Issue Date
March 25, 2004
Audit Case Number
2004-PH-1005
TO: William D. Tamburrino, Baltimore Public Housing Program HUB, 3BPH
FROM: Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic, 3AGA
SUBJECT: Petersburg Redevelopment and Housing Authority
Nonfederal Entities
Petersburg, Virginia
INTRODUCTION
We audited the Petersburg Redevelopment and Housing Authority’s (Authority) interface
with its three affiliated nonfederal entities. Our objective was to determine if the
Authority improperly used U.S. Department of Housing and Urban Development (HUD)
funds to develop and support these entities.
To accomplish our objective we reviewed applicable federal and HUD regulations, and
the Authority’s Annual Contributions Contract with HUD. We also interviewed
appropriate Authority and HUD Program staff and reviewed other relevant documents
including partnership agreements, financial statements, general ledgers, bank statements,
bank loan agreements, related correspondence, and minutes from Board meetings.
We conducted the audit from July 2003 through December 2003. The audit covered the
Authority’s operations from January 2000 through December 2003. We expanded the
scope of the audit as necessary and performed the audit in accordance with generally
accepted government auditing standards.
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 and 120 days
after report issuance for any recommendation without a management decision. Also, please
furnish copies of any correspondence or directives issued because of the audit.
Should you or your staff have any questions please contact Mr. John Buck, Assistant
Regional Inspector General for Audit, at (215) 656-3401, extension 3486.
SUMMARY
The Authority regularly used federal funds improperly to support its nonfederal entities
and placed its Annual Contributions Contract assets at risk by improperly guaranteeing
the debt of two of its three affiliated nonfederal entities. This occurred because the
Authority did not properly account for work its employees performed, and failed to
establish appropriate management controls to prevent it from encumbering or pledging its
federal assets without HUD approval. The Authority’s high management turnover,
inadequate financial system, and practice of allowing key Authority personnel to serve in
similar roles for its nonfederal entities contributed to these problems.
As a result, the Authority improperly pledged assets to guarantee debt incurred by its
nonfederal entities estimated at $950,318. Additionally, the Authority paid salaries
estimated at $620,236 from federal funds for work its employees performed in support of
its affiliated nonfederal entities on a part-time basis from January 2001 until December
2003. Further, we estimated the Authority could more effectively utilize another
$370,415 annually by ensuring it was properly accounting for and receiving
reimbursement for work its employees performed for its affiliated nonfederal housing
projects, and by preventing apparent conflict of interest situations in the future. Under
the Consolidated Annual Contributions Contract, these activities may be considered
events of substantial default.
BACKGROUND
The Petersburg Redevelopment and Housing Authority was established in 1968 to provide
safe and sanitary housing for the low-income citizens of the city of Petersburg, Virginia.
The Authority’s mission is to serve its citizens by providing affordable housing
opportunities in a safe environment, revitalizing and maintaining neighborhoods, providing
opportunities for low and moderate-income homeownership, and continuing an active
partnership with the city of Petersburg. The City Council appoints a seven-member Board
of Commissioners to govern the Authority. The present Board Chairman is Robert Jones.
The current Executive Director is Julian Marsh. The Authority is located at 128 South
Sycamore Street in Petersburg, Virginia.
The Petersburg Redevelopment and Housing Authority owns and manages 479 public
housing units under its Consolidated Annual Contributions Contract with HUD. The
Consolidated Annual Contributions Contract defines the terms and conditions under which
the Authority agrees to develop and operate all projects under the agreement. HUD
provided the Authority the following financial assistance from Fiscal Years 1999 to 2002:
• $4.3 million Operating Subsidy to operate and maintain its housing developments.
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• $3.4 million Capital Fund Program and Comprehensive Grant Program funding to
modernize public housing units.
• $10.6 million to provide housing assistance through tenant-based Section 8
certificates and vouchers.
• $323,430 Public Housing Drug Elimination Program funds to eliminate or reduce
drug related crime and other major crime and disorder problems.
Virginia state law also allows housing authorities to form non-stock and nonprofit entities
for the purpose of developing low-income housing outside of HUD. In addition to the
projects under its Consolidated Annual Contributions Contract with HUD, the Authority
established the Petersburg Housing Corporation in April 1992 to develop nonfederal low-
income housing projects. Two non-stock corporations known as Petersburg Housing
Corporation I and II later replaced the Petersburg Housing Corporation as the general
partners for the Authority’s nonfederal housing projects. The Authority also currently
acts as the management agent for a third nonfederal project. In total, the Authority
manages an additional 138 units outside of HUD at the three projects. The current
relationship between the Authority and its affiliated nonfederal entities is shown below:
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Authority officials created the Wythe Row Limited Partnership to acquire, finance,
rehabilitate, construct, own, operate and lease 12 units of low- and moderate-income
housing. The Authority formed the Washington Columns Limited Partnership to
develop, construct, own, maintain and operate a 26-unit project for rental to elderly
persons of low-income. This Limited Partnership also rehabilitated the Robert E. Lee
School building and “Blue House” on West Washington Street. Officials also created
separate Petersburg Housing Corporations (PHC) to act as general partners for Wythe
Row and Washington Columns. Additionally, the Authority is the management agent
for Gillhaven Manor, a Section 202 Project1 containing one hundred housing units.
Downtown Churches United and the Gillfield Housing Corporation own Gillhaven
Manor.
FINDING
THE AUTHORITY IMPROPERLY USED FEDERAL FUNDS TO SUPPORT ITS
AFFILIATED NONFEDERAL ENTITIES
The Authority used federal funds improperly on a regular basis to support its affiliated
nonfederal entities and also improperly pledged assets to guarantee the debt of two of its
three affiliated nonfederal housing projects. This occurred because it did not properly
account for work its employees performed and did not take measures to ensure Authority
assets were not encumbered or pledged without HUD approval. Specifically, officials did
not prepare personnel activity reports or time sheets for services performed by the
Executive Director, management staff, all accounting personnel, the Human Resources
Specialist, and some maintenance personnel. The Authority’s management turnover,
inadequate financial system, and potential conflicts of interest contributed to these
problems.
The Authority’s encumbering of assets without HUD approval may constitute grounds
for a declaration of substantial default of its Consolidated Annual Contributions Contract
with HUD. Further, the Authority violated the conflict of interest provisions of its
Contributions Contract. As a result, the Authority improperly guaranteed debt incurred by
its nonfederal entities estimated at $950,318. Additionally, it improperly paid salaries
estimated at $620,236 from federal funds for work its employees performed in support of
its affiliated nonfederal housing projects on a part-time basis from January 2001 until
December 2003. Further, we estimated the Authority could more effectively utilize
another $370,415 annually by ensuring it was properly accounting for and receiving
reimbursement for work its employees performed for its affiliated nonfederal housing
projects, and by preventing apparent conflict of interest situations in the future. Under
the Consolidated Annual Contributions Contract, these activities may be considered
events of substantial default.
The Authority Improperly Pledged Annual Contributions Contract Assets
The Authority violated its Annual Contributions Contract by guaranteeing debt, estimated at
$950,318, of its affiliated nonfederal housing projects. In so doing, the Authority placed
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federal funds at risk by improperly pledging assets covered by the contributions contract
without prior approval from HUD. Encumbering assets, or pledging Annual Contributions
Contract assets as collateral for a loan, constitutes grounds for a declaration of substantial
default of the contributions contract1. To illustrate:
• The Chairman of the Board of the Authority signed an agreement in May 1999,
which obligated the Authority to absolutely and unconditionally guarantee all of the
debt of the Wythe Row Limited Partnership. According to a document attached to
the Wythe Row Limited Partnership Agreement entitled “Affiliate Guaranty”, the
Petersburg Redevelopment and Housing Authority is responsible for all the
"indebtedness" of the Wythe Row Limited Partnership. The document did not
identify what assets the Authority would use in the event it was required to pay off
the Partnership’s current or future debts. By signing this absolute and unconditional
guarantee of all of the debt of the Wythe Row Limited Partnership however, the
Chairman of the Board created an unknown and potentially large contingent liability,
and placed the Authority’s assets at substantial risk. While the future indebtedness of
Wythe Row Limited Partnership is unknown at this time, our review of financial
records showed that as of November 2003, the Partnership owed $550,318 to its
creditors.
• The Chairman of the Board of the Authority signed a Promissory Note while also
serving as the President of the Petersburg Housing Corporation in February 2002.
The note required the Authority to pay $400,000 of the Washington Columns
Limited Partnership debt should it go into default. The document did not identify
which assets the Authority would use to pay the debt. As a result, the Authority
placed federal funds at substantial risk, in non-compliance with the Annual
Contributions Contract.
The Authority’s Executive Director could not tell us or provide documentation identifying
what Authority assets would be used to cover these contingent liabilities. In the absence of
documents identifying the funds that would be used to pay these contingent liabilities, there
is substantial risk to the Authority’s Annual Contributions Contract assets if the entities go
into default.
The Authority Did Not Properly Account for All Personnel Services It Provided to Its
Nonfederal Entities
According to the Authority’s financial records as of August 2003, its nonfederal entities
owed the Authority $102,570 for work Authority employees performed on a full-time
basis to support the nonfederal entities. These expenses consisted primarily of salaries
and fringe benefits for two Authority employees who worked full-time at Washington
Columns and five Authority employees who worked full-time at Gillhaven Manor.
However, during our review we found the Authority used a number of other employees,
on a part-time basis, to provide significant support to its nonfederal projects that it did not
properly account for in its books. Specifically, the Authority failed to prepare personnel
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Section 17 – Notices, Defaults, Remedies
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activity reports or time sheets to support services performed by the Executive Director,
management staff, accounting personnel, human resources specialist, and several
maintenance personnel. In total we estimate the Authority paid $620,236 from its Annual
Contributions Contract funds from January 2001 until December 2003 for salary and
benefits for Authority employees who worked to support the nonfederal housing
developments. As such, in the future we estimate the Authority will be able to use
$206,7452 more effectively on an annual basis by properly accounting for the work of its
employees.
The Authority’s Consolidated Annual Contributions Contract with HUD requires it to
maintain records that identify the source and allocation of its funds. This key
management control is critical in order to ensure the Authority spends federal funds,
provided through its Annual Contributions Contract, only in accordance with the
regulatory requirements of each specific federal program. Further, the contract specifies
that the Authority can only withdraw federal funds for the payment of costs associated
with the development and operation of projects under its Annual Contributions Contract
or other projects specifically approved by HUD. Thus, when employees work on
multiple programs, a distribution of their salaries should be supported by personnel
reports or equivalent documentation.
Further, the Office of Management and Budget Circular A-87 requires the Authority to
assign costs to benefited activities on a reasonable and consistent basis. Formal
accounting and other records should support all costs and other data used to distribute the
costs included in its cost allocation plan, including the support needed to establish the
propriety of the costs assigned to the federal awards.
Authority officials told us that since their affiliated nonfederal entities did not have their
own employees, these entities relied on the Authority’s employees to provide much of the
needed support. However, in doing so without properly reimbursing the Authority,
officials improperly used federal funds to sustain their affiliated nonfederal entities and
violated the terms of their Annual Contributions Contract with HUD.
Since the Authority did not have an allocation plan or maintain time sheets to properly
account for work its employees performed at both its federal and nonfederal properties, we
estimated the total salary and fringe benefits that the low-income housing fund paid to
support the nonfederal entities. Our estimate was calculated by multiplying the total salary
and benefits costs, that were paid to the individuals we identified as having worked on both
the federal and nonfederal, by the percentage the nonfederal units comprised of the total
units under the Authority’s management. We found the Authority managed a total of 617
low-income housing units and that 138 of these units were not covered by its Annual
Contributions Contract. As illustrated below, the percentage of employee salaries that
should have been fairly allocated to the nonfederal entities was 22-percent (138 nonfederal
units divided by 617 total units).
2
$620,236 divided by 3 years equals $206,745 per year.
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Nonfederal
Units
22%
Federal
Units
78%
Based on the accounting records of the Authority, total salaries and benefits paid to these
individuals from January 2001 through December 2003 totaled $2,819,255. Since the
nonfederal units under management accounted for 22-percent of the Authority’s total
units, we calculated the ineligible payments to be $620,236.
Nonfederal Entities Owed the Authority Over $100,000 for Full-time Support
As previously discussed, the Authority’s nonfederal entities owed the Authority $102,570
for work Authority employees performed on a full-time or dedicated basis. These
expenses consisted primarily of salaries and fringe benefits of two Authority employees
dedicated to Washington Columns and five Authority employees working full-time at
Gillhaven Manor. As of August 2003, the three nonfederal entities owed the following:
Nonfederal Project Amount
Washington Columns $ 69,214
Gillhaven Manor $ 29,103
Wythe Row $ 4,253
Total $102,570
The Authority used a due from/due to accounting system to account for expenses of its
nonfederal entities, including salaries and benefits of its employees working for the
nonfederal entities full-time. Housing authorities typically use this system when they pay
obligations for more than one program or entity from a general fund/revolving fund. They
may also use such accounting for transactions directly between other funds and/or other
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entities included within the general ledger. A program or entity's due-to balance represents
amounts it owes (payable) another fund or entity for disbursements and/or advances made in
its behalf. Conversely, a due-from balance (receivable) represents an amount owed the
entity. The Authority should ensure that its balances due from its nonfederal entities are
settled on a monthly basis and not carried forward.
The Authority should take immediate action to recover the $102,570 it is owed from its
nonfederal entities. Our review showed the Authority was regularly owed similar large
balances from its affiliated nonfederal entities since at least January 2001. Thus, we
estimated that in the future, the Authority will be able to use an estimated $102,570 more
effectively on an annual basis by ensuring that balances due from its nonfederal entities are
settled on a monthly basis and not carried forward for its employees working full-time in
support of its nonfederal housing projects.
Management Turnover Exacerbated Accounting Problems
The Authority had major turnover in key management positions that contributed
significantly to its accounting problems. For example, the Authority has been without a
Finance Director for over seven months (since June 2003). During 2002 and 2003, three
different individuals held the position of Finance Director. The Authority removed one of
those individuals from the position because of problems associated with its Fiscal Year 2000
financial audit. The next Finance Director served only six months. She was replaced by an
individual who was also serving as Vice Mayor of Petersburg. This individual resigned in
June 2003 because of apparent conflicts of interest identified by our audit (discussed below).
Our review also showed the Authority’s accounting system did not always produce reliable
data. Specifically, the interfund due to the low-income housing fund in the Fiscal Year 2001
audit of the Authority’s financial statements did not agree with either the electronic or hard
copy data. Additionally, we could not adequately track funds owed to the Authority by the
nonfederal entities. We believe the turnover of key financial management personnel and the
failure of the Authority to fill the position timely contributed to a great extent to the
Authority’s inability to produce reliable historical financial data. We will address problems
associated with the Authority’s inadequate financial system and other related audit issues in
greater detail in a subsequent audit report.
Apparent Conflicts of Interest Existed
Our audit also identified apparent conflicts of interest at the Authority. The Consolidated
Annual Contributions Contract prohibits the Authority from entering into any contract or
arrangement in connection with any project under the contract in which several classes of
people have an interest, direct and indirect, during his or her tenure or for one year
thereafter. These classes include any present or former member or officer of the governing
body of the Authority, any Authority employee who formulates policy or who influences
decisions with respect to the project(s), and any public official who exercises functions or
responsibilities with respect to the project(s) or the Authority.
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During the audit we found that the Authority’s Finance Director was also serving as the
Vice Mayor of the City of Petersburg. In addition to the apparent conflicting priorities of
the positions, the individual was earning compensation and had a financial interest in both
positions. Therefore, in our opinion, an apparent conflict of interest situation existed. After
we raised concerns about potential conflicts of interest with this arrangement, he attempted
to obtain a waiver of this requirement from HUD. HUD declined the waiver request
however, and the individual was required to resign as Finance Director. Since the
individual’s salary and benefits as Finance Director were valued at about $61,100 annually,
we believe these are funds that the Authority can put to better use in the future by preventing
apparent conflict of interest situations.
We further found that another apparent conflict of interest situation may have occurred
because the Chairman of the Board of the Authority signed a Guaranty Agreement and a
Promissory Note while also serving as the President of its affiliated nonstock corporations.
As stated previously, the Consolidated Annual Contributions Contract prohibits the
Authority from entering into any contract or arrangement in connection with any project
under the contract in which an officer of the governing body of the Authority has an interest,
direct and indirect. While HUD is permitted to waive this requirement for good cause, the
Authority did not obtain the needed waiver.
In our opinion, the Authority’s practice of allowing key Authority personnel to serve in
similar roles for its nonfederal entities contributed to its problems. By allowing this
practice, and not implementing effective controls to compensate for it, the Authority
accepted substantial and unacceptable risk to its assets. The Authority could have mitigated
much of this risk however, by obtaining a formal resolution from its Board of
Commissioners and requesting HUD approval authorizing these agreements guaranteeing
the debt of its affiliated nonfederal entities. It did not do so. Regrettably, in addition to the
apparent conflict of interest, these agreements improperly encumbered Consolidated Annual
Contributions Contract assets estimated at $950,318 without HUD or Board approval.
New Executive Director Appointed in April 2003
In April 2003, the Board of Commissioners appointed a new Executive Director who
inherited major challenges. While the current accounting staff and the newly appointed
Executive Director expressed a desire to correct the Authority’s deficiencies, they could not
adequately explain why the Authority does not adequately or accurately account for and
allocate costs. They also could not tell us what assets the Authority would use to cover its
contingent liabilities. In summary, we believe the Authority’s failure to properly allocate
and account for significant costs related to accounting, maintenance and other services it
provided to its nonfederal entities, and its pledging of future Consolidated Annual
Contributions Contract assets, may be grounds for a declaration of substantial default of its
contract with HUD.
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AUDITEE COMMENTS
We discussed the draft findings with Authority personnel during the audit, and at an exit
conference with the Executive Director on February 23, 2004. The Authority provided
written comments to our draft findings on March 12, 2004. In its response, the Authority
acknowledged it needed to take action to ensure it did not improperly pledge
Consolidated Annual Contributions Contract assets, and to ensure it properly accounted
for all personnel services it provided to its nonfederal entities. The Authority also agreed
its management turnover exacerbated its accounting problems, and it did not properly bill
or collect funds owed by its nonfederal entities. The Authority further acknowledged it
needed to take action to ensure apparent conflicts of interest did not exist.
The Authority stated it recently hired a consultant to prepare a cost allocation plan.
Based on this newly created allocation plan, and its belief it received management fees
from the entities, the Authority stated it earned a profit for providing services through its
nonfederal entities. The Authority also stated that going forward, it would ensure it used
only nonfederal assets to guarantee debt incurred by its nonfederal entities, and it would
consult with HUD whenever it perceives an apparent conflict of interest. Lastly, the
Authority stated it would begin billing and collecting funds owed by its nonfederal
entities on monthly basis.
OIG EVALUATION OF AUDITEE COMMENTS
We considered the Authority’s comments in preparing the final report and included the
full narrative portion of its response, without attachments, as Appendix B. The
Authority’s complete response, including attachments, is available upon request.
We are encouraged that the Authority acknowledged the management control weaknesses
our audit identified, and has begun taking actions to strengthen its management controls.
However, we question the Authority’s assertion that it made a profit for providing
services through its nonfederal entities. In this regard, we reviewed the cost allocation
plan the Authority’s consultant provided us at our exit conference.
During our audit we found the Authority used a number of employees, on a part-time
basis, to provide significant support to its nonfederal projects that it did not properly
account for in its books. However, the plan submitted by the Authority did not account
for these employees. Further, in its written response, the Authority acknowledged that its
financial records have been in disarray. In this regard, the Authority could not support its
claim that it received management fees from its nonfederal entities. The Authority’s
inability to support that it received management fees, coupled with its failure to allocate
all relevant costs, cast significant doubt on its contention that it realized a profit from its
nonfederal entities. On the contrary, our audit showed the Authority provided significant
assistance to these entities using federal assets.
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RECOMMENDATIONS
We recommend that HUD:
1A. Require the Authority to take immediate action to withdraw its pledge of
Consolidated Annual Contributions Contract assets.
1B. Take appropriate administrative action against the Chairmen of the Authority’s
Board of Commissioners responsible for pledging assets covered by the
Consolidated Annual Contributions Contract without prior approval from HUD.
1C. Require the Authority to submit all agreements in which it is guaranteeing debt to
HUD for approval and ensure that its assets are not encumbered or pledged without
HUD approval in the future.
1D. Review issues contained in this audit report, and if appropriate, initiate action to
declare the Authority in substantial default of its Consolidated Annual Contributions
Contract, and take appropriate administrative action as detailed in Section 17
(Notices, Defaults and Remedies) of the Contract.
1E. Require the Authority to recover $620,236 from its nonfederal entities for employee
expenses not properly allocated to the nonfederal entities or repay it from nonfederal
funds.
1F. Require the Authority to develop a reasonable method for allocating its future costs
to include preparing personnel activity reports or time sheets for services performed
by its employees.
1G. Require the Authority to recover $102,570 from its nonfederal entities for work
performed by its employees on a full-time basis in support of the entities or repay it
from nonfederal funds.
1H. Require the Authority to ensure that its due-from balances are settled on a monthly
basis and not carried forward.
1I. Require the Authority’s Board of Commissioners to implement appropriate
measures to prevent and resolve apparent conflict of interest situations.
1J. Require the Authority’s Board of Commissioners to establish controls to monitor
Authority interactions with its affiliated nonfederal entities and ensure transactions
comply with its Consolidated Annual Contributions Contract and other HUD
requirements.
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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 policies, procedures, control systems, and other management tools
implemented to ensure that the nonfederal entities pay for all the services provided by the
Authority were relevant to our audit objective. It is a significant weakness if
management controls do not provide reasonable assurance that the process for planning,
organizing, directing, and controlling program operations will meet an organization’s
objectives.
Based on our review, we believe the following items are significant weaknesses:
The Authority did not:
• Properly account for services performed by its management and staff personnel
for its nonfederal entities.
• Ensure that its nonfederal entities pay for all services provided by the Authority.
• Ensure that its Annual Contributions Contract assets are not encumbered or
pledged without HUD approval.
• Ensure that its due-from balances are settled on a monthly basis and not carried
forward.
• Ensure it took appropriate measures to prevent and resolve apparent conflict of
interest situations.
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Appendix A
SCHEDULE OF QUESTIONED COSTS
Funds Put to Better
Recommendation Number Ineligible Costs 1/ Use 2/
1A $ 950,318
1E $620,236
1F $ 206,745
1G $ 102,570
1I $ 61,100
Total $620,236 $1,320,733
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
activity that are not allowed by law, contract, or federal, state or local policies or
regulations.
2/ Funds put to better use quantify monetary savings from management actions that
prevent improper obligations or expenditures of agency funds or avoid
unnecessary expenditures.
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Appendix B
AUDITEE COMMENTS
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15
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Petersburg Redevelopment and Housing Authority Nonfederal Entities Petersburg, Virginia
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-03-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)