oversight

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)

                                                                 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.




                                             2
                            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


                                                  4
                                      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.




                                                8
                                 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




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