Issue Date
June 6, 2005
Audit Report Number
2005-PH-1012
TO: Malinda Roberts, Director, Office of Public Housing, Pennsylvania State Office,
3APH
FROM: Daniel G. Temme, Regional Inspector General for Audit, Philadelphia Region,
3AGA
SUBJECT: The Lycoming County Housing Authority, Williamsport, Pennsylvania, Risked
HUD Assets for the Benefit of Its Affiliated Nonfederal Entity
HIGHLIGHTS
What We Audited and Why
We audited the Lycoming County Housing Authority (Authority) in response to a
referral from the U.S. Department of Housing and Urban Development’s (HUD)
Pennsylvania State Office, Office of Public Housing. Our audit objective was to
determine whether the Authority properly used HUD funds to develop and
support its affiliated nonfederal entity.
What We Found
Although the Authority properly allocated direct and indirect costs to its
nonfederal entity, it violated its annual contributions contract with HUD by
guaranteeing a $3.5 million line of credit with HUD assets to help support the
nonfederal entity. As of March 2005, the Authority owed $2.9 million on this line
of credit, placing significant HUD assets at risk. This occurred because the
Authority erroneously believed that a disposition agreement approved by HUD
granted it permission to use HUD funds to support its affiliated nonfederal entity.
What We Recommend
We recommend that the Director, Office of Public Housing, Pennsylvania State
Office, notify the Authority that it has improperly encumbered annual contributions
contract assets and direct it to provide evidence within the next 30 days that the
financial instruments encumbering the assets have been changed to exclude the
assets and, thereby, put $2.9 million to better use. We further recommend that if the
Authority does not withdraw its encumbrances of annual contributions contract
assets, the Director, Office of Public Housing, Pennsylvania State Office, should
advise HUD Headquarters that the Authority is potentially in substantial default of
its annual contributions contract and request that it send a notice of default to the
Authority.
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
The Authority waived our formal exit conference on May 26, 2005, and provided
written comments to our draft report on May 27, 2005. The Authority agreed to
review the financial instruments the audit determined encumbered HUD assets and
stated it would make changes required to ensure that HUD assets are not at risk. 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 Improperly Guaranteed a $3.5 Million Line of Credit 5
with HUD Assets to Support Its Nonfederal Entity
Scope and Methodology 7
Internal Controls 8
Appendixes
A. Funds to Be Put to Better Use 9
B. Auditee Comments 10
3
BACKGROUND AND OBJECTIVES
The Lycoming County Housing Authority (Authority) was established in 1948 under the
Municipal Authorities Act of the Commonwealth of Pennsylvania to provide affordable housing
for qualified individuals in accordance with the rules and regulations prescribed by the U.S.
Department of Housing and Urban Development (HUD). A five-person board of directors
appoints the Authority’s executive director and governs the Authority. The executive director
during the audit, who had been serving in this position for more than five years, was Elizabeth
Turner. The Authority’s main administrative office is located at 1941 Lincoln Drive,
Williamsport, PA.
The Authority currently owns and operates 362 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
2002 to 2004:
• $880,000 operating subsidy to operate and maintain its housing developments,
• $1.9 million Public Housing Capital Fund program to modernize public housing units,
and
• $3 million to provide housing assistance through tenant-based Section 8 vouchers.
In 1997, the Authority created a nonfederal entity known as the Lycoming Housing Finance,
Incorporated. The Authority formed this nonprofit corporation in an effort to increase housing
opportunities to low-income families throughout Lycoming County. A board of directors,
consisting of three members who also serve on the Authority’s board of directors, presides over
the corporation. The Authority shares management and office space with the corporation. The
Authority’s executive director also serves as the chief executive officer of the Lycoming
Housing Finance, Incorporated, and is the nonvoting board secretary of both organizations.
Federal regulations1 allow HUD to approve the disposition of real property of a project in whole
or in part. In accordance with federal regulations, the Authority proposed to transfer 138 of its
public housing units to the Lycoming Housing Finance, Incorporated, instead of rehabilitating the
units and continuing to maintain them. HUD approved the Authority’s request to dispose of the
138 units in April 2000. The Lycoming Housing Finance, Incorporated, currently owns and
operates 216 units of low-income housing.
The overall objective of our audit was to determine whether the Authority properly used HUD
funds to develop and support its affiliated nonfederal entity.
1
24 CFR [Code of Federal Regulations] 970.9
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RESULTS OF AUDIT
Finding 1: The Authority Improperly Guaranteed a $3.5 Million Line of
Credit with HUD Assets to Support Its Nonfederal Entity
The Authority improperly encumbered HUD assets and violated its annual contributions contract
by using HUD assets to guarantee a $3.5 million line of credit to support its affiliated nonfederal
entity known as the Lycoming Housing Finance, Incorporated. This occurred because the
Authority erroneously believed that a disposition agreement approved by HUD granted it
permission to use HUD assets to secure the line of credit it used to support its affiliated
nonfederal entity. By withdrawing its encumbrances of annual contributions contract assets, the
Authority can ensure that HUD assets valued at $2.9 million2 are not at risk.
The Authority Improperly
Guaranteed $3.5 Million with
HUD Assets
The Authority violated its annual contributions contract by guaranteeing a $3.5
million line of credit starting in September 2000. The Authority obtained this line of
credit from a bank and used it to support its affiliated nonfederal entity known as the
Lycoming Housing Finance, Incorporated. In so doing, the Authority placed federal
funds at risk by improperly encumbering assets covered by its contributions contract
without prior approval from HUD. As of March 2005, the Authority owed $2.9
million on the bank loan, placing significant HUD assets at risk. The annual
contributions contract prohibits the Authority from encumbering or pledging its HUD
assets without HUD’s prior approval.3 The contract further states that encumbering
annual contributions contract assets as collateral for a loan constitutes grounds for
declaring the Authority in substantial default of its contributions contract.4
Nevertheless, we found the Authority improperly encumbered and placed HUD assets
at risk.
We discussed these problems with the executive director during the audit, and she
informed us that she believed the disposition agreement approved by HUD granted
the Authority permission to use HUD assets to secure the line of credit. However, we
found that nothing in the agreement granted the Authority permission to use HUD
assets to guarantee the line of credit it used to support the Lycoming Housing
Finance, Incorporated. By withdrawing its encumbrances of annual contributions
2
Balance on bank loan as of March 1, 2005
3
Part A, section 7, of the annual contributions contract, Covenant against Disposition and Encumbrances
4
Part A, section 17, Notices, Defaults, Remedies
5
contract assets, the Authority can ensure that HUD assets valued at $2.9 million are
not at risk.
Recommendations
We recommend that the Director, Office of Public Housing, Pennsylvania State Office
1A. Notify the Authority that it has improperly encumbered annual contributions
contract assets and direct it to provide evidence within the next 30 days that the
financial instruments encumbering the assets have been changed to exclude the
assets and, thereby, ensure that HUD assets valued at $2,888,300 are not at risk.
1B. If the Authority does not withdraw its encumbrances of annual contributions
contract assets, advise HUD Headquarters that the Authority is potentially in
substantial default of its annual contributions contract and request that it send a
notice of default to the Authority.
6
SCOPE AND METHODOLOGY
We performed an audit of the Lycoming County Housing Authority, located in Williamsport,
Pennsylvania. The audit was conducted from December 2004 through April 2005 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 2002 through September 2004. We expanded the scope of the audit
as necessary. We reviewed applicable guidance and discussed operations with management and
staff personnel at the Lycoming County Housing Authority and key officials from HUD’s
Pennsylvania State Office.
To determine whether the Authority properly used HUD funds to develop and support its
affiliated nonfederal entity, we
• Reviewed all documentation provided by the Authority related to our audit objective,
including partnership agreements, legal documents, financial statements, general ledgers,
bank statements, bank loan agreements, related correspondence, payment vouchers, and
minutes from board meetings.
• Reviewed the Authority’s and the Lycoming Housing Finance, Incorporated’s available
independent auditor’s reports for fiscal years 2002 and 2003.
• Reviewed HUD and Authority correspondence related to the audit and results of monitoring
reviews HUD’s Pennsylvania State Office conducted.
• Obtained and reviewed the legal opinion of the counsel to the inspector general
regarding issues identified during the audit.
7
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, procedures, control systems, and other management tools implemented
to prevent the inappropriate use of HUD funds for nonfederal purposes.
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 item is a significant weakness:
• The Authority did not prevent annual contributions contract assets from being
encumbered or risked without HUD approval.
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Appendixes
Appendix A
FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to Be Put
Number to Better Use 1/
1A $2,888,300
1/ “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.
9
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
10
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The Lycoming County Housing Authority, Williamsport, Pennsylvania, Risked HUD Assets for the Benefit of Its Affiliated Nonfederal Entity
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-06-06.
Below is a raw (and likely hideous) rendition of the original report. (PDF)