oversight

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)

                      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.



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                             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.




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                                      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




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                         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


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                    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.




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                    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.




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        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.




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                    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.




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                        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.



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                    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.




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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:
                    •      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)




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                                                                                                  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.




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    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




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    Ref to OIG Evaluation   Auditee Comments




   Comment 16




   Comment 17




Table of Contents            20
    Ref to OIG Evaluation   Auditee Comments




   Comment 18




   Comment 19




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                                 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


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                    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


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    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.




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