oversight

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)

                                                                   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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                                                     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.




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                                                    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.




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                                           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.




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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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                                             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.




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                                                    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.




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                                                    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).




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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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                                                    17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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                             18
Comment 1




   Table of Contents   19
Comment 2




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                      20
Comment 3




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                     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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