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. Table of Contents 2 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. Table of Contents 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. Table of Contents 5 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. Table of Contents 6 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. Table of Contents 7 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. Table of Contents 8 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. Table of Contents 9 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. Table of Contents 10 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. Table of Contents 11 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. Table of Contents 12 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. Table of Contents 13 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. Table of Contents 14 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. Table of Contents 15 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). Table of Contents 16 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. Table of Contents 17 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Table of Contents 18 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. Table of Contents 23
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)