oversight

The Jefferson County Housing Authority Birmingham, Alabama

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-02-24.

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

                                                            Issue Date
                                                                 February 24, 2005
                                                            Audit Case Number
                                                                 2005-AT-1006




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



FROM:      Sonya D. Lucas
           Acting Regional Inspector General for Audit, 4AGA

SUBJECT:   The Jefferson County Housing Authority
           Birmingham, Alabama

                                 HIGHLIGHTS

 What We Audited and Why

           We reviewed the Jefferson County Housing Authority’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 diverted or
           advanced resources subject to its low-income housing Annual Contributions
           Contract (Contract) or other low-income housing agreements or regulations to the
           benefit of the 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.

 What We Found


           The Authority inappropriately used funds in its Revolving Fund account to pay
           the expenses of its programs and nonprofit entities, including affiliated nonprofit
           corporations, in excess of the funds the programs or entities had on deposit. As of
           December 31, 2003, 19 programs or entities, including nonprofit corporations and
           other programs, owed the Revolving Fund account $2.7 million. However, the
           programs and entities only had $2 million on deposit. Therefore, the Authority
           inappropriately used funds to pay the expenses for the programs or entities. In
           addition, the Authority violated its Contract with HUD by inappropriately
           advancing public housing funds for some of its activities and activities of the
           nonprofit entities. At the end of 2003, the Authority had advanced more than
           $396,000 of public housing funds to other activities. These actions occurred
           because the Authority did not have adequate controls in place to monitor the
           Revolving Fund account.

           The Authority did not support its payment 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. For fiscal years 2000
           through 2003, the Authority did not support $3.3 million of salary costs allocated
           to Federal programs for employees dividing their time between several programs.

What We Recommend


           We recommend that HUD require the Authority to settle the $771,076 or current
           balance owed to the Revolving Fund account, and repay the $396,000 balance.

           We also recommend that HUD require the Authority to provide documentation to
           justify the $3.3 million of salary costs charged to Federal programs from 2000
           through 2003.

           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
           December 17, 2004, for their comments and discussed the report with the officials
           at the exit conference on December 20, 2004. The Authority provided written
           comments on January 3, 2005.

           The Authority generally agreed with the findings and highlighted corrective
           actions being taken. However, the Authority expressed some concerns regarding
           the improper bonuses and officials serving in dual capacities. After considering
           the Authority’s response and consulting with the Office of Inspector General’s
           legal counsel, we deleted the audit issues relating to the improper bonuses and
           officials serving in dual capacities.


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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.




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                            TABLE OF CONTENTS

Background and Objectives                                                5

Results of Audit
      Finding 1: The Authority Improperly Used and Advanced Its Funds    6

      Finding 2: The Authority Did Not Support Its Allocation of Costs   9


Scope and Methodology                                                    11

Internal Controls                                                        12

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




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                     BACKGROUND AND OBJECTIVES


The Jefferson County Housing Authority (Authority) was organized pursuant to the Housing Act
of 1937 and the laws of the State of Alabama. Its primary objective is to provide low-income
housing to the citizens of unincorporated areas of Jefferson County, Alabama, in compliance
with its Contract with HUD.

A five-member Board of Commissioners (Board) governs the Authority with members appointed
by the Jefferson County Commission. Alice Durkee is the Board chairperson, Eric Strong is
chief executive officer, Julia Reynolds is chief financial officer, and Lewis McDonald is the
executive director.

The Authority’s major program activities included administering 615 conventional low-income
units, 1,670 Section 8 vouchers, and 450 Shelter Plus Care certificates. During the past 4-years,
the Authority has expanded its projects and programs locally and state wide through the
Jefferson County Assisted Housing Corporation, an affiliated not-for-profit corporation.
Together the Authority and Jefferson County Assisted Housing Corporation own or manage over
2,500 units. Jefferson County Assisted Housing Corporation is also the participating
administrative entity for the State of Alabama under HUD’s Section 8 Mark-to-Market Program
and is the Section 8 Contract Administrator for the states of Alabama and Mississippi. Another
affiliated not-for-profit corporation, the Community Housing Development Corporation is the
lead developer for 80 houses in the tornado stricken Edgewater section of Western Jefferson
County.

HUD’s Office of Public Housing in Birmingham, Alabama, is responsible for overseeing the
Authority.

Our overall objective was to determine whether the Authority had diverted or advanced
resources subject to its low-income Contract with HUD and other low-income agreements or
regulations 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. Our objective did not include a review of the contracts administered by
the Jefferson County Assisted Housing Corporation or the Community Housing Development
Corporation.




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                                 RESULTS OF AUDIT

Finding 1:        The Authority Improperly Used and Advanced Its Funds
The Authority inappropriately used funds in its Revolving Fund account to pay the expenses of
its programs and nonprofit entities, including affiliated nonprofit corporations, in excess of the
funds the programs or entities had on deposit. As of December 31, 2003, 19 programs or
entities, including nonprofit corporations and other programs, owed the Revolving Fund account
$2.7 million. However, the programs and entities only had $2 million on deposit. Therefore, the
Authority inappropriately used funds to pay the expenses for the programs or entities. In
addition, the Authority violated its Contract with HUD by inappropriately advancing public
housing funds for some of its activities and activities of the nonprofit entities. At the end of
2003, the Authority had advanced more than $396,000 of public housing funds to other
activities. These actions occurred because the Authority did not have adequate controls in place
to monitor the Revolving Fund account.



 The Authority Inappropriately Used
 Funds To Pay Expenses

               The Authority inappropriately used funds from its HUD funded activities and its
               nonprofit activities to pay expenses in excess of the funds on deposit. The funds were
               pooled into the Authority’s Revolving Fund account. At December 31, 2003, various
               programs and entities owed the Revolving Fund account $2.7 million. For example,
               one entity, Westchester Apartments owed the Revolving Fund $1.1 million of the
               $2.7 million balance, but only had $17,000 on deposit as of December 31, 2003.

               Part C, Section 10 of the Contract, Pooling of Funds, states that the Authority
               shall not withdraw from any of the funds or accounts authorized under this section
               amounts for the projects under Contract, or for the other projects or enterprises, in
               excess of the amount then on deposit in respect thereto.

               The Authority did not have adequate internal controls for operating its Revolving
               Fund or monitoring it Revolving Fund activity. Instead of limiting payments
               from the Revolving Fund to amounts a specific program had on deposit, the
               Authority made payments in excess of funds the programs had on deposit.
               Therefore, the Revolving Fund deficit was paid by other programs. This resulted
               in programs loaning other programs funds. Since the Authority was using the
               Revolving Fund account to loan funds between programs and entities, all funds
               owed to the Revolving Fund should be settled.




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           At the end of 2003, the following 19 programs and entities owed the Revolving
           Fund $2.7 million, resulting in $771,076 more than the programs and entities had
           on deposit. The balances were not settled monthly and remained outstanding
           from month to month.

                      Program / Activity        Amount due to Revolving Fund

                OSCA Grant                              $         1,344
                CFP Grant 2001                          $         2,131
                Home Inspection Services                $         3,825
                Edgewater Rehab                         $         4,800
                Shelter Care C000005                    $         5,193
                S8 Service Coordinator                  $         6,683
                Shelter Care C100018                    $         7,032
                Housing Counseling                      $        10,078
                Eldergarden                             $        12,862
                Spring Gardens IV                       $        20,164
                ROSS Grant                              $        21,513
                Shelter Care C900002                    $        52,388
                CFP Grant 2002                          $        59,766
                Section 8                               $        95,064
                Spring Gardens I                        $       104,746
                Spring Gardens III                      $       116,377
                Spring Gardens II                       $       163,879
                Mississippi Contract Admin              $       960,850
                Westchester Apartments                  $     1,122,382

                Total Owed the Revolving
                Fund                                    $     2,771,076

Public Housing Funds Of $396,000
Were Improperly Used To Support
Other Entities and Activities


           In 1999, the Authority started using and commingling funds from various
           programs and entities into a Revolving Fund account. Low-income housing funds
           in excess of funds needed to pay the housing expenses were advanced to the
           Revolving Fund, resulting in the Revolving Fund owing public housing amounts
           ranging from $167,000 to more than $737,800 for fiscal years ending 1998 to
           2003. The loans between funds should have been settled each year. At
           December 31, 2003, the Revolving Fund owed public housing $396,000, which
           should be repaid to the public housing program.



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          Section 9 (A) 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.

Recommendations


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

          1A. Require the Authority to settle the $771,076 or current balance owed to the
              Revolving Fund account.

          1B. Require the Authority to repay its Conventional Public Housing fund the
              $396,017 or current balance owed from non-Federal sources.

          1C. Ensure future transactions comply with the Contract and other HUD
              requirements. Specifically, the Authority needs to establish controls to
              ensure pooled funds are not withdrawn for a program/entity in excess of the
              amount of funds on deposit for that particular program/entity.




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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 $11.8 million of salary cost charged to its
various programs for fiscal years 2000 through 2003, the Authority allocated $6.4 million to its
Federal programs. From the $6.4 million allocated to the Federal programs, $3.3 million was for
employees that were dividing their time between several programs and activities. The
Authority’s management was not aware allocations should have been based on activity reports.
As a result, the allocation of $3.3 million was unsupported.


 Chief Financial Officer’s Estimates
 Were Used to Allocate Costs
              The Authority operated approximately 30 programs and entities, including
              conventional public housing, capital grant, Section 8, and a not-for-profit
              corporation. The Authority’s Chief Financial Officer determined how salary costs
              were allocated. The Chief Financial Officer said that salaries were charged on a
              direct basis whenever possible. All other salaries were allocated based on either
              number of units, budgeted income, budgeted income adjusted for estimated time
              spent, or work assignments by the Maintenance Director.

              The Authority’s former Controller said that he and the other employees told the
              Chief Financial Officer how much time they thought they were spending on various
              activities and she determined the allocations. He did not know how she allocated the
              costs or what amounts were actually charged. No time allocation or activity records
              were kept; they simply estimated how their time was spent.

 Circular A-87 Requires Activity
 Reports To Support Allocation

              The requirement to use activity reports to support the allocation of costs is
              included in OMB 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.

              Since the Authority did not support its allocation of costs, we are questioning
              $3,361,785.



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Recommendations


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

           2A.    Require the Authority to obtain assistance in developing a justifiable
                  method of supporting the allocated costs. The method could include daily
                  activity reports prepared by its personnel and work orders to support the
                  allocation of the costs.

           2B.    Require the Authority to provide documentation to justify the $3,361,785
                  of salary costs allocated to Federal programs for years 2000 to 2003, and
                  ensure the Authority makes appropriate adjustments to the various
                  programs. In addition, require the nonprofit to reimburse the Authority for
                  any of its salary costs allocated to Federal programs for years 2000 to
                  2003.

           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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                        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, management agreements, partnership 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 HUD Birmingham Field Office Public Housing officials, and Authority
management and staff.

We performed our audit from March through September 2004. Our audit covered the period
from January 1, 1998, through December 31, 2003. As necessary we extended the period.

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




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                             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 finding 1).

              •   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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                                       APPENDIX

Appendix A

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


      Recommendation                                                        Funds To Be Put
          Number                Ineligible 1/         Unsupported 2/        To Better Use 3/

              1A                                                                 $ 771,076
              1B                  $ 396,017
              2B                                        $ 3,361,785
      Total                       $ 396,017             $ 3,361,785              $ 771,076


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
     policies 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. This includes costs
     not incurred, de-obligation of funds, withdrawal of interest, reductions in outlays,
     avoidance of premature rehabilitation, loans and guarantees not made, and other savings.
     In this report, this represents the additional funds that would be available to the Authority
     for preventive maintenance intended to reduce the accelerated deterioration of the
     Authority’s capital assets.




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Appendix B

        AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         14
15
Comment 1




            16
Comment 2




            17
Comment 3




            18
19
20
21
22
23
24
                      OIG Evaluation of Auditee Comments




Comment 1   The Authority’s practice of using its Revolving Fund account to loan money
            between funds and entities is not in accordance with HUD requirements.
            Although the Authority’s Director agreed that the practice of loaning money
            between funds certainly existed and indicated corrections were in process
            and planned, the Authority does not want to eliminate the practice
            completely. Therefore, the Authority does not want to comply with
            recommendation 1C1, which provides for establishing controls needed to
            prevent the prohibited practice. The Authority, in Part C, Section 10 of its
            Annual Contribution Contract with HUD, agreed that it would not loan
            pooled monies between programs or enterprises in excess of amounts these
            programs or entities had on deposit. The Authority’s practices violated this
            requirement and should be corrected.

Comment 2   The Authority’s methodology to determine what percentages of employees’
            salaries should be charged to Federal programs is not in accordance with the
            provisions of OMB Circular A-87. The Authority comments indicate that
            basing allocations on the Chief Financial Officer’s cost estimates were in
            compliance with OMB Circular A-87. 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. It further 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.
            The Authority’s policies and procedures did not provide for any after the fact
            documentation to support its allocations.

Comment 3   Based on the Authority’s response relating to the improper bonuses and
            officials serving in dual capacities, we modified our report by deleting the
            issues and recommendations.




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