Issue Date March 25, 2005 Audit Case Number 2005-FW-1006 TO: Dan Rodriguez Program Center Coordinator, Office of Public Housing, 6EPH FROM: James D. McKay Acting Regional Inspector General for Audit, 6AGA SUBJECT: The Housing Authority of the City of Houston’s Contractor, Houston, TX, Did Not Correctly Calculate or Support Its Section 8 Housing Assistance Payments HIGHLIGHTS What We Audited and Why As part of our Strategic Audit Plan, we audited the Section 8 Housing Choice Voucher Program, administered by the Housing Authority of the City of Houston (Authority). We designed the audit to determine whether the Authority’s Contractor correctly calculated housing assistance payments and to determine the effect if the Contractor calculated the payments incorrectly. What We Found The Authority’s Contractor did not correctly calculate or support its calculations of Section 8 housing assistance payments. Our projection of the results of a statistical sample showed the Authority’s Contractor made errors in at least 7,168 of its 13,732 Housing Choice Voucher files over a 13-month period. Due to the Contractor’s errors, the Authority overpaid at least $1.1 million and underpaid at least $115,000 in Section 8 assistance. The Authority did not detect or prevent the errors because it did not properly monitor its Contractor and relied on the Contractor to police itself. The Authority terminated its contract with the Contractor in October 2004. However, if the Authority does not implement controls and procedures to prevent similar errors, it will overpay and underpay at least an additional $1 million in incorrectly calculated housing assistance payments over the next 12 months. What We Recommend We recommend that the U.S. Department of Housing and Urban Development (HUD) require the Authority to review all of its Section 8 Housing Choice Voucher files and correct any errors that have occurred. HUD should require the Authority to repay the $13,227 that we identified as ineligible payments and pay the tenants the $1,680 that we identified as underpaid assistance based on our sample file reviews. Also, HUD should require the Authority, based on its file reviews, to either support the projected $1,140,915 that we identified as unsupported payments or repay those Section 8 funds to HUD and support the projected $113,680 that we identified as assistance underpayments or pay those Section 8 funds to the tenants. Finally, HUD should require the Authority to implement controls to prevent future housing assistance payment errors, which we project to be at least $1 million per year. 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 In general, the Housing Authority agreed with the audit report and indicated that it was taking action to correct the problems. 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 The Authority’s Contractor Did Not Correctly Calculate or Support Its 5 Section 8 Housing Assistance Payments Scope and Methodology 9 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. Criteria 19 3 BACKGROUND AND OBJECTIVES The City of Houston established the Housing Authority of the City of Houston (Authority) in 1938. The Mayor appoints a five-member Board of Commissioners (Board) to govern the Authority. The Board hires an Executive Director to manage the Authority’s day-to-day operations. The Authority keeps its records at its central office at 2640 Fountainview, Houston, Texas. The Authority has operated its Section 8 Rental Assistance Program since 1975. During our audit period of October 1, 2003, through October 7, 2004, the Authority administered more than 13,000 Housing Choice Vouchers. Further, for fiscal years 2003 and 2004, the U.S. Department of Housing and Urban Development (HUD) paid the Authority $202 million to fund its Housing Choice Voucher Program, including $14.9 million for administrative expenses. During 2001, HUD designated the Authority “troubled” and gave it a low Section 8 Management Assessment Program score. The Authority contracted with Quadel Consulting (Contractor) in November 2001 to manage and improve its Section 8 program performance. The Contractor formed a subsidiary, Houston Housing Assistance Partnership, to perform the contract work. The Contractor improved the Authority’s score, taking it out of the “troubled” category. The contract called for the Authority to pay the Contractor 85 percent of its administration fee or $12.6 million to administer the Section 8 program during 2003 and 2004. This audit is part of an ongoing review of the Authority. This audit reviewed whether the Authority’s Contractor correctly calculated housing assistance payments. The Authority terminated the Contractor’s contract in October 2004 based, in part, on our earlier audit of overhoused tenants, Report Number 2004-FW-1010, Housing Choice Voucher Subsidy Standards, Housing Authority of the City of Houston. 4 RESULTS OF AUDIT Finding: The Authority’s Contractor Did Not Correctly Calculate or Support Its Section 8 Housing Assistance Payments. In 71 out of 118 files reviewed, the Authority’s Contractor made errors in violation of HUD’s and the Authority’s policies. Our projection of the results of this statistical sample showed the Authority’s Contractor made errors in at least 7,168 of its 13,732 Housing Choice Voucher files over a 13-month period. The Authority did not detect or prevent these errors because it did not properly monitor its Contractor and relied on the Contractor to police itself. As a result, the Contractor’s errors caused the Authority to both overpay at least $1.1 million and underpay at least $115,000 in Section 8 housing assistance payments. The Authority terminated its contract with the Contractor in October 2004. However, if the Authority does not implement controls and procedures to prevent similar errors, it will overpay and underpay at least an additional $1 million because of incorrectly calculated housing assistance payments over the next 12 months. Contractor Made a Variety of Errors As the following table shows, the Contractor made a variety of errors in 71 out of 118 statistically selected files (more than 60 percent). Many of the files contained more than one type of error. Number of Files Type of Error with Type of Error Unable to locate file 2 Failed to perform 3rd party verification of income 8 Incorrect utility allowance 33 Incorrect income calculation or deduction 34 Incorrectly completed or missing documents 15 Failed to perform annual recertification in a timely 8 manner Although all of these errors could affect the Contractor’s ability to correctly calculate and support the housing assistance payments, only 43 of the files resulted in an underpayment or overpayment. Errors in 31 of the 43 files resulted in the Authority making net overpayments of $13,227. Errors in the remaining 12 resulted in the Authority making net underpayments of $1,680. In most cases, the remaining 28 files either lacked sufficient information to allow a determination as to whether an improper payment occurred, or the tenant was already receiving the maximum assistance, and the error did not affect that amount. 5 Authority Agreed the Errors Existed We reviewed the results of each of our file reviews with the Authority’s representatives in January 2005, and the representatives agreed that the errors existed. The Authority gave us additional information and insight into why the errors occurred. Contractor Made the Errors for a Variety of Reasons The Contractor did not correctly calculate or support its Section 8 housing assistance payments for a variety of reasons. For example, the Contractor made many of the utility allowance-related errors because it entered information regarding utilities and utility fuels (gas or electric heating, cooking or water heating) into its automatic utility allowance calculations that conflicted with other source documents in the file. In addition, the Contractor made many of the income- and deduction-related errors because some of its housing specialists did not fully understand how to annualize income or properly calculate tenant deductions. To complicate matters, some of the Contractor’s supervisors gave the housing specialists conflicting instructions concerning how to calculate annual income. Additionally, the Contractor used two teams to recertify tenants. The teams often recertified the same tenant simultaneously using different and sometimes conflicting sources of information. The teams did not communicate with each other. Therefore, they did not know that there were data discrepancies. Each team believed that its calculations were correct, but neither team considered all of the tenant’s recertification data because neither had access to all of the tenant’s data. As a result, a tenant’s assistance payment was sometimes based on information provided by whichever team submitted its recertification last, and the last recertifications may have been based on outdated information. Authority Did Not Detect the Errors The Authority did not detect or prevent these housing assistance payment errors because it did not properly monitor its Contractor. Instead, the Authority relied on the Contractor to police itself. The Contractor had a quality control process in place to review a sample of the housing assistance payments actions that its employees processed. The Contractor used the review results to provide feedback to its employees and reported the errors in a monthly report to the Authority. 6 However, the Authority could not show that it took steps to correct the significant error rates in the reports. Even though the Authority hired the Contractor to manage and operate its Section 8 program, it was and is responsible to HUD for its program operations and for any errors. Section 8 Housing Assistance was Both Overpaid and Underpaid When statistically projected to the 13,732 housing choice voucher population, the audit results show that the Authority overpaid at least $1,154,142 to house at least 2,705 tenant families and underpaid at least $115,360 to house at least 824 tenant families. Since it overpaid housing assistance for some tenants, the Authority was unable to assist the maximum number of tenants that its funds would allow. According to the Authority’s policies, these funds are not generally recoverable from the tenants unless tenant fraud was involved. The audit did not reveal any instances of tenant fraud; therefore, the overpayments are not recoverable from the tenants. As a result of underpaying housing for other tenants, the Authority may have caused those tenants to spend more than the maximum established by federal regulations for low-income, federally assisted tenants. According to the Authority’s policies, these funds are refundable to the tenants. Authority Has Taken Steps to Correct the Problems The Authority terminated its contract with the Contractor in October 2004. Further, the Authority has begun to review all of its Section 8 Housing Choice Voucher files. It has also initiated other changes, like stopping the practice of having two teams recertify tenants. However, the Authority retained most of the Contractor’s staff. If the Authority does not implement controls and procedures to prevent the types of errors identified in this report, it will overpay and underpay at least an additional $1 million in incorrectly calculated housing assistance payments over the next 12 months. Recommendations We recommend that HUD require the Authority to: 1A. Reimburse HUD $13,227 for the ineligible expenses identified as assistance overpayments during the audit. 7 1B. Reimburse the tenants the $1,680 that it underpaid for the housing assistance identified during the audit. 1C. Review 100 percent of the tenant files and identify and repay HUD any ineligible Section 8 housing assistance, which we project to be at least $1,140,915. 1D. Identify and reimburse tenants for any underpaid housing assistance, which we project to be at least $113,680. 1E. Implement controls to prevent future housing assistance payment errors, which we project to be at least $1 million per year. 8 SCOPE AND METHODOLOGY Our audit objective was to determine whether the Authority’s Contractor correctly calculated housing assistance payments and to determine the effect if the Contractor calculated the payments incorrectly. To accomplish the objective, we: • Obtained and reviewed relevant HUD regulations and Authority guidelines in the Authority’s Administrative Plan (see Appendix C). • Selected a statistical sample of Housing Choice Voucher tenant families from HUD’s Multifamily Tenant Characteristic System (see statistical sample selection and methodology below). • Obtained and reviewed the tenant files for the 118 tenant families. We verified that each file contained support for tenant income, utility allowances, deductions, payment standards, and contract rent. Using this information, we recomputed the tenant’s assistance payments and compared them to the Contractor’s assistance payment calculations to determine any variances. • Discussed the files with variances with the Authority’s representatives to validate the variances and obtain explanations. Statistical Sample Selection and Methodology We obtained a download of all of the Authority’s tenants from the Multifamily Tenant Characteristic System on October 7, 2004. We deleted those tenants identified as no longer participating in the program. We also excluded those tenants reviewed in our previous Subsidy Standards audit, which found overhousing, and tenants whose units we selected for testing in our ongoing Housing Quality Standards audit. The universe size is 13,732 tenant families. We used EZ Quant software to select a simple random statistical sample from the 13,732 tenant families. Based on a confidence level of 90 percent, a precision level of 10 percent, and an assumed error rate of 10 percent, the EZ Quant software returned a statistical sample of 118 tenant families with a random selection start. We conducted our fieldwork between October 2004 and January 2005 at the Authority’s offices in Houston, Texas. Our audit period was October 1, 2003, through October 7, 2004. We expanded our audit testing to prior periods if the housing payment assistance paid by the Authority during our audit period was based on a calculation performed and/or supported by information obtained in a prior period. 9 We conducted the audit in accordance with generally accepted government auditing standards. 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: Policies and procedures that the Authority put into place to reasonably ensure that valid and reliable data are obtained and used to determine tenant income, utility allowances, and deductions. Policies and procedures that the Authority put into place to reasonably ensure that assistance payments are consistent with laws and regulations. Significant Weaknesses Based on our review, we believe the following items are significant weaknesses: • The Authority did not implement adequate controls over its Contractor to ensure that Housing Choice Voucher assistance payments were accurate. • The Authority’s Contractor did not establish effective internal controls to ensure that its housing specialists correctly calculated assistance payments. 11 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Unsupported 2/ Funds To Be Put to Number Better Use 3/ 1A $13,227 1B $1,680 1C $1,140,915 1D $113,680 1E $1,065,360 Totals $13,227 $1,140,915 $1,180,720 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/ “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 Comment 1 13 14 15 Comment 2 16 17 OIG Evaluation of Auditee Comments In general, the Housing Authority agreed with the audit report and indicated that it was taking action to correct the problems. The Authority’s response contained two attachments that we did not include in the report. Comment 1 In its response, the Authority understated the severity of the file errors. It emphasized the 43 files that resulted in known payment errors and de-emphasized the 28 other files that also contained errors. We believe that some of the 28 files contain additional erroneous payments, since some of them lacked sufficient information for us determine the accuracy of the payments. Further, the Authority could not locate two files and some of the files contained errors that could result in future overpayments and underpayments. Comment 2 The Authority submitted alternative recommendations that would allow it to use the amount of ineligible and unsupported expenses for implementation of its corrective action plan. We have identified those costs that are ineligible and unsupported per HUD’s requirements in this report. However, the Office of Public and Indian Housing has the authority to implement alternative resolutions and we encourage the Authority to work with them. 18 Appendix C CRITERIA HUD’s rules for determining income and the Housing Choice Voucher Program are contained in the Code of Federal Regulations. The Code of Federal Regulations (24 CFR 5.611(a)) requires that the Authority determine adjusted income by making deductions for dependents, unreimbursed medical expenses greater than 3 percent of annual income, and necessary child care expenses when the child care enables a family member to be employed. The Code of Federal Regulations (24 CFR Part 982) governs the Housing Choice Voucher Program. Part 982.54 requires the Authority to administer the program in accordance with its Administrative Plan. Part 982.158 requires the Authority to maintain complete and accurate accounts and other records. Part 982.451 requires the Authority to determine the housing assistance payments in accordance with HUD requirements. Part 982.516 requires the Authority to conduct income reexaminations at least annually and to make appropriate adjustments to the assistance payments based on the examinations or reexaminations. Part 982.517 requires the Authority to maintain a utility allowance schedule for all tenant-paid utilities and housing services and to give the tenant an allowance that includes those utilities and services necessary to provide housing that complies with Housing Quality Standards. The Authority’s Administrative Plan (January 1, 2004 version) establishes local policies for items not specifically covered by federal regulations and acknowledges the Authority’s responsibility for complying with HUD regulations. 19
Housing Authority of the City of Houston Section 8 Housing Assistance Payments Houston, TX
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)