oversight

Housing Authority of the City of Northport, Northport, Alabama

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-05-20.

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

  AUDIT REPORT




HOUSING AUTHORITY OF THE

   CITY OF NORTHPORT

  NORTHPORT, ALABAMA

        2004-AT-1009

        MAY 20, 2004

   OFFICE OF AUDIT, REGION 4
      ATLANTA, GEORGIA
                                                                 Issue Date
                                                                         May 20, 2004
                                                                Audit Case Number
                                                                         2004-AT-1009




TO:           R. Edmond Sprayberry, Director, Office of Public Housing, 4CPH




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

SUBJECT:      Housing Authority of the City of Northport
              Northport, Alabama

We have completed a review of the Housing Authority of the City of Northport’s (Authority)
administration of housing development activities with its related entities, Northport Housing
Limited (NHL) and Northport Housing Limited II (NHII). The review focused on the
Authority’s development of Hampton Point and Grand View Apartments, private housing
developments. We performed the review as part of our audit of the Department of Housing and
Urban Development’s (HUD) oversight of Public Housing Agency (PHA) development
activities with related non-profit entities. Our primary objective was to determine whether the
Authority diverted or pledged resources subject to an Annual Contributions Contract (ACC) or
other agreement or regulation to the benefit of other entities without specific HUD approval.
Our report includes two findings.

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 Sonya D. Lucas, Assistant
Regional Inspector General for Audit at (404) 331-3369.
Management Memorandum




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2004-AT-1009              Page ii
Executive Summary
We have completed a review of the Housing Authority of the City of Northport’s administration of
housing development activities with its related entities, NHL and NHII. The review focused on the
Authority’s development of Hampton Point and Grand View Apartments, private housing
developments. We performed the review as part of our audit of HUD’s oversight of PHA
development activities with related non-profit entities. Our primary objective was to determine
whether the Authority diverted or pledged resources subject to an ACC or other agreement or
regulation to the benefit of other entities without specific HUD approval.

Our assessment showed that the Authority improperly advanced public housing funds for a non-
Federal development, and inappropriately guaranteed performance for its tax credit properties.



                                     The Authority violated its ACC by advancing $434,735 of
 The Authority violated              public housing funds for a non-Federal development.
 HUD program                         Subsequent repayments of $375,000 left $59,735 due to the
 requirements                        Authority. However, HUD should recapture $78,334 of the
                                     $375,000 repayments. Additionally, the Authority did not
                                     allocate costs, including salaries and rental space,
                                     attributable to non-profit activities.         The Authority
                                     advances were for up-front funding for a private
                                     development, until tax credits were received.             The
                                     Executive Director (ED) said he advanced the funds based
                                     on verbal approval from prior HUD management. Further,
                                     Authority management instructed staff to perform certain
                                     tasks for its tax credit properties, without full knowledge of
                                     HUD rules for such activities. As a result, $434,735 of
                                     ineligible advances reduced funds for its Low Rent
                                     Housing and Capital Fund Programs. Also, tax credit
                                     development costs were understated because the Authority
                                     did not charge any direct or indirect costs to its
                                     development activities.

                                     In violation of its ACC, the Authority inappropriately
                                     guaranteed performance for both of its tax credit properties.
                                     The Authority's ED signed guaranty agreements and loan
                                     obligations, without HUD approval. The ED also signed
                                     other documents that included inappropriate guarantees by
                                     the Authority as a guarantor or key principal. These
                                     actions occurred because the ED stated the tax credit
                                     attorneys and building consultant had assured him that the
                                     guarantees did not physically encumber the Authority.
                                     Additionally, the ED acknowledged that he did not read
                                     each document, but totally relied on legal counsel because
                                     of the massive paperwork involved. Further, the ED

                                         Page iii                                    2004-AT-1009
Executive Summary


                    violated the ACC's conflict of interest provision by
                    functioning as the Authority's ED while serving as
                    President of both General Partnerships. The ED stated he
                    was not aware he had violated any requirements,
                    particularly since HUD had approved a conflict of interest
                    waiver for the Section 8 Program. These actions could
                    result in the Authority assuming liabilities for non-Federal
                    activities and conflicts of interest, which could unjustly
                    enrich private developments at the Authority's expense.

                    We recommend you require the Authority to: (1) obtain
 Recommendations    repayment from NHL of the $59,735 balance owed from
                    the $434,735 advanced; (2) ensure that no further
                    advances/expenditures of HUD funds are made on behalf
                    of non-HUD entities, without prior HUD approval;
                    (3) recapture $78,334 of the repayment; (4) ensure
                    reasonable allocations of salaries and other costs, such as
                    use of office space and equipment, and reimburse the
                    Authority any ineligible costs attributable to any non-HUD
                    entity; (5) pursue terminating inequitable guarantees;
                    (6) obtain HUD’s approval prior to any future encumbrance
                    of Authority assets; and, (7) establish adequate controls to
                    monitor the Authority’s interactions with its non-profit and
                    limited partnerships and ensure transactions comply with
                    the ACC, particularly as it relates to conflict of interest
                    situations.

 Auditee comments   We presented our results to the Authority and HUD
                    officials during our review. We provided a copy of the
                    draft report to the Authority and HUD’s Alabama State
                    Office on April 6, 2004, for their comments. We discussed
                    the report with the officials at the exit conference on April
                    15, 2004. The Authority provided written comments to our
                    draft on April 15, 2004. The Authority’s comments are
                    summarized in the findings and included in their entirety as
                    Appendix B.




2004-AT-1009            Page iv
Table of Contents
Management Memorandum                                                    i



Executive Summary                                                      iii



Introduction                                                            1



Findings

1.    The Authority Improperly Advanced Funds                           3


2.    The Authority Inappropriately Guaranteed Performance              9



Management Controls                                                   15



Follow Up On Prior Audits                                             17



Appendices
     A. Schedule of Questioned Costs and Funds Put to Better Use      19

     B. Auditee Comments                                              21




                               Page v                        2004-AT-1009
Table of Contents


Abbreviations
ACC            Annual Contributions Contract
ED             Executive Director
HUD            U.S. Department of Housing and Urban Development
NHL            Northport Housing Limited
NHII           Northport Housing Limited II
PHA            Public Housing Authority
WAAHC          West Alabama Affordable Housing Corporation




2004-AT-1009                          Page vi
Introduction
The Housing Authority of the City of Northport was organized pursuant to the Housing Act of 1937
and the laws of the State of Alabama. Its primary objective is to provide low-income housing to the
citizens of Northport, Alabama and surrounding areas in compliance with its ACC with HUD.

A five-member Board of Commissioners governed the Authority with members appointed by the
Mayor of the City of Northport. The Board is responsible for signing contracts, hiring personnel,
setting income limits, and approving budgets. Jim Handley is the Board Chairman and
Milo Pearson is the Executive Director.

The Authority’s major program activities included administering 330 Conventional units, 393
Rental Voucher units, 28 Section 8 Moderate Rehabilitation units, and 25 Section 8 Rental
Certificate units. HUD’s Alabama State Office in Birmingham, Alabama, Office of Public
Housing is responsible for overseeing the Authority.

On July 2, 1996, the Authority created West Alabama Affordable Housing Corporation
(WAAHC), a non-profit organization, to provide safe, decent, sanitary, and affordable housing,
to very low to moderate-income groups. From the WAAHC, the Authority created two limited
partnerships, NHL and NHII, to purchase and develop 60 and 72-unit properties known as
Hampton Point and Grand View Apartments, respectively. The new units would be financed
with private loans and capital contributions from John Hancock, invested limited partner, for tax
credits. To date, Hampton Point is completed and fully occupied, with Grand View to be
completed by Summer 2004.

The Authority’s financial records are maintained primarily at its office located at
3500 West Circle #39, Northport, Alabama.



                                      Our primary objective was to determine whether the
 Audit Objectives                     Authority diverted or pledged resources subject to an ACC
                                      or other agreement or regulation to the benefit of other
                                      entities without specific HUD approval.


                                      To accomplish the objective, we reviewed applicable HUD
 Audit Scope and                      requirements and regulations, the Authority’s ACC
 Methodology                          (executed October 27, 1995), and other requirements. We
                                      interviewed the Alabama State Office of Public Housing
                                      Program officials, and Authority management and staff.
                                      We reviewed various documents including: financial
                                      statements, general ledgers, bank statements, minutes from
                                      Board meetings, check vouchers, and invoices. We also
                                      reviewed NHL and NHII records, including applicable
                                      incorporation and partnership documents, bank statements,

                                          Page 1                                      2004-AT-1009
Introduction


               and Board minutes.         In addition, we obtained an
               understanding of the Authority’s accounting system as it
               related to our review objective.

               We performed our on-site review from November 17, 2003
               through February 12, 2004, and covered the period
               July 1, 1999 to June 30, 2003. We extended the period as
               necessary. We performed our review in accordance with
               generally accepted government auditing standards.




2004-AT-1009       Page 2
                                                                                       Finding 1


     The Authority Improperly Advanced Funds
The Authority violated its ACC by advancing $434,735 of public housing funds for a non-
Federal development. Subsequent repayments of $375,000 left $59,735 due to the Authority.
However, HUD should recapture $78,334 of the $375,000 repayments. Additionally, the
Authority did not allocate costs, including salaries and rental space, attributable to non-profit
activities. The Authority advances were for up-front funding for a private development, until tax
credits were received. The ED said he advanced the funds based on verbal approval from prior
HUD management. Further, Authority management instructed staff to perform certain tasks for
its tax credit properties, without full knowledge of HUD rules for such activities. As a result,
$434,735 of ineligible advances reduced funds for its Low Rent Housing and Capital Fund
programs. Also, tax credit development costs were understated because the Authority did not
charge any direct or indirect costs to its development activities.



                                     Section 9, Depository Agreement and General Fund, of the
 HUD requirements                    ACC states that the Authority may withdraw funds from
                                     the General Fund only for: (1) payment of the costs of
                                     development and operation of the projects under the ACC
                                     with HUD; (2) purchase of investment securities as
                                     approved by HUD; and (3) such other purposes as may be
                                     specifically approved by HUD.

                                     Public and Indian Housing Notice 2000-43, Section D (2),
                                     states that eligible PHAs may expend Capital Fund
                                     Program funds by reporting the funding amount on Budget
                                     Line Item 1406 in the Annual Statement, Part I, and
                                     drawing the funds down for operating expenses. Amounts
                                     allocated by PHAs to Budget Line Item 1406 must only be
                                     used for non-capital operating expenses.

                                     The ACC, Section 2, Definitions, defines operating
                                     expenses as all costs incurred by the PHA for
                                     administration, maintenance, and other costs and charges
                                     that are necessary for the operation of its HUD project(s).
                                     Operating expenses shall not include any cost incurred as
                                     part of the development or modernization costs, or payment
                                     of principal and interest of bonds and notes. Section 11 (D)
                                     states the PHA shall not incur any operating expenditures
                                     except pursuant to an approved budget.




                                         Page 3                                     2004-AT-1009
Finding 1


                             The Office of Management and Budget Circular A-87
                             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. Costs must be allocable to the Federal
                             award. A cost is allocable to a particular cost objective if
                             the goods or services involved are chargeable or assignable
                             to such cost objective in accordance with relative benefits
                             received.

                             The Authority improperly advanced $434,735 of public
  The Authority improperly
                             housing program funds for non-Federal activities. Of this
  advanced $434,735
                             amount, $277,179 was from its operating subsidy and
                             $157,556 from its Capital Fund program. The advances
                             covered expenses incurred for the non-profit activities,
                             including application fees, until tax credits were received.
                             The Authority received repayments totaling $375,000,
                             therefore $59,735 remains due to the Authority.

                             The ED stated that the public housing funds were advanced
                             based on verbal approval from HUD’s Alabama State Office
                             prior Director of Public Housing. The ED stated that their
                             Section 8 Administrative and Public Housing reserves were
                             consistently significant, which was the basis for the verbal
                             approval. Further, the ED stated that the Authority was
                             verbally informed that:

                                funds could be advanced from various HUD programs,
                                including operating subsidy and Capital Funds, with an
                                executed note that such funds would be repaid.

                                the Section 8 Administrative reserve funds could be
                                advanced without repayment, since the Authority
                                earned these fees from administering the Section 8
                                Program.

                             In a May 8, 2003, letter, HUD granted the Authority
                             approval to advance Section 8 Administrative reserve funds
                             for other housing development activities, relating to NHII.
                             However, the $434,735 was advanced from February 2002
                             to May 2002 for NHL. Further, the funds advanced to
                             NHL were from other HUD program funds and not its
                             Section 8 Administrative reserves.



2004-AT-1009                     Page 4
                                                                               Finding 1


                          HUD officials stated they would not have approved a
                          request to pay tax credit project costs, since it was not
                          covered under the ACC. Without approval, the Authority
                          should have either obtained funds from other sources or
                          advanced funds from its Section 8 Administrative reserves,
                          as approved by HUD.         As a result, the Authority
                          improperly advanced $434,735 from its Low Rent Housing
                          and Capital Fund Programs.

                          Although the Authority received repayments of $375,000,
HUD should recapture
                          HUD should recapture $78,334 of the funds. The $78,334
$78,334
                          was originally advances from Budget Line Item 1406,
                          Operations, of the Authority’s fiscal year 2000 Capital
                          Fund programs. Subsequently, HUD recaptured 2000
                          fiscal year funding due to the Authority not obligating
                          Capital Funds within the required two-year period.

                          HUD officials stated that funds passed through Budget
                          Line Item 1406 lose their identity and can be utilized for
                          any operation expenses relating to HUD programs.
                          However, the Authority redirected these funds to its related
                          entity without HUD’s approval. HUD’s Acting Director of
                          Public Housing, at that time, stated they would not have
                          approved a request to advance Capital Funds to Hampton
                          Point (non-Federal project) since it was not covered under
                          the ACC or noted as an eligible expense. Therefore, since
                          HUD recaptured the Capital Funds, which should have
                          included the budgeted $78,334, this amount should also be
                          recaptured.

                          According to the ED, the Authority did not allocate costs,
The Authority did not     including salaries, to the non-profit or other related entities.
properly allocate costs   However, the ED and Authority's staff performed work for
                          the entities. Further, non-profit operations were conducted
                          from the Authority's office. The ED did not fully
                          understand HUD rules regarding work performed for the
                          non-profit had to be allocated to that activity. Certain staff
                          members performed work on behalf of the tax credit
                          properties, as instructed by ED.             HUD provided
                          correspondence that confirmed cost allocation was needed
                          for its tax credit activities.




                              Page 5                                        2004-AT-1009
Finding 1


                    In addition, the Supplemental Management Agreements, as
                    noted in its Limited Partnership Agreements, required the
                    Authority to materially participate in management
                    responsibilities, which included utilizing Authority staff
                    resources for non-subsidized activities up to 500 hours. As
                    a result, the tax credit development costs were understated
                    because the Authority did not charge any direct or indirect
                    costs to its development activity.



Auditee Comments    Excerpts from the Authority’s written comments on our
                    draft finding follow. The complete text is included as
                    Appendix B.

                    "$434,735 of public housing funds were advanced to the
                    nonprofit for the develop [sic] Hampton Point and Grand
                    View       Apartments      until   tax     credits    were
                    received....Unfortunately, costs associated with the non-
                    profit activities were not allocated. $375,000 has been
                    repaid by the non-profit to the Authority, leaving $59,735
                    due.

                    "We respectfully disagree concerning the finding that
                    $157,556 is due to be repaid to HUD. CFP 2001 was not
                    recaptured by HUD, therefore, the $79,222.00 in account
                    1406 was not subject to recapture and should not have to be
                    repaid. However, HUD did recapture CFP 2000 because
                    we failed to obligate on time. HUD only recaptured the
                    funds in CFP 2000 that were not obligated.

                    “The $78,334.00 in account 1406 was not recaptured
                    because it was obligated and drawn down on time.
                    Therefore, it should not have to be repaid.

                    "As it is our goal to maintain a solid and cohesive
                    relationship with the Department, this Authority will
                    comply with all recommendations of the Office of
                    Inspector General…”




OIG Evaluation of   We agree that HUD did not recapture the 2001 Capital
                    Funds. Therefore, we adjusted the finding and reduced the
Auditee Comments    recommended amount to be recaptured to $78,344.


2004-AT-1009            Page 6
                                                                     Finding 1


                  However, the Authority's proposal that the $78,334 should
                  not be repaid is incorrect. The use of the funds violated its
                  Capital fund grant agreement. Capital funds budgeted in
                  line item 1406 must be used for operating expenses for
                  HUD programs rather than advancing the funds to cover
                  nonprofit expenses. Although the funds were expended
                  prior to recapture, its usage was noncompliant with those
                  expenses noted as eligible HUD operating expenses.
                  Therefore, HUD should recapture the $78,334 as
                  recommended.

                  We believe the Authority's actions will strengthen controls
                  over expenditures and cost allocations. However, HUD
                  should ensure reimbursement of ineligible costs is pursued
                  from NHL and Authority.



Recommendations   We recommend that the Director of the Office of Public
                  Housing:

                  1A.     Require the Authority to obtain repayment from NHL
                          for the $59,735 balance owed from the $434,735
                          advanced.

                  1B.     Ensure that no further advances/expenditures of HUD
                          funds are made on behalf of non-HUD entities,
                          without prior HUD approval.

                  1C.    Recapture $78,334 of the repayment of Capital
                         Funds (this amount is included in the $434,735
                         advance).

                  1D.    Require the Authority to allocate the salaries and
                         other costs, such as use of office space and
                         equipment, attributable to any non-HUD entity and
                         reimburse the Authority all ineligible costs.




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Finding 1




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2004-AT-1009     Page 8
                                                                                          Finding 2




      The Authority Inappropriately Guaranteed
                    Performance
In violation of its ACC, the Authority inappropriately guaranteed performance for both of its tax
credit properties. The Authority's ED signed guaranty agreements and loan obligations, without
HUD approval. The ED also signed other documents that included inappropriate guarantees by
the Authority as a guarantor or key principal. These actions occurred because the ED stated the
tax credit attorneys and building consultant had assured him that the guarantees did not
physically encumber the Authority. Additionally, the ED acknowledged that he did not read
each document, but totally relied on legal counsel because of the massive paperwork involved.
Further, the ED violated the ACC's conflict of interest provision by functioning as the
Authority's ED while serving as President of both General Partnerships. The ED stated he was
not aware he had violated any requirements, particularly since HUD had approved a conflict of
interest waiver for the Section 8 Program. These actions could result in the Authority assuming
liabilities for non-Federal activities and conflicts of interest, which could unjustly enrich private
developments at the Authority's expense.



                                      Part A, Section 7 of the ACC, Covenant Against
 HUD requirements                     Disposition and Encumbrances, states in part, with the
                                      exception of entering into dwelling leases with eligible
                                      families for dwelling units in the projects covered by this
                                      ACC, and normal uses associated with the operation of the
                                      project(s), the housing authority shall not in any way
                                      encumber any such project, or portion thereof, without the
                                      prior approval of HUD. In addition, the housing authority
                                      shall not pledge, as collateral for a loan, the assets of any
                                      project covered under this ACC.

                                      Part A, Section 19 of the ACC, Conflict of Interest,
                                      prohibits the Authority from entering into any contract or
                                      arrangement in connection with any project under the ACC
                                      in which any Authority employee who formulates policy or
                                      who influences decisions with respect to the project(s), has
                                      an interest, direct and indirect, during his tenure or for one
                                      year thereafter.

                                      The Authority created WAAHC as a non-profit corporation
 Background                           to provide safe, decent, sanitary, affordable housing to very
                                      low, low, and moderate-income residents and to prevent the
                                      spread of slum conditions. To fulfill this purpose, the non-
                                      profit was to raise necessary funding to finance housing

                                           Page 9                                      2004-AT-1009
Finding 2


                       construction and/or redevelopment, and could own,
                       manage, or operate housing on its own behalf or on behalf
                       of others whose housing promoted the corporation's
                       purposes. The Authority created two limited partnerships,
                       NHL and NHII, through the non-profit. The partnerships
                       purchased and developed properties known as Hampton
                       Point Apartments and Grand View Apartments,
                       respectively.     For-profit entities Port Development
                       Corporation (WAAHC's subsidiary) and Northport
                       Affordable Housing Corporation (Authority's subsidiary)
                       were the eventual Co-General Partners for both limited
                       partnerships. The Authority's Executive Director served as
                       the President of both General Partnerships. The Developer
                       was WDM L.L.C. and Bob Morrow Construction Company
                       was the Builder for both properties.

                       The Authority signed as a guarantor for the Guaranty
 Guaranty Agreements
                       Agreements dated May 21, 2002, for NHL and
                       May 15, 2003, for NHII. Each Agreement was part of the
                       respective Partnership Agreement between the Co-General
                       Partners and applicable John Hancock companies, as
                       limited partner(s). Section H of each Agreement's Recitals
                       Section states, in part, the Guarantors expect to receive
                       substantial economic benefits as a result of the construction
                       and development of the property and the admission of the
                       Limited Partners to the Partnership. Section H further
                       states that:

                          The guarantors hereby unconditionally and irrevocably
                          jointly and severally guarantee to the Limited Partners,
                          to the extent not paid or performed by the General
                          Partner, the Developer, or the Builder, as the case may
                          be, the punctual payment when due, and at all times
                          thereafter, of each and every obligation of the General
                          Partner to make any payment or advance any funds
                          under the terms and conditions of the Partnership
                          Agreement. The guarantee also required the Authority
                          to cover the General Partner’s obligation to advance
                          operating deficit loans and other funds pursuant to the
                          Partnership Agreement.

                          The guarantors additionally hereby unconditionally and
                          irrevocably jointly and severally guarantee to the
                          Limited Partners, the due and punctual performance of
                          all obligations of the General Partner, the Developer,
                          and the Builder pursuant to the terms of the Partnership

2004-AT-1009               Page 10
                                                                   Finding 2


                    Agreement, the Development Agreement, and the
                    Construction Contract, including, without limitation,
                    the Developer’s and the Builder’s obligations to cause
                    the completion of the construction of the Property.

                    The Guarantors agree to: (i) assume all responsibility
                    for the completion of the construction of the Property
                    and, at the Guarantors’ own cost and expense, to cause
                    the construction of the Property to be fully completed in
                    accordance with the Construction Documents, the
                    Partnership Agreement and the Development
                    Agreement, (ii) pay all bills in connection with the
                    construction of the Property, and (iii) indemnify and
                    hold harmless the Limited Partners from any and all
                    Adverse Consequences that the Limited Partners may
                    suffer by reason of any such non-compliance by the
                    General Partner, the Developer, or the Builder.

Other document   The Authority also was a guarantor/key principal for five
guarantees       other documents regarding NHL, and as one of three
                 guarantors for the First Amended and Restated Limited
                 Partnership Agreement, dated May 15, 2003, for NHII, as
                 follows:

                    Loan Commitment Letter from Regions Bank, dated
                    September 17, 2001, included the Authority as one of
                    two guarantors for a $5,657,700 loan commitment.

                    First Amended and Restated Limited Partnership
                    Agreement, dated May 21, 2002, showed the Authority
                    as one of three guarantors.

                    Permanent     Loan    Commitment      Letter,    dated
                    April 1, 2002, showed the Authority as one of two key
                    principals.   The key principals were jointly and
                    severally liable for the outstanding indebtedness,
                    including without limitation principal, interest, and
                    other amounts due and owed from the Borrower (NHL)
                    under the proposed Mortgage Loan.

                    Construction and Term Loan Agreement, dated
                    May 22, 2002, showed the Authority as one of four
                    guarantors.




                    Page 11                                     2004-AT-1009
Finding 2


                           Regions Bank Promissory Note, dated May 22, 2002,
                           included the Authority as one of five guarantors for a
                           $1,623,500 Note.

                        The Guaranty states, in part, that the Authority absolutely
                        and unconditionally guarantees and promises to pay to
                        Regions Bank or its order, the indebtedness of NHL. The
                        guarantor's liability is unlimited and the obligations of the
                        guarantor are continuing. The indebtedness guaranteed by
                        this Guaranty, includes any and all of the Borrower's
                        (NHL) indebtedness to Lender and is used in the most
                        comprehensive sense and means and includes any and all of
                        the Borrower's liabilities, obligations, and debts to the
                        Lender, now existing or hereinafter incurred or created.
                        The Guaranty was executed at the Borrower's request, not
                        the Lender's.

                        The ED stated he had been assured by the tax credit
                        attorneys and building consultant that the guarantees did
                        not physically encumber the Authority. Additionally, the
                        ED acknowledged that he had not read each document, but
                        totally relied on legal counsel because of the massive
                        paperwork involved.

                        We did not locate any written HUD approval for these
                        actions. As a result, these actions could result in the
                        Authority assuming liabilities for non-Federal activities
                        that enrich private developments at the Authority’s
                        expense.

 Conflict of interest   The ED violated the ACC conflict of interest restrictions by
                        serving in dual capacities for both the Authority and the
                        two limited partnerships. The signing of the Guaranty
                        Agreements as a guarantor or key principal placed
                        Authority assets at risk to the benefit of the limited
                        partner(s). When signing the documents, the Authority's
                        ED was also the President of both limited partnerships.

                        The ED stated he was not aware he had violated any
                        requirements, particularly since HUD had approved a
                        conflict of interest waiver for the Section 8 Program.
                        However, the Section 8 waiver did not apply to the other
                        HUD programs.




2004-AT-1009                Page 12
                                                                        Finding 2




Auditee Comments    Excerpts from the Authority’s written comments on our
                    draft finding follow. The complete text is included as
                    Appendix B.

                    "Relative to item 2A however, the Authority requests
                    forgiveness of inappropriately guaranteed performances.
                    The present circumstances, relative to the completion of the
                    projects in question, make it extremely difficult, if not
                    impossible, to terminate the guarantees.

                    “Although we agree that mistakes have been made, we take
                    comfort in knowing that your findings are based on our
                    mistakes, and not fraudulent or deceitful conduct.

                    “This Authority, and its governing Board, is committed to
                    all necessary actions to correct those mistakes.



OIG Evaluation of   The Authority presented a willingness to work with HUD
Auditee Comments    to resolve the deficiencies, and ensure its non-profit
                    activities are properly monitored and adhere to HUD
                    regulations. However, the Authority must attempt to seek
                    removal of inequitable guarantees or demonstrate legal
                    actions if such arrangements are not removed. The
                    potential risk to Authority assets for assuming liability for
                    non-Federal activities could reduce needed resources for its
                    HUD programs and ultimately, its residents. If such
                    attempts are not achieved, HUD should require the
                    Authority to appropriately document its inability to
                    dissolve the guarantees and continually monitor the
                    projects.



Recommendations     We recommend the Director of the Office of Public Housing:

                    2A.      Require the Authority      to   pursue    terminating
                             inequitable guarantees.

                    2B.      Require the Authority to obtain HUD’s approval
                             prior to any future encumbrance of Authority assets.



                          Page 13                                     2004-AT-1009
Finding 2


               2C.      Require the Authority to establish adequate controls
                        to monitor Authority interactions with its non-profit
                        and related entities and ensure transactions comply
                        with the ACC, particularly as it relates to conflict of
                        interest situations.




2004-AT-1009         Page 14
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 objective:
 Controls
                                     •   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.

                                     To assess the relevant controls, we:

                                     •   Reviewed the laws and regulations governing the
                                         program;

                                     •   Interviewed HUD officials and Authority staff;

                                     •   Reviewed general ledgers, bank statements, and Board
                                         minutes;

                                     •   Reviewed available non-profit records, including
                                         general ledgers, bank statements, and bank loan
                                         documents; and

                                     •   Analyzed reports      from    the   independent   public
                                         accountant.

                                     A significant weakness exists if management controls do
                                     not give reasonable assurance that resource use is
                                     consistent with laws, regulations, and policies; that
                                     resources are safeguarded against waste, loss, and misuse;
                                     and that reliable data are obtained, maintained, and fairly
                                     disclosed in reports.

                                         Page 15                                    2004-AT-1009
Management Controls



                      Based on our review, we identified significant weaknesses in
                      the above management controls. See Findings 1 and 2.




2004-AT-1009              Page 16
Follow-Up On Prior Audits
This is the first Office of Inspector General audit of the Housing Authority of the City of
Northport.

LeCroy, Hunter, & Company, Certified Public Accountants, completed the most recent audit of
the Authority’s financial statements for the 12-month period ended June 30, 2002. The report
did not contain any findings. However, a Note to the financial statements indicated the
Authority advanced $430,000 to Northport Housing Limited, with $311,000 repaid. The balance
of $119,000 was an accounts receivable-miscellaneous to the Authority.




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Follow-Up On Prior Audits




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2004-AT-1009                 Page 18
                                                                                                        Appendix A

Schedule of Questioned Costs
and Funds Put to Better Use


          Recommendation                           Ineligible1                  Funds Put to Better Use2
                1A                                  $434,735
                1C                                   ( 78,334)                            $78,334
          Total                                     $356,401                              $78,334




1
    Ineligible costs are not allowed by law, contract, HUD, or local agency policies, or regulations.
2
    Funds Put to Better Use are costs that will not be expended in the future if our recommendations are
    implemented. These funds include costs not incurred, and de-obligation of funds.




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Appendix A




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2004-AT-1009    Page 20
                             Appendix B

Auditee Comments




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Appendix B




2004-AT-1009   Page 22
          Appendix B




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