oversight

Puerto Rico Public Housing Administration, San Juan, Puerto Rico

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-04-22.

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

                                                                   Issue Date
                                                                           April 22, 2004
                                                                  Audit Case Number
                                                                          2004-AT-1006




TO:            Olga Saez, Director, Public Housing Division, 4NPH




FROM:          James D. Mc Kay
               Regional Inspector General for Audit, 4AGA

SUBJECT:       Puerto Rico Public Housing Administration
               San Juan, Puerto Rico


                                      INTRODUCTION

We completed a review of selected activities of the Puerto Rico Public Housing Administration
(PRPHA). The review was performed as part of our audit of the Department of Housing and
Urban Development’s (HUD) oversight of Public Housing Agency activities with related
nonprofit entities. Our objective was to determine whether the PRPHA diverted or pledged
resources subject to an Annual Contribution Contract (ACC) or other agreement/regulation to
benefit other entities without HUD’s approval.

To accomplish our objectives we reviewed applicable HUD regulations, the PRPHA’s ACC, and
other program related requirements. We reviewed PRPHA’s files and records including
financial statements, general ledgers, check vouchers, and invoices. We examined the PRPHA’s
records to identify activities with related nonprofit organizations and verify balances of account
receivables. We also interviewed responsible PRPHA and Caribbean Office Public Housing
officials.

We performed our on-site work between October and December 2003. Our review generally
covered the period July 1, 1998, through June 30, 2003, and other periods as necessary. We
performed our review in accordance with generally accepted government auditing standards.
We discussed our audit results with HUD and PRPHA officials during our review and at an exit
conference held on March 1, 2004.           We provided a copy of our report to the
Honorable Ileana Echegoyen, Secretary, Puerto Rico Housing Department and Carlos Laboy,
Administrator, Puerto Rico Public Housing Administration. The PRPHA provided written
comments to our draft on March 22, 2004, and generally agreed with our report. Their
comments are summarized in the finding and included in their entirety as Appendix D.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us for each
recommendation without a management decision, 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 days 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.

Should you or your staff have any questions, please contact me or Michael A. Rivera, Assistant
Regional Inspector General for Audit at (787) 766-5540.

                                         SUMMARY

Our review identified several conditions regarding the use of HUD funds that were in violation
of the ACC. As of September 30, 2003, PRPHA accounting records reflected net account
receivables owed to its Low-Income Public Housing Program exceeding $5.97 million. Review
of these receivables disclosed that the PRPHA:

       Improperly used HUD funds totaling about $1.1 million for activities not related to the
       administration of its public housing projects, and
       Did not provide support for $4.23 million owed to its public housing program by the
       Puerto Rico Public Buildings Authority (PBA), and its public housing management
       agents.

We recommend that you require the PRPHA to reimburse $1.1 million to the ACC projects, from
non-Federal funds, for ineligible expenses not related to the operation of its housing projects.
We also recommend that you require the PRPHA to submit all supporting documentation and
determine the accuracy of the $4.23 million owed by the PBA and its management agents. Any
amounts determined ineligible must be reimbursed to the ACC projects from non-Federal funds.
Further, we recommend that you require the PRPHA to establish and implement policies and
procedures to ensure that grant funds are used solely for authorized purposes. In addition, we
recommend your office work with the PRPHA to identify and refer the officials responsible for
the mismanagement of HUD funds to the Departmental Enforcement Center (DEC).




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                                       BACKGROUND

Puerto Rico’s public housing and urban renewal started in 1938. By 1957 the Puerto Rico Urban
Renewal and Housing Corporation, the PRPHA’s predecessor, was created by Commonwealth
Law No. 88 for the purpose of reorganizing the programs. In 1972, the government of Puerto
Rico established the Department of Housing (Law 97 dated June 10, 1972). Under this law, the
Puerto Rico Urban Renewal and Housing Corporation was attached to the Department of
Housing, and the powers and faculties of the Board of Directors were transferred to the Secretary
of Housing.

The PRPHA was created in 1989 and placed under the direction of the Puerto Rico Department
of Housing for the purpose of creating an efficient and flexible administration of public housing
(Law 66 dated August 17, 1989). In 1991, the Puerto Rican Government dissolved the
Puerto Rico Urban Renewal and Housing Corporation and transferred the powers and faculties of
its Public Housing Program to the Puerto Rico Secretary of Housing. The PRPHA is the second
largest public housing authority in the nation with over 55,000 dwelling units scattered
throughout Puerto Rico.

In 1992, the PRPHA contracted all of its housing project management functions to private
management agents. The contracts were cancelled in 1995 and another bid process was
performed. For this bid process, the contracts were effective until April 1999. In November
1998, the PRPHA started another procurement process for the administration of its public
housing projects, and in April 1999 the PRPHA awarded 5-year contracts to 15 management
companies.

A new organizational structure was implemented within the PRPHA in 2001, which included the
creation of the Office of Internal Auditor (Administrative Order 01-65 dated October 10, 2001).
This new office was created with the purpose of providing an objective and independent service
towards the improvement of operational procedures in the PRPHA.

In 2003, the Board of Governors of the Public Housing Administration (the Board) was created,
placing the PRPHA and its Administrator under the supervision of the Board (Law 71 dated
January 10, 2003). The Board was formed to promote citizen participation in overseeing the
administration and services provided to the public housing sector. The creation of the Board was
expected to maximize government resources and improve the quality of public housing. The
Board is composed of seven members, and is presided by the Secretary of the Puerto Rico
Department of Housing.

In fiscal year 2002, the PRPHA was approved for $258 million of Federal funding, including
$165 million for its Capital Fund Program, and $93 million for operating subsidy. For fiscal year
2003, the PRPHA was expected to receive $127 million for its Capital Fund Program and $97
million for operating subsidy.       The PRPHA’s books and records are maintained at
606 Barbosa Avenue, San Juan, Puerto Rico.




                                               3
Finding 1 - Improper and Unsupported Use of HUD Funds

The PRPHA did not comply with Federal requirements governing the management and use of
HUD funds. It improperly withdrew and used over $1.1 million in operating subsidies for
program activities not related to the administration of its public housing projects. In addition,
the PRPHA did not provide support to document the purpose of over $4.23 million owed to its
Low-Income Public Housing Program by the Puerto Rico PBA, and its public housing
management agents. We attribute these deficiencies to the PRPHA’s disregard of program
requirements and because it did not efficiently implement controls to ensure that grant funds
were used solely for authorized purposes. As a result, Federal funds were unduly disbursed.

CRITERIA

Part A, Section 9 of the ACC, allows the PRPHA to withdraw funds from the General Fund only
for: (1) payment of the costs of development and operations of the projects under its ACC with
HUD; (2) the purchase of investment securities as approved by HUD; and (3) such other
purposes as may be specifically approved by HUD.

Additionally, Title 24 of the Code of Federal Regulations, Part 85.20(a)(2) provides that grantees
must have adequate fiscal controls and accounting procedures to trace grant funds and ensure
that they are used solely for authorized purposes.

Activities Not Related to Public Housing

The PRPHA disregarded HUD requirements and improperly withdrew and used over $1.22
million in Public Housing operating funds to pay for activities not related to the administration of
its public housing units. Among the ineligible activities not related to its public housing program
were: (a) legal services ($602,627); (b) acquisition of motor vehicles ($121,071); (c) transfers to
the Puerto Rico Department of Housing-Special Communities Program ($115,000); and (d)
emergency relief efforts ($68,003). The PRPHA did not provide evidence of HUD approval for
the expenditures. As of September 2003, the PRPHA’s accounting records showed account
receivables of $1,222,429 for activities not related to its Low-Income Public Housing Program as
follow:

           FEMA (Emergency relief efforts)                                 $      68,003
           Puerto Rico Department of Housing                                     124,921
           State Programs (non-Federal)                                        1,029,505
           (Various Vendors-See Appendix B)
           Total                                                            $ 1,222,429

On March 3, 2004, following the exit conference, the PRPHA provided additional documents
related to the acquisition of motor vehicles ($121,071) mentioned above. The new information
showed the PRPHA had reimbursed its Low-Income Public Housing Program but failed to
reduce the account receivable. The PRPHA adjusted the accounting records on March 2, 2004,
to reflect the correct balance. Therefore, charges of $121,071 are considered resolved, leaving a
remaining balance of $1,101,358.


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Receivables Without Support

   a) Puerto Rico Public Buildings Authority         The PRPHA’s accounting records, as of
      September 2003 reflected that the PBA owed over $2.54 million to its public housing
      program. The PRPHA did not provide any documentation that could explain the purpose,
      accuracy, or eligibility of the transaction. The PRPHA’s Budget Analyst indicated that in
      the past, the PBA was in charge of the modernization efforts of its housing projects, but
      could not explain the nature or how this amount was determined.

   b) Public Housing Management Agents       According to the PRPHA’s accounting records,
      as of September 2003, its public housing management agents owed the public housing
      program over $1.69 million (see Appendix C). According to PRPHA’s Assistant
      Administrator for Finance and Administration, in the past, management agents received
      advances to manage the daily operations of its public housing units. The PRPHA’s
      former Independent Public Accountant consultant, responsible for the administration of
      the Finance Department, determined the amounts owed prior to 2000. However, the
      PRPHA did not provide any documentation that could support the purpose and accuracy
      of the amount owed by the management agents.

The PRPHA’s Assistant Administrator for Finance and Administration acknowledged that HUD
funds were improperly used for activities not related to project operating costs, and recorded as
accounts receivable. The Assistant Administrator indicated that these receivables included in the
operating subsidy fund account were originated prior to 2000 under the former PRPHA
Administrator.

AUDITEE COMMENTS

PRPHA officials attributed most of the improper transactions to very poor accounting procedures
and almost nonexistent record keeping procedures under the previous administration.

PRPHA officials stated it is in the process of reconstructing the accounts receivable due from the
Department of Housing. The officials believed $437,456 was improperly entered as an account
receivable in the Low-Income Public Housing Program account. This sum represents the
payment of salaries advanced by the Department of Housing on behalf of PRPHA, and the
accounting was intended to reflect reimbursement by PRPHA to the Department of Housing. If
further review determines that the amounts are due, PRPHA will seek reimbursement from
nonfederal funds.

The officials stated PRPHA would submit documentation to determine the accuracy of the
$4,230,646 owed by the PBA and its public housing management agents. PRPHA will provide
an explanation of the monies used by PBA in its modernization efforts and will seek
reimbursement from PBA of all modernization funds not properly spent. Additionally, PRPHA
will provide an accounting of the amounts demanded of the management agents.




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The official believed the current administration had established and implemented policies and
procedures to ensure that all grant funds are used solely for the authorized purposes.


OIG EVALUATION OF AUDITEE COMMENTS

The PRPHA actions to perform detailed review of the account receivables and the submission of
additional support may resolve some of the questioned costs. The PRPHA also proposed the
reimbursement, from non-Federal funds, of any balance due. The PRPHA’s comments and
actions if timely and fully implemented in accordance with HUD requirements, should correct
the deficiencies discussed in the finding and improve administration of its programs.

RECOMMENDATIONS

We recommend that you:

1A.    Require the PRPHA to submit supporting documentation or reimburse $1,101,358 to its
       ACC projects, from non-Federal funds, for ineligible expenses not related to the
       operation of housing projects.

1B.    Require the PRPHA to submit all supporting documentation and determine the accuracy
       of the $4,230,646 owed by PBA and its public housing management agents. Any
       amounts determined ineligible must be reimbursed to the ACC projects, from non-
       Federal funds.

1C.    Require the PRPHA to establish and implement policies and procedures to ensure the
       proper recording of program transactions, and the timely reconciliation and collection of
       program account receivables.

1D.    Work with the PRPHA to identify and refer the officials responsible for the
       mismanagement of HUD funds to the DEC. The referrals should be monitored until a
       final decision is made by the DEC.




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                                MANAGEMENT CONTROLS

Management controls include the plan of organization, methods, and procedures adopted by the
management to ensure that its goals are met. Management controls include the processes for
planning, organization, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.

We determined the following management controls were relevant to our audit objectives:

   •   Compliance with laws and regulations – Policies and procedures that management has
       implemented to reasonably ensure that resource use is consistent with laws and
       regulations.
   •   Safeguarding Resources – Policies and procedures that management has implemented to
       reasonably ensure that resources are safeguarded against waste, loss and misuse.
   •   Allowable costs/cost principle

To assess the relevant controls, we:

   •   Interviewed HUD and PRPHA officials;
   •   Reviewed the regulations governing the program;
   •   Reviewed PRPHA general ledgers, cash disbursement records, cancelled checks, and
       other related documentation; and
   •   Reviewed PRPHA’s Financial Statements.

A significant weakness exists if management controls do not provide reasonable assurance that
resource use is consistent with laws, regulations and policies; and, that resources are safeguarded
against waste, loss, and misuse.

Based on our review, we identified the following significant weaknesses:

   •   Compliance with Laws and Regulations – PRPHA’s management violated its ACC with
       HUD by inappropriately disbursing public housing funds for ineligible program
       expenditures. (See Finding 1)

   •   Safeguarding Resources - PRPHA’s management inappropriately allowed the misuse of
       public housing funds for activities not related to the operation of its public housing units.
       (See Finding 1)




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                             FOLLOW-UP ON PRIOR AUDITS

The most recent audit of the PRPHA that impacts the objectives of this audit was an Office of
Inspector General for Audit’s report (No. 2003-AT-1002 dated March 21, 2003) on the
procurement of its management agents. The report concluded that the former PRPHA
Administrator failed to ensure that the contracts awarded were procured in a manner providing
full and open competition consistent with the standards, and were reasonable and beneficial to
the PRPHA. The PRPHA: (1) disregarded procurement requirements; (2) executed financially
burdensome management contracts; (3) paid excessive non-project salaries; and (4) paid
excessive overhead and profit. It was estimated that the 5-year contracts were awarded at $35
million more than necessary. The report contained four findings with five recommendations. At
the time of this review, two recommendations were not resolved.

The Single Audit Report of the PRPHA for the year ended June 30, 2002, was issued on
March 12, 2003. The Independent Public Accountant gave an unqualified opinion on the 2002
statements. The report questioned costs totaling $372,460. Among the deficiencies reported
were: (1) payment of payroll related services incurred prior to contract execution, (2) inadequate
monitoring system of management agents activities, (3) tenants files lacked required records and
eligibility supporting documentation, (4) lack of documentation evidencing compliance with
cash management requirements, and (5) lack of documentation evidencing compliance with
property acquisition and relocation assistance requirements.




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                                                                                                   Appendix A


                               SCHEDULE OF QUESTIONED COSTS




                    Recommendation                       Type of Questioned Cost
                        Number                         Ineligible1        Unsupported2

                             1A                        $1,101,358

                             1B                                                 $4,230,646

                Total                                  $1,101,358               $4,230,646




1   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor
    believes are not allowable by law, contract or Federal, State or local policies or regulations.
2   Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and eligibility
    cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a
    need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a
    future decision by HUD program officials. This decision, in addition to obtaining supporting documentation,
    might involve a legal interpretation or clarification of Departmental policies and procedures.




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                                                                            Appendix B

SCHEDULE OF STATE PROGRAMS ACCOUNT RECEIVABLES


            Professional Services and/or Personnel Training
                                                           Balance
  Account    Vendor                                  September 30, 2003
  1129.00
             Confetti Flower Shop                             $     3,150
             Depto. Vivienda                                      335,853
             Seguro Responsabilidad Pública                        31,023
             PR Creative Designs                                      500
             Seminarios y Talleres                                    442
             Fondo Estatal                                         89,265
             Secretario de Hacienda                               119,787
             Fernández & Gutierrez                                 19,883
             Fiddler Glez. Rdz.                                   325,786
             Aspen Systems Corporation                                 65
             O.C.A.L.A.R.H.                                           565
             Sparta Consulting Corp.                                  650
             N.A.H.R.O.                                               545
             Coalition for Juvenile Justice                           560
             I.P.E.D.                                               1,010
             Carlos Carrero & Associates                           12,420
             Centro Com. De Empresas y Empleo                      38,858
             Adams Mark of Dallas Hotel & Rest.                     5,883
             Others                                                43,260

             Total                                            $1,029,505




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                                                           Appendix C

SCHEDULE OF MANAGEMENT AGENT ACCOUNT RECEIVABLES


                                            Balance
 Account   Agent                      September 30, 2003
 1129.00
           Inter-Island Rental               $ 386,119
           Central Housing                       4,371
           American Management                 177,602
           Pinnacle Realty                     163,504
           Peregrine Management                 36,558
           Miramar Property                     11,830
           Martinal Property (58)                  390
           Nereida Falto de Colé                 6,186
           Cora Management                       5,878
           M.J. Consulting                      25,908
           Management Adm. Services            140,608
           S.P. Management                       4,850
           Apj-Park Management                  22,626
           Cost Control                        111,674
           Housing Promoters                       424
           Zeta Enterprises                    306,524
           La Rosa                              28,657
           Antigua Vía                           1,517
           Padre Nazario                         2,762
           Western Housing                     113,964
           Villa Los Santos I                   19,714
           Cidra Housing                        14,858
           El Cortijo                            6,424
           Campo Verde                          50,191
           Valencia                             41,634
           Marini Farm                           8,912
           Auto Administrados                        1

           Total                             $1,693,686




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                   Appendix D

AUDITEE COMMENTS




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