oversight

Stark Metropolitan Housing Authority; Canton, Ohio; The Authority Used Annual Contributions Contract Funds for Development Activities Outside Its Annual Contributions Contract

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-05-31.

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

          AUDIT REPORT




  STARK METROPOLITAN HOUSING AUTHORITY
    NONPROFIT DEVELOPMENT ACTIVITIES

               CANTON, OHIO

                2005-CH-1011

                MAY 31, 2005



           OFFICE OF AUDIT, REGION V
               CHICAGO, ILLINOIS


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                                                                   Issue Date
                                                                            May 31, 2005
                                                                   Audit Report Number
                                                                                2005-CH-1011




TO:         Thomas S. Marshall, Director of Public Housing Hub, 5DPH


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Stark Metropolitan Housing Authority; Canton, Ohio; The Authority Used
            Annual Contributions Contract Funds for Development Activities Outside Its
            Annual Contributions Contract

                                    HIGHLIGHTS

 What We Audited and Why

             We completed an audit of the Stark Metropolitan Housing Authority’s (Authority)
             activities with its related nonprofit organizations. The review of housing
             authorities’ development activities is set forth in our fiscal year 2005 annual audit
             plan. We selected the Authority for audit because it was identified as having
             high-risk indicators of nonprofit development activity. Our objectives were to
             determine whether the Authority: used annual contributions contract funds for
             non-annual contributions contract activities; accounted for the source and use of
             funds as required by its annual contributions contract with the U.S. Department of
             Housing and Urban Development (HUD); and encumbered HUD funds for the
             benefit of non-HUD development activity without specific HUD approval.

 What We Found


             The Authority received more than $459,000 of HOME funds from Stark County
             between August 2001 and September 2002 to develop five low- income ho using
             units. Two of the five units were for the Ruthe and Isadore Freed Housing
             Corporation (Freed), the Authority’s nonprofit affiliate entity. The Authority
             administered these funds and deposited them into its general fund. The general
             fund is a pool of funds that consists mainly of federal operating subsidies for the


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         Authority. However, the general fund also included proceeds from the sale of
         low- income homes. The Authority expended an additional $696,592 from its
         general fund for the development of low-income housing units; however, the
         Authority could not provide documentation to support whether HUD operating
         subsidies or nonfederal funds in its general fund was expended.

         Freed transferred $528,402 to the Authority, who deposited the funds into its
         general fund. The Authority has not demonstrated that these funds were
         reimbursed to its low-income housing program. The transfers made to Freed were
         in excess of the amount Freed had on deposit in the Authority’s general fund for
         the period between December 2000 and March 2005. Freed lacked the funds to
         transfer $168,190 to the Authority as of March 2005.

         The Authority also executed two loan agreements for the purchase of properties
         that encumbered $278,000 of its general fund, including low-income housing
         operating subsidies, without HUD approval. The agreements included provisions
         that allowed the lender to withdraw the funds on deposit if the loan payments
         were not made. In April 2004, the Authority secured $184,000 of the loan
         agreements with nonfederal funds.

What We Recommend

         We recommend that HUD’s Director of Public Housing Hub, Cleveland Field
         Office, requires the Authority to (1) collect the $168,190 that Freed owes the
         Authority and reimburse its low-income housing reserve account, or reimburse its
         low- income housing reserve account from nonfederal funds if Freed cannot repay
         the Authority, (2) provide adequate documentation to support that the repayment
         of $528,402 from Freed Corporation was from nonfederal funds, or reimburse its
         low- income housing reserve account from nonfederal funds if adequate
         documentation is not provided, (3) provide adequate documentation to support
         that the encumbrance for $94,000 was removed and secured with nonfederal
         funds, and (4) implement procedures and controls to correct the weaknesses cited
         in this report. The procedures and controls should help ensure that future HUD
         funding received by the Authority will be appropriately used.

         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.




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Auditee’s Response


           We provided our discussion draft audit report to the Authority’s Executive
           Director and HUD’s staff on April 26, 2005. We conducted an exit conference
           with the Authority on May 4, 2005.

           We requested the Authority to provide written comments on our discussion draft
           audit report by May 11, 2005. The Authority provided written comments to the
           discussion draft audit report on May 11, 2005. The Authority generally agreed
           with our recommendations. The complete text of the Authority’s written
           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                                                             5

Results of Audit
      Finding 1: The Authority Inappropriately Used Annual Contributions Contract     6
                 Funds for Development Activities Outside Its Annual Contributions
                 Contract
      Finding 2: The Authority Inappropriately Encumbered HUD Funds                   9

Scope and Methodology                                                                11

Internal Controls                                                                    12

Follow up on Prior Audits                                                            14

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                 15
   B. Auditee Comments and OIG’s Evaluation                                          16
   C. Federal Requirements                                                           20




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                     BACKGROUND AND OBJECTIVES

The Canton Metropolitan Housing Authority was created in 1939 in accordance with the
provisions of the Ohio Revised Code to help fill the need for decent, safe, sanitary, and
affordable housing in Stark County, Ohio. Its name was changed to the Stark Metropolitan
Housing Authority (Authority) in 1970. It is a public nonprofit organization, chartered by the
State of Ohio, funded in part through the U. S. Department of Housing and Urban Development
(HUD). It currently operates 2,539 low- income housing units, 1,467 Section 8 housing units,
873 senior or disabled housing units, and 6 community centers in 933 buildings.

A five- member board of Commissioners oversees the Authority. These members are appointed
to a five- year term and are not compensated for their services. The mayor of Canton, Ohio, the
largest city in Stark County, appoints two members. The Stark County Commissioners, the Stark
County Court of Common Pleas, and the Stark County Court of Common Pleas Probate Division
each appoint one member.

The Authority currently receives approximately $20 million in subsidies from HUD. Of this
amount, $6.8 million is for the Section 8 Tenant housing program, $6.1 million is for the low-
income housing operating subsidy, $4.2 million is for its capital fund program, and
approximately $2 million is for the project based Section 8 programs.

The Authority established the Ruthe and Isadore Freed Housing Corporation (Freed), a 501(c)(3)
nonprofit entity in 1996. Freed is a no nprofit subsidiary of the Authority established to provide
eligible residents of Stark County with quality affordable housing opportunities. Freed receives
funding from the HOME Investment Partnership program and proceeds from the sale of homes
under its homeownership program. Between August 2001 and September 2002, the Authority
received and administered approximately $459,000 of HOME funds for the development of five
low- income housing units. Two of the five units were for Freed.

We selected the Autho rity for audit because it was identified as having high-risk indicators of
nonprofit development activity. Our objectives were to determine whether the Authority: used
annual contributions contract funds for non-annual contributions contract activities; accounted
for the source and use of funds as required by its annual contributions contract with HUD; and
encumbered HUD funds for the benefit of non-HUD development activity without specific HUD
approval.




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                                RESULTS OF AUDIT

Finding 1: The Authority Inappropriately Used Annual Contribution
      Contract Funds for Development Activity outside Its Annual
                        Contributions Contract
The Authority received $459,457 in HOME funds to develop low-income housing for its
nonprofit entity, Freed, in 2001 and 2002. The HOME funds were administered by the Authority
and deposited into its general fund. The Authority expended money from its general fund to
develop these HOME units for Freed. The general fund is a pool of funds that consists mainly of
federal operating subsidies for the Authority. However, the general fund also contained proceeds
from the sale of low- income homes.

The Authority transferred $696,592 from its general fund to Freed between December 2000 and
March 2005. According to the Authority’s records, Freed repaid the Authority’s general fund
$528,402 between January 2002 and March 2005. As of March 2005, the Authority’s general
ledger shows a balance due from Freed of $168,190.

The Authority violated its annual contributions contract with HUD by transferring federal funds
to pay the expenses of its nonprofit entity’s development activities not under an annual
contributions contract with HUD and without specific HUD approval. The Authority also could
not identify the source of funds expended for Freed. The Authority lacked procedures and
controls to ensure its contract with HUD and HUD’s requirements were followed. Specifically,
the Authority was not aware of the requirements of its annual contributions contract with HUD.
As a result, there were fewer funds available to serve the Authority’s low- income residents.



 Inappropriate Transfer of
 Federal Funds


              The Authority inappropriately transferred HUD funds to pay the expenses of
              development activities not under an annual contributions contract for its nonprofit
              affiliate entity, Freed. The funds used were in excess of the funds that Freed had
              on deposit in the Authority’s general fund. The Authority pooled its HUD funds
              in its general fund account with federal funds that Freed received for its
              development activities. Freed received HOME Investment Partnership funds
              from Stark County, as a community housing development organization.

              The Authority transferred $696,592 to Freed from its general fund between
              December 2000, and March 2005 (an average of $167,182 per year). Freed
              transferred to the Authority’s general fund (HUD programs) $528,402 for these
              expenditures. The Authority has not demonstrated that these funds were

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           reimbursed to its low income-housing program. In addition, the Authority could
           not provide supporting documentatio n to identify the source of funds transferred
           to Freed from the Authority’s general fund. As of March 2005, Freed owes the
           Authority $168,190. The transfers made to Freed were in excess of the amount
           Freed had on deposit in the Authority’s general fund for the period between
           December 2000 and March 2005.


The Authority did not Maintain
Complete and Accurate Books
of Record

           Contrary to its annual contributions contract with HUD, the Authority did not
           maintain complete and accurate books of record. While the pooling of funds is
           permitted by HUD, the Authority must maintain records that identify the source
           and application of funds. The Authority was not able to identify the source of the
           funds that were transferred to its nonprofit affiliate entity or the use of the funds
           repaid by its nonprofit. The Authority’s Senior Accountant said the Authority
           reconciles its source and use of funds once a year before the annual financial audit
           performed by its independent public accountant.

Recommendations

           We recommend that HUD’s Director of Public Housing Hub, Cleveland Field
           Office, ensure that the Authority

           1A.    Collects from Freed the $168,190 due the to the Authority for the current
                  balance owed as of March 2005. If the Authority cannot collect the
                  $168,190 from Freed, it should reimburse its low- income housing reserve
                  account from nonfederal funds.

           1B.    Provides adequate documentation to support that the repayment of
                  $528,402 from Freed Corporation was from nonfederal funds. If
                  documentation cannot be provided, the Authority should reimburse its
                  low- income housing reserve account from nonfederal funds.

           1C.    Implements procedures and controls to ensure that no further transfers of
                  HUD funds are made on behalf of its nonprofit (nonfederal) activities
                  without prior HUD approval. These procedures and controls should help
                  to ensure that approximately $167,182 in HUD funds is prevented from
                  being advanced to the Authority’s nonprofit (nonfederal activities)
                  annually.




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       1D.   Implements procedures and controls to ensure pooled funds are not
             withdrawn for a program or entity in excess of the amount of funds on
             deposit for that particular program or entity.




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Finding 2: The Authority Inappropriately Encumbered HUD Funds
The Authority inappropriately encumbered HUD funds by issuing two certificates of deposit
from its general fund for $195,000 and $94,000 as collateral for two loans to its nonprofit
affiliate entity without HUD approval. In April 2004, the encumbrance on the $195,000 was
removed when the Authority refinanced the loan and secured it with nonfederal funds. As of
March 2005, the certificate of deposit for $94,000 held as collateral for Freed was an
encumbrance on the Authority’s general fund, comprised of HUD funds. The Authority used
HUD funds as collateral because it believed that it had enough nonfederal funds to pay the loans
if necessary. As a result, HUD funds were at risk.



 Inappropriate Encumbrance of
 HUD Funds


              As part of the Authority’s nonprofit development activities, it entered into two
              bank loans for the purchase of single-family properties. The Authority guaranteed
              the payment of the loans with HUD funds from its general fund on deposit with
              its bank. Contrary to its annual contributions contract with HUD, the Authority
              encumbered HUD funds when it issued the two certificates of deposit as collateral
              for loans made to Freed. The two loans were obtained in April and October 2001
              from a local bank for $195,000 and $97,000, respectively. The loans were
              secured with certificates of deposit from the Authority’s general fund for
              $195,000 and $94,000. In April 2004, the encumbrance on the $195,000 was
              removed when the Authority refinanced the loan and secured it with nonfederal
              funds. As of March 2005, the certificate of deposit for $94,000 held as collateral
              for Freed was an encumbrance on the Authority’s general fund.

              The Authority used HUD funds as collateral because it believed that it had
              enough nonfederal funds to pay the loans if necessary. However, the Authority
              did encumber HUD funds.

 Recommendations



              We recommend that HUD’s Director of Public Housing Hub, Cleveland Field
              Office, ensure that the Authority

              2A.     Provides adequate documentation to support that the encumbrance for
                      $94,000 was removed and secured with nonfederal funds. If
                      documentation cannot be provided, the Authority should refinance the
                      loan for its nonprofit affiliate entity and/or secure the collateral for the
                      $94,000 loan with nonfederal funds.

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       2B.   Implements procedures and controls to ensure the Authority’s future
             transactions with its nonprofit affiliate entity comply with HUD’s
             requirements, specifically its annual contributions contract with HUD.




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                        SCOPE AND METHODOLOGY

We conducted the audit at the Authority’s Canton, Ohio office. We performed our audit work
between November 2004 and February 2005. To accomplish our objective, we interviewed
HUD’s staff, the Authority’s manageme nt and employees, and the employees of the Authority’s
nonprofit affiliate, Freed. We reviewed the Authority’s annual contributions contract with HUD,
schedule of financial assistance by program area for fiscal years 2001 through 2004, and general
ledgers. We also reviewed the general ledgers for the Authority’s nonprofit.

The audit covered the period from April 1, 2001, through March 31, 2004. The audit period was
expanded as necessary. We conducted the 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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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:

              •       Program Operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and Reliability of Data - Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

              •       Compliance with Laws and 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
                      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 management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




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Significant Weaknesses


           Based on our audit, we believe the following items are significant weaknesses:

           •      Program Operations – The Authority did not implement procedures and
                  controls to ensure that HUD funds were used in accordance with HUD’s
                  requirements (see findings 1 and 2).

           •      Validity and Reliability of Data – The Authority did not maintain
                  complete and accurate books of record (see finding 1).

           •      Safeguarding Resources – The Authority failed to ensure that its HUD
                  funds were used in accordance with HUD’s requirements (see findings 1
                  and 2).




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                       FOLLOW UP ON PRIOR AUDITS

This was the first audit of the Stark Metropolitan Housing Authority by HUD’s Office of
Inspector General (OIG).

The last two independent auditor’s reports for the Authority covered the years ending March 31,
2002, and March 31, 2003. The auditor’s report for year ending 2002 identified two promissory
notes for its component unit, described as a legally separate, nonprofit organization, Freed. The
notes are for $195,110 and $96,713, respectively. The total long-term debt for Freed in 2002
was $291,823. Both notes were held with The First Merit Bank, in Canton, Ohio. The auditor’s
report for the year ending March 31, 2003 also disclosed two promissory notes for Freed in the
amount of $184,810 and $94,400, respectively. The total long-term debt for Freed in 2003 was
$279,210.

The independent auditor’s reports for years ending 2002 and 2003 had no findings or questioned
cost.




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                                      APPENDIXES

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                  $168,190
                  1B                                        $528,402
                  1C                                                          $167,182
                  2A                                                            94,000
                 Totals               $168,190              $528,402          $261,182


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 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 of departmental policies and
       procedures.

3/     “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
       OIG recommendation is implemented, resulting in reduced expenditures later 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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Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




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Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




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                         OIG Evaluation of Auditee Comments

Comment 1   The advances to the Freed Housing Corporation do not meet the requirements
            stated in the Authority’s implementing agreement with HUD that incorporates the
            Authority’s Homeownership Plan. Section 3.1 of the agreement states in part that
            the Authority agrees that sale proceeds shall be used only in accordance with the
            Plan and the Authority certifies that its Plan complies with 24 Code of Federal
            Regulations, part 906.15, governing the use of sale proceeds. Part 906.15
            provides for the sale proceeds to be retained by the public housing authority and
            used for housing assistance to low- income families.

Comment 2   Section 4 of the 5(h) Agreement did indeed require the Authority to establish a
            separate account for any project or program funded with the sale proceeds.
            Additionally, the Agreement required that the sale proceeds might be commingled
            with funds contributed to the project or program from other sources, so long as
            the Authority maintains the separate identity of the sale proceeds covered by the
            agreement. Section 9(C) of the annual contributions contract between the
            Authority and HUD requires the Authority to maintain records that identify the
            source and application of funds in such a manner as to allow HUD to determine
            that all funds are and have been expended in accordance with each specific
            program regulation and requirement.

Comment 3   While the Authority did maintain a record of its advances to Freed, it was unable
            to identity the source of these advances.

Comment 4   Recommendation 1B was revised to provide an opportunity for the Authority to
            submit adequate documentation to support that the advances either did occur from
            nonfederal funds, or support that the repayment of $528,402 from Freed was from
            nonfederal funds.

Comment 5   Recommendation 2A was revised to provide an opportunity for the Authority to
            submit adequate documentation to support that the encumbrance for $94,000 was
            removed and secured with nonfederal funds.




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Appendix C

                           FEDERAL REQUIREMENTS

24 CFR Part 906.15 states that sale proceeds may, after provision for sale and administrative
costs that are necessary and reasonable for carrying out the homeownership plan, be retained by
the public housing authority and used for housing assistance to low- income families.

Section 7 of the annual contributions contract between the Authority and HUD states the
Authority shall not in any way encumber any project or portion thereof without prior HUD
approval. Section 7 further prohibits the Authority from pledging assets of the project covered
under the annual contributions contract as collateral for a loan.

Section 9(C) of the annual contributions contract states in part, that the Authority shall maintain
records that identify the source and application of funds in such a manner as to allow HUD to
determine that all funds are and have been expended in accordance with each specific program
regulation and requirement. Funds may only be withdrawn from the general fund for (1) the
payment of the cost of development and operation of the projects under annual contributions
contract with HUD, (2) the purchase of investment securities as approved by HUD, and (3) such
other purposes as may be specifically approved by HUD.

Section 10(C) of the annual contributions contract states that the Authority shall not withdraw
from any of the funds or accounts authorized under this section amounts for the projects under
the annual contribution contract or for the other projects or enterprises in excess of the amount
then on deposit for that purpose.




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