oversight

The Housing Authority of the City of Charleston Charleston, South Carolina

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-11-15.

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

                                                             Issue Date
                                                                     November 15, 2004
                                                            Audit Case Number
                                                                   2005-AT-1002




TO:        Larry Knightner, Director, Office of Public Housing, 4EPH




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

SUBJECT:   The Housing Authority of the City of Charleston
           Charleston, South Carolina

                                  HIGHLIGHTS

 What We Audited and Why

           We reviewed the Housing Authority of the City of Charleston’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 nonprofit entities.

           Our primary objective was to determine whether the Authority encumbered
           resources subject to an Annual Contributions Contract (Contract) or other
           agreement or regulation to the benefit of other entities without specific HUD
           approval. Our objective included determining whether the Authority’s cost
           allocation method complied with provisions of Office of Management and Budget
           (OMB) Circular A-87, and whether the Authority used the Section 8
           administrative fee reserves in accordance with the Contract and other regulations.


 What We Found

           The Authority did not support its allocations of $8,956,361 and costs of
           $6,681,053 in salaries, wages, and fringe benefits that were charged to the Federal
           programs, as required in OMB Circular A-87. The Authority officials believed
           their allocation method complied with the requirements. However, without
           support to substantiate the allocations and costs of actual services performed by
           personnel or some type of quantifiable measures of employee effort, the Authority
           may not have accurately charged the Federal programs.

           The Authority transferred $400,000 of its Section 8 administrative fee reserves to
           its Housing Finance Agency (Agency) fund but never expended or returned the
           funds to the reserve account, contrary to its Contract. When the Authority
           transferred the funds to its Agency account, HUD lost visibility of the funds.
           Therefore, HUD could not monitor the funds to ensure they were properly spent
           for other housing purposes, as stated in the Contract.

What We Recommend


           We recommend that the Director of the Office of Public Housing require the
           Authority to provide documentation to justify the $8,956,361of allocated costs
           and the $6,681,053 of costs without supporting certifications and ensure the
           Authority makes appropriate adjustments to the various programs.

           We also recommend that the Director of the Office of Public Housing require the
           Authority to develop a reasonable method for allocating its future costs to include
           daily activity reports and semi-annual certifications for services performed by its
           personnel.

           Further, we recommend that the Director of the Office of Public Housing direct
           the Authority to transfer the $400,000 of Section 8 administrative fee reserve
           funds back to the reserve account, along with the interest earned on the funds.

           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 Authority officials on October
           12, 2004, for their comments and discussed the report with the officials at the exit
           conference on October 21, 2004. The Authority provided written comments on
           November 4, 2004.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in Appendix B of this report.



                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                 4

Results of Audit
      Finding 1: The Authority Did Not Support Its Allocation of Costs
      to the Federal Programs                                             5

      Finding 2: The Authority’s Section 8 Administrative Fee Reserves
      Were Not Used In Accordance With Its Contract
                                                                          8

Scope and Methodology                                                     10

Internal Controls                                                         11

Follow-up on Prior Audits                                                 12

Appendix
      A. Schedule of Questioned Costs and Funds To Be Put To Better Use   13
      B. Auditee Comments and OIG’s Evaluation                            14




                                             3
                     BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Charleston (Authority) was organized in 1935. It is a
public, corporate, and political body organized under the laws of the State of South Carolina by
the City of Charleston. The purpose of the Authority is to provide adequate housing for qualified
low-income individuals in compliance with its Annual Contributions Contracts (Contract) with
HUD.

The Mayor and City Council of Charleston appoint the Authority’s seven-member Board of
Commissioners (Board) to 5-year terms. The Board elects its own chairperson and designates its
own chief executive officer, who currently is Donald J. Cameron. The chief executive officer
provides oversight over the Authority, and a chief operating officer is responsible for the
Authority’s daily operations, under the direction of the chief executive officer.

The Authority entered into Contracts with HUD to be the administrator of housing and housing-
related programs. The Authority’s funding is primarily from HUD and payments received from
tenants of the Authority-owned housing. In 2003, the Authority managed 1,383 public housing
units, administered 1,317 Section 8 vouchers, and was awarded approximately $12.3 million in
HUD funds for housing and other programs.

One of the Contracts regulates the Authority’s use of its Section 8 administrative fee reserves.
Section 12 of the Section 8 Contract states that funds in the administrative fee reserves must be
used to pay administrative expenses in excess of program receipts or, if needed, to improve
administration of the Section 8 program. Section 12 also allows remaining funds to be used for
other housing purposes if permitted by State and local law.

Our overall audit objective was to determine whether the Authority encumbered resources
subject to its Contract or other agreement or regulation to the benefit of other entities without
specific HUD approval. Our objective included determining whether the Authority’s cost
allocation method complied with provisions of OMB Circular A-87, and whether the Authority
used the Section 8 administrative fee reserves in accordance with the Contract and other
regulations.




                                                 4
                                 RESULTS OF AUDIT

Finding 1: The Authority Did Not Support Its Allocation of Costs to the
           Federal Programs

The Authority did not support its allocations of $8,956,361 in salaries, wages, and fringe benefits
charged to the Federal programs, as required in OMB Circular A-87. In addition, the Authority
did not perform certificiatons for employees who worked solely on a single Federal award or
cost objective, as required in OMB Circular A-87. As a result, charges of $6,681,053 to the
Federal Program for employees’s salaries, wages, and fringe benefits were not supported by
required certifications. The Authority did not have records of the actual time spent by employees
between Federal programs and non-Federal programs. The Authority officials believed their
allocation method complied with the requirements. However, without support to substantiate the
allocations of actual services performed by personnel or some type of quantifiable measures of
employee effort, the Authority may have inaccurately charged the Federal programs.
Therefore, the allocations and costs of $15,637,414 for salaries, wages and fringe benefits
charged to the Federal programs over the past 5-year period were unsupported.


 Allocation of Costs Was Not
 Documented

               The Authority did not have supporting documentation to support its allocations of
               salaries, wages, and related fringe benefits charged to the Federal programs.
               According to the Authority’s allocation plan, wages and related benefits of senior
               staff and general administrative positions were charged based on a time analysis,
               but the Authority could not provide the supporting documentation used to perform
               the time analysis. The Authority charged maintenance labor wages and related
               benefits on a per-unit-per-program basis as opposed to actual work orders or work
               performed.

               We inquired whether the Authority kept activity reports or equivalent
               documentation for services performed by its administrative personnel. The
               Authority stated," we believe our methodology complies with the spirit of A87
               and further believe that should actual activity reports were kept, the amounts
               applicable to the federal programs would be significantly more than its
               methodology charges and has a detrimental impact on the viability of the federal
               programs."

               We determined that the allocation method used by the Authority does not comply
               with the provisions of OMB Circular A-87 nor does it have HUD’s approval. The
               Authority did not base its cost allocation of salaries and related fringe benefits on
               actual services performed or use statistical sampling standards per OMB Circular


                                                 5
           A-87. The provisions of OMB Circular A-87, Attachment B, Section h.(4),
           comprise, 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… Budget
           estimates or other distribution percentages determined before the services are
           performed do not qualify as support for charges to Federal awards…”

           Since the Authority was unable to provide supporting documentation of actual
           services performed by personnel or some type of quantifiable measures of
           employee effort, we are questioning all allocations of administrative and
           maintenance salaries, wages, and fringe benefits that were charged to the Federal
           programs over the past 5 fiscal years, from October 1, 1998, through September
           30, 2003. During the 5-year period, the Authority charged $8,956,361of
           administrative, maintenance, and tenant service costs to the Federal programs
           without support for its allocations.

Costs Were Not Supported by
Certifications

           The Authority did not have the required certifications to support costs of
           $6,681,053 charged the Federal program for salaries, wages, and fringe benefits
           of employees who worked solely on a single Federal award or cost objective. The
           Authority did not perform certifications as required in OMB Circular A-87.
           According to OMB Circular A-87, Attachment B, Section h. (3), salary and wage
           charges for employees who are expected to worked solely on a single Federal
           award or cost objective will be supported by periodic certifications, and the
           certifications will be prepared at least semi-annually and will be signed by the
           employee or supervisory official.

           Because the Authority did not have certifications for employees who worked
           solely on a single Federal award or cost objective, we are questioning all costs
           that were charged to the Federal program for salaries, wages, and fringe benefits
           for these employees. Over the past 5 fiscal years, from October 1, 1998, through
           September 30, 2003, the Authority charged $6,681,053 of administrative,
           maintenance, and tenant service costs to the Federal programs without supporting
           certifications.




                                            6
Recommendations

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

          1A.     Require the Authority to provide documentation to justify the $8,956,361
                  of allocated costs and ensure the Authority makes appropriate adjustments
                  to the various programs.

          1B.     Require the Authority to obtain assistance in developing a justifiable
                  method of supporting the allocated costs.

          1C.     Require the Authority to develop a reasonable method for allocating its
                  future costs to include daily activity reports for services performed by its
                  personnel.

          1D.     Require the Authority to provide documentation to justify the $6,681,053
                  of costs without supporting certifications.

          1E.     Require the Authority to perform semi-annually certifications for
                  employees who work solely on a single Federal award or cost objective.




                                            7
Finding 2: The Authority’s Section 8 Administrative Fee Reserves
           Were Not Used in Accordance With Its Contract
The Authority withdrew $400,000 of its Section 8 administrative fee reserves and transferred the
funds to its Agency fund. However, the funds were not spent, which is contrary to the Contract.
Also, when the Authority transferred the funds to its Agency account, HUD lost visibility of the
funds. Therefore, HUD could not monitor use of the funds to ensure they were properly spent
for other housing purposes, as stated in the Contract.


 The Authority Did Not Use the
 Funds in Accordance With Its
 Contract


              In March 2003, the Authority transferred $400,000 of its Section 8 administrative
              fee reserves to its Agency fund. The Authority’s Board approved the transfer on
              February 25, 2003, from funds in the reserve as of September 30, 2002. The
              Board’s minutes documented that the Authority’s chief executive officer indicated
              that most of the reserves were at risk of HUD recapturing the money or not
              allowing the Authority to do whatever it wanted with the money.

              The chief executive officer told us that the reserves were transferred to
              supplement a proposed $1 million revolving loan for renovation of affordable
              housing for first-time homebuyers. The loan was to be made through the Agency
              to the City of Charleston (City). The Board’s minutes also indicated that the
              Board discussed using the $400,000 transfer to reduce the amount the Authority
              would need to borrow for the loan to the City. The Board also discussed how the
              City’s proposed affordable housing project would provide a project for which the
              funds were used productively, should HUD question the transaction. The chief
              executive officer stated that he could make a good case that the money was
              continuously benefiting the people the Authority served and that the money could
              remain active and be reused. He anticipated that HUD might attempt to recapture
              the administrative fee reserves in 2003.

              The chief executive officer informed us that the City’s plan failed so the funds
              were not used. In April 2003, the City requested that its proposal be deferred.
              The Authority’s chief operating officer stated that Authority officials interpreted
              the deferral to mean that the City’s plan failed because the proposal was never
              resumed. The chief executive officer added that the funds remained in the
              Agency account for future affordable housing renovations.

              The $400,000 has been unused in the Agency account for more than a year. The
              Contract allows use of the reserve funds for other housing purposes. However,
              transferring the funds to the Agency and not expending them does not constitute
              funds being used for other housing purposes. Therefore, the funds did not benefit


                                                8
            the people the Authority serves. The funds should be transferred back to the
            reserve account, along with the interest earned on the funds, so that HUD can
            monitor how the funds are used.

HUD Could Not Monitor Use of
The Funds


            A HUD Headquarters Public Housing official stated that it was never HUD’s
            intent for the excess funds to be transferred out of the Section 8 administrative fee
            reserves, and the Authority needs to return the $400,000 to the reserve account.
            The official added that HUD’s intent was for funds to be spent directly from the
            reserves. Otherwise, HUD could not monitor the expenditures and ensure that the
            Authority properly used the funds for other housing purposes. When the
            Authority transferred the funds to its Agency account, the funds became
            vulnerable to being used for purposes other than those allowed by the Contract
            because HUD lost visibility of the funds.


 Recommendations


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

            2A.    Require the Authority to transfer the $400,000 of Section 8 administrative
                   fee reserve funds back to the reserve account, along with the interest
                   earned on the funds, so that HUD can monitor the funds and ensure that
                   they are used for their intended purpose.

            2B.    Require the Authority’s Board to establish controls to monitor future
                   transfers of Section 8 administrative fee reserves and ensure that
                   transactions comply with the Contract and other HUD requirements.




                                              9
         SCOPE AND METHODOLOGY

To achieve our audit objectives we reviewed the following:

•    Applicable laws, regulations, and other HUD program requirements;

•    The Authority’s consolidated Contracts;

•    HUD’s and the Authority’s program files; and

•    The Authority’s accounting books and records.

We reviewed all outstanding loans and documents supporting the loans and all
outstanding notes receivable from October 1, 2001, through September 30, 2003.
We reviewed related guarantee agreements, management agreements, partnership
agreements, and the related nonprofit entity’s bylaws. We also reviewed the
Section 8 administrative fee reserves, the financial statements, and HUD’s Real
Estate Assessment Center financial data.

Additionally, we used audit software to retrieve and analyze the accounting data
from the general ledger in an electronic form provided by Authority staff. We
also interviewed HUD staff, Authority officials, and Authority accounting staff.

We performed our onsite work between March and May of 2004. Our audit
covered the period from October 1999 through September 2003, but we extended
the period as necessary.

We performed our review in accordance with generally accepted government
auditing standards.




                                10
                             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 and Regulations and

              •       Safeguarding of Resources.

              We assessed the relevant controls identified above.


 Significant Weaknesses

              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.

              Based on our review, we believe the following items are significant weaknesses:

              •   The Authority violated the requirements of OMB Circular A-87 by not
                  supporting its allocations of $8,956,361 and not performing certifications for
                  $6,681,053 in salary costs charged to Federal programs (see finding 1).

              •   The Authority violated its Contract by transferring $400,000 of its Section 8
                  administrative fee reserves to another account but not using the funds (see
                  finding 2).



                                               11
                    FOLLOW-UP ON PRIOR AUDITS

Citizen Complaints – Housing
Authority of the City of
Charleston - Audit Report No:
99-AT-204-1807

            The audit was initiated based on citizen complaints concerning the sites selected
            for the development of new public housing projects by the Authority. All
            recommendations in the report have been implemented.


Fiscal Year 2003 Audited
Financial Statements of the
Authority

            Rector & Moffitt, P.C., completed the most recent audit of the Authority’s
            financial statements for the 12-month period ending September 30, 2003. The
            financial statement report contains an unqualified opinion. The report did not
            contain any findings that required reporting under section 510(a) of Office of
            Management and Budget Circular A-133.

            There were no findings or recommendations in any of the reports that affected our
            audit objectives.




                                            12
                                       APPENDIX


Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE



                    Recommendation            Unsupported 1/        Funds To Be Put
                        Number                                      To Better Use 2/
                           1A                   $8,956,361
                           1D                   $6,681,053
                           2A                                           $400,000
                         TOTAL                 $15,637,414              $400,000




1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity where 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.

2/   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,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         14
                     OIG Evaluation of Auditee Comments




Comment 1   The Authority’s methodology to determine what percentage of employees’
            salaries should be charged to Federal programs is not in accordance with the
            provisions of OMB Circular A-87. In essence, the Authority’s comments
            indicate that allocations are determined, reviewed, and approved each year
            during the budget process. OMB Circular A-87 explicitly states that budget
            estimates or other distribution percentages determined before the services are
            performed do not qualify as support for charges to Federal awards. The
            Authority officials also comment that their allocations are based on
            interviews with staff, upcoming projects, and anticipated changes in
            employees’ duties determined at budget preparation. OMB Circular A-87
            provides that, 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 each employee’s activity.
            Further, the Authority indicates that its staff uses spreadsheets to track the
            allocations each year. We reviewed the spreadsheets and found that they are
            not equivalent to personnel activity reports because they only show
            percentages of time, by position title, allocated to various programs.




                                         15