oversight

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)

             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
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                              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