oversight

                                                      U.S. Department of Housing and Urban Development
                                                                    Office of Inspector General
                                                                                 Pacific/Hawaii Region IX
                                                                        611 West Sixth Street, Suite 1160
                                                                      Los Angeles, California 90017-3101
                                                                                           (213) 894-8016
                                                                                      Fax (213) 894-8115


                                                                              Memorandum No.
                                                                                 2005-LA-1802

November 5, 2004

MEMORANDUM FOR:              Cecilia J. Ross, Director,
                             Los Angeles Office of Public and Indian Housing, 9DPH



FROM:                        Joan S. Hobbs, Regional Inspector General for Audit, 9DGA

SUBJECT:                     Housing Authority of the City of Los Angeles
                             Nonprofit Organizations
                             Los Angeles, CA


                                     INTRODUCTION

We have completed an external audit survey of the Housing Authority of the City of Los
Angeles’ (Authority) activities with its 13 related nonprofit organizations. The survey focused
on the use of assets provided by the Department of Housing and Urban Development (HUD).
We performed the survey as part of the audit of the HUD oversight of Public Housing Agency
(PHA) development activities with related nonprofit entities. Our objective was to determine
whether the Authority complied with laws and regulations and properly safeguarded resources
when it conducted business with its 13 related nonprofit entities.

Our survey disclosed that the Authority inappropriately transferred $30,196,274 in Section 8
administrative fee reserves to the nonprofit entity Los Angeles LOMOD West, Inc. However, at
HUD’s direction, Los Angeles LOMOD West, Inc. transferred all of the reserves back to the
Authority. We also found that the Authority had difficulty using their accounting system to
produce supporting documentation for general ledger transactions. To correct this problem, the
Authority is implementing an Oracle based accounting system which is expected to be
operational in December of 2004.

Since the Authority has taken appropriate actions to correct the problems identified, we do not
believe additional audit work relative to the survey objectives is warranted.
                             METHODOLOGY AND SCOPE

To accomplish our objective, we reviewed applicable HUD regulations, the Authority’s Annual
Contributions Contract (ACC), and other requirements. We interviewed appropriate Authority
and HUD Office of Public and Indian Housing management staff and reviewed various
Authority documents including audited financial statements, general ledgers, bank statements,
invoices, minutes from Board meetings, and HUD correspondence. We also reviewed audited
financial statements for 9 of the 13 Authority controlled nonprofit entities.

We performed our on-site survey work from June 01, 2004, through September 10, 2004, and
covered the period January 01, 2002, to May 31, 2004.

                                      BACKGROUND

The Housing Authority of the City of Los Angeles was organized as a Public Housing Authority
in 1938 under California law to provide safe and sanitary housing for persons of low and
moderate income. The Authority is one of the largest Public Housing Authorities in the nation
and has more than 60 developments with over 8,000 units and 20,000 residents in its
conventional public housing program. The Authority also manages a Section 8 Program with
over 44,000 units and 95,000 residents. As of October 26, 2004, the Authority had 25,000
applicants on the public housing program waiting list and as of October 22, 2004, there were
94,151 applicants for the Section 8 Program. The Authority is the parent company of thirteen
active wholly owned nonprofit subsidiaries:

       Los Angeles LOMOD Corporation is a housing development corporation created in 1973
       to develop low-income properties. In March of 2003, the Los Angeles LOMOD
       Corporation was selected as the contract administrator for the Authority’s Project-based
       Section 8 program.
       La Cienega LOMOD, Inc., Los Angeles LOMOD South, Inc., and Los Angeles LOMOD
       West, Inc. were created in 1975 to provide housing for persons of low and moderate
       income;
       Los Angeles LOMOD Owensmouth, Inc. was created in 1975 to provide sanitary and low
       income housing to elderly/disabled persons;
       Los Angeles Section 8 Apperson LOMOD Corporation, Los Angeles, Section 8 Jefferson
       LOMOD Corporation, Los Angeles Section 8 Manhattan LOMOD Corporation, Los
       Angeles Section 8 Simpson LOMOD Corporation, Los Angeles Section 8 Browning
       LOMOD Corporation, Los Angeles Section 8 Coronado LOMOD Corporation, and Los
       Angeles Section 8 Juanita LOMOD Corporation are all housing development
       corporations created in 1982 for the development, construction, financing and
       rehabilitation of housing projects for persons of low and moderate income;
       New Vision Assets, Inc. was created in 2003 to provide assistance to the Authority by
       owning and operating multifamily residential rental properties, land and equipment for
       the exclusive use and benefit of the Authority. The assets for Los Angeles LOMOD
       Owensmouth were transferred to New Vision Assets in 2003 as part of a bond issue to
       fund the creation of New Vision Assets.
       Kids Progress, Inc. is a children and youth foundation created in 2002 to increase
       educational, artistic, cultural and technical opportunities for Authority residents.

A seven member Board of Commissioners governs the Authority. Three of the Authority’s
Board of Commissioners serve concurrently as the Board of Directors for each of the 13
nonprofit subsidiaries. The Authority’s Executive Director and Chief Financial Officer normally
serve as the President and Treasurer, respectively, for each of the 13 nonprofit subsidiaries. The
Authority’s financial records were maintained primarily at its central office located at 2600
Wilshire Boulevard, Los Angeles, California.

                                      SURVEY RESULTS

Based upon the limited external audit survey work, the majority of the Authority’s activities with
its 13 nonprofit subsidiaries appear to be in accordance with statutory and regulatory
requirements. Our survey did identify a deviation from program requirements and an area of
apparent risk: (1) transfer of $30,196,274 in Section 8 Administrative Fee Reserves to the
nonprofit entity Los Angeles LOMOD West, Inc., and (2) inability to provide sufficient general
ledger data. However, both of these problems have been adequately addressed by corrective
actions taken by HUD and the Authority. Los Angeles LOMOD West, Inc. has transferred the
$30,196,274 back to the Authority’s reserve account, and the Authority’s outdated accounting
system is being replaced with a new Oracle based accounting system.

The Authority inappropriately transferred $30,196,274 in Section 8 Administrative Fee
Reserves

On December 31, 2003, Authority management violated its Section 8 Annual Contributions
Contract (ACC) with HUD by inappropriately advancing $30,196,274 in Section 8
Administrative Fee Reserves to Los Angeles LOMOD West, Inc., an Authority controlled
nonprofit entity. This occurred because the Authority inappropriately prioritized spending
administrative reserves on various Authority activities rather than covering over-leasing costs in
2003 and 2004. However, on March 30, 2004, Los Angeles LOMOD West transferred the
$30,196,274 back into the Authority’s Section 8 reserve account.

Part A, Section 12 of the Section 8 ACC, Administrative Fee Reserve, states that the Authority
may only use administrative fee reserve funds for other housing purposes if the funds are not
needed to pay administrative expenses. Title 24 of the Code of Federal Regulations, Part
982.155 (b)(1), subpart D, provides requirements for administrative fee reserves. Under Title 24
C.F.R § 982.155(b)(1), the Authority must use funds in the administrative fee reserve to pay
program administrative expenses in excess of administrative fees paid by HUD for a fiscal year.

The Authority transferred $30,196,274 to Los Angeles LOMOD West, Inc. as part of
$74,743,213 transferred from Section 8 administrative fee reserves to various other accounts and
activities in order to protect the reserves from being used to cover Authority over-leasing costs in
2003 and projected over-leasing costs in 2004. Apparently, the former Executive Director
wanted to use administrative fee reserves on Authority activities before Congress passed
legislation that would limit how public housing authorities could spend their reserves. The hope
was that over-leasing costs for 2003 and 2004 would be covered through additional financial
assistance, which was requested from HUD. On March 30, 2004, at HUD’s direction,
$63,132,880 was transferred from various Authority accounts and activities back into the Section
8 administrative reserve account to be applied to the actual and expected over-leasing costs. The
$63,132,880 represented the unspent portion of the $74,743,213 originally removed from the
reserve account and included all of the $30,196,274 which had been transferred to the
Authority’s nonprofit affiliate, Los Angeles LOMOD West, Inc. The $11,610,333 in spent funds
was used for public housing security consulting contracts, Section 8 new construction operating
deficits, public housing operating expenses, resident relations program deficits, and
compensation for the conversion from cash to an accrual accounting method.

Authority accounting staff had difficulty providing supporting documentation for general
ledger transactions

In order to isolate the nonprofits' cash and accounts payable entries on the Authority's general
ledgers and select a sample of transactions to test, we first had to extract (download) raw data
from the Authority’s accounting system. After sorting, filtering and analyzing the Authority’s
data using external Audit Command Language software, we made a sample selection and
requested the related supporting documentation. It then took the Authority accounting staff over
a month to research and retrieve all of the documents necessary to support the transactions.

The accounting staff had difficulty because the Authority was using an outdated accounting
information system purchased in the 1980’s, and they did not know how to extract data and
support in a timely fashion. To correct the problems with the accounting system, the Authority
has installed an Oracle based accounting information system, which will run parallel to the
existing system until it is fully operational which is expected in December 2004. During our
survey fieldwork, Authority staff had been receiving training on the new Oracle system.

                                   RECOMMENDATIONS

Since the Authority has taken appropriate corrective action for the problems identified by our
survey, no recommendations are considered necessary.

If you have any questions, please contact me at (213) 894-8016, or Charles Johnson, Assistant
Regional Inspector General for Audit, at (602) 379-7243.