oversight

The Housing Authority of the City of Newark Bond Financing Activities and Section 8 Choice Voucher Administrative Fee Reserves

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-05-26.

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

             AUDIT REPORT




     The Housing Authority of the City of Newark
Bond Financing Activities and Section 8 Housing Choice
        Voucher Administrative Fee Reserves
                Newark, New Jersey

                   2005-NY-1005

                    May 26, 2005



               OFFICE OF AUDIT
            New York/New Jersey Region
                                                                 Issue Date
                                                                   May 26, 2005
                                                                 Audit Report Number
                                                                    2005-NY-1005




TO:         Edward T. De Paula, Director, Office of Public Housing, 2FPH



FROM:       Edgar Moore, Regional Inspector General for Audit, 2AGA


SUBJECT: The Housing Authority of the City of Newark, Newark, New Jersey, Improperly
         Used $6.5 Million from Bond Financing Activities and Section 8 Housing
         Choice Voucher Administrative Fee Reserves


                                   HIGHLIGHTS

 What We Audited and Why

             Pursuant to a November 7, 2004, request from the former U.S. Department of
             Housing and Urban Development (HUD) New York/New Jersey regional
             director, who was concerned with media reports of questionable business
             practices, we initiated a comprehensive survey of the Housing Authority of the
             City of Newark (Authority). After commencing our survey we focused our
             objectives on determining whether the Authority (1) complied with HUD
             requirements for the disposition of proceeds from the redemption of tax-exempt
             bond financing, and (2) properly expended its Section 8 (housing choice voucher)
             administrative fee reserves.

 What We Found
             The Authority did not comply with HUD requirements when it improperly
             allowed its Housing Finance Corporation to retain more than $2.5 million in funds
             remaining after the redemption of the Authority’s 1980 tax-exempt mortgage
             revenue bonds.

             The Authority improperly used its housing choice voucher administrative fee
             reserves by committing over $4.4 million and expending more than $3.9 million to
           acquire properties related to a hockey arena. These expenses had previously been
           charged to its urban renewal program and were not housing related.

           The Authority’s improper use of its administrative fee reserves caused an
           underreporting of its administrative fee reserve balance as of January 31, 2003.
           Consequently, $729,423 in administrative fee reserves should have been subject to
           recapture by HUD.

What We Recommend


           We recommend that HUD require the Authority and its Housing Finance
           Corporation to pay HUD the $2,533,536 in funds that remained after the
           Authority’s 1980 mortgage revenue bonds were redeemed. We also recommend
           that HUD ensure that the Authority reimburses the housing choice voucher
           administrative fee reserve account the $3,991,350 expended for the acquisition of
           properties related to a hockey arena. Furthermore, we recommend that HUD
           recapture $729,423 of the housing choice voucher administrative fee reserves that
           exceeded the allowable level for January 31, 2003. In addition, we recommend
           that controls be established to ensure the proper (1) disposition of the proceeds
           from bond redemptions, and (2) use and reporting of housing choice voucher
           administrative fee reserves.

           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


           Officials of the Authority generally disagreed with our findings, however, they
           did agree to reimburse the questioned $3,991,350 expenditure of administrative
           fee reserves.

           We provided a copy of the draft audit report to Authority officials on April 21,
           2005, and discussed its contents with them at an exit conference on May 5, 2005,
           at which time the officials provided their written comments. The complete text of
           the Authority’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 1: The Authority Improperly Retained Proceeds from Bonds That Had Been
           Redeemed                                                                  5
Finding 2: The Authority Improperly Used Its Housing Choice Voucher Administrative
           Fee Reserves                                                              7




Scope and Methodology                                                                10

Internal Controls                                                                    11



Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                 13
   B. Auditee Comments and OIG’s Evaluation                                          14




                                            3
                     BACKGROUND AND OBJECTIVES


The Newark Housing Authority (Authority) was established in 1938 after the passage of the
Federal Housing Act of 1937 to build and manage public housing developments for residents of
the City of Newark. Currently, the Authority owns approximately 7,800 low-income housing
units, assists an additional 6,700 families through the Section 8 program, and operates various
urban renewal programs. In addition, the Authority’s board of commissioners established the
Housing Finance Corporation to sponsor the issuance of tax-exempt bonds to finance the
construction of Section 8 housing. The Authority reported total operating revenue of more than
$185 million for the period ending March 31, 2004.

The Authority’s board of commissioners is comprised of seven members, who serve five-year
terms; one member is appointed by the mayor, five members are appointed by the mayor with
city council approval, and one member is appointed by the New Jersey Department of
Community Affairs as delegated by the governor. The executive director of the Authority is Mr.
Harold Lucas.

The former HUD regional director had requested a full operational audit of the Authority
because of media allegations of questionable business practices. As a result, we initiated a
comprehensive survey to address the allegations and determine whether an audit was warranted.
We anticipate that we will issue multiple reports addressing the operations of the Authority.
After commencing our survey we focused our objectives on determining whether the Authority
(1) complied with HUD requirements for the disposition of proceeds from the redemption of tax-
exempt bond financing, and (2) properly expended its Section 8 (housing choice voucher)
administrative fee reserves.




                                               4
                                RESULTS OF AUDIT

Finding 1: The Authority Improperly Retained Proceeds from Bonds
           That Had Been Redeemed
Contrary to HUD requirements, the Authority allowed its Housing Finance Corporation to retain
$2,533,536 of the funds remaining after the redemption of the Authority’s 1980 tax-exempt
mortgage revenue bonds. Authority officials advised that they interpret section 413 of the
indenture of trust as permitting the Authority to retain any funds that remained after the bonds
had been redeemed, however this is contrary to Federal regulations. As a result, HUD was
deprived of the use of these funds.


 The Authority Improperly
 Retained Bond Proceeds

              On July 31, 2002, the trustee for the Authority’s financing of four 1980 Section 8-
              assisted Federal Housing Administration-insured projects notified the Authority
              that its $9.6 million mortgage revenue bonds had been called in full as of July 19,
              2002, and that the mortgage had been terminated. The trustee also requested
              instructions for the transfer of funds remaining in the redemption account. On
              August 1, 2002, the Authority instructed the trustee that all funds remaining after
              payment of bond principal, interest, and other obligations should be paid to the
              Housing Finance Corporation in accordance with section 413 of the indenture of
              trust. Consequently, on August 1, 2002, the trustee transferred $2,533,536 to the
              Authority. The Authority credited this amount to its Housing Finance
              Corporation as unrestricted funds. However, Authority officials failed to
              recognize that these proceeds should have been returned to HUD in accordance
              with 24 Code of Federal Regulations Part 811.

              24 Code of Federal Regulations Part 811.105(a)(2)(iii)(b) provides that the applicant
              shall receive no compensation in connection with the financing of a project, except for
              its expenses… Should the applicant receive any compensation in excess of such
              expenses, the excess is to be placed in the debt service reserve. In addition, 24 Code of
              Federal Regulations Part 811.108(b)(3), which relates to debt service and reserves,
              provides that upon full payment of the principle and interest on the obligations
              (including that portion of the obligations attributable to the funding of the debt service
              reserve), any funds remaining in the debt service reserve shall be remitted to HUD.

              We found that on March 13, 1980 the Housing Finance Corporation certified that
              the terms of the financing, the amount of the obligations issued with respect to the
              projects, and the use of the funds raised would be in compliance with applicable
              HUD regulations in 24 Code of Federal Regulations Part 811. Officials of the
              Authority advised us that they complied with section 413 of the indenture of trust,
              dated February 15, 1980 and 24 Code of Federal Regulations Part 811. However,


                                                5
          compliance with 24 Code of Federal Regulations Part 811 would require the
          remittance of excess proceeds to HUD. In response to a prior Office of Inspector
          General (OIG) audit of the Authority (Report No. 92-NY-204-1009, dated
          September 24,1992), HUD’s chief counsel of the Newark Office concluded that
          the Housing Finance Corporation was bound by the provisions of 24 Code of
          Federal Regulations Part 811. As a result, Authority officials need to ensure that
          they and the Housing Finance Corporation are in compliance with federal
          regulations when redeeming its bonds and they should remit the residual bond
          proceeds amounting to $2,533,536 to HUD, as required.


Recommendations

          We recommend that the Director, Office of Public Housing, instruct:

          1A. The Authority and its Housing Finance Corporation to pay HUD the
              $2,533,536 in funds that remained after the 1980 mortgage revenue bonds
              were redeemed.

          1B. The Authority and its Housing Finance Corporation to establish controls and
              procedures that will ensure that all bond financing activities are in
              compliance with federal regulations and to ensure that the proceeds from
              bond redemptions are remitted to HUD as required.




                                           6
Finding 2: The Authority Improperly Used Its Housing Choice
          Voucher Administrative Fee Reserves
The Authority improperly committed $4.4 million, and subsequently expended, more than $3.9
million in administrative fee reserves that had previously been charged to its urban renewal
program. In addition, the Authority improperly committed another $220,000 for previously
expended security and HOPE VI-related costs. This occurred because the Authority did not have
adequate internal controls over the use of administrative fee reserves. As a result, the
administrative fee reserves were underreported at January 31, 2003, and $729,423 in
administrative fee reserves should have been subject to recapture by HUD.


 Administrative Fee Reserves
 Were Used for Ineligible Costs

              Our review disclosed that the Authority had committed $4.4 million, and actually
              expended $3,991,350 in administrative fee reserves for expenses previously charged
              to the Authority’s urban renewal program. These expenses funded the acquisition
              of property for resale to a corporation that would use the land to build a hockey
              arena, which is not housing-related as required by HUD regulations.

              In May 2001, the Authority entered into an agreement to purchase 12 properties
              within an area of Newark proposed for the development of a professional hockey
              arena. Authority officials noted that the Authority would gain by this agreement,
              regardless of whether the arena was built. If the land was developed into an arena,
              the Authority was assured a 4-percent return on its investment, and the money could
              then be used to develop other housing units. If the arena did not materialize, the
              Authority would have ownership of prime property, which could be developed into
              low-income housing units. However, the agreement did not contain any provision
              for housing.

              The Authority authorized these expenses to be paid from urban renewal funds in
              2001. However, on January 1, 2003, the Authority charged the housing choice
              voucher administrative fee reserves for these costs, and the board of commissioners
              authorized this transfer on March 27, 2003. While the $3,991,350 spent for urban
              renewal project-related expenses was an appropriate use of urban renewal program
              funds, it represents an unallowable use of administrative fee reserves. According to
              24 Code of Federal Regulations Part 982.115, administrative fee reserves must be
              used for housing-related expenses. Consequently, the $3,991,350 should be
              reimbursed to the housing choice voucher administrative fee reserve account.

 The Authority Underreported
 Its Administrative Fee Reserves
              Because of the above improper use and/or commitment of administrative fee
              reserves, the Authority has underreported its administrative fee reserve balance as of


                                                7
                  January 31, 2003. Accordingly, HUD was not aware that $729,423 in administrative
                  fee reserves was available to be recaptured.

                  As of January 31, 2003, the Authority reported an administrative fee reserve balance
                  of $474,808. Adjusting for $379,602 in net fixed assets incorrectly included in the
                  balance by the Authority yields a balance of $95,206. However, as noted
                  previously, as of January 31, 2003, the Authority had improperly committed
                  $4,400,000 in administrative fee reserves to the hockey arena project. If the
                  $4,400,000 is considered an unallowable use of reserve funds and added to the
                  January 31, 2003 available balance, the adjusted balance is $4,495,206 ($95,206 plus
                  $4,400,000). Further, on March 27, 2003, the board of commissioners approved the
                  use of $3,928,396 in administrative fee reserves for security and HOPE VI-related
                  costs that already had been expended. These costs were allowable uses of
                  administrative fee reserves; however, we found that this authorization exceeded the
                  previously authorized amount by $220,000. Accordingly, since this $220,000 was
                  authorized after January 31, 2003, it should be added to the amount considered
                  available as of January 31, 2003, and thus subject to recapture.

                  As shown below, if the $4,400,000 and $220,000 are added back to the available
                  administrative fee reserves, the Authority’s reserve balance at January 31, 2003
                  should have been $4,715,206.

                           January 31, 2003, administrative fee reserves reported
                             by the Authority                                                 $ 474,808
                           Less: OIG adjustment for erroneously
                             included net fixed assets                                        $ (379,602)
                           Adjusted balance                                                   $   95,206
                           Add: OIG disallowance of questionable funds
                                  for the hockey arena project                                $ 4,400,000
                                 OIG disallowance of funds used in
                                  excess of authorized commitment                            $ 220,000
                           OIG computed balance at January 31, 2003                          $ 4,715,206


    Administrative Fee Reserves
    Should Have Been Recaptured
                  The Consolidated Appropriations Resolution of 2003 provides that HUD, among
                  other things, should reduce administrative fees paid in fiscal year 2003 to any
                  agency whose available reserve amount1 was more than 105 percent of the fees
                  earned in fiscal year 2002 and recapture any fees paid in fiscal year 2003 that
                  exceeded actual administrative expenses. Further, Public and Indian Housing Notice
                  2003-23, issued September 20, 2003, provides for reducing a housing authority’s
                  ongoing administrative fee by the amount that the available administrative fee


1
  As reported by the Government Accountability Office (GAO-05-30), the lack of a clear definition of “available”
resulted in housing authorities using varying interpretations to calculate the reserve balance subject to recapture.


                                                          8
          reserve balance as of January 31, 2003, exceeded 105 percent of its fiscal year 2002
          administrative fees earned.

          As a result, in accordance with Public and Indian Housing Notice 2003-23, we
          determined that the Authority’s administrative fee reserves in excess of $3,985,783
          should have been subject to recapture. This amount is calculated by taking 105
          percent of the $3,795,984 in administrative fees earned for federal fiscal year 2002.
          Consequently, $729,423, which is the amount in excess of 105 percent of the
          Authority’s fiscal year 2002 balance ($4,715,206 less $3,985,783), should be subject
          to recapture by HUD.

Recommendations

          We recommend that the Director, Office of Public Housing,

          2A.     Ensure that the Authority reimburses the housing choice voucher
                  administrative fee reserves for the $3,991,350 improperly expended for
                  the acquisition of properties related to a hockey arena.

          2B.     Recapture $729,423 in administrative fee reserves that exceeded the
                  allowable “available” administrative fee balance as of January 31, 2003.

          2C.     Direct the Authority to establish controls to ensure that housing choice
                  voucher administrative fee reserves are used for allowable purposes and
                  reported accurately.




                                            9
         SCOPE AND METHODOLOGY

Our review was conducted at the Newark Housing Authority located at 500 Broad
Street Newark, New Jersey. To accomplish our objectives we interviewed HUD
officials and officials of the Authority and its Housing Finance Corporation. In
addition, we reviewed the following:

•   Applicable laws, regulations, and other HUD program requirements;
•   The Authority’s annual contribution contracts and trust indenture; and
•   HUD and the Authority’s program files for the low-rent housing and Section 8
    programs.

We reviewed various documents including financial statements; general ledgers;
bank statements; invoices; purchase orders; contracts; check vouchers; and prior
OIG, General Accountability Office, and HUD reports on the Authority. We also
reviewed the Authority’s financial and administative records related to its
Housing Finance Corporation and its Section 8 administrative fee reserve account.
In addition, we reviewed the Authority’s audited financial statements for project
years 2002, 2003, and 2004.

We performed the audit from October 2004 through March 2005. The audit
covered the period from January 1, 2003, through December 31, 2004, but we
extended the period as necessary.

We performed our review in accordance with generally accepted government
auditing standards.




                               10
                             INTERNAL CONTROLS

Internal controls are 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 that 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.

              •       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 has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              •       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.

              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.

 Significant Weaknesses


              Based on our review, the following items are significant weaknesses:




                                               11
•   The Authority did not have a system to ensure compliance with laws and
    regulations related to the disposition of the proceeds of bond financing
    activities and the use of housing choice voucher administrative fee reserves
    (findings 1 and 2).

•   The Authority did not have a system to ensure resources were properly
    safeguarded when it used its Section 8 housing choice voucher
    administrative fee reserves to pay for non-housing-related expenses (finding
    2).




                              12
                                       APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE


               Recommendation                                Funds to be
               Number                 Ineligible 1/          Put to Better Use 2/
                      1A              $2,533,536
                      2A              $3,991,350
                      2B                                        $729,423



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
     policies or regulations.


2/   “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 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.




                                              13
Appendix B
     AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation   Auditee Comments




                         14
Comment 1




            15
Comment 2




Comment 3



Comment 4




            16
 Comment 1



 Comment 4




Comment 5




             17
Comment 6




            18
Comment 7




            19
Comment 5




Comment 5




Comment 5




            20
                         OIG Evaluation of Auditee Comments

Comment 1   The additional provisions of 24 Code of Federal regulations Part 811 section 110 (f),
            referred to by the Authority pertain to refunding obligations issued to finance Section 8
            projects, and provide that a HUD review should be obtained for the release of reserves
            from the trust indenture for outstanding bonds that are being refunded, defeased, or
            prepaid However, the documentation provided by the Authority did not demonstrate
            that HUD approval had been sought nor obtained for the retention of the funds held by
            the trustee under the trust indenture for the 1980 bonds.

Comment 2   The Letter of Determination signed by Mr. James P. Sweeney, Area Manager, HUD
            Newark Office, on March 30, 1980 refers to the designation that the bonds issued
            under the 1980 financing comply with the requirements for Section 11(b) of the United
            States Housing Act of 1937. This Determination provides that the bonds issued will be
            designated as tax-exempt securities. Accordingly, this document does not refer to the
            release of excess reserves without HUD approval as indicated by the Authority.
            Consequently, without evidence of HUD approval for the retention of the residual
            funds, 24 Code of Federal Regulations Part 811 requires that the excess proceeds from
            the bond redemption should be returned to HUD.

Comment 3   We have removed the statement that officials of the Authority advised us that they
            complied with section 413 of the indenture of trust, dated February 15, 1980, under the
            belief that the Housing Finance Corporation did not have to comply with 24 Code of
            Federal Regulations Part 811. Nevertheless, it is our belief that, the Authority did not
            comply with 24 Code of Federal Regulations Part 811 section 108 by allowing the
            Housing Finance Corporation to retain the funds remaining after the bond redemption.

Comment 4   The documentation provided by the Authority to support its position that HUD
            approved the use of funds for Low-Income Housing security-related purposes
            pertained to funds resulting from a 1994 bond refinancing. This approval does not
            pertain to the disposition of the funds from the redemption of the 1980 bonds in
            question. Accordingly, the Authority has not documented HUD approval to retain the
            1980 bond redemption proceeds.

Comment 5   It is our opinion that the Authority did not have a system in place to ensure
            compliance with applicable HUD regulations, and that consequently, it’s
            resources were not properly safeguarded. This opinion is supported by our
            finding and the Authority’s own admission that HUD did not approve the
            utilization of these funds as per the resolution passed by the Board.

Comment 6   The GAO report referred to by the Authority noted that for the housing agencies
            visited, the agencies calculated their reserves in a manner consistent with HUD
            guidance. However, the GAO report also notes that GAO did not perform a
            financial audit of the housing agencies’ administrative fee reserves. As such, the
            GAO report does not state whether the Authorities’ administrative fee reserves
            were expended in accordance with HUD requirements.



                                             21
            In our draft report, issued to HUD and the Authority on April 20 and 21, 2005,
            respectively we originally recommended that the HUD field office obtain a legal
            opinion to determine whether spending the housing choice voucher administrative
            fee reserve funds for the purchase of the arena-related land was an allowable use.
            However, since the Assistant Secretary for Public and Indian Housing released its
            report on the Authority on April 22, 2005 that concluded that the expenditure was
            an unallowable use of the reserves, we have revised our recommendation to state
            that the HUD field office should ensure that the reserve funds are reimbursed.

Comment 7   The Authority has incorrectly computed the amount of housing choice voucher
            administrative fee reserves subject to recapture as of January 31, 2003 for several
            reasons. First, the analysis of the administrative fee reserve balance available as
            of January 31, 2003 should be based on the total reserve as of that date less funds
            that were committed for allowable costs. When the Authority reported its January
            31, 2003 administrative fee reserve balance, it was reduced by the $4.4 million
            committed to the arena project. Consequently, the $4.4 million committed for the
            unallowable arena-related expenditure, not just the $3,991,350 actually expended,
            should be added back to determine available reserves as of January 31, 2003.
            Second, the additional $220,000 for security and Hope VI-related costs should not
            have been included in the amount that was committed as of January 31, 2003
            because these commitments were not authorized by the board until March 21,
            2003. Third, the basis for the recapture is the amount of any reserves in excess of
            105 percent of administrative fees earned in federal fiscal year 2002.




                                            22