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). 2 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. 4 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. 5 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. 6 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) 7 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. 8 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. 9 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 10 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 11 Appendix D AUDITEE COMMENTS 12 13 14
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)