interests
    of private investors. That some of these guarantees may have now expired without occurrence of
    circumstances causing the private investors to exercise a claim on Authority assets is of little
    consequence.

    Our draft report discussed two loan guarantees. We later found there were three guarantees and
    revised the finding accordingly.

15. The IPA stated that NHE and not NRHA was responsible for cost overruns and loss of tax credits, and
    this is in fact the case.

    OIG response
    Upon further review, we agree that we misinterpreted the IPA’s note. We therefore deleted the
    comment from the report. However, although the Authority is technically correct in stating the

                                            Page 71                                        2003-AT-1001
                                                                                             Appendix C

   (primary) responsibility for loss of tax credits rests with NHE, the remarks fall short of full
   disclosure. NHE, as general partner/managing member of the LP/LLCs, was responsible to the
   private investors for loss of tax credits. However, Authority management caused the Authority to take
   on that obligation, for at least two of the projects, by signing agreements with the investors for those
   projects. Through these agreements the Authority acquired responsibility for the loss of tax credits
   by guaranteeing NHE would perform its obligations.

16. NRHA Section 8, public housing, tax credit development and home ownership programs are
    operating efficiently, serving NRHA’s clients effectively, and promoting HUD’s objectives in
    providing decent, safe and sanitary housing to thousands of low income residents of western North
    Carolina.

   OIG response
   As shown in the finding, the facts remain that the Authority repeatedly violated the ACC’s with HUD.
   Management inappropriately pledged Authority assets as collateral for unauthorized bank loans.
   Management also misused $584,858 of HUD Section 8 and public housing funds for development
   activities. As a result of payments and advances by the Authority, NHE and the developments owed
   the Authority at least $4,224,342. Management advanced another $45,324 for development of a
   property owned by another non-profit company. Management and the Board put the Authority at
   further risk by guaranteeing repayment of private development loans and exposing the Authority to
   potential liabilities. These actions not only violated the ACC’s, but also reduced funds available for
   public housing operations. Management and the Board’s disregard for HUD requirements left the
   Authority in a precarious financial condition and led to the selling of 18 public housing units.

FINDING 2 – TRAVEL EXPENSES WERE UNECESSARY AND INELIGIBLE

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:

1. No NRHA program, HUD or otherwise, suffered funding unavailability due to travel or other
   expenditures.

   OIG response
   If the funds were spent, they are not available. The funds could have been used to improve the
   condition of its public housing units. As shown in Finding 4, improvements were needed. The
   Authority’s personal travel, no matter how small, was ineligible. The Authority did not provide any
   evidence the funds were repaid.

2. The author of the 1998 HUD report agreed that “local public practice” did not mean the policy of the
   Town of Boone but of comparable North Carolina Housing Authorities. According to that definition,
   NRHA policy conforms to “local public practice.”

   OIG response
   The Authority knew, based on the results of the 1988 HUD review, that its travel policy should have
   spending limits in order to be comparable with "local public practice.” It provided no evidence to
   support that a HUD official advised them that local practice meant comparable housing authorities.
   Even if that is the case, the Authority did not provide evidence that it had performed a comparability
   study and had adopted policies similar to comparable authorities. Should the Authority have support,
   it should provide it to the Action Official.

3. Comparable North Carolina Housing Authorities maintain a “reasonable and actual cost” policy
   similar if not identical to NRHA’s.

                                             Page 72                                        2003-AT-1001
                                                                                              Appendix C


    OIG response
    The Authority did not provide evidence that it had performed a comparability study and had adopted
    policies similar to comparable authorities. Should the Authority have support, it should provide it to
    the Action Official.

4. NRHA employees are not federal employees , and the NRHA Board is not required to adopt a “GSA-
   style” daily limit policy. The NRHA Board prefers to monitor travel expense closely and allow
   managers and staff the latitude to incur reasonable and actual costs.

    OIG response
    Our comparison to Federal guidelines was a comparison for demonstration purposes, which brings
    into question whether the costs were reasonable and necessary in accordance with A-87. We believe
    they were not. OMB Circular A-87 provides, "A cost is reasonable if, in its nature and amount, it
    does not exceed that which would be incurred by a prudent person under the circumstances
    prevailing at the time the decision was made to incur the cost. The question of reasonableness is
    particularly important when governmental units or components are predominately federally-funded."
    In addition, the Circular provides that a cost is reasonable if it is recognized as ordinary and
    necessary for the performance of a Federal award and if the entity acted with prudence considering
    its responsibilities to its employees, the taxpayers, and the Federal Government.

    We added Appendix K showing the costs of the six trips discussed in the finding. Again, while the
    Authority is not required to follow Federal per diem limits, the table shows the unreasonableness of the
    Authority’s travel costs, particularly the amounts spent on meals. The finding provides additional
    examples of unreasonable costs, such as $1,100 for a meal for four persons. The Authority did not
    present any evidence to OIG that the costs were in accordance with A-87.

    Based on the high level of spending, the Board either was not effectively monitoring travel expenses
    or had turned its head to the excessive spending, since the Board participated in the abuse.
    Regardless of the “local policy” used, the Authority had not demonstrated restraint. Limits should be
    adopted.

5. The NRHA Board approves in advance all out-of-region travel.

    OIG response
    Evidence showed the Board approved the location of the out-of-town trips and the staff members that
    would go, but it did not approve a spending budget for the trips.

6. THE OIG provides no evidence for its assertion that “many of the expenditures were unnecessary for
   the execution of HUD programs” nor that NRHA overspent its budget by $50,000. NRHA disagrees
   with both assertions.

    OIG response
    The finding clearly shows the expenditures were not reasonable and necessary in accordance with
    OMB Circular A-87. We added a schedule to the finding showing the Authority overspent its travel
    budget by $50,000.

7. The OIG concludes but does not prove that HUD funds paid for all travel expense or that all travel
   was in connection with “HUD programs”.



                                              Page 73                                        2003-AT-1001
                                                                                          Appendix C

   OIG response
   The draft finding said in part, “The Authority spent $295,547 for travel during our review period.
   These travel costs included unnecessary and ineligible costs, such as paying travel expenses for
   family members of management and Board members…From July 1, 1998, through June 30, 2001, the
   Authority spent $295,547 for travel. Many of the expenditures were unnecessary for the execution of
   HUD programs.” Our reference to the $295,547 was for informational purposes to give readers of
   the report a perspective of the amount spent. However, we revised the finding to show that $221,151
   was charged to its public housing ($42,185) and Section 8 programs ($179,966). It is not necessary
   for the OIG to show that all travel was in connection with HUD programs. It is our responsibility to
   show the use of the Federal funds was not reasonable and necessary, and that Federal funds were
   used for ineligible travel expenses.

   We also revised the finding to show that twenty-two trips totaling over $23,000 were for improper
   authority business, such as activities solely associated with the unauthorized developments, and were
   ineligible. We made other changes to clarify the finding.

8. The OIG provides no evidence that NRHA used funds provided under the Conventional Public
   Housing ACC for travel expense.

   OIG response
   We revised the finding to show the Authority charged $42,185 of the travel expenses to its public
   housing program.

9. NRHA lawfully incurred certain of the criticized expense in connection with the lawful and
   authorized development of $15 million of affordable housing units. NRHA Board and staff members
   incurred other criticized expense for Board-approved travel to conferences. Neither type of expense
   is unlawful, and the NRHA Board is the proper arbiter of what is necessary and prudent travel
   expense.

   OIG response
   As stated in previous responses, the Authority was not authorized to develop the housing units. We
   also previously addressed the Board approval of the travel. The Authority apparently does not
   realize that while the Board does have authority to approve travel, it also has a responsibility to
   ensure costs are reasonable, necessary, and eligible. It is not the Board that determines what is
   reasonable and necessary. The OMB establishes the requirements, and HUD determines whether the
   requirements were met.

10. The NRHA staff member involved has repaid the single instance of inadvertent personal travel
    expense.

   OIG response
   The Authority refers to a single instance. As shown in the finding, travel included costs for other
   personal travel, such as for spouses of Board members. While the staff member, Deputy Director, did
   repay this expense, she only did so after OIG brought it to her attention.

11. NRHA’s since-terminated Accounting Manager did keep indeed terrible records, but no evidence of
    non-reimbursement exists. The current Finance Director does keep accurate records. The Board is
    wholly unaware of any non-reimbursed amounts that any member may owe and firmly believes that
    no such amounts exist.



                                           Page 74                                        2003-AT-1001
                                                                                               Appendix C

    OIG response
    Due to the Authority’s failure to maintain records, we could not determine whether all personal
    travel expenses were reimbursed. In fact, the Deputy Director told an OIG auditor that no records
    were kept for Board members personal expenditures.

FINDING 3 – OTHER EXPENSES WERE UNNECESSARY, INELIGIBLE, AND
UNSUPPORTED

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:

1. Charging miscellaneous expense to public housing and Section 8 results from an allocation policy for
    common expenses that spreads them across all NRHA programs. NRHA’s IPA has not objected to
    this practice and advises that in his extensive experience the practice is common among Housing
    Authorities.

    OIG response
    We did not question the allocation process in the report. The statement in the finding regarding
    charges to the public housing and Section 8 programs was provided to give the readers a perspective
    of the costs. The questioned costs included those charged to Federal programs.

2. NRHA at no time deprived its public housing and Section 8 programs of essential operating funds, its
    financial condition was not and is not precarious, and no tenant resided in units other than decent, safe
    and sanitary. See the comment to findings 1 and 4.

    OIG response
    The property conditions described in Finding 4 show the units were not decent, safe, and sanitary.
    We addressed the comment regarding the Authority’s financial condition in our responses to Finding
    1 comments.

3. Appendix C provides additional details for all expenses questioned as ineligible.

    OIG response
    The Authority referred to Appendix C, which would have included its preliminary comments;
    however, because they were voluminous, we did not include them in the report. The details, to which
    the Authority refers, discuss the value of having staff and Board retreats, annual meetings, seasonal
    social events and the purchase of gifts for staff and others. The comments lend credence to our
    statements in the finding that it pampered staff and Board members. We fail to see any benefit to the
    tenants from these expenditures.

    The Authority included a schedule in its preliminary response that we have added as Appendix I of
    the audit report, as it provides more detailed information about the questioned expenditures. The
    schedule also showed that expenses we originally questioned as unsupported were actually ineligible.
    Thus, we changed the finding to show expenditure of $11,070 for ineligible items. We also made
    appropriate changes to recommendation 3E and deleted recommendation 3F, which requested
    support for $1,787.

4. The vast number of questioned expenses were for morale-building nominal gifts and mementos for
   NRHA staff not able to attend conferences. NRHA does not think it improper for the Board and
   management to let employees know their leaders are thinking of them and value their efforts.



                                              Page 75                                         2003-AT-1001
                                                                                              Appendix C

    OIG response
    Professional awards would be considered reasonable, but as shown in Appendix I of the report, the
    Authority repeatedly purchased gifts and other improper personal items for staff, Board members,
    spouses, and others. The Authority did not provide any support the questioned expenditures were
    necessary for the execution of HUD programs.

5. NRHA agrees that a small number of questioned expenses were not properly incurred, and the
    beneficiaries of those expenses have since re-paid NRHA.

    OIG response
    The Authority did not provide any evidence that any of the questioned expenditures were repaid.

6. The NRHA Board decided to halt the “memento purchase” practice in early 2000; with one
    exception, no expense questioned by the OIG occurred after 1999.

    OIG response
    The Authority claimed it halted the memento practice early in 2000, with one exception. As shown in
    Appendix I, the Authority purchased luggage for the Executive Director in April 2000, gifts for board
    members spouses and others in June 2000, and candy and other items for staff in March 2001.


FINDING 4 – HEALTH AND SAFETY CONCERNS EXISTED AT PUBLIC HOUSING
SITES

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:

1. NRHA emphatically denies that it neglected its conventional public housing units.

    OIG response
    The conditions cited in the finding show the Authority did neglect its public housing units.

2. The OIG claims to have found allegedly health and safety threatening “deficiencies (that) require
    immediate attention” during a February inspection but did not advise NRHA of its finding until
    September.

    OIG response
    Indeed, OIG would be remiss in not promptly reporting inspection results had it not been that a
    member of the Authority’s staff accompanied us on our February inspection.

3. The cited REAC scores are well within the acceptable range; the same REAC survey gave NRHA a
    perfect score for conventional public housing management.

    OIG response
    A conventional public housing management score addresses overall management of public housing,
    is based on information provided by the Authority, and does not pertain to unit conditions.

4. Appendix C provides more detailed explanations concerning the five specific findings, the upshot
    being that four of them indeed have rebuttal explanations and only the discarded water heaters are an
    NRHA stumble, since corrected.



                                              Page 76                                        2003-AT-1001
                                                                                            Appendix C

    OIG response
    The five findings, to which the Authority refers, are:

    ·   Trash, garbage, and other debris behind buildings at Cub Creek Apartments.
    ·   Rusted, potentially dangerous water heaters that had been discarded on the property.
    ·   The topography behind Building C of Woodland Apartments was very steep and should be
        protected by railings or fences.
    ·   Refuse containers were in poor condition.
    ·   Broken window at the rear of Building F had not been repaired even though REAC identified the
        deficiency in its October 2001 report.

    In its preliminary comments, the Authority said its maintenance staff cleaned up trash and removed
    debris every 2 months. However, that the trash and debris we observed were also identified by REAC
    4 months earlier, and that Authority staff admittedly discarded the water heaters indicated
    maintenance staff needed closer supervision.

    The Authority is responsible for ensuring the safety of its residents. As such, it should install
    protective railings or fences at Cub Creek to reduce the likelihood of tenants falling down the
    embankment.

    The Authority should ensure the refuse containers are repaired or replaced.

    We removed the reference to the broken window being previously identified by REAC because we
    could not ensure it was the same break REAC identified.

5. Ground Fault Circuit Interruptors were not Code-required when the units were built, and although
    NRHA is not required to retrofit, it has budgeted capital funds to do so.

    OIG response
    The Authority’s installation of GFCI outlets will address the condition.

6. Subfloor and cabinet/countertop replacement programs are both in the plan for capital fund
    expenditures, and HUD approved the undertaking of the latter improvements in April, 2002.

    OIG response
    The Authority’s replacement of faulty subfloors, cabinets, and countertops will address several
    conditions.

7. Regarding the individual unit findings, while NRHA agrees that no deficiency is acceptable, it notes
    that seven, nine and eleven deficiencies are not an overwhelming number in a protocol with several
    hundred criteria.

    OIG response
    While the number of deficiencies may not be overwhelming, we consider them to be significant since
    they reflect on the living conditions of residents.




                                              Page 77                                      2003-AT-1001
                                                                                             Appendix C

FINDING 5 – THE AUTHORITY DID NOT MAINTAIN ACCURATE ACCOUNTING
RECORDS

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:

1. NRHA agrees that its since-terminated Accounting Manager was less than competent and
   estates that he was the cause of every supportable element of this Finding. As the report shows, his
   poor practices and lack of professionalism caused short-term, since corrected harm to NRHA’s
   accounting system.

   OIG response
   Our draft report did not attribute the accounting deficiencies to any single person or factor. Rather,
   we attributed the deficiencies to several factors, including:

   ·    Numerous, complicated, and improper inter-entity transactions;
   ·    Complicated journal entries;
   ·    Complicated spreadsheets that were not integrated with the Authority’s accounting system;
   ·    An inadequate automated system; and,
   ·    Failure of a vendor to transfer all balances for the development entities from the Authority’s
        accounting system to a personal computer that was to account for development entity activities.

   The final report continues to reflect these causes. However, we revised the finding to emphasize that
   management, not its staff or contractors, is ultimately responsible for ensuring its records are
   complete and accurate.

2. As the report notes, the current Finance Director is an extremely capable CPA who has guided NRHA
   through the remedial actions required to correct the former Accounting Manager’s numerous
   accounting depredations. The current Finance Director is successfully continuing his efforts to
   maintain the books and records of NRHA and its affiliates to the highest professional standards.

   OIG response
   As stated in the finding, the current Finance Officer made significant progress towards correcting the
   deficiencies.

3. The IPA stated that the former problems were in the accounting controls over the general ledger and
   in the reporting function, rather than in controls over cash collection or disbursement, both of which
   were subject to good controls.

   OIG response
   We did not question the controls over cash receipts and disbursements. We questioned the recording
   of transactions. The IPA agreed transactions were not properly recorded or reported, and there were
   weak controls.

4. Developments costs and amounts due NRHA were not properly identified but they were correctly
   stated.

   OIG response
   If amounts were not properly identified, we do not understand the Authority’s claim they were
   correctly stated. Further, as stated in the finding, about $400,000 the developments owed the


                                            Page 78                                         2003-AT-1001
                                                                                              Appendix C

    Authority was not recorded on the development’s books, thus management wrote the $400,000 off as
    a loss to the Authority.

5. As noted in Finding 1, the IPA rendered an unqualified opinion regarding NRHA’s financial position
    and results of operations for fiscal years 1999, 2000 and 2001.

    OIG response
    Although the IPA gave unqualified opinions, the records were not maintained in accordance with
    HUD requirements.


FINDING 6 – THE SECTION 8 PROGRAM WAS NOT PROPERLY ADMINISTERED

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:

1. For the fiscal year ending June 30, 2001, HUD’s Section 8 Management Assessment Plan (SEMAP)
    awarded NRHA’s Section 8 program a score of 96 out of 100, which afforded NRHA HUD’s highest
    level of program recognition, that of Section 8 High Performer.

    OIG response
    A Section 8 Management Assessment Plan score addresses the overall management of the Section 8
    Program, but does not address the adequacy of requisitioning Section 8 funds. The Authority’s score
    is, therefore, irrelevant to the finding.

2. NRHA agrees that the since-terminated Accounting Manager did not undertake the required ninety-
    day reviews. The current Finance Director has been doing so since October, 2001, and indeed
    performs such reviews monthly.

    OIG response
    Performing monthly reviews should help resolve the deficiency.

3. NRHA does in fact deposit all requisitioned funds (and all other funds) in interest bearing accounts,
    although for purposes of reconciliation of Section 8 requisitions this practice is irrelevant, since HUD
    imputes an interest rate on excess requisitions regardless of where funds are deposited.

    OIG response
    Our review of the general ledgers showed the Authority typically drew down the funds, and then soon
    thereafter transferred them to the general fund where they were commingled with other funds. While
    the general fund did earn interest, the funds were quickly disbursed, thus interest earnings were
    minimal. We revised the finding to emphasize that rather than “maintaining” the funds, the Authority
    spent them. The Authority should maintain the funds in an interest-bearing account, use them to pay
    program expenses, or reimburse them to HUD to the extent required. Because the Authority did not
    maintain the funds, it had to obtain a bank loan at 9.37 percent interest to repay debt, including
    excessive withdrawals of $240,000.

4. At no time did NRHA excess withdrawals approach $1 million, and NRHA promptly repaid in the
    normal course of business the excess withdrawals for two of the report years as part of the annual
    settlement process that all PHA’s undertake. For the third year, the annual reconciliation showed that
    HUD owed NRHA $376,359 on the NRHA voucher program.


                                              Page 79                                        2003-AT-1001
                                                                                            Appendix C

   OIG response
   Although the Authority did in fact withdraw “in total” over $1 million ($636,568 + $391,429) of
   excess funds, we deleted the $1 million figure from the finding. The finding did not say the Authority
   had over $1 million at a given time. In fact, as the revised finding shows, the Authority quickly spent
   the funds.

   We added a discussion to the finding regarding the Authority’s withdrawal of $376,359 less than it
   was due.

5. NRHA has determined that the $391,429 figure (which was as of December 31. 2001 and not
   within the report period) had been over-stated. The actual figure as of March 31, 2002 was
   $224,000, well within the five per cent guideline.

   OIG response
   At the time of our review, the amount was $391,429. Although the Finance Director told us the
   Authority would have to borrow to repay any excess, we removed the statement from the finding.

6. The cited extreme example of 575% over-requisitioning involved a moderate rehabilitation program
   that is a miniscule part of NRHA’s overall Section 8 program. It was caused by the failure of
   landlords to keep their properties fully leased. From an overall Section 8 program cash management
   perspective, NRHA has not come close to exceeding the five per cent guideline.

   OIG response
   HUD requires housing authorities to requisition Section 8 funds and perform year-end
   reconciliations by individual project. As a result, HUD’s 5 percent guideline applies to individual
   projects, not a housing authority’s entire Section 8 Program. Our review showed that in 12 of 21
   instances, the Authority exceeded the 5 percent threshold.

   We removed the cited example from the finding and added a discussion to show the Authority other
   examples of excessive withdrawals and an example of the Authority withdrawing $376,359 less than
   it was due for one project. The examples show the Authority did not following requisitioning
   requirements.

7. NRHA has never deprived eligible applicants of available housing and needed financial assistance.
   The 104 certificates and vouchers cited were part of a fair share allocation that HUD awarded to
   NRHA in October 2001(outside the report period) as part of the FY 2002 distribution. HUD’s own
   regulations permit PHA’s eighteen months to issue and lease up allocated vouchers or certificates,
   in this case until March 31, 2003. In fact, a mere two and one half months into the permitted
   eighteen month period, NRHA had issued almost half the allocated vouchers. Thus, NRHA was
   well ahead of HUD’s permitted schedule.

   OIG response
   Based on the Authority’s explanation, we removed the discussion from the finding.


FINDING 7 – MISMANAGEMENT WAS APPARENT IN OTHER AREAS OF OPERATIONS

Authority Comments: As more specifically detailed in Appendix C, NRHA replies as follows:




                                            Page 80                                         2003-AT-1001
                                                                                             Appendix C

1. At all times NRHA has been able to identify or calculate funds that its holds on behalf of tenants or
   program participants, and NRHA has in all cases promptly paid all sums due to any tenant or program
   participant.

    OIG response
    The Authority admitted it did not have almost $35,000 of the tenant FSS fund on deposit but argued
    that enough funds were available and, if not, it would make up any difference from the general fund.
    The Authority missed the point. HUD clearly requires the funds to be segregated and deposited in an
    interest-bearing account. At all times the full balance must be available. If, as the Authority stated,
    the CDs representing tenant FSS funds were pledged as collateral for loans, they could not be used to
    repay tenants.

2. As noted in the comments to Finding 1, NRHA agrees that it inadvertently but no less improperly
   pledged two CD’s containing FSS funds as collateral for a loan, but the holding Bank has since
   agreed to release the collateral. The report’s statement about an unaccounted- for $116,948 is likely a
   reflection of the auditors’ not noticing the second CD.

    OIG response
    The Authority’s explanation of the pledging of the second CD helped account for a significant portion
    of the FSS funds. It also provided another example of the Authority’s unauthorized pledging of assets
    and disregard for HUD requirements. As such, we made appropriate changes to this finding as well
    as Finding 1.

    The Deputy Director failed to advise us of the second CD when we asked for a full accounting.

3. NRHA agrees that it should take the steps required to bring its depository handling of tenant security
   deposits into conformance with HUD requirements, and it is in the process of doing so. Its overall
   administrative and tenant pay-out treatment of security deposits is proper and accurate, and no tenant
   interests have been prejudiced by NRHA’s depository practices.

    OIG response
    The tenant security deposits were commingled with rent receipts and expended along with other
    funds. Without a separate account where the funds are maintained on deposit, the Authority cannot
    clearly show funds are on hand and available for disbursement.

4. NRHA agrees that its accounts receivables are higher than it would prefer, but NRHA is not ashamed
   of trying to work with delinquent tenants rather than casting them into the street. Note that the
   $12,731 cited as a write-off covers two fiscal years. NRHA will gladly entertain HUD’s assistance in
   crafting a policy that balances sound fiscal management of tenant rent accounts with the need to treat
   deprived and sometimes desperate tenants humanely.

    OIG response
    We added a section to the finding explaining the standards and criteria for admission to and
    occupancy of public housing. At times it may be necessary for the Authority to terminate leases of
    tenants who fail to make their rent payments. Regulations provide grievance procedures to assure
    tenants are protected from arbitrary actions.

    Regarding the write-off of $12,731 of receivables, it is immaterial the write-off covered 2 years. The
    points were that since they were written off, they were not collected and are unavailable. The
    Authority should ensure it pursues collection remedies, and then, if receivables are deemed
    uncollectible, write off the balances.

                                             Page 81                                         2003-AT-1001
                                                                                             Appendix C


5. NRHA did not violate its nepotism policy because a violation requires circumstances that do not fall
   within policy guidelines or circumstances where the Board did not grant a waiver to a relationship
   that would otherwise fall within the policy. As shown in Appendix C, the assertions of nepotism
   set forth here either inaccurately portray the nature of the family relationship or the character of the
   employment relationship, or do not take into account Board deliberation and assent.

    OIG response
    While it may be permissible for the Board to grant an occasional waiver, to frequently do so weakens
    internal controls needed to ensure integrity of operations.

6. NRHA has never received a copy of the 1995 ACC revisions regarding nepotism policies.

    OIG response
    HUD considers the practice of nepotism to be improper and, in 1995, revised the Consolidated ACC
    to prevent it. Although HUD intended for all public housing authorities to convert to the revised
    ACC, this authority, among others, did not convert. The Authority should, at a minimum, adhere to
    its written policy and closely scrutinize relationships that could affect internal controls.




                                             Page 82                                         2003-AT-1001
                                                                                  Appendix D

Limited Partnership and Limited Liability
Companies
Following is summary information regarding the tax credit entities.

                              Woodland Hills Limited Partnership

NHE partnered with tax syndicator National Equity Fund 1994 Limited Partnership to form a North
Carolina LP, National Woodland Hills Limited Partnership. NHE formed the LP to develop
Woodland Hills, a 32-unit apartment complex for low-income elderly and disabled persons. The
Authority managed the property.

                              Blue Ridge Housing of Sparta, LLC

Blue Ridge Housing of Sparta, LLC is a North Carolina Limited Liability Company formed to
develop Highland Village, a 30-unit low-income housing development. NHE partnered with tax
syndicator Carolina Equity Fund V Limited Partnership to form the LLC. The Authority developed
the project and was the property manager.

                            Blue Ridge Housing of Bakersville, LLC

Blue Ridge Housing of Bakersville, LLC is a North Carolina Limited Liability Company formed to
develop Cane Creek Village, a 25-unit low-income housing development. NHE partnered with tax
syndicator North Carolina Equity Fund III Limited Partnership to form the LLC. The Authority
developed the project and was the property manager.


                             Blue Ridge Housing of Jefferson, LLC

Blue Ridge Housing of Jefferson, LLC is a North Carolina Limited Liability Company formed to
develop Oak Grove Village, a 30-unit apartment complex for low-income families. NHE partnered
with tax syndicator North Carolina Equity Fund III Limited Partnership to form the LLC. The
Authority developed the project and was the property manager.

                                   Boone-White Laurel, LLC

Boone-White Laurel, LLC is a North Carolina Limited Liability Company formed to develop White
Laurel, a 42-unit apartment complex for low-income families. NHE partnered with tax syndicators
National Equity Fund 1997, and 1997 Series II, Limited Partnerships to form the LLC. The
Authority developed the project and was the property manager.




                                          Page 83                                 2003-AT-1001
                 Appendix D




THIS PAGE LEFT
    BLANK
INTENTIONALLY




 Page 84         2003-AT-1001
                                                                                                    Appendix E

Comparison of Budgeted and Actual
Development Costs

                                                                            Cane         Oak
                                             Woodland       Highland       Creek        Grove          White
    Funding Source                            Hills          Village       Village      Village        Laurel

    Sale of Tax Credits                  $    892,457      $1,314,531    $1,232,986    $1,408,616    $1,755,252
    Bank Loans                                290,000                                     435,000     1,181,358
    NCHFA Loans3                              500,000         945,078       815,000       515,000
    Federal Home Loan Bank                                    240,000       131,419       174,144
    Deferred Developer Fees                  168,600           50,000
    Owner Investment                          28,0004                        17,706        20,228
    Total Budget                         $ 1,879,057       $2,549,609    $2,197,111    $2,552,988    $2,936,610

    Actual Cost per Cost Certification       1,947,782      3,154,801      3,260,846    3,394,136     5,544,647

    Cost Overrun                         $     68,725      $ 605,192     $1,063,735    $ 841,148     $2,608,037


Total cost overruns were $5,186,837.




3
    Includes HOME funds.
4
    The application indicates the $28,000 was land provided by the Authority.

                                                 Page 85                                          2003-AT-1001
                 Appendix E




THIS PAGE LEFT
    BLANK
INTENTIONALLY




 Page 86         2003-AT-1001
                                                                                      Appendix F

White Laurel II Homeownership Project
White Laurel II is a NHE homeownership project located adjacent to the White Laurel
townhouse development. Unlike other NHE projects, it was financed entirely by the Authority
through NHE, and it did not involve tax credits. On October 27, 1997, The Authority obtained a
$2.48 million bank construction loan secured by a deed of trust on the property. The Authority
then loaned the funds to NHE for project development. Original budgets indicated the project
could provide homeownership opportunities to low and moderate-income families at a profit.
That scenario proved overly optimistic.

White Laurel II came about as part of the Town of Boone’s flood mitigation project. It was an
ambitious undertaking involving the relocation and renovation of 21 single-family homes located
in a flood plain. The Authority paid the town $10 each for the homes. Heavy equipment
relocated the homes to a mountainside site. The site required extensive and expensive site
preparation. The Authority planned to use proceeds from selling the homes to retire the
construction loan. Sales prices were limited to $104,500, the maximum sales price under the
U.S. Department of Agriculture low interest rate loan program for low-income buyers.

Unfortunately, various unexpected costs caused the project to be much more expensive than
originally planned, resulting in a loss. The actual loss can only be estimated because of the poor
condition of the accounting records (Finding 5), and uncertainty regarding how much more it
will cost to complete the project. As of March 31, 2002, five units remained unsold. The
Authority estimated that, once the remaining units were sold, the project would lose $1,053,083.
However, that estimate did not consider renovations that were needed on three of the remaining
units. The Authority’s Construction Manager estimated these renovations would cost between
$150,000 and $200,000 in total.

The bank that provided the construction loan realized that sales proceeds from the remaining five
units would be insufficient to retire its loan. In a September 12, 2001, letter to the Authority it
stipulated the Authority pay $350,000 toward the loan balance and sell remaining units at market
value - instead of discounted to low income buyers. On November 30, 2001, the Authority obtained
another loan for $1.35 million and paid the $350,000 from those proceeds. The Authority had plans
to sell a public housing development to repay the $1.35 million loan (See Finding 1).




                                          Page 87                                     2003-AT-1001
                 Appendix F




THIS PAGE LEFT
    BLANK
INTENTIONALLY




 Page 88         2003-AT-1001
                                                                                      Appendix G

Bank Loans
                                  Original           Date         Monthly      March 31, 2002
               Bank             Note Amount         Obtained      Payment         Balance

      Wachovia Bank (1)         $ 2,482,000         10/27/1997   $ 1,407.72       $   626,124
      Bank of America (2)         1,350,000         11/30/2001      2,991.69          755,000
      Bank of America (3)           606,000         06/29/2000      7,798.42          545,031
      Centura Bank (4)              500,000         06/24/1999      1,859.74          195,363
      Branch Bank & Trust (5)       400,000         03/29/2000      3,833.33          400,000
               Total            $ 5,338,000                      $ 17,890.90      $ 2,521,518



(1)      The Authority obtained this loan to finance construction of White Laurel II (Appendix F).
         The Executive Director and Deputy Director signed various loan documents.
         Management borrowed the funds in the name of the Authority, and then executed another
         note for the same amount between the Authority and NHE. The NHE note and deed of
         trust to the property secured the loan. In addition, management guaranteed the bank that
         it would, if needed, repay the NHE note with Authority funds. The 2-year loan has been
         refinanced several times for varying amounts as NHE failed to complete the development
         on schedule. The loan has been paid down to the current level as the houses were sold.
         Further, in December 2001, the Authority used $350,000 of a $755,000 consolidation
         loan draw (Note 2) to reduce the loan balance.

(2)      The Authority obtained this loan to consolidate its existing debt and pay development
         costs overruns of two LLC developments. The note requires monthly interest payments
         over the 2-year term. The loan can be extended an additional 12 months at the bank’s
         discretion. The Valley View public housing development serves as collateral for the
         loan. The loan balance is to be reduced as the Valley View units are sold. On December
         7, 2001, the Authority received its first draw of $755,000. The Authority used $350,000
         of the funds to reduce the White Laurel II Wachovia loan by $350,000 (Note 1), pay
         about $374,000 toward interest and construction costs for an LLC, and pay various
         attorney and recording fees ($44,600) resulting from the loan. A Board resolution signed
         by the Board Chairman, the Executive Director, and Deputy Director authorized the loan.
         It also authorized granting the bank a security interest in any real or personal property
         belonging to the Authority.

(3)      This is an unsecured operating loan requiring 60 monthly payments of $7,798.42. The
         Executive Director and Deputy Director signed the promissory note. This loan was
         obtained to repay $240,000 to HUD for excessive Section 8 fund withdrawals, and to pay
         for White Laurel cost overruns. The loan was not secured with Authority assets.
         However, the Executive Director requested HUD allow him to use Authority assets as
         collateral. HUD denied the request.




                                          Page 89                                     2003-AT-1001
                                                                                   Appendix G



(4)   This is a line of credit loan that supported development costs overruns for White Laurel.
      Interest is payable monthly. Management partially secured the loan with Authority
      certificates of deposits, including one held in trust for the FSS Program. In the April 7,
      1999, loan request, the Executive Director assured the bank that, if necessary, he would
      use the Authority’s operating revenues to repay the loan. The Executive Director and
      Deputy Director signed the loan documents. The Board members signed a resolution
      authorizing the loan.

(5)   This is a loan supporting development costs overruns for White Laurel. The Executive
      Director and Deputy Director signed the promissory note and subsequent modifications.
      The loan matured on May 26, 2002. Management planned to draw funds from the
      consolidation loan (Note 2) to repay this loan.




                                        Page 90                                    2003-AT-1001
                                                                                                    Appendix H

 Sources and Uses of Funds Provided to the LP,
 LLC, and NHE
Sources of Funds5
       Development/Property Management                                                               $ 2,693,087
       Deferred Development Fees                                                                         503,277
       Unknown – Reinstated Receivable                                                                   399,563
       Section 8 Vouchers                                                                                310,610
       Conventional Public Housing                                                                       274,248
       General Fund                                                                                       42,959
       Capital Fund Program                                                                                  598
       Total                                                                                         $ 4,224,342



 Amounts Owed to the Authority by the Various Entities6
       NHE, Inc.                                                                                     $ 3,034,466
       Blue Ridge Housing of Bakersville, LLC                                                            554,514
       Blue Ridge Housing of Sparta, LLC                                                                 244,746
       Boone White Laurel, LLC                                                                           155,267
       Woodland Hills, LP                                                                                136,847
       Blue Ridge Housing of Jefferson, LLC                                                               98,502
       Total                                                                                         $ 4,224,342




 5
     Amounts derived from Authority’s General Ledger trial balance at April 30, 2002, adjusting entries (1)
     reinstating receivables previously written off, and (2) recording deferred development fees not previously
     recorded in General Ledger.
 6
     These amounts are General Ledger receivables from the various entities. Amounts shown for the LLCs/LP
     project ownership entities represent funds the Authority directly advanced them or expenses the Authority paid
     on their behalf. The project ownership entities further benefited from amounts NHE paid on their behalf, or
     advanced to them, from the $3,034,466 it received from the Authority.


                                                 Page 91                                            2003-AT-1001
                 Appendix H




THIS PAGE LEFT
    BLANK
INTENTIONALLY




 Page 92         2003-AT-1001
                                                                                               Appendix I

Other Ineligible Expenses
                                                ITEM(S)                    DESCRIPTION
       PAYEE          COST      DATE          PURCHASED            (as prepared by the Auditee)
Alterations Express     31.25   06/29/99      Alterations        ED personally purchased a new business
                                                                 suit while on NRHA business travel in
                                                                 Greensboro, North Carolina for purpose
                                                                 of dressing to accept SERC NAHRO
                                                                 Creativity Award 1999 for NRHA's
                                                                 sponsorship of the WHITE LAUREL
                                                                 affordable housing development
                                                                 combining assisted rental, FSS and first
                                                                 time homeownership. Suit vendor failed
                                                                 to timely complete alterations requiring
                                                                 purchase of this express service.
Crabtree & Evelyn       75.00   08/14/99      Beauty supplies    Nominal soap and cream gifts for staff
                                                                 promoting employee morale received by
                                                                 10-12 staff
Hospitality House      700.00   12/05/99      Holiday Benefit    Annual fundraiser for regional homeless
                                              Ball               shelter – NRHA purchases once per year
                                                                 tickets for one eight-top table for key
                                                                 staff and professional affiliates to support
                                                                 emergency shelter and to promote
                                                                 employee morale. NRHA ED has served
                                                                 as a volunteer board member of
                                                                 Hospitality House for the past 14 years.
                                                                 Shelter serves 14,400 bed nights and
                                                                 25,200 meals to its clients annually.
Hospitality House      600.00   12/02/98      Same as above      Same as above
Carolina Polo           85.00   10/15/99      Carriage ride in   ED and Deputy were on NRHA business
Carriage Co                                   Charleston, SC     travel in Charleston, South Carolina
                                                                 attending a series of professional
                                                                 meetings with assisted housing
                                                                 personnel, attorneys and private
                                                                 investors. Meeting locations were 12 to
                                                                 15 blocks from lodging. Carriage ride
                                                                 was from lodging to meetings. ED
                                                                 acknowledges they could have taken a
                                                                 taxi at more reasonable expense and has
                                                                 reimbursed the $85.00 cost of the
                                                                 carriage ride to NRHA. It should be
                                                                 noted that ED and Deputy donated
                                                                 personal weekend time to attend these
                                                                 important meetings on behalf of NRHA.
Saks Fifth Avenue      110.24   08/14/98      Cosmetics          Nominal creams and lotion gifts for staff
                                                                 promoting employee morale received by
                                                                 10 staff
Belk                   265.00   04/22/00      Luggage            ED utilized document and clothing
                                                                 carriers for NRHA business locally and
                                                                 on travel and wears them out
                                                                 approximately every five years – this was
                                                                 a replacement carrier.

Greensboro Wine        228.73   06/29/99      Wine               Personal purchase of a case of wine by
Whse                                                             ED was mistakenly charged on NRHA,


                                           Page 93                                           2003-AT-1001
                                                                                          Appendix I

                                                             rather than personal credit card, in his
                                                             absence – vendor executed the charge
                                                             ticket – ED was not informed by
                                                             accounting staff of the error – ED
                                                             reimbursed NRHA by personal check.
Wal-Mart                 11.85   05/27/98      Socks         Personal purchase of socks by Deputy
                                                             Director for grandchildren which by
                                                             oversight had remained umreimbursed –
                                                             Deputy reimbursed NRHA by personal
                                                             check.
The Style Company       425.05   06/26/00      Gift          Gift baskets at Annual meeting for board
                                                             members spouses, attorney spouse and
                                                             key staff comprised of nominal soaps,
                                                             lotions, candles and potpourri. 25-30
                                                             baskets were made up and delivered for
                                                             corporate team building and employee
                                                             morale.
Williams & Sonoma       688.45   12/17/99      Gifts         Gift baskets same purpose and volume as
                                                             above comprised of nominal hand towels,
                                                             oils, teas, spices, peppercorns, crackers,
                                                             wooden spoons and assorted kitchen
                                                             utensils for staff promoting employee
                                                             morale.
Capital Image DC        195.43   03/10/99      Staff Gifts   Nominal t-shirts and capital city
                                                             mementos for staff promoting employee
                                                             morale received by 12-14 staff.
Filenes Basement         63.44   03/10/99      Staff Gifts   Same as above
DC
Hall of Cards            71.10   09/16/98      Staff Gifts   Frames for certificates of professional
                                                             achievement rewarding outstanding
                                                             performance
Market Sq T-Shirt –      65.88   10/25/98      Staff Gifts   Nominal tin ware, refrigerator magnets, t-
Texas                                                        shirts and mementos for staff gifts
                                                             promoting employee morals received by
                                                             12-14 staff.
Official City Store –   226.28   10/27/98      Staff Gifts   Same as above
Texas
Williams & Sonoma       796.01   06/17/99      Gifts         Same as previous entry for this vendor
                                                             except that additional (in addition of
                                                             NRHA staff) of nominal gifts included
                                                             selected professional partners – 25 to 30
                                                             recipients.
Wal-Mart                205.82   12/14/98      Gifts         Gift packages for spouses and staff
                                                             comprised of nominal wooden cutting
                                                             boards, platters, ribbons and wrapping
                                                             (10-12 recipients) along with a filter for
                                                             an office air purification device.




                                            Page 94                                      2003-AT-1001
                                                                                                Appendix I



South's              163.24    12/15/99      Sweater              Gift sweater to board member spouse
                                                                  who had been unable to attend Christmas
                                                                  meeting and dinner due to major surgery.
                                                                  All other board members or member's
                                                                  spouse gifts were foregone at this
                                                                  Christmas meeting.
Peabody's Beer &     637.04    08/11/98      Refreshments and     Refreshments and sundries for after
Wine                                         sundries             house celebration of staff and
                                                                  professional partners of successful
                                                                  completion of financing a two-year effort
                                                                  providing public-private financed new
                                                                  affordable housing community.
Saslow's Jewelers   2,091.17   06/02/99      Watches              Gift watches and ring for board and staff
                                                                  in celebration of twentieth anniversary of
                                                                  NRHA.
Saslow's Jewelers   1,546.54   06/28/99      Watches and ring     Same as above and all distributed at
                                                                  Annual corporate meeting with 25
                                                                  recipients.
The Mole Hole        221.01    10/16/99      Gifts – no receipt   Nominal gifts for staff comprised of
                                                                  mementos, refrigerator magnets and
                                                                  snacks promoting employee morale 12-
                                                                  14 recipients. Charge ticket was attached
                                                                  to ED travel sheets which were held by
                                                                  federal audit team for 6 months during
                                                                  the on site review.
Beau Rivage          770.40    09/21/99      Theater tickets –    Theater tickets while on professional
                                             no receipt           business travel during personal weekend
                                                                  time for six board members, key staff and
                                                                  attorney provided in lieu of Christmas
                                                                  gifts promoting corporate team building.
                                                                  This item was booked through corporate
                                                                  travel agent with receipt attached to ED's
                                                                  travel sheets. 16 tickets were purchased
                                                                  as a cost of $48.15 each.
Grandover Golf       106.81    08/05/99      Unknown – no         Business lunch with professional
Course                                       receipt              development and finance partners while
                                                                  attending training by Federal Home Loan
                                                                  Bank of Atlanta (FHLB). FHLB has
                                                                  provided low or no cost financing for
                                                                  new affordable rental and
                                                                  homeownership to NRHA and affiliated
                                                                  entities in excess of 2 million private
                                                                  dollars in the past five years, reducing the
                                                                  burden of government.
Hecht's              179.91    03/18/01      Unknown – no         Nominal candies, jelly beans, miniature
                                             receipt              stuffed animals, baskets for Easter gifts
                                                                  to staff promoting employee morale 10-
                                                                  12 recipients. Charge ticket attached to
                                                                  ED travel sheet – vendor receipt has
                                                                  apparently been lost.




                                          Page 95                                             2003-AT-1001
                                                                                       Appendix I



Lillian Vernon         53.42    06/03/98      Unknown – no   Nominal door prizes for professional
                                              receipt        business meeting of the Southeastern
                                                             Section 8 Housing Association. Charge
                                                             ticket attached to ED travel sheet.
Pier 1 Imports         49.82    06/23/98      Unknown – no   Nominal gifts for staff at Annual
                                              receipt        meeting. Charge ticket attached to ED
                                                             travel sheet.
Williams & Sonoma     153.70    07/27/98      Unknown – no   Same as above.
                                              receipt
Williams & Sonoma     252.28    06/22/98      Unknown – no   Same as above.
                                              receipt
Total               11,069.87




                                           Page 96                                    2003-AT-1001
                                                              Appendix J

Inspection Deficiencies by Category

         DEFICIENCY                 CUB CREEK   WOODLAND   TOTAL
 Security                               3           3         6
 Defective Windows                      3           3         6
 Defective Ceilings                     3           0         3
 Defective Walls                        3           2         5
 Defective Floors                       9           9        18
 Defective Interior Doors               5           6        11
 Defective Bathtubs                     2           0         2
 Defective Smoke Detectors              1           1         2
 Electrical Hazards                    21          32        53
 Defective Kitchen and Bath Sinks       0           4         4
 Defective Kitchen Cabinets and         6           7        13
     Countertops
 Kitchen Appliances                       3        0         3
 Building Exteriors                       0        3         3
 Safety of Heating–Equipment &            8        0         8
     Quality of Interior Air
 General Health and Safety              12          3        15
 Other Hazards                           0          1         1
 Total                                  79         74       153




                                    Page 97                  2003-AT-1001
                  Appendix I




THIS PAGE LEFT
    BLANK
INTENTIONALLY




 Page 98         2003-AT-1001
                                                                                                  Appendix K

Room and Meal Cost for Six Trips



                                    Amount Spent          Federal Allowance Difference  Difference
 Dates of Travel     Destination   Lodging Meals          Lodging Meals Lodging Meals Lodging Meals

11/16/98-11/18/98 Raleigh, NC      $   1,112 $ 1,583 $        768 $    380 $     344 $ 1,203          45% 317%

10/14/99-10/17/99 Charleston, SC       1,194      1,557       570      294       624      1,263      109% 429%

11/12/99-11/16/99 Biloxi, MS           3,168      2,636     2,304     1,710      864       926        38%   54%

01/06/00-01/09/00 Washington, DC       1,374       636        708      322       666       314        94%   98%

10/28/00-11/01/00 Scottsdale, AZ       3,184       957      1,264      945      1,920       12       152%   1%

03/17/01-03/21/01 Washington, DC       5,264      1,418     1,904      828      3,360      590       176%   71%

Totals                             $ 15,296 $     8,787 $   7,518 $   4,479 $   7,778 $   4,308     103% 96%




                                               Page 99                                            2003-AT-1003
                 Appendix K




THIS PAGE LEFT
    BLANK
INTENTIONALLY




 Page 100        2003-AT-1001
                                                                               Appendix L

Distribution Outside of HUD
 Executive Director, Northwestern Regional Housing Authority, Boone, North Carolina
 Chairman of the Board, Northwestern Regional Housing Authority, Boone, North Carolina
 Sharon Pinkerton, Senior Advisor, Subcommittee on Criminal Justice, Drug Policy & Human
    Resources
Stanley Czerwinski, Director, Housing and Telecommunications Issues
Steve Redburn, Chief Housing Branch, Office of Management and Budget
Linda Halliday (52P), Department of Veterans Affairs
William Withrow (52KC), Department of Veterans Affairs, OIG Audit Operations Division
Chairman, Committee on Government Affairs
Ranking Member, Committee on Governmental Affairs
Chairman, Committee on Government Reform
Ranking Member, Committee on Government Reform
The Honorable John Edwards
Kay Gibbs, Committee on Financial Services
George Reeb, Assistant Inspector General for Health Care Financing Audits
Andy Cochran, House Committee on Financial Services
Clinton C. Jones, Senior Counsel, Committee on Financial Services
Jennifer Miller, Professional Staff, House Committee on Appropriations
Complainants
Kenny Poteat, Chairman, Avery County Board of Commissioners
James Coffey, Chairman, Watauga County Board of Commissioners
Harry Anderson, Chairman, Mitchell County Board of Commissioners
R. Eldon Edwards, Chairman, Alleghany County Board of Commissioners
Charles Sink, Chairman, Wilkes County Board of Commissioners
Larry Rhodes, Chairman, Ashe County Board of Commissioners
John Renfro, Chairman, Yancey County Board of Commissioners




                                      Page 101                                 2003-AT-1001