Department of Housing and Urban Development, Office of Inspector General | Housing and Urban Development | Housing Authority of the City of Houston Section 8 Housing Assistance Payments Houston, TX

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)

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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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; 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.

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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.

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Appendix B

AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation Auditee Comments

Comment 1

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Comment 2

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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.

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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.