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. 11 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). 12 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)