oversight

Lehigh County Housing Authority, Emmaus, PA, Could Not Support All Costs and Used HUD Funds to Support Its Nonfederal Entities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-09.

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

                                                               Issue Date
                                                                      March 9, 2005
                                                               Audit Report Number
                                                                     2005-PH-1007




TO:        Malinda Roberts, Director, Office of Public Housing, Pennsylvania State Office,
            3APH



FROM:      Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic Region,
            3AGA

SUBJECT:   Lehigh County Housing Authority, Emmaus, PA, Could Not Support All Costs
            and Used HUD Funds to Support Its Nonfederal Entities


                                  HIGHLIGHTS

 What We Audited and Why

           We completed an audit of the Lehigh County Housing Authority (Authority) in
           response to a complaint. The complainants alleged the Authority improperly used
           HUD funds to benefit its affiliated nonfederal entities. Our audit objectives were
           to determine whether the Authority could adequately support its use of HUD
           funds and if it used HUD funds to develop and support its affiliated nonfederal
           entities.

 What We Found


           Contrary to its Annual Contributions Contract, the Authority could not always
           support expenditures made with HUD funds and used HUD funds to develop and
           support its affiliated nonfederal entities. Specifically, the Authority could not
           provide adequate documentation to support $4 million in expenditures it made
           from January 2001 to December 2003 using HUD Public Housing and Section 8
           Program funds. During the same period, the Authority also used an estimated


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           $726,625 in HUD funds to pay salary and administrative costs of its affiliated
           nonfederal entities. Further, by accurately allocating salaries and other
           administrative costs, and supporting its disbursements, the Authority will more
           effectively use HUD funds of $1.6 million annually.

What We Recommend


           We recommend that HUD require the Authority to provide adequate
           documentation to fully support its disbursement of $4 million of HUD funds that
           it could not properly support, or reimburse HUD from nonfederal sources. We
           also recommend HUD require the Authority to implement an equitable method of
           allocating administrative expenses to its nonfederal entities and to reimburse the
           Public Housing Program $726,625 for ineligible salaries and administrative costs
           it provided to its nonfederal entities.

           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


           We discussed the report with the Authority during the audit and at an exit conference
           on February 10, 2005. The Authority provided its written comments to our draft
           report on March 4, 2005. The Authority acknowledged that it could not adequately
           support costs during the audit and did not have a certified cost allocation plan. It
           agreed to pass Board resolutions approving new procedures needed to ensure it
           properly supports and allocates costs. The Authority believed however, that after the
           audit it had located additional documentation needed to support its costs. It also
           stated it would work with the Director of Public Housing, Pennsylvania State Office
           to develop an accurate allocation plan and to recover amounts subsequently
           determined to be not properly allocated. The complete text of the Authority’s
           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 1: The Authority Could Not Adequately Support Costs of $4 Million   5
      Finding 2: The Authority Used $726,625 of HUD Funds to Support Its          7
                 Nonfederal Entities

Scope and Methodology                                                             10

Internal Controls                                                                 11

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use              12
   B. Auditee Comments                                                            13




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                      BACKGROUND AND OBJECTIVES

The Lehigh County Housing Authority was established in 1975 under the Housing Authorities
Law of the Commonwealth of Pennsylvania to provide affordable, sanitary and safe housing for
low-income families. A five-member Board of Commissioners appoints the Authority’s
Executive Director and governs the Authority. The current Board Chairman is Robert Forney.
John Seitz was the Authority’s Executive Director during most of the audit. Mr. Seitz resigned
during the audit in September 2004. The Board subsequently appointed Daniel Beers, formerly
the Authority’s Deputy Executive Director, to replace him. The Executive Director and Deputy
had served in their respective positions for more than 20 years. The Authority’s main
administrative office is located at 635 Broad Street, Emmaus, PA.

The Authority owns and manages 289 public housing units under its Annual Contributions
Contract with HUD. The Annual Contributions Contract defines the terms and conditions under
which the Authority agrees to develop and operate all projects under the agreement. HUD
authorized the Authority the following financial assistance from fiscal years 2000 to 2004: $2.9
million Operating Subsidy to operate and maintain its housing developments; $2.0 million
Capital Fund Program to modernize public housing units; and $35.4 million to provide housing
assistance through tenant-based Section 8 certificates and vouchers.

In 1982, the Authority created a nonfederal entity known as the Valley Housing Development
Corporation. The Authority formed this nonprofit corporation to provide low- and moderate-
income households opportunities for low cost rental housing and homeownership. A Board of
Commissioners, consisting of 11-21 members, governs the corporation. As of December 2003,
the Valley Housing Development Corporation held an interest in 46 limited partnerships in
which it served as the general partner. It primarily funded its limited partnerships through a
combination of private investment (in exchange for Federal housing tax credits), commercial
loans, and loans the corporation made using funds it received in exchange for 1-year state tax
credits. In total, these partnerships operate more than 1,300 units of low-income housing.

Since November 1990, the Authority has assisted the Valley Housing Development Corporation,
for a fee, to enable it to develop and operate its housing projects for low- and moderate-income
households. The Authority shares common management, administrative, and maintenance
service employees with the corporation. In July 2003, several complainants alleged the
Authority used HUD funds improperly to benefit the Valley Housing Development Corporation.
This is the second and final report we will issue in response to this complaint. In our first report
(Audit Case Number 2005-PH-1001, dated October 15, 2004), we noted the Authority improperly
pledged $4.4 million in HUD assets to guarantee debt incurred by its nonfederal entities and
improperly provided these nonfederal entities $95,634. Our audit objective for this second report
was to determine whether the Authority used HUD funds to develop and support its affiliated
nonfederal entities and whether it could adequately support its expenditures of HUD funds.




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                                        RESULTS OF AUDIT

Finding 1: The Authority Could Not Adequately Support Costs of $4
Million

Contrary to its Annual Contributions Contract, the Authority could not adequately support
disbursements of $4 million made over the 3-year period reviewed from January 2001 to
December 2003. This occurred because the Authority’s former Executive Director did not
ensure costs were adequately supported and the Authority’s Board of Commissioners did not
ensure internal controls were in place to prevent these problems from occurring. We estimate the
Authority could annually put $1.3 million1 to better use by ensuring its future costs are
allowable, properly supported, and well documented.



    The Authority Could Not
    Support $4 Million in
    Expenditures


                    The Authority could not adequately support how it spent $4 million of $5.5
                    million (73 percent) of the disbursements audited. Specifically, our review of
                    disbursements made during the audit period showed the Authority could not
                    provide adequate documentation to support how it used $1.2 million of Public
                    Housing and $2.3 million of Section 8 Program funds. The funds from these two
                    programs were deposited into the Authority’s general fund account which is used
                    for payroll and the disbursement of general operating expenses. The Authority
                    also received $565,454 in Housing Assistance Payment Savings funds. It could
                    not support that these funds were used to benefit very low-income persons and
                    families.

                    Part A, Section 9 (C) of the Authority’s Annual Contributions Contract with HUD
                    requires it to maintain records identifying the source and allocation of Federal
                    funds. The Authority may withdraw funds only for the payment of costs related
                    to the operation of the projects under its Annual Contributions Contract. This key
                    management control is critical to ensure the Authority spends Federal funds,
                    provided through its Annual Contributions Contract, only in accordance with the
                    regulatory requirements of each specific Federal program. Federal regulations2
                    also require the Authority to maintain complete and accurate records identifying
                    the source and application of grant funds such as cancelled checks, paid bills,
                    payrolls, and time and attendance records. Office of Management and Budget

1
    $4,028,698/3 years = $1,342,899 annually
2
    Title 24 Code of Federal Regulations 85.20


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                   Circular A-873 further requires the Authority to adequately document its costs
                   under Federal awards.

                   The Authority was required to use the unsupported $4 million mostly to fund its
                   Public Housing and Section 8 Programs. Since the Authority did not properly
                   support its disbursements, we have limited assurance that it used HUD funds
                   properly. The Authority acknowledged its supporting documentation was not
                   adequate and stated it was now working to correct the problem. The Authority’s
                   lack of support for its transactions has also contributed to HUD designating it a
                   substandard financial agency for its Public Housing Program and a troubled
                   performer for its Section 8 Program.

    Recommendations



                   We recommend that the Director, Office of Public Housing, Pennsylvania State
                   Office:

                   1A. Direct the Authority to provide adequate documentation to support the
                       $4,028,698 million identified in this finding or reimburse HUD from
                       nonfederal sources.

                   1B. Require the Authority’s Board of Commissioners to pass a Board resolution
                       approving procedures requiring it to maintain required supporting
                       documentation such as cancelled checks, paid bills, payrolls, and time and
                       attendance records, and thereby, put $1,342,899 million to better use
                       annually.

                   1C. Periodically perform reviews at the Authority to ensure that it maintains
                       documentation for salaries and administrative expenses related to the Public
                       Housing and Section 8 Programs. The documentation should identify the
                       source and application of grant funds such as cancelled checks, paid bills,
                       payrolls, and time and attendance records where appropriate.




3
    Attachment A, Paragraph C, Subparagraph 1.j


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Finding 2: The Authority Used $726,625 of HUD Funds to Support Its
Nonfederal Entities

Contrary to its Annual Contributions Contract, the Authority used HUD funds to support its
affiliated nonfederal entities. This occurred because the Authority’s former Executive Director
did not ensure all relevant costs were accurately allocated to the nonfederal entities and the
Authority’s Board of Commissioners did not ensure adequate internal controls were in place to
prevent these problems from occurring. As a result, the Authority paid salaries and
administrative expenses totaling $726,625 from Federal funds from January 2001 to December
2003 for work its employees performed for its nonfederal entity. We also estimated the
Authority will annually put $242,208 to better use by properly accounting for and allocating
work its employees perform in support of its nonfederal entity.



    Authority Improperly
    Subsidized Nonfederal Entities


                 The Authority paid expenses totaling $726,6254 from Federal funds from January
                 2001 to December 2003 for work its employees performed for its nonfederal
                 entity. Specifically, our review showed the Authority did not properly allocate
                 salaries, fringe benefits and other administrative expenses associated with at least
                 16 employees who performed work for its affiliated Valley Housing Development
                 Corporation. The 16 employees performed a variety of duties such as
                 management, maintenance, purchasing, and tenant selection. Authority officials
                 used a range of percentages to allocate salaries and other administrative expenses
                 to its nonfederal entities. However, Authority officials did not develop a cost
                 allocation plan or maintain formal accounting and other records to support the
                 various percentages used as required by Office of Management and Budget
                 Circular A-875. The Deputy Director informed us that he and the Executive
                 Director determined the individual percentages. However, they could not explain
                 the methodology used or provide any other documentation supporting the
                 estimates.

                 Part A, Section 9 (C) of the Authority’s Annual Contributions Contract with HUD
                 requires it to maintain records identifying the source and allocation of Federal
                 funds. This key management control is critical to ensure the Authority spends
                 Federal funds, provided through its Annual Contributions Contract, only in
                 accordance with the regulatory requirements of each specific Federal program.
                 Further, the contract specifies that the Authority can only withdraw Federal funds

4
  Some of these costs may be included in the $4 million in unsupported costs reported in Finding 1. Since the
Authority lacked adequate support, we could not determine how much of the $726,625 is included in the $4 million.
5
  OMB Circular A-87- Attachment E, Section (A)(1)(3) and (4)



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for the payment of costs associated with the development and operation of
projects under its Annual Contributions Contract or other projects specifically
approved by HUD. Thus, when employees work on multiple programs, a
distribution of their salaries should be supported by personnel reports or
equivalent documentation. As stated previously, Office of Management and
Budget Circular A-87 also requires the Authority to assign costs to benefited
activities on a reasonable and consistent basis. Formal accounting and other
records should support all costs and other data used to distribute the costs
included in its cost allocation plan, including the support needed to establish the
propriety of the costs assigned to the Federal awards.

Since the Authority did not have an allocation plan or other records to support the
percentages used to allocate salaries and other administrative expenses to its
nonfederal entities, we estimated the total salaries and other administrative expenses
the Authority should have paid based on the ratio of the number units of low-income
housing managed by the two organizations. We found that from January 2001 to
December 2003, an average of 1,354 of 1,643 units the Authority managed were not
covered by its Annual Contributions Contract. As illustrated below, the percentage
of costs that should have been fairly allocated to the nonfederal entities was an
average of about 18 percent (289 nonfederal units divided by 1,643 total units).


                                                              Federal units
                                                                  18%




          Nonfederal
            units
            82%



As shown above, only about 18 percent of the low-income housing units the
Authority managed, maintained, and supported were covered by its Annual
Contributions Contract with HUD. Therefore, the Authority is prohibited from
using HUD funds to manage, maintain, and support an estimated 82 percent of its
units. Accordingly, we used 18 percent to estimate salaries, fringe benefits and
other administrative expenses that should be allocated to the Authority’s HUD-
funded Public Housing Program. In this regard, we analyzed salaries, fringe


                                  8
          benefits and other administrative expenses the Authority paid for the 16
          employees who were working concurrently for the Authority and its nonfederal
          entities from January 2001 to December 2003. Our review showed the Authority
          improperly paid salaries and administrative expenses totaling $726,625 from
          Federal funds from January 2001 to December 2003 to support its nonfederal
          entities. We also estimated that in the future, the Authority can annually put
          $242,208 to better use by properly accounting for and allocating work its
          employees perform in support of its nonfederal entities.

Recommendations



          We recommend that the Director, Office of Public Housing, Pennsylvania State
          Office:

          2A. Require the Authority to recover $726,625 from its nonfederal entity for
              employee expenses not properly allocated to its nonfederal entity or repay it
              from nonfederal funds.

          2B. Require the Authority’s Board of Commissioners to pass a Board resolution
              approving procedures for accurately allocating costs to ensure the Authority
              does not use HUD funds to support its affiliated nonfederal entities, and
              thereby, put $242,208 to better use annually.




                                          9
                        SCOPE AND METHODOLOGY

We performed an audit from November 2003 through November 2004 of the Lehigh County
Housing Authority, located in Emmaus, PA. The audit was conducted in accordance with generally
accepted government auditing standards and included tests of internal controls that we considered
necessary under the circumstances.

The audit covered transactions representative of operations current at the time of the audit and
included the period January 2001 through December 2003. We expanded the scope of the audit
as necessary. We reviewed applicable guidance and discussed operations with management and
staff personnel at the Lehigh County Housing Authority and key officials from HUD’s
Pennsylvania State Office.

To determine that the Authority improperly used HUD funds to develop and support its affiliated
nonfederal entities and whether it could properly support its expenditures of HUD funds we:

    •   Reviewed all documentation provided by the Authority related to our audit objectives,
        including accounting records, invoices, cancelled checks, payrolls, time and attendance
        records, partnership agreements, financial statements, general ledgers, bank statements,
        payment vouchers, minutes from Board meetings and other related correspondence.

    •   Non-statistically selected $5.5 million of disbursements the Authority made from its
        general fund account from January 2001 to December 2003 and reviewed documentation
        such as accounting records, invoices, cancelled checks, payrolls, and time and attendance
        records that were used to support those disbursements.

    •   Reviewed the Authority’s available Independent Auditor’s Reports for fiscal years 2001
        and 2002.

    •   Reviewed HUD and Authority correspondence related to the audit and results of monitoring
        reviews HUD’s Pennsylvania State Office conducted.




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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:

              •   Assigning costs to benefited activities on a reasonable and consistent basis
                  including maintaining support to establish the propriety of costs assigned to
                  the Federal awards.

              •   Maintaining complete and accurate records identifying the source and
                  application of grant funds.

              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, we believe the following items are significant weaknesses.
              The Authority did not:

              •   Assign costs to its nonfederal entities on a reasonable and consistent basis and
                  did not maintain required support.

              •   Maintain complete and accurate records identifying the source and application
                  of grant funds.



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                                 Appendixes
Appendix A

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

        Recommendation             Ineligible 1/    Unsupported     Funds To Be Put
              Number                                         2/      to Better Use 3/

                       1A                             $4,028,698
                       1B                                                 $1,342,899
                       2A             $726,625
                       2B                                                 $ 242,208
                    Total             $726,625        $4,028,698          $1,585,107


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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity, where 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,
     de-obligation 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


         Ref to OIG Evaluation        Auditee Comments




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