oversight

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)

                                                             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.




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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




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                      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.




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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.




                                              11
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.




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Appendix B

             AUDITEE COMMENTS


                   Auditee Comments




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