oversight

The Town of Crossville, TN, Housing Authority Improperly Used Public Housing Funds for Other Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-07-06.

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

                                                              Issue Date
                                                                      July 6, 2005
                                                             Audit Case Number
                                                                      2005-AT-1012




TO:        Karl H. Kucen, Director, Office of Public Housing, Memphis Hub, 4KPH




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

SUBJECT:   The Town of Crossville, TN, Housing Authority Improperly
           Used Public Housing Funds for Other Activities


                                    HIGHLIGHTS

 What We Audited and Why

           Because of indications of violations of U.S. Department of Housing and Urban
           Development (HUD) requirements, the Office of the Inspector General reviewed
           the Town of Crossville Housing Authority’s (Authority) housing development
           activities. Our primary objective was to determine whether the Authority used
           public housing funds for development activities in violation of its annual
           contributions contract or other requirements. Our second objective was to
           determine whether the Authority’s cost allocation procedures complied with
           Office of Management and Budget requirements.


 What We Found

           The Authority spent $583,800 from its public housing programs for ineligible
           activities. In violation of its annual contributions contract, the Authority used the
           funds to support its affordable housing development activities, including several
           tax credit properties substantially owned by other entities. As a result, the funds
           were not available for operation or modernization of the Authority’s public



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           housing units. This occurred because management mistakenly believed it was
           allowed to use the funds for the development activities.

           The Authority did not adequately support costs allocated to its federal programs
           as required by Office of Management and Budget Circular A-87. The Authority
           estimated cost allocations but did not reevaluate the accuracy of the estimates and
           make necessary adjustments. In addition, it did not prepare required
           certifications. This occurred because the Authority was not aware of the
           requirements. Without adequate support, the Authority cannot assure that its
           various programs, including HUD programs, paid only their fair share of costs.

What We Recommend

           We recommend that the director of the Office of Public and Indian Housing
           require the Authority to reimburse its conventional public housing program
           $417,800, recapture $130,000 in capital funds, provide guidance to the Authority
           regarding proper disposition of $36,000 from the sale of public housing land, and
           periodically review the Authority’s use of public housing funds to verify that the
           funds are not used for ineligible purposes. The director should also require the
           Authority to develop cost allocation procedures that are in compliance with Office
           of Management and Budget Circular A-87.

           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 the findings with the Authority during the audit and at an exit
           conference on June 8, 2005. The Authority did not agree with our
           recommendation to recapture $130,000 in capital funds.

           The complete text of the Authority’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                                                           4

Results of Audit
      Finding 1: The Authority Spent $583,800 in Public Housing Funds for Ineligible 5
      Activities

      Finding 2: The Authority Did Not Support Allocation of Costs                  8

Scope and Methodology                                                               10

Internal Controls                                                                   11




Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                12
   B. Auditee Comments and OIG’s Evaluation                                         13




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                      BACKGROUND AND OBJECTIVES

The Town of Crossville Housing Authority (Authority) was organized in 1952 pursuant to the
Tennessee Housing Authorities Law. The Authority’s mission is to serve low-income families
within its jurisdiction through the provision of safe and sanitary affordable housing. The
Authority operates 329 units of conventional public housing and administers 333 housing choice
vouchers. The Authority also manages and serves as general partner in several properties it
developed using low-income housing tax credits. The limited partner investors who purchased
the tax credits substantially own these properties, but the Authority retained the right to purchase
the properties after the tax credit compliance period. The Authority also provides affordable
housing, including homeownership opportunities through properties acquired and/or developed
through the U.S. Department of Housing and Urban Development’s (HUD) HOME Investment
Partnerships Program (HOME) and housing programs of the U.S. Department of Agriculture.

A five-member board of commissioners appointed by the mayor of Crossville governs the
Authority. J. Robert Mitchell is the board chairperson, and Donald R. Alexander is the executive
director.

HUD’s Knoxville, Tennessee, Office of Public and Indian Housing is responsible for overseeing
the Authority.

Our primary objective was to determine whether the Authority used public housing funds for
development activities in violation of its annual contributions contract or other requirements.
Our second objective was to determine whether the Authority’s cost allocation procedures
complied with Office of Management and Budget requirements.




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                                                 4
                                       RESULTS OF AUDIT


Finding 1: The Authority Spent $583,800 in Public Housing Funds
           for Ineligible Activities
The Authority inappropriately used $583,800 from its public housing general fund to support its
affordable housing development activities, including several tax credit properties substantially
owned by other entities. As a result, the funds were not available for operation or modernization
of the Authority’s public housing units. This occurred because management mistakenly believed
it was allowed to use the funds for the development activities.

    Ineligible use of $583,800



                 As of December 31, 2004, the Authority’s books and records showed accounts
                 receivable totaling $583,800 due from 21 related funds or entities. We reviewed
                 the six largest receivables totaling $451,592, or about 77 percent of the total.
                 Most of the receivables arose out of the use of public housing funds for
                 non-public-housing development.

                         Account no.        Account description                      Amount
                         1129.1900          Braun St. Apts.                         $180,915
                         1129.3200          Accts Rec HOMES1 (CFP)                   130,000
                         1129.1000          Accounts Rec. HOMES Other                 40,568
                         1129.2800          Mutual Self Help                          37,449
                         1129.8000          A/R HOMES (Sale of Braun)                 36,000
                         1129.1400          Rec. Day Care                             26,660
                            Total                                                   $451,592


                 In April 2001, the Authority loaned $180,915 from its public housing operating
                 account to Braun Cove Apartments LP to fund development cost overruns for a
                 tax credit property. The Authority was both the project developer and general
                 partner but was not authorized to use HUD funds for the property.

                 The Authority also used $130,000 from its Public Housing Capital Fund program
                 to help finance several non-HUD developments including other tax credit
                 developments. It used $100,000 from its year 2000 grant and $30,000 from its
                 year 2001 grant. Management agreed it misused the funds but said that at the
                 time, it believed such use of capital funds was permissible. Management recently
                 realized such use was improper.

1
      The Authority maintained a “HOMES” account. This account included both HUD HOME funds and other
      funds for development of homes.


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          The U.S. Housing Act of 1937, as amended, Section 9(j), provides penalties for
          slow expenditure of capital funds. Public housing agencies shall obligate any
          assistance received under this section not later than 24 months after the date on
          which the funds become available to the housing agency for obligation for
          modernization or the date the housing agency accumulates adequate funds to
          undertake the modernization, substantial rehabilitation, or new construction of
          units. Any assistance must be spent not later than four years after the date the
          funds become available to the agency for obligation. Section (j)(6) provides HUD
          the right to recapture amounts for violation of the requirements. Because the
          $130,000 was not available for authorized capital fund activities, the Authority
          failed to obligate it within 24 months as required. Thus, HUD should recapture
          the funds.

          The $36,000 account receivable pertains to sales proceeds for land the Authority
          sold to a tax credit partnership. HUD released the Declaration of Trust to permit
          the Authority to use the surplus land for the tax credit development. Since the
          Authority obtained HUD’s approval, we did not take exception to the land sale.
          However, rather than depositing the $36,000 in sales proceeds into its public
          housing operating account, the Authority deposited it into its HOMES account.
          Management stated that it asked HUD how it should dispose of the sales
          proceeds, such as using the funds for public housing or submitting the funds to
          HUD. The Authority agreed that it should return the funds to its public housing
          account but awaits instructions as to whether it can use the funds or whether they
          should be returned to HUD.

          The remaining receivables we reviewed consisted largely of nonreimbursed
          expenses, paid with public housing operating funds to benefit various other
          programs or entities, or nonreimbursed cost allocations. While the other
          programs or entities often reimbursed the public housing general fund within
          about a month, in some cases, balances were not paid in full, resulting in the
          accounts receivable balances. The receivable balance of $40,568 in “Accounts
          Rec. HOMES Other” represents the amount owed the public housing general fund
          from the Authority’s HUD HOME program grants. The balance of $37,449 due
          from “Mutual Self Help” represents nonreimbursed expenses for startup costs for
          a Farmers Home Administration Section 523 homeownership project.

          The $26,660 account receivable pertained to funds owed public housing by a
          daycare center owned by the Authority’s resident council through a nonprofit
          corporation. The daycare center provided discounted services to public housing
          residents but also served the general public.

          Numerous small accounts make up the remaining receivable balance of $132,208.
          Because the individual amounts were small, we did not review them in detail, but
          our cursory review showed the balances included nonreimbursed cost allocations.
          We also noted some unpaid development fees owed by tax credit partnerships.



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          The executive director confirmed the amounts were paid from the public housing
          operating account.

          Part A, section 9(C), of the annual contributions contract between the Authority
          and HUD allows the Authority to use general fund cash only for (1) the payment
          of the costs of development and operation of projects under an annual
          contributions contract with HUD, (2) the purchase of investment securities
          approved by HUD, and (3) such other purposes as may be specifically approved
          by HUD. The housing authority may use the general fund to make payments for
          other activities but only to the extent those activities have cash on deposit in the
          general fund.

          The executive director acknowledged the payments were improper and agreed the
          funds should be repaid.

Recommendations


          We recommend the director of the Office of Public and Indian Housing

          1A.     Require the Authority to repay its conventional public housing program
                  account $180,915 or the current balance due from Braun Cove Apartments
                  from nonfederal funds.

          1B.     Recapture $130,000 in capital funds that the Authority failed to obligate
                  within the 24-month requirement.

          1C.     Require the Authority to repay its conventional public housing program
                  account $236,885 or the current balance due for the remaining receivables
                  from nonfederal funds.

          1D.     Advise the Authority as to whether it should submit to HUD the $36,000 it
                  received for the sale of public housing land or use the funds for eligible
                  public housing activities, thereby putting the funds to better use.

          1E.     Periodically review the Authority’s use of public housing funds to verify
                  that the funds are not used for ineligible purposes.




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Finding 2: The Authority Did Not Support Allocation of Costs
The Authority did not adequately support allocation of costs charged to federal programs as
required by Office of Management and Budget Circular A-87. The Authority estimated cost
allocations, but it did not reevaluate the accuracy of the estimates and make necessary
adjustments. In addition, it did not prepare required certifications. This occurred because
Authority management was not aware of the requirements. As a result, the Authority cannot
assure that its programs, including its HUD programs, paid only their fair share of costs.


 The Authority Did Not Adjust
 Cost Based on Actual Cost

              The Authority failed to perform periodic evaluations and make necessary
              adjustments to estimated salary and wage costs for employees working on
              multiple federal programs. For each employee working on multiple federal
              programs, Office of Management and Budget Circular A-87 requires an allocation
              of salary supported by documentation reflecting an after-the-fact determination
              based on actual activity. Allocation percentages based on estimates determined
              before the services are performed do not qualify as support. Estimated
              percentages may be used for budgeting, but adjustments based on actual
              percentages must be made at least quarterly.

              Further, although the Authority’s cost allocation plan identified employees who
              were expected to work on a single federal program, the Authority did not prepare
              required certifications to support their salary and wage costs. Office of
              Management and Budget Circular A-87 requires that salary and wage charges for
              such employees be supported by periodic certifications prepared at least
              semiannually and signed by the employee or supervisory official.

              The Authority also failed to reevaluate estimated indirect costs. The Authority
              prepared provisional (estimated) costs but did not compare them to actual costs
              incurred and make any necessary adjustments. Office of Management and Budget
              Circular A-87 allows the use of provisional rates only if they are later adjusted
              with final rates based on actual costs.


 Recommendations


              We recommend that the director of the Office of Public and Indian Housing
              require the Authority to

              2A.     Perform quarterly evaluations of actual time for employees who worked
                      on multiple programs and adjust the estimated allocation percentages for
                      variances as needed.


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           2B.      Complete the required semiannual certifications for employees who
                    worked on a single federal program.

           2C.      Develop and apply a final indirect cost rate based on actual costs.

           2D.      Amend its cost allocation plan to comply with the requirements of Office
                    of Management and Budget Circular A-87.




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                         SCOPE AND METHODOLOGY

To accomplish our audit objectives we reviewed the following:

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

•     Independent auditor reports and other data in HUD’s Real Estate Assessment Center
      system;

•     Applicable internal controls; and

•     HUD’s monitoring reviews.

We also reviewed various documents at the Authority offices, including various financial
statements, general ledgers, minutes from board meetings, journal vouchers, loan documents,
contracts, partnership agreements, and various documents pertaining to tax credit developments.

We interviewed Knoxville, Tennessee, Public and Indian Housing program officials and
Authority management and staff.

We performed our audit from February 22, 2005, through May 9, 2005. Our audit covered the
period from January 1, 2001, through December 31, 2004.

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 assure that resource use is consistent with laws
                  and regulations.
              •   Policies and procedures that management has implemented to reasonably
                  assure that resources are safeguarded against waste, loss, and misuse.

           We assessed the relevant controls identified above.

           A significant weakness exists if management 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 ensure that HUD funds were used only for eligible
                  activities (see finding 1).
              •   The Authority lacked assurance its various activities are paying their fair share
                  of costs because its cost allocation plan and practices did not fully comply
                  with federal requirements (see finding 2).




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                                         APPENDIXES

Appendix A

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

                       Recommendation            Ineligible1/       Funds to be put
                                                                    to better use 2/
                              1A                 $ 180,915
                              1B                   130,000
                              1C                   236,885
                              1D                                       $ 36,000
                             Total               $    547,800          $ 36,000


1/       Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
         that the auditor believes are not allowable by law; contract; or federal, state, or local
         polices or regulations.

2/       “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.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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Comment 1




Comment 2




Comment 3




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Comment 4




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                       OIG Evaluation of Auditee Comments




Comment 1   The report recognized that management mistakenly believed it was allowed to
            use the funds for the development activities. The Quality Housing and Work
            Responsibility Act of 1998 does allow development of mixed-finance housing.
            However, authorities desiring to develop mixed finance public housing are
            required to follow HUD regulations at 24 CFR 941 Subpart F. The regulations
            require approvals by HUD Headquarters throughout the development process
            and require an amended annual contributions contract. The Authority did not
            obtain HUD approval or obtain an amended annual contributions contract.

Comment 2   Funds recapture does not contradict the concerns in the report. The Authority
            expended the funds for ineligible purposes which suggests it did not need
            them for operations or modernization of public housing units. Following
            recapture, HUD can redistribute the funds to high-performing public housing
            agencies needing them for operation and modernization of public housing.

Comment 3   24 CFR 905.120, paragraph (b) provides exceptions to obligation requirements
            for capital funds. A public housing agency may request and HUD may
            approve a longer timeframe, by prior approval granted before the expiration
            of the 24 months. The additional time period cannot exceed 12 months. Any
            extensions under 24 CFR 968 must be due to reasons beyond the Authority’s
            control and the request must be made no later than 30 calendar days after the
            deadline date. The Authority did not request and HUD did not grant any
            extension. HUD will need to assess what, if any, remedies other than
            recapture are appropriate. If HUD determines other remedies might be
            appropriate, the OIG will discuss those with HUD as part of the management
            decision process.

Comment 4   We recognize the Authority did allocate costs, but that it was not in complete
            compliance with requirements. We believe the Authority will make the
            necessary changes to its procedures.




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