oversight

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.




                                            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




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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.




                                                   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.




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