Issue Date
November 1, 2004
Audit Case Number
2005-AT-1001
TO: Boyce Norris, Jr., Director, Office of Public Housing, 4APH
FROM: James D. McKay, Regional Inspector General for Audit, 4AGA
SUBJECT: The Housing Authority of the City of Carrollton
Carrollton, GA
HIGHLIGHTS
What We Audited and Why
We reviewed the Housing Authority of the City of Carrollton’s (Authority)
administration of its housing development activities as part of our audit of the
U.S. Department of Housing and Urban Development’s (HUD) oversight of
Public Housing Agency development activities with related non-profit entities.
Our primary objective was to determine whether the Authority had advanced or
encumbered resources subject to an Annual Contributions Contract (Contract) or
other agreements or regulation to the benefit of other entities without specific
HUD approval.
What We Found
The Authority advanced more than $316,495 to its private housing program, Little
River Management, without specific HUD approval. The advances were made
because the private housing program did not have sufficient income to pay its
obligations and reimburse the Authority. HUD required the Authority to repay
the funds and discontinue the advances. The Authority repaid the HUD program
$249,247, the amount owed at May 31, 2002, however; it continued to advance
funds. As of May 31, 2004, the Authority had advanced an additional $43,309.
The repayment included the cash payment and an adjustment of $120,993 the
Authority did not support. As a result, $359,804 of ineligible advances reduced
funds for its public housing program needed to serve its low-income residents. In
addition, the Authority failed to realize approximately $15,116 of interest income
because the funds were not available for investment.
The Authority did not support its allocation of administrative and maintenance
salary costs with activity reports or equivalent documentation as required. Thus,
it did not have a record of the time spent on various activities and some activities
may have paid a disproportionate share of the costs. As of June 30, 2003, the
Authority had allocated $1,062,846 to its Federal programs.
The Authority executed five loan agreements for the purchase of private property
that put $1,489,819 of its HUD funds at risk. The agreements included set-off
provisions that allowed the lender to withdraw the HUD funds on deposit if the
loan payments were not made.
What We Recommend
We recommend that HUD require the Authority to repay the $43,309 balance and
the $15,116 interest lost from non-Federal sources, ensure that no further
advances are made without prior HUD approval, and provide documentation to
support the $120,993 adjustment, or reimburse its public housing program.
We recommend that HUD ensure the Authority uses activity reports to support its
allocation of costs and makes appropriate adjustments to the $1,062,846
allocation.
Further, we recommend that HUD require the Authority to take immediate action
to terminate the agreements that have the $1,489,819 of HUD funds at risk by
either seeking a wavier of the set-off provisions, closing its accounts with the
local lender, or refinancing the loans with another lender.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06 REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We discussed our review results with the Authority and HUD officials during the
audit. We provided a copy of the draft report to the Authority officials on
September 24, 2004 for their comments and discussed the report with the officials
at the exit conference on October 8, 2004. The Authority provided written
comments on October 14, 2004.
2
The complete text of the auditee’s response, along with our evaluation of that
response can be found in Appendix B of this report.
3
TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: The Authority Improperly Advanced Federal Funds To Its Private
Housing Program 6
Finding 2: The Authority Did Not Support Its Allocation of Costs 9
Finding 3: The Authority Executed Loan Agreements That Put Its HUD Funds at 11
Risk
Scope and Methodology 13
Internal Controls 14
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 15
B. Auditee Comments 16
4
BACKGROUND AND OBJECTIVES
The Housing Authority of the City of Carrollton (Authority) was organized pursuant to the
Housing Act of 1937 and the laws of the State of Georgia. Its primary objective is to provide
low-income housing to the citizens of Carrollton, Georgia and surrounding areas in compliance
with its Annual Contributions Contract (Contract) with the U. S. Department of Housing and
Urban Development (HUD).
A five-member Board of Commissioners (Board) governs the Authority with members appointed
by the mayor of the City of Carrollton. Harlan Carroll is the Board chairman and
Sandra Morris is the executive director.
The Authority’s major program activities included administering 280 conventional low-income
units, 104 Section 8 units, and 390 private units. The private housing units are identified as
Little River Management and include single and multifamily units. Little River Management,
however, is not a separate entity. It is governed by the Authority’s Board, and its assets and
liabilities are included in the Authority’s general ledger.
HUD’s Georgia State Office of Public Housing in Atlanta, Georgia, is responsible for overseeing
the Authority.
Our overall objective was to determine whether the Authority had advanced or encumbered
resources subject to its Contract or other agreement or regulation to the benefit of other entities
without specific HUD approval.
5
RESULTS OF AUDIT
Finding 1: The Authority Improperly Advanced Federal Funds to Its
Private Housing Program
The Authority violated its Contract with HUD by advancing more than $316,495 of its public
housing funds to its private housing program, Little River Management, without HUD’s
approval. HUD required the Authority to repay the funds and discontinue the advances. The
Authority repaid the HUD program $249,247, the amount it owed at May 31, 2002, however; it
continued to advance funds. As of May 31, 2004, the Authority had advanced an additional
$43,309. The repayment included the cash payment and an adjustment of $120,993 that the
Authority did not support. The Authority advanced the funds to subsidize the operating costs of
its private housing program, because the private housing program did not have sufficient income
to pay its obligations. As a result, $359,804 of ineligible advances reduced funds for its public
housing program needed to serve its low-income residents. In addition, the Authority failed to
realize approximately $15,116 of interest income because the funds were not available for
investment.
Private Housing Program Could
Not Pay Its Expenses
Over the years, Little River Management had paid its own expenses. However, it
started experiencing financial difficulties when one of its projects, Brookwood
Apartments, could not produce the income it needed to break even. Little River
Management purchased the 318-unit project in April 1999. The project needed
repairs when it was purchased and many of the units were not available for lease.
In addition, unexpected sewer problems caused one of the buildings to be closed.
Because of the reduced rental income, Little River Management could not pay its
expenses or reimburse the Authority’s advances to pay its administrative and
maintenance salary costs. This caused the amount due the Federal program to
increase monthly. By June 30, 2001, the Authority had advanced Little River
Management $316,495 of public housing funds. The Authority’s 2001 financial
statement audit report cited the Authority for violating its Contract, by using its
public housing funds to pay the expenses of Little River Management. Section 9
(C) of the Contract, states the housing authority may withdraw funds from the
general funds only for: (1) the payment of costs of development and operation of
projects under Contract with HUD; (2) the purchase of investment securities as
approved by HUD; and (3) such other purpose as may be specifically approved by
HUD.
6
HUD Asked The Authority To
Pay Funds Back
In response to the financial statement audit report, HUD asked the Authority to
follow the recommended corrective actions. The report recommended the
Authority take steps necessary to pay back the outstanding debt to the Federal
program. During an August 2002 HUD management review, the Authority
assured HUD the practice of advancing Federal funds to the non-Federal program
would stop.
Repayment Included an
Adjustment That Was Not
Supported and Interest Income
Of $15,116 Was Lost
On June 27, 2002, the Authority borrowed $265,000 to pay back the amount due the
Federal program and to provide operating funds for its private housing program.
The loan did not encumber the Authority’s low-income housing assets. On
June 28, 2002, Little River Management settled the balance due of $249,247. The
Authority’s fee accountant determined the amount of the settlement based on the
amount Little River Management owed on May 31, 2002. The settlement, however,
included a $120,993 adjustment that the Authority could not support. The fee
accountant’s computation did not include reimbursement for interest income of
$15,116 the Authority lost because the funds were not available for investment.
Authority Continued To Fund
Private Housing Program
Little River Management was able to reimburse the Federal program monthly
during fiscal year 2003. However, during fiscal year 2004, it was unable to fully
reimburse the Federal program for funds advanced. The amount owed increased
from a negative balance of $3,029 on July 31, 2003, to $43,309 on May 31, 2004.
Authority Is Trying To Sell
Brookwood Apartments
The Authority’s fee accountant and auditor recommended the Authority sell
Brookwood Apartments to improve its financial position. The Authority agreed
with the recommendation and is in the process of selling the apartments. The
Authority has received several offers from both public and private entities. Once
Brookwood is sold, the private housing program should become self-sufficient
again.
7
Recommendations
We recommend that HUD:
1A. Require the Authority to repay its public housing program the $43,309 or
current balance owed from non-Federal sources.
1B. Require the Authority to repay its public housing program, from non-
federal sources, $15,116 for lost interest accrued as of May 31, 2002, as
well as the lost interest to date of payment.
1C. Ensure that no further advances of HUD funds are made on behalf of its
non-Federal activities, without prior HUD approval.
1D. Require the Authority to provide documentation to support the $120,993
adjustment, or repay its public housing program from non-Federal funds.
8
Finding 2: The Authority Did Not Support Its Allocation of Costs
The Authority did not support its allocation of administrative and maintenance salaries and
benefits with activity reports or equivalent documentation as required. Thus, the Authority did
not have a record of the actual time spent on the various programs and some programs may have
paid a disproportionate share of the costs. Of the $2,100,247 charged to its various programs for
the fiscal years 2001 through 2003, the Authority allocated $1,062,846 to its Federal programs.
The Authority’s management was not aware the allocation was to be based on activity reports.
As a result, the allocation of $1,062,846 was unsupported.
Budgets Were Used to Allocate
Costs
The Authority operated several programs including conventional public housing,
capital grant, Section 8, private housing, and several other grant programs. The
Authority allocated 40 percent of its administrative and maintenance costs to the
public housing programs, 44 percent to its privately owned housing program, 12
percent to a major health grant, and the remaining 4 percent to its other programs.
The Authority developed its allocation from operating budgets that were based on
the funds available for each program. As available program funds changed, it would
adjust its allocation. The Authority did not compare the budgeted estimates to actual
activity.
Total Salary and Wage Costs
Were Supported
We reviewed the total salary and wage costs charged to the Authority’s programs
from October 1, 2001 through September 30, 2003. The Authority properly
supported its salary and wage costs but did not adequately support its allocations.
Circular A-87 Requires Activity
Reports To Support Allocation
The requirement to use activity reports to support the allocation of costs is
included in Office of Management and Budget Circular A-87, Attachment B,
paragraph 11 h (4). The paragraph states, in part, where employees work on
multiple activities or cost objectives, a distribution of their salaries or wages will
be supported by personnel activity reports or equivalent documentation. The
activity reports must reflect an after the fact distribution of the activity of each
individual employee.
9
Daily Time Records Are Being
Kept
The Authority has implemented a system requiring its staff to keep a daily time
record of their activities. The executive director said the Authority would start
using these records to support the allocation of its administrative expenses. She
said that work orders would be used to support the allocation of maintenance
salaries and benefits.
Recommendations
We recommend that HUD:
2A. Require the Authority to obtain the assistance of its fee accountant or
auditor in developing a justifiable method of supporting the allocated
costs. The method could include daily activity reports prepared by its staff
and work orders to support the allocation of costs.
2B. Require the Authority to provide documentation to justify the $1,062,846
costs allocation and ensure that it makes appropriate adjustments to the
various activities.
2C. Require the Authority to develop a reasonable method for allocating its
future costs, to include daily activity reports for services performed by its
staff.
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Finding 3: The Authority Executed Loan Agreements That Put Its HUD
Funds at Risk
The Authority executed five loan agreements with the West Georgia National Bank (Bank) that
put $1,489,819 of its HUD funds at risk. The loans were for the purchase of private properties
and included set-off provisions allowing the Bank to withdraw loan payments from the HUD
accounts if the loan payments were not made. These provisions allow HUD funds to be used for
non-HUD activities, which violate the Authority’s Contract. The Authority’s management was
aware of the set-off provisions, but was not aware of the impact they could have on the HUD
funds.
Five Loans Included the Set-off
Provisions
As part of its private housing program, the Authority entered into five loans with
the Bank to purchase several properties, including single and multifamily
properties and vacant land. The Authority secured the loans with the properties.
However, it guaranteed the payment of the loans with HUD funds and other funds
it had on deposit with the Bank. The guarantee was a set-off provision included
in each loan.
Set-off Provisions Violated
HUD Contract
The set off provisions violated Section 7 of the Contract, which provides that the
Authority shall not, in any way, encumber any project covered under the Contact,
or portion thereof, without the prior approval of HUD.
The set-off provision states that the Authority agrees that the Bank might set-off
any amount due and payable under the note against any right the Authority has to
receive any money from the Bank. Right to receive money means any deposit
account balance the Authority has with the Bank.
Therefore, as of April 2004, $1,489,819 of the Authority’s HUD funds were at
substantial risk by guaranteeing the loans of its private housing program.
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Recommendation
We recommend that HUD:
3A. Require the Authority to take immediate action to terminate the
agreements that have $1,489,819 of HUD funds at risk by either
(1) seeking waivers of the set-off provisions with the Bank, (2) closing its
HUD-funded accounts with the Bank and transferring the funds to another
financial institution, or (3) refinancing the loans with another financial
institution.
12
SCOPE AND METHODOLOGY
To accomplish our audit objective we reviewed the following:
• Applicable laws, regulations, and other HUD program requirements;
• The Authority’s Contracts; and
• HUD’s and the Authority’s program files.
We reviewed various documents including: financial statements, general ledgers,
bank statements, minutes from Board meetings, check vouchers, invoices, loan
documents, related guarantee agreements, and reports from the independent public
accountant. In addition, we obtained an understanding of the Authority’s
accounting system as it related to our review objective.
We also interviewed the Georgia State Office of Public Housing program officials,
and Authority management and staff.
We performed our audit from March through July 2004. Our audit covered the
period from July 1, 2001, through June 30, 2003, but we extended the period as
necessary.
We performed our audit in accordance with generally accepted government
auditing standards.
13
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, and
• Compliance with applicable laws and regulations.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined the following internal controls were relevant to our audit objectives:
• Compliance with laws, 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.
We assessed the relevant controls identified above.
A significant weakness exists if internal controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
Significant Weaknesses
Based on our review, we believe the following items are significant weaknesses:
• The Authority did not have a system to ensure that Federal funds were properly
used and the funds were not put at risk (see findings 1 and 3).
• The Authority did not have a system to ensure that costs charged among its
various programs were properly supported (see finding 2).
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Unsupported 2/ Funds To Be
Number Put to
Better Use 3/
1A $43,309
1B 15,116
1D $ 120,993
2B 1,062,846
3A $1,489,819
Total $58,425 $1,183,842 $1,489,819
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
polices or regulations.
2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of audit. 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.
3/ Funds to be put to better use are quantifiable savings that are anticipated to occur if an
Office of Inspector General (OIG) recommendation is implemented resulting in reduced
expenditures at a later time for the activities in question. This includes costs not incurred,
de-obligation of funds, withdrawal of interest, reductions in outlays, avoidance of
unnecessary expenditures, loans and guarantees not made, and other savings.
15
Appendix B
AUDITEE COMMENTS
Auditee Comments
16
17
The Housing Authority of the City of Carrollton, Carrollton, GA
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-11-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)