AUDIT REPORT Review of Worcester Housing Authority, Worcester, MA Identified $1.9 million of its Public Housing Operating Funds Used for Non-program Purposes 2006-BO-1002 November 29, 2005 OFFICE OF AUDIT, REGION 1 Boston, Massachusetts Table of Contents Issue Date November 29, 2005 Audit Report Number 2006-BO-1002 TO: Donna Ayala, Director, Office of Public Housing, Boston Hub, 1APH FROM: John Dvorak, Regional Inspector General for Audit, 1AGA SUBJECT: Review of Worcester Housing Authority, Worcester, MA Identified $1.9 Million of its Public Housing Operating Funds Used for Non-program Purposes HIGHLIGHTS What We Audited and Why We reviewed the Housing Choice Voucher program and the Public Housing Operating Fund program at the Worcester Housing Authority (Authority). This audit was conducted as part of our fiscal year 2005 annual audit plan. Our objectives were to determine whether the Authority improperly used Federal funds for expenses of its State programs, and whether it properly allocated salary and other expenses to its Housing Choice Voucher program and Public Housing Operating Fund program. What We Found The Authority did not administer its federal funds in compliance with the financial provisions of its annual contributions contracts. Specifically, the Authority used its Public Housing Operating Funds to pay expenditures for state-subsidized housing programs and other federal programs, and did not properly allocate salary and benefit expenses to its Housing Choice Voucher program and Public Housing Operating Fund program. Table of Contents These conditions occurred because the Authority did not follow the internal controls that it established to ensure compliance with its annual contributions contracts and HUD regulations. The executive director stated that he made a decision to loan Public Housing Operating Fund operating reserves to pay state expenses until the state reimbursed the Authority for its expenses. Also, the salary and benefits were not charged to the programs using a supported basis to ensure that only reasonable costs were charged for the operation of the programs. As a result, the Authority did not have more than $1.9 million available for its Public Housing Operating Fund program. Additionally, without an adequate basis, the Authority could not support the salary and benefits expenses charged to its Housing Choice Voucher and Public Housing Operating Fund programs. What We Recommend We recommend that the director of the Office of Public Housing require the Authority to • Cease the practice of using Public Housing Operating Funds to pay for nonprogram costs, such as the $1.9 million1 used from and owed to the Public Housing Operating Fund program as of August 31, 2005. • Reimburse its revolving fund the amounts owed by its programs on a monthly basis. • Conduct a time study to determine the appropriate allocation of salaries and benefits for its federal programs. • Develop and implement a HUD-approved cost allocation plan for salaries and employee benefits, and adjust its fiscal year 2006 accounting records accordingly. For each recommendation in the body of the report 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 complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 1 The Authority repaid $1.2 million in August 2005 and another $1.2 million in October 2005. Both payments went into the revolving fund and were transferred to the Public Housing Operating Fund program in these same months. Table of Contents 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The Authority Inappropriately Used $1.9 Million in Federal Funds 5 Finding 2: The Authority Did Not Properly Allocate Expenses to Federal 9 Programs Scope and Methodology 13 Internal Controls 14 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 15 B. Auditee Comments and OIG’s Evaluation 16 3 BACKGROUND AND OBJECTIVES The United States Housing Act of 1937 established the first federal framework for government- owned affordable housing. This act also authorized public housing as the nation’s primary vehicle for providing jobs and building and providing subsidized housing through the Department of Housing and Urban Development (HUD). HUD disperses funds to public housing agencies under annual contribution contracts to provide subsidy payments or housing assistance payments for participating low-income families. In addition, the United States Housing Act of 1937 as amended by the Quality Housing and Work Responsibility Act of 1998 authorizes operating subsidies for public housing agencies administering HUD low-income housing programs. HUD provides annual operating subsidies, through the Public Housing Operating Fund program, to help public housing agencies pay some of the cost of operating and maintaining public housing units. Operating subsidies are essential for public housing agencies to provide cost-effective, decent, safe, and affordable dwellings for low-income and very low-income tenants who pay no more than 30 percent of their adjusted income for rent. The Quality Housing and Work Responsibility Act of 1998 created the Housing Choice Voucher program. The Housing Choice Voucher program allows public housing authorities to pay HUD subsidies directly to the housing owners on behalf of the assisted family. Through annual contributions contracts, HUD contracts with the Worcester Housing Authority (Authority) for the administration and management of 2,074 low-income units, 1,798 housing choice vouchers and 39 moderate rehabilitation vouchers.2 The annual contributions contracts require the Authority to follow appropriations laws, public housing notices, and the Authority’s administrative plan. The Authority provides these housing assistance subsidies to assist families with housing through its leases with property owners and its agreements with other housing authorities. The Authority also receives a fee to administer the Housing Choice Voucher program. Our overall audit objectives were to determine whether the Authority improperly used federal funds to pay expenses of its state programs in violation of the financial provisions of its annual contributions contracts and whether it properly allocated salary and other expenses to its Housing Choice Voucher program and Public Housing Operating Fund programs. _____________________ 2 The Authority administers 1,837 vouchers in total, which includes the 1,798 Housing Choice Vouchers and 39 Moderate Rehabilitation program vouchers. Table of Contents 4 RESULTS OF AUDIT Finding 1: The Authority Inappropriately Used $1.9 Million in Federal Funds The Authority did not comply with its annual contributions contracts when it used Public Housing Operating Fund program funds to pay for nonprogram expenses. These program funds may only be withdrawn for Public Housing Operating Fund program purposes. However, the Authority inappropriately used these federal funds to pay for expenses of its state funded programs and other federal programs. The executive director stated he decided to loan Public Housing Operating Fund operating reserves for state expenses because the state did not reimburse the Authority timely for state program expenses. As a result, the Authority did not have more than $1.9 million available for its Public Housing Operating Fund program as of August 31, 2005. The Authority Used Federal Funds Inappropriately The Authority’s consolidated annual contributions contracts with HUD require it to maintain records that identify the source and application of funds. These records are required to allow HUD to determine whether the Authority has expended funds appropriately. The Authority uses a series of fund accounts to track the source and use of funds for programs such as the Public Housing Operating Fund program (low-rent program). The funds received for all federal programs flow through the program’s general ledger account into the Authority’s revolving fund, from which program expenditures are paid. However, federal program funds were not always used to pay expenditures of the funded federal program. We verified that the Authority transferred Public Housing Operating Fund program funds to the revolving fund to pay for expenses of state and other federal programs. The Authority generally repaid the Public Housing Operating Fund program on a quarterly basis by transferring funds from the state and other programs through the revolving fund. However, the Authority indicated that it loaned Public Housing Operating Fund operating reserves to the revolving fund for state program expenses until the state paid the Authority. On July 1, 2005, the state confirmed that it owed the Authority approximately $1.5 million. The revolving fund showed that the Public Housing Operating Fund was owed $1,943,662 on August 31, 2005. When we asked for the breakout of the $1,943,662 Table of Contents 5 the Authority provided a reconciliation showing the amounts owed by programs. Programs Owing Amount Owing Programs Owed Amount Owed Public Housing State programs $1,622,851 $1,943,662 Operating Fund Housing Choice Advances to $582,292 $300,808 Voucher program Revolving fund Other federal $39,327 programs Subtotal $2,244,470 Subtotal $2,244,470 The Authority attributes the $300,808 difference at August 31, 2005 to advances from programs to the revolving fund. Additionally, the Authority attributed the amount owed by the Housing Choice Voucher program and other federal programs a result of the Authority’s procedures to reimburse its revolving fund quarterly instead of monthly. Also, as the chart below shows, the Authority’s revolving fund routinely owed the Public Housing Operating Fund program and the amount owed changed each month. Amount that revolving fund owed to Public Housing Operating Fund program $3,500,000 $3,000,000 $2,500,000 Dollars $2,000,000 $1,500,000 $1,000,000 $500,000 $- 0 03 0 03 0 03 0 04 0 04 0 04 0 04 0 05 0 05 0 05 r-2 l -2 ct -2 n -2 r-2 l -2 ct -2 n -2 r-2 l -2 Ap Ju O Ja Ap Ju O Ja Ap Ju Month and year Authority Repaid Public Housing Operating Fund program The state paid the Authority $1.2 million in August 2005 and another $1.2 million in October 2005. Both payments went into the revolving fund and then were transferred to the Public Housing Operating Fund program in these same months. In Table of Contents 6 September 2005, the Authority reimbursed the revolving fund the $582,292 owed by the Housing Choice Voucher program and the $39,327 owed by other federal programs. Internal Controls Not Followed The Authority’s improper use of federal funds occurred because it did not follow the internal controls it established to ensure compliance with the financial provisions of its annual contributions contracts for its federal programs. The Authority’s executive director advised us that he made a decision to loan Public Housing Operating Program reserve funds to cover state expenses due to a failure of the state to provide sufficient funding for the state-subsidized housing programs in a timely manner. As a result, the Authority’s use of these funds violated the provisions in its annual contributions contract with HUD. Additionally, it attributed the amounts owed by other programs, including the Housing Choice Voucher program, a result of its policy to reimburse the revolving fund on a quarterly basis, as opposed to a monthly basis. Conclusion The Authority did not follow internal controls that prevented it from using federal funds to pay nonprogram expenditures. The Authority’s executive director decided to use Public Housing Operating program funds for nonprogram purposes, which was an inappropriate use of more than $1.9 million in federal funds, and left its Public Housing Operating Fund program less funding available. The Authority repaid $1.2 million in August 2005 and another $1.2 million in October 2005 to its revolving fund and then transferred funds to the Public Housing Operating Fund program in these same months. Recommendations We recommend that the director of the Office of Public Housing require the Authority to 1A. Cease the practice of using Public Housing Operating Funds to pay for nonprogram costs, such as the $1,943,662 that was owed as of August 31, 2005. 1B. Submit monthly accounting reports with supporting documentation to HUD for monitoring. Table of Contents 7 1C. Reimburse its revolving fund the amounts owed by its programs on a monthly basis, as opposed to a quarterly basis. We recommend that the director of the Office of Public Housing 1D. Take appropriate administrative actions against Authority officials for the improper use of federal funds. Table of Contents 8 Finding 2: The Authority Did Not Properly Allocate Expenses to Federal Programs The Authority did not properly allocate salaries and employee benefits to the proper programs during fiscal years 2003, 2004, and 2005. We estimate that the Authority overallocated $2,363,161 in administrative and maintenance salaries and employee benefits3 to the Public Housing Operating Fund program and underallocated $672,039 to its Housing Choice Voucher program. This occurred because the Authority did not have a supportable basis for the plan governing the allocation of costs to the benefiting programs, but adjusted its cost allocations according to program funding levels. The Authority attributed the inappropriate allocation to the Commonwealth of Massachusetts not providing sufficient funding to operate the Authority’s state-subsidized programs. As a result, the Authority had less funding available to operate its Public Housing Operating Fund program. Authority’s Unsupported Basis for Allocating Costs The Authority did not have a documented basis for the salary percentages allocated to its programs. The Authority acknowledged that the allocated salaries based on those percentages were not supported with time studies or other measurable basis. The Authority indicated that it used the same plan for many years—including those years when HUD required all Authorities to submit operating budgets with allocation plans for HUD’s approval. During our audit period, this requirement was no longer in effect. The Authority acknowledged that the Public Housing Operating Fund program was allocated more in salary costs due to salary caps imposed by the state.4 The Authority Improperly Allocated Expenses in its Fiscal Years 2003 to 2005 We estimate that the Authority overallocated $2,363,161 in administrative salaries, ordinary maintenance salaries and employee benefits to the Public Housing Operating Fund program, of which $672,039 was underallocated to the Housing Choice Voucher program and $1,691,122 was underallocated to state programs. The tables below summarize the total estimated amounts 3 Employee benefits included retirement benefits, unemployment taxes, health insurance, and Medicare taxes. 4 The Commonwealth of Massachusetts requires each housing authority that receives state-subsidized housing funds to operate within a maximum budget provided by the state. Table of Contents 9 inappropriately allocated to the Public Housing Operating Fund and Housing Choice Voucher programs by fiscal year under the Authority’s allocation plan or methodology. Public Housing Operating Fund program Fiscal year Fiscal year Fiscal year Total 2003 2004 2005 Description Administrative $410,205 $315,067 $287,144 $1,012,416 salaries Ordinary maintenance $148,511 $114,918 $113,794 $377,223 salaries Employee $408,712 $284,338 $280,472 $973,522 benefits Totals $967,428 $714,323 $681,410 $2,363,161 Housing Choice Voucher program Fiscal year Fiscal year Fiscal year Total Description 2003 2004 2005 Administrative ($436,458) ($173,612) ($163,327) ($99,519) salaries Ordinary $0 maintenance $0 $0 $0 salaries Employee ($235,581) ($75,319) ($103,209) ($57,053) benefits Totals ($248,931) ($266,536) ($156,572) ($672,039) For all departments except the Authority’s Admissions Department, we used a straight unit allocation methodology that divided the budgeted salaries by the number of units of housing affected. This straight unit allocation methodology was used because the Authority did not document the amount of time that each employee spent on each of its programs. Absent time studies or other measurable basis, a unit methodology would more appropriately allocate the costs to these programs than the allocation method used by the Authority. Also during our review of the salary expenses for the Admissions Department, we found that a unit allocation methodology used for these costs would misallocate expenses to the Housing Choice Voucher program when the Public Housing Operating Fund program and state public housing programs benefitted from the expense. Staff in the Admissions Department indicated that 50 percent of their time was spent on the Public Housing Operating Fund program and 15 percent of their time was spent on the Housing Choice Voucher program. Table of Contents 10 The Authority also used a different method to allocate its employee benefits.5 For employee benefits, the Authority divided the subtotal of budgeted salaries by program into the total salaries for all programs to develop its allocation percentages. The Authority then charged this percentage of the employee benefits cost to each program. Since employee benefits are inherently tied to salaries, the Authority should have used the same basis for employee benefits that it used for salaries. Incorrect Use of Public Housing Operating Fund Program Units in Allocation Plans The Authority has other allocation plans for which the allocation basis was units. For several of these plans, the Authority used 2,155 public housing units when the authorized units were 2,074. The Authority should correct the number of units in all of its allocation plans, adjust the unit-totals in its computer system, and correct its accounting records accordingly for fiscal year 2006. Conclusion The Authority’s executive director made a decision to continue using the cost allocation plan in place at the Authority when he was hired. However, the Authority did not have a supportable basis that ensured costs were allocated and charged to the benefiting programs. The Authority’s inappropriate allocations removed more than an estimated $2.36 million or $787,720 annually from its Public Housing Operating Fund program, of which $672,039 or $224,013 annually in salary expenses should have been allocated to its Housing Choice Voucher program. Developing a cost allocation plan with a supportable basis will save the Public Housing Operating Fund program $787,720 and appropriately charge an additional $224,013 to the Housing Choice Voucher program in fiscal year 2006. Recommendations We recommend that the director of the Office of Public Housing require the Authority to 2A. Conduct a time study to determine the proper allocation of salaries and benefits to the Housing Choice Voucher and Public Housing Operating Fund programs. 5 The Authority did allocate medicare taxes based on its salary allocation plan. Table of Contents 11 2B. Correct the number of units in all allocation plans to reflect the authorized 2,074 public Housing units. 2C. Develop, obtain HUD approval of, and implement an appropriate cost allocation plan for salaries and employee benefits to ensure that only necessary costs for administering the Public Housing Operating Fund and Housing Choice Voucher programs are charged to the programs. 2D. Correct the Housing Choice Voucher and Public Housing Operating Fund programs’ accounting records to record the appropriate salary and benefit expenses attributable to the administration of these programs for fiscal year 2006, which would result annually in funds put to better use of $787,720 for the Public Housing Operating Fund program and $224,013 for the Housing Choice Voucher program Table of Contents 12 SCOPE AND METHODOLOGY We performed our review in accordance with generally accepted government auditing standards. We conducted the audit between March and September 2005 and covered the period April 1, 2002, through March 31, 2005. The audit period was extended when necessary to meet our objectives. To accomplish our audit objectives, we • Reviewed the annual contributions contracts, Public and Indian housing notices, the Authority’s administrative plans, the board of commissioners’ minutes, the audited financial statements and the Authority’s procedures. • Interviewed Authority officials and contractors about the financial controls, the Housing Choice Voucher program controls, administrative procedures, and job duties. • Analyzed the Authority’s cost allocation plans, salaries, employee benefits, and account records for fiscal years 2003, 2004, 2005, and 2006. • Summarized results of our analyses. Table of Contents 13 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: • Controls over sources and uses of federal funds. • Controls over tracking and reporting expenditures. • Compliance with laws and regulations-Policies of management to reasonably ensure that resource use is consistent with laws and regulations. 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 items are significant weaknesses: • The Authority used federal funds inappropriately to pay expenditures for state programs and other federal programs. (finding 1) • The Authority inappropriately allocated expenses to federal programs. (finding 2) Table of Contents 14 APPENDICES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Unsupported 2/ Unreasonable or Funds to be put number unnecessary 3/ to better use 4/ 1A. $1,943,6626 2D. $1,011,733 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 polices or regulations. 2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures. 3/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary, prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 4/ “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an Office of Inspector General 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. __________________ 6 The Authority repaid $1.2 million in August 2005 and another $1.2 million in October 2005. Both payments went into the revolving fund and then were transferred to the Public Housing Operating Fund program in these same months. Table of Contents 15 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Table of Contents 16 Ref to OIG Evaluation Auditee Comments Comment 1 Comment 2 Comment 3 Comment 4 Table of Contents 17 Ref to OIG Evaluation Auditee Comments Comment 5 Comment 6 Comment 7 Comment 8 Table of Contents 18 Ref to OIG Evaluation Auditee Comments Comment 9 Comment 10 Comment 11 Comment 12 Comment 13 Comment 14 Comment 15 Table of Contents 19 Ref to OIG Evaluation Auditee Comments Comment 16 Comment 17 Table of Contents 20 Ref to OIG Evaluation Auditee Comments Comment 18 Comment 19 Table of Contents 21 OIG Evaluation of Auditee Comments Comment 1 The audits conducted by the Authority’s Independent Public Accountant(s) should have identified the issues of where federal funds were used for non-program purposes. Comment 2 Recommendation 1D recommends that HUD pursue administrative action regarding the Authority’s inappropriate use of Federal funds. Comment 3 The Authority violated its annual contributions contract when it withdrew Public Housing Operating Funds operating reserves from the program to address cash flow shortages in its other programs. The annual contributions contract states that funds may be withdrawn only for specific purposes. These purposes are the payment of the costs of development and operation of the projects under this contract; the purchase of investment securities as approved by HUD; and such other purposes specifically approved by HUD. HUD did not approve the use of operating reserves for other Authority programs. Also, the usage of a revolving fund is permitted by the annual contributions contract for the Public Housing Operating Fund; however, amounts owed to the revolving fund by each program should have been transferred to the revolving fund from each programs’ own funds; and not used from the Public Housing Operating Fund program. While the Authority reimbursed the operating reserves quarterly or when the funds became available to the other programs, the usage of the fund was inappropriate. Comment 4 We agree that using a unit approach does not take into account the amount of time spent on federal programs; however, the Authority did not maintain its payroll records to show the amount of time staff members worked on each of its programs. Absent this data or a time study, a unit allocation was more appropriate than methodology used by the Authority. Comment 5 The statement that federal funds were not used to pay state expenses is incorrect. The audit clearly showed that federal funds were used to pay state program expenses, and the executive director made a statement that he made a decision to use federal funds to pay state program expenses because the state had not provided the state funding timely. Comment 6 The Public Housing Operating Fund program was owed over $1.9 million by other programs. This amount represents federal funds that were not available to the Public Housing Operating Fund program, regardless of whether the Authority had additional operating reserve funds available. The Authority is only allowed to use Public Housing Operating Fund program funds and operating reserve funds for its federal Public Housing Operating Fund program. Comment 7 While the Authority has a systematic cost allocation plan that has been used for years, this plan must have a documented methodology and measurable basis to the Table of Contents 22 amounts charged to federal programs. Without a documented methodology such as hours charged each pay period to each program and a measurable basis such as a unit allocation, the Authority’s plan does not support that it appropriately charged costs to the benefiting program. OMB Circular A-87 requires that the Authority allocate costs to the benefiting program. HUD has not required public housing authorities to submit operating budgets for its approval since the 1990s. Even when HUD approved budgets, the Authority retained the responsibility to document the basis for its charges to the various programs. Comment 8 We did not take exception to the use of budgeted salaries versus actual salaries in the Authority’s allocation plan; instead, we noted how the Authority allocated employee benefits. Employee benefits must follow the same allocation approach as its salary allocations because employee salaries and employee benefits are inherently tied to each other. The allocations for salaries and for employee benefits should be consistent. Comment 9 See Comment 3. Comment 10 See Comment 1. Comment 11 Federal operating reserve funds must be used for the program it was intended to benefit, specifically the Public Housing Operating Fund program; and cannot be used to cover cash flow shortages in other programs. Each program must run independently and in accordance with each program’s contractual agreement. Comment 12 The Authority tracks its sources and uses of funds; however, we did not find that the Public Housing Operating Fund program was reimbursed in full by the revolving fund during the April 2003 and August 2005 period reviewed. The line chart on page 6 shows that the reimbursement changed each month but did not reach zero at any point during that period. Comment 13 We changed the report to recognize that the Authority reimbursed the operating reserve in full at the end of our audit fieldwork. Comment 14 See Comment 6. Comment 15 We changed the report to reflect the separate payments of $1.2 million repaid in August 2005 and another $1.2 million repaid in these same months. Both payments went into the revolving fund and then were transferred to the Public Housing Operating Fund program. Comment 16 See Comment 4. Comment 17 See Comment 8 Table of Contents 23 Comment 18 See Comment 7 Comment 19 Salary comparability studies are used to show that the total amount of a positions’ salary is appropriate for that job description in that locality. Comparability studies do not show that the allocation of the salaries to specific programs is appropriate. Since 1973, HUD has increased the quantity and diversity of the programs that it offers to public housing authorities. The Authority has availed itself of the opportunities in these programs by applying for and receiving grants and contracts. With each new grant or contract, the Authority’s salary allocation plan should change to reflect the new staff hired or existing staff allocated to operate and manage each new grant or contract. Table of Contents 24
Review of Worcester Housing Authority, Worcester, MA, Identified $1.9 Million of its Public Housing Operating Funds Used for Non-Program Purposes
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)