Issue Date
April 25, 2006
Audit Report Number
2006-AT-1008
TO: Dominique Blom, Acting Deputy Assistant Secretary for Public Housing
Investments, PIU
Boyce J. Norris, Director, Office of Public housing, 4APH
FROM:
James D. McKay
Regional Inspector General for Audit, 4AGA
SUBJECT: The Housing Authority of the City of Macon, Georgia’s Controls for Expending
Low-Income Housing and HOPE VI Program Funds and Safeguarding Low-
Income Housing Assets Were Inadequate
HIGHLIGHTS
What We Audited and Why
We reviewed the Housing Authority of the City of Macon’s (Authority)
administration of its housing development activities as part of our audit of the
U.S. Department of Housing and Urban Development’s (HUD) oversight of
public housing agency development activities with related nonprofit entities.
Our audit objectives were to determine whether the Authority inappropriately
used low-income housing and HOPE VI Program funds for unauthorized purposes
to benefit other entities without specific HUD approval and whether the Authority
complied with applicable laws and regulations and properly safeguarded low-
income resources when it conducted business with affiliated nonprofit entities and
consultants.
Table of Contents
What We Found
The Authority violated its annual contributions contract (contract) with HUD by
using funds from its low-income housing general fund account to pay expenses of
its programs and affiliated entities. As of December 31, 2004, 11 programs or
entities, including nonprofit firms and other programs, owed the general fund
account $395,211. As a result, the Authority made ineligible disbursements with
low-income housing funds totaling $395,211.
Further, the Authority violated its contract with HUD by using low-income public
housing assets as collateral to guarantee loans for two affiliated nonprofit entities
totaling $2.2 million, thereby placing contract assets at risk. The original $2.2
million in loan balances guaranteed has been reduced to $125,000, which is the
amount currently at risk.
Additionally, the Authority violated federal contracting requirements by entering
into an open-ended contract with a consultant without a ceiling price. The
Authority spent $227,684 on the contract, which has been in effect since
November 2001.
What We Recommend
We recommend that the director of the Office of Public Housing require the
Authority to collect the $395,211 or current balance owed to the general fund
account and repay the low-income public housing reserve the amounts collected.
In addition, the director of the Office of Public Housing should require the
Authority to pursue terminating the loan guarantees, so the contract collateral
used to guarantee the unpaid loan balances of $125,000 will not be at risk.
Finally, the acting deputy assistant secretary for Public Housing Investments
should require the Authority to justify the necessity and reasonableness of the
payments made for the consultant’s contract. Any amounts that cannot be
supported should be reimbursed from nonfederal funds. The acting deputy
assistant secretary should require the Authority to terminate or amend the
consultant’s contract in accordance with applicable federal requirements.
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Auditee’s Response
We discussed our review results with the Authority and HUD officials during the
audit. We provided a copy of the draft report to Authority officials on March 9,
2006, for their comments and discussed the report with the officials at the exit
conference on March 20, 2006. The Authority provided written comments on
March 24, 2006. The Authority disagreed that it placed their assets at risk with
the loan guarantees. The Authority acknowledged that it used the general fund for
all operations, and did not include a ceiling price in the consultant contract.
The complete text of the Authority’s response, along with our evaluation of that
response, can be found in appendix B of this report. The Authority also provided
attachments with its response that are available for review upon request.
HUD Management Decisions
The Office of Public Housing’s memorandum dated April 12, 2006, indicated
agreement with the findings and recommended corrective actions, and provided
proposed management decisions for recommendations 1A, 1B, 2A, 2B, and 3C.
In addition, the Office of Public Housing Investment’s memorandum dated April
19, 2006, indicated agreement with the findings and recommended corrective
actions, and provided proposed management decisions for recommendations 3A
and 3B. We have accepted the management decisions, and they will be recorded
in the Departmental audit resolution tracking system upon report issuance. Please
furnish us copies of any correspondence or directives issued because of the audit.
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3
TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: The Authority Used Low-Income Public Housing Funds for Other 6
Programs
Finding 2: The Authority Used Low-Income Housing Assets to 9
Guarantee Loans
Finding 3: The Consultant’s Open-Ended Contract Violated HUD Contracting 11
Requirements
Scope and Methodology 14
Internal Controls 15
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 17
B. Auditee Comments and OIG’s Evaluation 18
4
BACKGROUND AND OBJECTIVES
The Housing Authority of the City of Macon (Authority) was organized pursuant to the Housing
Act of 1937 and the laws of the State of Georgia. Its primary objective is to provide low-income
housing to the citizens of Macon, Georgia, in compliance with its contract with the U.S.
Department of Housing and Urban Development (HUD).
A six-member board of commissioners (board) governs the Authority with members appointed in
accordance with Georgia law. Each member is appointed to a five-year term. Joann Fowler is
the board chairperson, and John Hiscox is the executive director.
The Authority’s major programs include administering 2,159 conventional low-income housing
units and 2,713 Section 8 vouchers. The Authority also administers business-type activities
(proprietary funds), which include the activities of affiliated nonprofit entities.
The Authority administers federally funded activities for the low-rent public housing program,
Housing Choice Voucher program, Public Housing Capital Fund grant programs, HOPE VI grant
program, Section 8 Moderate Rehabilitation program, and Section 8 substantial rehabilitation
and new construction program.
In addition, the Authority administers activities which are not federally funded for Tattnall Place,
L.P.; 2009 Vineville, L.P.; Grove Park Village, Inc.; Family Investment Center and Other
Nonfederal Grants; Administration Fund; Special Programs Fund; Homeownership Fund; Mark
to Market Corporation; HAP [housing assistance payment] Administration Fund; Revenue Bond
Fund; Autumn Manor Management Fund; Blended Component Unit – Infill Housing, Inc.;
Blended Component Unit – Infill Housing II, Inc.; and, Blended Component Unit – Vineville
Management, Inc.
HUD’s Office of Public Housing in Atlanta, Georgia, is responsible for overseeing the Authority.
HUD’s Office of Public Housing Investments is responsible for overseeing the Authority’s
HOPE VI program.
Our overall objective was to determine whether the Authority used low-income housing funds
for unauthorized purposes, including nonprofit entity activities, and whether the Authority
complied with laws and regulations and properly safeguarded low-income resources when it
conducted business with nonprofit entities and consultants.
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RESULTS OF AUDIT
Finding 1: The Authority Used Low-Income Public Housing
Funds for Other Programs
The Authority violated its annual contributions contract (contract) with HUD by using funds
from its low-income public housing general fund (general fund) account to pay expenses of its
programs and affiliated nonprofit firms. As a result, as of December 31, 2004, 11 programs or
entities, including nonprofit firms and other programs, owed the general fund account $395,211.
These actions occurred because the Authority did not have adequate controls in place to ensure
its general fund transactions followed contract requirements. Also, Authority officials
incorrectly believed that it was an acceptable practice for housing authorities to use low-income
public housing funds to pay operating expenses for the Section 8 Housing Choice Voucher
program and not repay the funds for several months.
The Authority Used Its General
Fund to Pay Expenses
The Authority used funds from its general fund account to pay expenses for programs
and entities that were not under its contract with HUD. As of December 31, 2004, 11
programs and entities owed the general fund account $395,211 for the ineligible
disbursements. Of that amount, the Authority’s Section 8 Housing Choice Voucher
program owed $235,519.
Section 9(C) of the contract states that the Authority may withdraw funds from
the general fund account only for (1) the payment of costs of development and
operation of projects under contract with HUD, (2) the purchase of investment
securities as approved by HUD, and (3) such other purpose as may be specifically
approved by HUD.
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The Authority Had Inadequate
Controls for Its General Fund
The Authority did not have adequate internal controls for operating its general
fund. Instead of limiting payments from the general fund account to paying
expenses for contract projects, it also paid expenses for other programs and
entities. These programs and entities would repay the general fund account, but it
was never completely repaid.
At the end of 2004, the following 11 programs and entities owed the general fund
account $395,211:
Program/activity Amount due to general fund
Section 8 vouchers $235,519
HOPE VI 85,238
Special programs 30,503
Macon HAP [housing assistance payment]
Administration 14,404
InFill Housing, Inc. 10,396
Moderate Rehabilitation 03 6,018
Riverside Gardens 5,369
Moderate Rehabilitation 01 4,596
Dempsey Apartments 2,891
Autumn Manor/Grove Park Management 192
Administration 85
Total owed the general fund $395,211
The above balances were not settled monthly and remained outstanding from
month to month. Although some payments and reclassifications were made to
reduce the balances owed, at no time were the balances reduced to zero.
Therefore, the public housing program was deprived of $395,211 in HUD-
approved funds that should have been used for public housing activities.
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Recommendations
We recommend that the director of Office of Public Housing
1A. Require the Authority to collect the $395,211 or current balance owed to
the general fund account and repay the low-rent public housing reserve the
amounts collected.
1B. Require the Authority to establish and implement controls to ensure
contract funds are only spent for operating projects and activities under its
contract with HUD.
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Finding 2: The Authority Used Low-Income Public Housing Assets To
Guarantee Loans
In violation of its contract, the Authority used low-income public housing assets as collateral to
guarantee loans for two affiliated nonprofit entities totaling $2.2 million. The loan guarantees
placed the Authority’s assets at risk. As of October 2005, the remaining loan balance was
$125,000. These actions occurred because the Authority did not establish sufficient controls to
monitor its interactions with affiliated nonprofit entities and ensure related transactions followed
contract requirements. Authority officials incorrectly believed that low-income public housing
assets were not placed at risk because it could have used nonfederal assets from other banks,
instead of the pledged low-income public housing assets, to cover the loan repayments if default
occurred.
The Authority Inappropriately
Used Assets for Collateral
On December 20, 2002, and November 17, 2003, respectively, the Authority’s
executive director signed guaranty of payment agreements, pledging accounts the
Authority had on deposit at the lending bank as collateral for a $900,000 loan by 2009
Vineville, L.P., and a $1.3 million loan by Tattnall Place, L.P. The bank accounts
that were used as collateral allowed the bank to withdraw loan payments from the
HUD accounts if the loan payments were not made. The nonprofit entity 2009
Vineville, L.P., obtained the $900,000 loan to finance construction costs, and Tattnall
Place, L.P., obtained the $1.3 million to finance development costs.
Part A, section 7, of the contract provides that the Authority shall not pledge, as
collateral for a loan, the assets of any project covered under the contract.
Additionally, part A, section 17, of the contract provides that upon occurrence of
a substantial default by the Authority, as determined by HUD, HUD shall be
entitled to any or all of the remedies set forth in paragraphs (E), (F), and (H) of
section 17 of the contract. Paragraph (F) states that nothing contained in the
contract shall prohibit or limit HUD from the exercise of any other right or
remedy existing under applicable law or available at equity.
The Authority placed its assets at risk and substantially violated its contract
requirements by using its assets as collateral to guarantee affiliated nonprofit
entities’ loans totaling $2.2 million. As of October 2005, $125, 000 of the
Authority’s HUD funds remain at risk.
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Recommendations
We recommend that the director of the Office of Public Housing
2A. Require the Authority to pursue terminating the loan
guarantees risking the $125,000 pledged for unpaid loan balance.
2B. Require the Authority to establish adequate controls to monitor
interactions with its nonprofit and related entities and ensure transactions
comply with the contract, particularly as it relates to using contract assets
as collateral for loans.
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Finding 3: The Consultant’s Open-Ended Contract Violated HUD
Contracting Requirements
The Authority entered into an open-ended time and materials type contract without a ceiling
price, which violated federal procurement and contracting requirements. The Authority spent
$227,684 of HOPE VI Program funds on the contract, which has been in effect since November
16, 2001. The contract terms did not provide adequate safeguards to ensure amounts paid to the
consultant were for necessary goods and services at reasonable prices. Also, the consultant did
not bear any of the risks associated with contract performance since the contract does not have a
ceiling price. These contracting violations occurred because Authority management disregarded
certain contracting requirements due to its desire to hire a consultant for its HOPE VI program,
before the program was established and specific needs were determined, and its failure to amend
the consultant’s contract after the specifics were determined. As a result, HUD lacked assurance
that the Authority obtained goods and services for this contract at the most advantageous terms.
Further, contract terms do not provide adequate safeguards to ensure future amounts paid for this
contract will be necessary and reasonable.
Contracting Requirements
Contracting requirements are included in 24 CFR [Code of Federal Regulations]
85.36. Section (b)(10) provides that the grantee may use a time and material type
contract only if the following two conditions are met: (1) a determination was
made that no other contract was suitable, and (2) the contract includes a ceiling
price that the contractor exceeds at its own risk.
Section (b)(9) requires the grantee to maintain records that document the rationale
for the method of procurement, selection of contract type, and contractor selection
or rejection. Section (f)(1) states that grantees must perform a cost or price
analysis in connection with every procurement.
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Contracting Requirements
Violated
On November 16, 2001, the Authority entered into an open-ended contract with a
consultant, which violated federal contracting requirements. The contract did not
have a ceiling price, and Authority files did not document the rationale for the
contract type or include a cost or price analysis in connection with the
procurement.
The contract stated that the consultant would provide certain consulting and
advisory services to the Authority in connection with development, planning,
financing, and/or operation of the Authority’s HOPE VI project. The Authority
agreed to compensate the consultant according to a schedule that set forth rates
for seven members of the consulting firm, ranging from $840 to $1,470 per day,
with the rates adjusted annually. For all additional expenses, the Authority agreed
to reimburse the consultant the actual cost of such expenses. The contract did not
include limits on contract price, compensation to the consultant, or contract
length. Also, the contract did not specify what specific goods and services the
consultant would provide. Authority officials said they would limit payments to
the consultant to the amount included in the Authority’s budget for such services,
originally $420,000 but later reduced to $235,343 by budget revision.
Authority files did not document the reason for the contract type or whether any
type of cost or pricing analysis was performed. Because of the Authority
awarding the open-ended contract without documenting a cost or price analysis
and justification, improper payments may have been made to the consultant.
There was no assurance that goods and services were procured at the most
favorable prices.
Recommendations
We recommend that the acting deputy assistant secretary for Public Housing
Investments require the Authority to
3A. Justify the necessity and reasonableness of the payments made for the
contract. Any amounts that cannot be supported should be reimbursed
from nonfederal funds.
3B. Terminate or amend the contract in accordance with applicable federal
requirements.
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We also recommend that the director of Office of Public Housing require the
Authority to
3C. Establish and implement adequate management controls to monitor
contract activities and ensure contracts follow federal requirements and
payments do not exceed contract limitations.
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SCOPE AND METHODOLOGY
To accomplish our audit objective, we reviewed the following:
• Applicable laws, regulations, and other HUD program requirements;
• The Authority’s contracts; and
• HUD’s and the Authority’s program files.
We reviewed various documents, including financial statements, general ledgers, bank
statements, minutes from board meetings, check vouchers, invoices, loan documents, related
guarantee agreements, partnership agreements, and reports from the independent public
accountant. Additionally, we obtained an understanding of the Authority’s accounting system as
it related to our review objective.
We reviewed the contracts for each of the five consultants used by the Authority from January 1,
1999, through September 30, 2005. Further, after determining that one of the contracts did not
meet federal contracting requirements, we reviewed documentation relating to the Authority’s
procurement of the contract and payments made for the contract.
We also interviewed officials of HUD’s Atlanta, Georgia, Office of Public Housing and
Authority management and staff.
We performed our audit work at the Authority’s offices in Macon, Georgia, from August through
October 2005. Our audit covered the period from January 1, 1999, through September 30, 2005.
We performed our audit in accordance with generally accepted government auditing standards.
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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:
• Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure resource use is
consistent with laws and regulations.
• Safeguarding of resources – Policies and procedures that management has
implemented to reasonably ensure resources are safeguarded against waste,
loss, and misuse.
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.
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Significant Weaknesses
Based on our review, we believe the following items are significant weaknesses:
• The Authority did not have a system to ensure that federal funds were
properly used and the funds were not put at risk (see findings 1 and 2).
• The Authority did not have a system to ensure that its contracts met
federal procurement and contracting requirements (see finding 3).
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Funds to be put
Recommendation Ineligible 1/ to better use 2/
1A $ 395,211
2A ________ $ 125,000
Total $ 395,211 $ 125,000
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
Office of Inspector General (OIG) recommendation is implemented. 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.
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Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
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Comment 1
Table of Contents 19
Comment 2
Table of Contents
20
Comment 3
Table of Contents
21
Comment 4
Table of Contents 22
OIG Evaluation of Auditee Comments
Comment 1 The Authority’s response that HOPE VI is a public housing program and
operates on a reimbursable basis is incorrect. The HOPE VI Grant Agreement
in Article X states that the Grantee agrees that it will not commingle HOPE VI
grant funds with funds from any other sources including but not limited to
other HUD program funds or funds from other Federal, state, or local
government agencies. In addition, Article XXI states that commingled funds
constitute a default and one remedy is to reduce the grant or petition for the
appointment of a receiver to manage the grant. Therefore, the Authority did
not comply with the Grant Agreement, and has committed a significant
violation causing a default of the Grant Agreement and should immediately
change its method of operations.
Comment 2 The Authority disagreed that it placed its Federal assets at risk with the loan
guarantees. We do not agree with the Authority’s comments because the
Authority’s guarantee agreements with a lending bank that allowed the bank to
use HUD-controlled funds on deposit to make loan payments for affiliated
non-profit firms, if the non-profit firms defaulted on their loans. The
agreement placed the HUD-controlled funds in those bank accounts at risk.
Those agreements also violated the terms of the Authority’s annual
contributions contract with HUD and should be corrected.
Comment 3 The Authority’s response did not indicate that a cost or pricing analysis was
performed to support this determination. Further, the Authority’s response
indicates that there was no negotiation of contract price. Because the
Authority awarded the open-ended contract without documenting a cost or
price analysis and without any negotiation of the contract price, improper
payments may have been made to the consultant.
Comment 4 The addendum adding an upset price to the contract that was included with the
Authority’s response did not include dates for the signatures. Also, the upset
price for the contract added by the addendum was $420,000, although the
Authority indicated that only about $240,000 would be spent for the contract.
Further, the contract remains open-ended with no contract termination date
specified.
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The Housing Authority of the City of Macon, Georgia�s Controls for Expending Low-Income Housing and HOPE VI Program Funds and Safeguarding Low-Income Housing Assets Were Inadequate
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-04-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)