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.
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 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
4
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.
5
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.
6
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.
7
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.
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 $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.
9
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.
10
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.
13
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.
25
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)