AUDIT REPORT Inappropriate Use of Federal Funds Led to $3.5 Million Deficit in HUD Programs Administered by Fall River Housing Authority 2005-BO-1005 August 31, 2005 OFFICE OF AUDIT, REGION 1 Boston, MA Issue Date August 31, 2005 Audit Report Number 2005-BO-1005 TO: Donna J. Ayala, Director, Office of Public Housing, Massachusetts State Office, 1APH FROM: John A. Dvorak, Regional Inspector General for Audit, 1AGA SUBJECT: Inappropriate Use of Federal Funds Led to $3.5 Million Deficit in HUD Programs Administered by Fall River Housing Authority, Fall River, Massachusetts HIGHLIGHTS What We Audited and Why We reviewed the Housing Choice Voucher, the Public Housing Operating Fund, and the Public Housing Capital Fund programs at the Fall River Housing Authority (Authority). The audit was conducted as part of our fiscal year 2005 annual audit plan. Our objective was to determine whether the Authority used its federal funds in compliance with the financial provisions of its annual contributions contracts. What We Found The Authority did not administer its federal funds in compliance with the financial provisions of its annual contributions contracts. The Authority used federal funds to pay expenditures for state-subsidized housing programs This condition occurred because the Authority failed to follow the internal controls that it established to ensure compliance with its annual contributions contracts and prevent the use of federal funds to pay state program expenses. As a result, the Authority did not have $3.5 million available to administer its federal programs. Additionally, the Authority over reported its voucher utilization because it did not have adequate controls to ensure accurate reporting of voucher utilization. What We Recommend We recommend that the director of the Office of Public Housing require the Authority to • Repay $3,530,080 taken from the federal programs); • Strengthen its controls over tracking and reporting of federal funds; and • Establish adequate controls to ensure accurate reporting of Section 8 housing choice voucher utilization. For each recommendation in the body of the report 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 The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The Authority Used Federal Funds to Subsidize State Programs 5 Finding 2: The Authority Inaccurately Tracked and Reported Voucher 8 Utilization 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 C. Federal Funds for State Programs 18 D. Voucher Utilization 20 3 BACKGROUND AND OBJECTIVES The United States Housing Act of 1937 established the first federal framework for government-owned affordable housing. This act also authorized public housing as the nation’s primary vehicle for providing jobs and building and providing subsidized housing through the Department of Housing and Urban Development (HUD). HUD disperses funds to public housing authorities to provide subsidy payments, or housing assistance payments, directly to owners of housing units on behalf of qualified, participating low-income families. The Housing and Community Development Act of 1974 authorized and established the Section 8 program. The Section 8 program allows public housing authorities to pay subsidies directly to the housing owner on behalf of the assisted family. Since its enactment, the Section 8 program has become the most important source of federal subsidies for assisted housing and is HUD’s largest program with annual funding exceeding $22 billion. In addition, Congress directed HUD that Section 8 funds shall only be used for activities related to the provision of tenant-based rental assistance authorized under Section 8. Congress also directed that operating subsidy funds shall only be used for activities related to the provision of operating subsidies to approved housing authorities. Through annual contributions contracts, HUD contracts with the Fall River Housing Authority (Authority) for the administration and management of 1,569 low-income units and 2,431 Section 8 vouchers. The annual contributions contracts require the Authority to follow appropriations laws, public housing notices, and the Authority’s administrative plan. The Authority, through its leases with property owners and its agreements with other housing authorities, provides Section 8 housing assistance payment subsidies to assist families with housing. The Authority receives a fee to administer the Housing Choice Voucher program. With the passage of the federal fiscal year 2004 Appropriations Act, HUD changed the way in which it funded vouchers. With this change, HUD began basing voucher funding on actual utilization and housing assistance payments reported in its Voucher Management System instead of using estimated utilization and housing assistance payments. HUD relies on these data to determine the amount of renewal funds to pay to each housing authority and needs accurate information on voucher utilization to appropriately distribute limited public housing funding. The actual voucher cost and utilization data are reported to the Voucher Management System by the housing authorities.. Our overall audit objective was to determine whether the Authority used its federal funds in compliance with the financial provisions of its annual contributions contracts. We examined the causes of the operating deficits in the federal programs and the accuracy of portability and utilization data reported to HUD. 4 RESULTS OF AUDIT Finding 1: The Authority Used Federal Funds to Subsidize State Programs The Authority inappropriately used federal funds to pay expenditures of state programs. It used funds from the Housing Choice Voucher, Public Housing Operating Fund, Public Housing Capital Fund, and Public Housing Drug Elimination programs to fund its state- subsidized housing programs. This condition occurred because the Authority failed to follow the internal controls it established to ensure compliance with the financial provisions of its annual contributions contracts for its federal programs. As a result, the Authority did not have $3.5 million available for its federal programs on January 1, 2005. The Authority Used Federal Funds Inappropriately The Authority’s consolidated annual contributions contracts with HUD require the Authority to maintain records that identify the source and application of funds. These records are required to allow HUD to determine whether the Authority expended funds appropriately. Therefore, the Authority uses a series of fund accounts to track the source and use of funds for the Housing Choice Voucher program (Section 8 program), the Public Housing Operating Fund program (low-rent program), the Public Housing Capital Fund program, and the Public Housing Drug Elimination program. 1 The funds received for the federal programs flow through the Authority’s federal account into its revolving fund, from which program expenditures are paid. We verified that the Authority recorded paid program expenditures in the appropriate fund accounts for the programs. This verification showed that between March 2001 and January 2005, the Authority transferred $6,340,789 to the revolving fund to pay for expenses of its state-subsidized housing programs. This improper use occurred because the Authority failed to follow its internal controls that would have prevented it from using federal funds for state-subsidized housing programs. Between March 2003 and November 2004, the Authority repaid $2,810,709 to its federal programs but needed to repay an additional $3,530,080 as of January 2005. In addition, the Authority’s use of funds continues to increase as shown in the following chart. 1 The Public Housing Drug Elimination program ended on February 29, 2004. 5 Average use of federal funds for state programs increasing 2 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 01 Ju 002 Ju 003 Ju 004 1 ch 1 2 ch 2 ch 3 4 3 4 1 2 3 4 00 00 00 00 00 00 00 00 00 em 200 em 200 em 200 20 2 2 2 ec er 2 r2 ec er 2 r2 ec er 2 r2 ec er 2 r2 2 ch e ne ne ne be be be be Se un b b b b ar ar ar ar em em em em em J M M M M pt pt pt pt Se Se Se D D D D The Authority attributed its inappropriate use of its federal funds to a failure by the Commonwealth of Massachusetts Department of Housing and Community Development (the state) to provide sufficient funding for the state-subsidized housing programs. At our request, the Authority contacted the state to determine the amount owed. The state advised that it owed the Authority $1,412,122 on December 31, 2004. This situation occurred because the Authority’s management did not aggressively pursue collections from the state. The Authority indicated that it used the federal funds for state-subsidized housing programs because it did not want to discontinue housing for families assisted by the state programs. 3 However, the Authority also had needy families waiting for federally assisted housing, and these families typically had waited for approximately one year. In addition, the Authority’s use of the $3.5 million for state programs has decreased voucher utilization in its federal Housing Choice Voucher program, thereby reducing future awards. Under the appropriations laws for 2005, HUD is required to fund vouchers at housing authorities based upon actual utilization and housing assistance payments. In its response, the Authority has pointed out that its conservative approach to voucher utilization was a necessary adjustment to changes in the voucher program and concerns over program costs. 2 Appendix B lists the transfers by month. 3 Through these state-subsidized housing programs, the Authority housed or provided subsidies to a maximum of 882 families. 6 Conclusion The Authority failed to follow its internal controls to prevent the use of federal funds to pay nonprogram or state program expenditures. The Authority’s inappropriate use of $3.5 million in federal funds to pay expenses for its state-subsidized programs left its federal programs less funding for federal purposes. Recommendations We recommend that the director of the Office of Public Housing require the Authority to 1A. Identify the federal program(s), and the month and year of each transfer and expense that nets to $3,530,080. 1B. Submit monthly accounting reports with supporting documentation to HUD for monitoring. We also recommend that the director of the Office of Public Housing 1C. Confirm repayment from nonfederal sources the $3,530,080 plus interest to the appropriate federal program(s) or United States Treasury for the funds repaid for closed programs. 1D. Confirm the implementation of controls over tracking and reporting of federal funds to ensure that the Authority is using federal funds for federal programs only. 1E. Take appropriate administrative actions against Authority Officials for the improper use of federal funds. 7 Finding 2: The Authority Inaccurately Tracked and Reported Voucher Utilization The Authority misreported its voucher utilization by 350 vouchers between April 1, 2002, and March 31, 2004. All authorities must report voucher cost and utilization data to HUD through the Voucher Management System. HUD also requires all housing authorities to be able to identify and support all voucher transactions related to portability using a register and separate subsidiary ledger. The Authority did not have adequate controls to ensure accurate reporting of its Section 8 voucher utilization and port-in vouchers. The lack of controls allowed the Authority’s staff to change voucher reporting procedures and report port-in vouchers as its own vouchers. As a result, the Authority inflated its voucher utilization data in the Voucher Management System. Changes in Procedures Led to Inflated Utilization The Authority’s annual contributions contract with HUD requires accurate reporting of voucher utilization into the Voucher Management System. HUD uses the data in the Voucher Management System to calculate future funding for housing authorities. However, the Authority did not report accurate utilization data to HUD. In January 2002,, the Authority replaced an external management company that had administered its Section 8 program with its own staff. The staff then changed the Authority’s reporting procedures for voucher utilization and began overreporting the Authority’s voucher utilization. The change in voucher reporting resulted in the port-in vouchers being inappropriately included in the Authority’s utilization counts in the Voucher Management System. 4 Also, the Authority’s internal controls did not detect in a timely manner that its reported voucher utilization data included the port-in vouchers. HUD needs accurate information on voucher utilization to appropriately distribute limited public housing funding and relies on the data in the Voucher Management System to determine the amount of renewal funds to pay to each housing authority. From April 1, 2002, to March 31, 2004, the Authority routinely administered an average of 12 port-in vouchers per month for other housing authorities, which the authority reported as part of its own voucher utilization in the Voucher Management System. Through the portability feature of the Housing Choice Voucher program, HUD- subsidized families can move from the jurisdiction of one housing authority to another housing authority or port in. The second housing authority may administer the port-in voucher for the first housing authority 4 Appendix C shows the reported utilization and the actual utilization by month. 8 and report the port-in vouchers separately from its own voucher utilization. In the spring of 2004, the Authority discovered that it had incorrectly entered the port-in data into the Voucher Management System and attempted to correct the data. It entered revisions, but did not always enter the correct utilization data or correct the appropriate month. As a result, additional revisions are needed. In addition, the Authority was considering changes to its procedures for reporting Section 8 utilization, but it had not changed these procedures or its administrative plan as of the end of our audit. Conclusion The Authority misreported its voucher utilization. This occurred because the Authority did not have adequate controls established to prevent the over reporting. Additionally, the Authority’s internal controls did not detect the inaccurate data in a timely manner. By including port-in vouchers from other housing authorities in its utilization data, the Authority inflated its voucher utilization and increased the funding it received as indicated in finding 1. Recommendations We recommend that the director of the Office of Public Housing confirm that the Authority has 2A Reconciled reported utilization data and identify the correct data for the Voucher Management System. 2B Updated the Authority’s written procedures to reflect changes in voucher utilization reporting procedures. 2C Submitted documentation supporting its revisions correcting the port-in utilization data in the Voucher Management System. 9 SCOPE AND METHODOLOGY We performed our review in accordance with generally accepted government auditing standards. We conducted the audit between December 2004 and May 2005, and covered the period April 1, 2002, through March 31, 2004. The audit period was extended when necessary to meet our objectives. We looked at the Authority due to risk analysis utilization. To accomplish our audit objectives, we • Reviewed the annual contributions contracts, public and Indian housing notices, the Authority’s administrative plans, and the board of commissioners’ minutes, the audited financial statements, and the Authority’s procedures. • Interviewed Authority officials about the financial controls, the Section 8 program controls, and procedures. • Analyzed the Authority’s records for fiscal years 2001, 2002, 2003, and 2004. • Summarized results of our analyses. 10 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined the following internal controls were relevant to our audit objectives: • Compliance with laws and regulations – Policies of management to reasonably ensure that resource use is consistent with laws and regulations. • Validity and reliability of data – Policies and procedures that management has implemented to reasonably ensure that valid data are entered into the Voucher Management System. 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 to be significant weaknesses: • The Authority did not ensure federal funds were only utilized for federal programs in compliance with laws and regulations. (finding 1). • The Authority did not have adequate systems for tracking and reporting utilization of vouchers (finding 2). 11 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Unsupported Unreasonable or Funds to be put number 2/ unnecessary 3/ to better use 4/ 1A. $3,530,080 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/ 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 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/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary, prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 4/ “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. 12 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 13 Ref to OIG Evaluation Auditee Comments Comment 1 Comment 2 Comment 3 14 Ref to OIG Evaluation Auditee Comments Comment 4 Comment 5 15 Ref to OIG Evaluation Auditee Comments Comment 6 16 OIG Evaluation of Auditee Comments Comment 1 As shown in the chart on page 7, the Authority has not fully reimbursed its federal programs at any point in the last four years. As such the loans were not short term. Additionally, the Annual Contributions Contracts between HUD and the Authority do not permit the use of these Housing Choice Voucher funds or the Operating Subsidy funds for other programs. No change to the report is needed. Comment 2 We agree with the Authority’s statement that it exercised caution in leasing units under the Section 8 Voucher Program as a result of changes in overall funding for this program and removed that the program housed fewer families under its federal housing program. Comment 3: We evaluated the documentation, statements, and the Authority's use of informal communications with the State through phone conversations and meetings, but we still maintain that a formalized collection process would serve the authority better. Collection efforts need to be documented through written notices containing statements of amounts due, interest due and payment due dates. Discussions regarding collection activities should be documented, and such documentation aids the collection effort. Also, it is especially necessary to show the steps taken to repay the funds back to the Federal programs. Collection efforts during our audit period were not adequately documented. Without this documentation, measuring the effectiveness of collection efforts is impossible. We also do acknowledge that the Authority did document the collection efforts that occurred following the period of our review. Comment 4: As discussed in Comment 2, the Authority states that the decrease is due to changes in the Section 8 program and families that would have been required to wait for a determination on whether or not loans had been made. We changed the report and removed that the program housed fewer families under its federal housing program. We also have included the Authority’s assertion that its conservative approach to voucher utilization was a necessary adjustment to changes in the voucher program and concerns over program costs. Comment 5: The Authority advised that it had received overdue funding from the State and the Authority had prohibited loans between its state and federal programs. As a result of this information, we have changed our recommendations. Comment 6: We have changed the recommendations to reflect the actions the Authority has taken to ensure correct information is entered into the Voucher Mangement System. 17 Appendix C FEDERAL FUNDS FOR STATE PROGRAMS Federal general Funds withdrawn Funds reimbursed fund account Funds transferred from revolving to federal general Month and year payable to revolving fund fund fund February 2001 $275,641 0 March 2001 (989,128) (1,264,769) 1,264,769 April 2001 (989,128) 0 May 2001 (989,128) 0 June 2001 (989,128) 0 July 2001 (989,128) 0 August 2001 (989,128) 0 September 2001 (989,128) 0 October 2001 (989,128) 0 November 2001 (989,128) 0 December 2001 (989,128) 0 January 2002 (989,128) 0 February 2002 (989,128) 0 March 2002 (2,426,973) (1,437,845) 1,437,845 April 2002 (2,426,973) 0 May 2002 (2,426,973) 0 June 2002 (2,426,973) 0 July 2002 (2,426,973) 0 August 2002 (2,426,973) 0 September 2002 (2,426,973) 0 October 2002 (2,426,973) 0 November 2002 (2,426,973) 0 December 2002 (2,426,973) 0 January 2003 (2,426,973) 0 February 2003 (2,426,973) 0 March 2003 (825,633) 1,601,340 1,601,340 April 2003 (1,092,059) (266,426) 266,426 May 2003 (1,027,352) 64,707 64,707 June 2003 (1,202,263) (174,911) 174,911 July 2003 (1,435,534) (233,271) 233,271 August 2003 (1,426,560) 8,974 8,974 September 2003 (1,667,737) (241,177) 241,177 October 2003 (1,518,839) 148,898 148,898 November 2003 (1,688,269) (169,430) 169,430 December 2003 (1,937,776) (249,507) 249,507 18 Federal general Funds withdrawn Funds reimbursed fund account Funds transferred from revolving to federal general Month and year payable to revolving fund fund fund January 2004 (2,080,191) (142,415) 142,415 February 2004 (2,373,747) (293,556) 293,556 March 2004 (1,752,842) 620,905 620,905 April 2004 (1,677,348) 75,494 75,494 May 2004 (2,028,432) (351,083) 351,083 June 2004 (2,205,623) (177,191) 177,191 July 2004 (2,422,983) (217,360) 217,360 August 2004 (2,750,923) (327,941) 327,941 September 2004 (2,965,253) (214,330) 214,330 October 2004 (2,851,851) 113,402 113,402 November 2004 (2,674,862) 176,989 176,989 December 2004 (3,116,248) (441,385) 441,385 January 2005 (3,254,439) (138,192) 138,192 Totals ($3,530,080) $6,340,789 $2,810,709 19 Appendix D VOUCHER UTILIZATION Month Vouchers utilized Vouchers reported Difference April 2002 2327 2308 19 May 2002 2289 2269 20 June 2002 2284 2278 6 July 2002 2293 2254 39 August 2002 2276 2255 21 September 2002 2260 2260 0 October 2002 2252 2238 14 November 2002 2255 2226 29 December 2002 2235 2226 9 January 2003 2257 2236 21 February 2003 2265 2248 17 March 2003 2264 2246 18 April 2003 2265 2245 20 May 2003 2265 2243 22 June 2003 2243 2224 19 July 2003 2250 2238 12 August 2003 2259 2243 16 September 2003 2253 2249 4 October 2003 2327 2262 65 November 2003 2326 2326 0 December 2003 2322 2323 -1 January 2004 2322 2324 -2 February 2004 2326 2329 -3 March 2004 2330 2345 -15 Totals 52,418 52,087 350 20
Inappropriate Use of Federal Funds Led to $3.5 Million Deficit in HUD Programs Administered by Fall Rivers Housing Authority, Fall Rivers, Massachusetts
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-08-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)