oversight

The Portland Housing Authority, Portland, Maine, Did Not Use Reserve Funds or Properly Allocate Employee Costs, Resulting in Questioned Costs of More Than $850,000

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-08-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                Issue Date
                                                                       August 28, 2006
                                                                Audit Report Number
                                                                             2006 BO 1011




TO:         Donna J. Ayala, Director, Office of Public Housing, Boston, Massachusetts,
            Regional Office, 1APH


FROM:
            John A. Dvorak, Regional Inspector General for Audit, Boston, 1AGA


SUBJECT: The Portland Housing Authority, Portland, Maine, Did Not Use Reserve Funds
         or Properly Allocate Employee Costs, Resulting in Questioned Costs of More
         Than $850,000



                                   HIGHLIGHTS

 What We Audited and Why


             We reviewed the Section 8 Housing Choice Voucher program (Voucher program)
             at the Portland Housing Authority (Authority) as part of our fiscal year 2006
             annual audit plan. Our objective was to determine whether the Authority properly
             administered its Voucher program in accordance with its annual contributions
             contracts and U.S. Department of Housing and Urban Development (HUD)
             requirements.


 What We Found


             The Authority generally administered its Voucher program in accordance with its
             annual contributions contracts and HUD requirements. However, it did not use its
             Section 8 administrative fee reserves in a timely manner or properly allocate
             salary and employee benefits expense to the Voucher program.
           In February 2003, the Authority transferred Section 8 administrative fee reserves
           to its local programs account, but as of March 2006, it had not used $647,814 of
           these reserve funds for program or other housing purposes. This occurred
           because the Authority (1) did not implement its Board resolution donating
           $550,000 to the Authority’s non-profit entity, the Portland Housing Development
           Corporation (PHDC), (2) lacked specific plans to use available funds, and (3) was
           unaware that reserve funds must be expended to be considered used. The
           Authority also undercharged its Voucher program by $158,034 in salary and
           employee benefits expense because its cost allocation procedures improperly
           charged the program costs to its Public Housing Capital Fund (Capital Fund)
           program when the Voucher program had funding shortfalls. The Authority agreed
           to establish quantifiable and verifiable procedures, which should reduce future
           Capital Fund program costs by $44,336 during the next 12 months.


What We Recommend


           We recommend that the director of the Office of Public Housing, Boston,
           Massachusetts, require the Authority to (1) repay to its Section 8 program the
           unused portion of $647,814 in administrative fee reserve funds transferred to its
           local programs account and provide supporting documents for verification of the
           $158,034 in transferred reserve funds to the Capital Fund program, (2) identify
           current and valid uses for the remaining Section 8 administrative reserves
           ($489,780), and (3) establish and implement formal written procedures to
           properly allocate costs to the benefiting programs, thereby reducing future Capital
           Fund program expenses by $44,336. In addition, we recommend that HUD verify
           the repayment of $158,034 to the Authority’s Capital Fund program for ineligible
           administrative expenses.

           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 also 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.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                           4

Results of Audit
      Finding 1: The Authority Did Not Use $647,814 in Section 8 Reserve Funds in   5
      a Timely Manner
      Finding 2: The Authority Improperly Charged $158,034 in Voucher Program       8
      Expenses to Its Capital Fund Program


Scope and Methodology                                                               11

Internal Controls                                                                   12

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                14
   B. Auditee Comments and OIG’s Evaluation                                         15
   C. Selected Criteria - Administrative Fee Reserve                                27




                                            3
                     BACKGROUND AND OBJECTIVES

The Section 8 Housing Choice Voucher program (Voucher program) is the federal government’s
major program for helping very low-income families, the elderly, and the disabled to afford
decent, safe, and sanitary housing in the private market. Participants are free to choose any
housing that meets program requirements. Public housing agencies administer U.S. Department
of Housing and Urban Development (HUD)-funded vouchers, which pay a housing subsidy
directly to the landlord on behalf of the participating family. Public housing agencies also
determine family eligibility based on income and family size and determine the amount of tenant
subsidy. Annually, the agencies verify family income and composition and ensure that units
meet minimum housing quality standards.

The city council of Portland, Maine, established the Portland Housing Authority (Authority) in
1943 to provide and promote safe and sanitary housing for low-income persons residing in
Portland. A seven-member board of commissioners appointed by the city council governs the
Authority. The Authority manages several HUD-funded housing programs including its
conventional low-income public housing, Section 8, and Public Housing Capital Fund (Capital
Fund) programs. The Authority’s Section 8 programs include its New Construction/Substantial
Rehabilitation, Moderate Rehabilitation, and Housing Choice Voucher (Voucher program)
programs. The Authority must operate its Voucher program and other Section 8 programs
according to the rules and regulations prescribed by HUD in accordance with its annual
contributions contracts, and 24 CFR [Code of Federal Regulations] Part 982. The Authority’s
Voucher program received more than $39 million in funds from HUD to support more than
1,700 families during fiscal years 2003 through 2005.

Our overall audit objective was to determine whether the Authority managed its Voucher
program according to its annual contributions contracts and HUD program requirements. We
wanted to determine whether the Authority
   •   Properly accounted for Section 8 interfund transfers and properly used federal funds and
   •   Allocated and charged its Voucher program an appropriate amount of salary and
       employee benefits expense.




                                               4
                                  RESULTS OF AUDIT

Finding 1: The Authority Did Not Use $647,814 in Section 8 Reserve
Funds in a Timely Manner
The Authority did not expend funds from its Section 8 administrative fees reserve account in a
timely manner. It transferred $976,687 from its reserve funds to its local programs account in
February 2003, and as of March 2006, it had only used $328,873 of the transferred reserves for
Section 8 or other valid housing programs, and $647,814 in reserve funds remained. We also
identified $158,034 in funding shortfalls in the Authority’s Section 8 program. The Authority
agreed to use part of this reserve funding to correct the condition cited (see finding 2). The failure
to appropriately use the funds occurred because the Authority did not implement the Board’s
resolution (donation of $550,000 to PHDC), it lacked a specific plan to use available Section 8
reserve funds, and it was unaware that reserve funds must expended for program or other housing
purposes in a timely manner. As a result, the Authority had $489,780 in unused transferred reserve
funds that had been in its local programs account for more than three years.


 The Authority Transferred
 Reserves to Its Local Programs
 Account

               The Authority transferred $976,687 in Section 8 voucher, moderate rehabilitation,
               and new construction administrative fee reserves (reserves) to its local programs
               account on February 28, 2003. The transfer was completed to distinguish
               between reserves earned before October 1, 2002, which could be used for other
               housing programs, and reserves earned after enactment of the 2003 appropriations
               act, which required reserves be used for Section 8 program purposes only.
               However, the transfer did not constitute a “use” of reserve funds because the
               Authority did not expend the funds in a timely manner subsequent to their
               removal from the Section 8 program accounts, as required. As a result, the
               Authority’s Section 8 administrative fee reserve accounts were understated by
               $976,687 at the time of the transfer, and HUD lost visibility of the reserve funds.


Section 8 Reserves Were Not
Used for Program Expenses

               Federal regulations and the Authority’s contract with HUD require that Section 8
               administrative fee reserves be used to pay for Section 8 program expenses when
               expenses exceed program receipts. Any funds remaining after program expenses
               have been paid may be used for other housing purposes. However, the
               Authority’s internal controls did not adequately ensure that program expenses
               were met before using the $976,687 in reserve funds for other purposes (see

                                                  5
                  finding 2). For instance, from July, 1 2003, through March 11, 2006, the
                  Authority had Voucher program shortfalls and incorrectly charged $158,034 in
                  program expenses to the Capital Fund program. In response to our audit
                  recommendation, the Authority agreed to repay its Capital Fund program for these
                  expenses from the Section 8 reserve funds transferred to its local programs
                  account.


    The Authority Lacked a
    Specific Plan for Unused
    Reserves

                  The Authority originally intended to use the $976,687 in Section 8 reserve funds
                  transferred to its local programs account, but its management was unaware that
                  reserve funds must be expended before HUD considers them as used, nor did it
                  have a specific use for the funds when they were transferred. For instance, the
                  Authority spent $180,000 of the transferred reserve funds in October 2003 for
                  other housing purposes, 1 approximately eight months after the transfer. In
                  December 2003, the Authority’s board of commissioners passed a resolution to
                  donate $550,000 in Section 8 reserves to the Authority’s nonprofit housing
                  development corporation for unspecified housing purposes. However, the reserve
                  funds were never donated to the development corporation. In October 2004 (20
                  months after the transfer), the Authority spent another $148,873 for the
                  maintenance of public housing projects in preparation for an inspection of its
                  public housing units.

                  During the audit, the Authority identified several possible uses for the transferred
                  reserve funds. For example, the reserve funds could have been used to pay
                  expenses associated with hard-to-house, lead-based paint testing, and abatement
                  fees. The Authority also identified other needs such as a new roof for its Harbor
                  Terrace project and street, sewer, and water main work for the Riverton Family
                  Development. Despite the occasional identification of other housing needs that
                  could have been satisfied, the Authority did not develop specific plans to use the
                  transferred Section 8 reserve funds in meeting these needs. At the conclusion of
                  our audit, $489,780 of the transferred reserve funds remained unused for more
                  than three years.


    Conclusion


                  The Authority understated its Section 8 administrative fee reserves to HUD when
                  it transferred $976,687 in Section 8 reserves to its local programs account. Of the
                  total funds transferred, the Authority used $328,873 for other valid housing
1
    The $180,000 was expended to purchase and renovate of the Authority’s Washington Avenue property.

                                                       6
          purposes. It also agreed to repay $158,034 to its Capital Fund program for its
          Section 8 funding shortfalls (see finding 2) in response to our audit
          recommendations. However, the Authority’s management was unaware of the
          requirement that reserve funds be expended to be considered used for program or
          other housing purposes, and it lacked a specific plan to use the transferred reserve
          funds for program purposes or other housing needs. As a result, the balance of
          $489,780 in transferred reserve funds has remained unused for more than three
          years.


Recommendations

          We recommend that the director of the Office of Public Housing require the
          Authority to

          1A. Repay its Section 8 program account the unused portion of $647,814 in
          administrative fee reserve funds.

          1B. Provide supporting documents on the payment of $158,034 from transferred
          reserve funds to the Capital Fund program to the Office of Public Housing for
          review and verification.

          1C. Develop or strengthen internal controls to ensure administrative reserve
          funds are transferred only when used (expensed) for valid program purposes or as
          allowed; and develop a specific plan to identify current and valid uses for its
          Section 8 administrative fee reserves ($489,780) and use the funds for Section 8
          program expenses or for other valid housing needs as required.

          1D. Make a prior-year adjustment to reflect the repayment of the Section 8
          administrative fee reserves when submitting its fiscal year 2006 financial
          statements.




                                            7
                                 RESULTS OF AUDIT

Finding 2: The Authority Improperly Charged $158,034 in Voucher
Program Expenses to Its Capital Fund Program
The Authority did not charge the appropriate salary and employee benefits expense to its Section
8 program when funding shortfalls occurred. Instead, it charged $158,034 in Section 8 program
expenses to its Capital Fund program from July, 1 2003, through March 11, 2006. The
uncharged costs occurred because the Authority’s cost allocation procedures needed
improvement. The Authority agreed to repay $158,034 to the Capital Fund program after we
identified these charges as ineligible costs. The Authority also agreed to establish quantifiable
and verifiable cost allocation procedures, which should reduce future Capital Fund program costs
by at least $44,336 during the next 12 months.



Section 8 Costs Charged to the
Capital Fund Program

              Federal cost principles require that activities benefiting from a governmental
              unit’s indirect costs receive an appropriate allocation of costs. The Authority
              could not support the amount of expenses allocated for employees who worked on
              multiple programs. It improperly charged the salary and employee benefits costs
              of one housing inspector to the Capital Fund program from July, 1 2003, through
              March 11, 2006. The charges were ineligible because the inspector spent 90
              percent of his time conducting inspections for the Section 8 programs and only 10
              percent of his time conducting inspections for the Capital Fund program. The
              Authority charged the inspector’s salary costs to its Capital Fund program
              because procedures allowed these costs to be allocated to programs with available
              funding when its Section 8 programs did not have sufficient funds to pay the
              salary costs. If the appropriate allocations had been made, $158,034 would have
              been charged to the Section 8 program, and $17,559 would have been charged to
              the Capital Fund program.


   Inadequate Allocation
   Procedures

              The salary and employee benefits were not properly charged because the policies
              and procedures followed did not provide a reasonable basis for identifying and
              allocating these costs. For instance, the Authority did not maintain certifications for
              employees showing the programs for which they worked, and the managers
              developing the cost allocation plan were unaware that some program employees
              worked on multiple programs. This budget planning information would help

                                                 8
             identify anticipated expenses and whether the Authority’s various programs were
             adequately funded. In addition, the Authority did not maintain time records to show
             how many hours employees spent working for each program. Instead, procedures
             allowed allocation of salary costs to programs based on unsupported estimates and
             available funding. As a result, the amount of salaries and employee benefits the
             Authority charged for employees working on multiple programs was not
             quantifiable, verifiable, or supported in accordance with federal requirements.


Authority to Repay $158,034
and Establish New Procedures


             In response to our audit finding, the Authority agreed that 90 percent of the
             inspector’s costs were not properly allocable to the Capital Fund program. The
             Authority agreed to repay $158,034 to the Capital Fund program with unused
             Section 8 program reserve funds. It also agreed to establish quantifiable and
             verifiable cost allocation procedures for salary and employee benefits.
             Implementing new procedures should ensure that the appropriate housing
             programs are charged their share of salary expenses and reduce future Capital
             Fund salary costs by at least $44,336 during the next 12 months. The savings for
             the Capital Fund program will be realized when the cost of the inspector is
             appropriately charged under the Section 8 program.


Conclusion


             The Authority undercharged its Section 8 program $158,034 when program costs
             exceeded program income and incorrectly charged them to the Capital Fund
             program. It improperly charged the $158,034 in Section 8 program costs to its
             Capital Fund program because its cost allocation procedures did not provide for
             the proper allocation of salary costs. However, it agreed to repay the Capital
             Fund program for the ineligible costs and to establish adequate cost allocation
             procedures, which would reduce future Capital Fund program costs by $44,336
             during the next 12 months.




                                              9
Recommendations

          We recommend that the director of the Office of Public Housing

          2A. Verify that the Authority repaid the $158,034 to the Capital Fund program
          from its Section 8 reserve funds.

          2B. Require the Authority to establish and implement formal written procedures
          that properly allocate costs to the benefiting programs, which would reduce
          Capital Fund program expenses, resulting in $44,336 in funds to be put to better
          use (reduced outlays).




                                          10
                        SCOPE AND METHODOLOGY


We performed our review in accordance with generally accepted government auditing standards.
We conducted the audit between January and April of 2006. Our fieldwork was completed at the
Authority’s office located at 14 Baxter Boulevard, Portland, Maine. Our audit covered the
period July 1, 2003, through June 30, 2005. To accomplish our audit objectives, we

   •   Reviewed program requirements, including federal laws and regulations, Office of
       Management and Budget circulars, and the consolidated annual contributions contracts
       between the Authority and HUD.

   •   Reviewed the Authority’s financial statements and independent public accountant’s reports.


   •   Interviewed Authority and HUD personnel and officials and reviewed meeting minutes from
       the Authority’s board.

   •   Selected and tested a representative nonstatistical sample of Voucher program tenant
       files, which we reviewed for compliance with program requirements to ensure that
       program participants were eligible, housing assistance payments were properly supported
       and calculated, housing deficiencies were corrected in a timely manner, and rents paid
       were reasonable (10 tenant files from a universe of 1,704 Voucher program tenants as of
       December 1, 2005).

   •   Reviewed allocation procedures to determine whether the Authority charged its Voucher
       program an appropriate amount of salary and employee benefits expense.

   •   Reviewed interfund transfer procedures to verify that transfers were properly accounted
       for and that federal funds were used for their intended program.


Regarding funds to be put to better use (Appendix A), the funds indicated will be put to better
use (i.e., used for program purposes) once the Authority implements our recommendations
because it will cease charging the Capital Fund program for Section 8 inspectors’ salary
expenses. When the Authority successfully improves its procedures and implements its controls,
this will be a recurring benefit. Our estimate reflects only the initial year of these recurring
benefits.




                                               11
                             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 tenant eligibility and calculating housing assistance payments,
                      tenant payments, and utility allowances;
              •       Controls over rent reasonableness;
              •       Controls over housing quality standards inspections;
              •       Controls over allocating salary and employee benefits costs;
              •       Controls over accounting for interfund transfers

              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:

              •       Accounting procedures did not ensure that Section 8 administrative fees
                      were properly classified and reported to HUD (see finding 1).




                                               12
•   Allocation procedures did not adequately ensure that expenses were
    charged to the appropriate programs (see finding 2).




                            13
                                          APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

     Recommendation number                         Ineligible 1/    Funds to be put to better
                                                                                       use 2/
                           1A                        $647,814
                           2A                        $158,034
                           2B                                                        $44,336
                      Subtotal                       $805,848                        $44,336
                        Total                                                       $850,184


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/   “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, 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. In this
     instance, if the Authority implements our recommendations, it will cease to charge the
     Capital Fund program for Section 8 inspectors’ salary expenses. Between July, 1 2003,
     and March 11, 2006, the Authority charged $158,034 in Section 8 program expenses to
     its Capital Fund program, which is on average $1,246 a week or $58,356 in annual salary
     cost. For our estimate of funds put to better use, we used the average chargeable Section
     8 salary of $852.62 a week reflected by the payroll register for the inspector during the
     period of July 2005 through March 2006 to arrive at the fund put to better use of $44,336
     during the next 12 months. Once the Agency successfully improves its procedures and
     implements its controls, this will be a recurring benefit. Our estimate of $44,336 reflects
     only the initial year of these recurring benefits.




                                              14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments

Comment 1




                         15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




Comment 4




Comment 5

Comment 6




                         17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 7



Comment 8




Comment 9




Comment 10



Comment 11




                         18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 12




Comment 13



Comment 14




Comment 15


Comment 16

Comment 17




Comment 18




                         19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 18




Comment 19




Comment 20




Comment 21




                         20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 22




Comment 23




Comment 24




                         21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 25




Comment 26




                         22
Appendix B
                           OIG Evaluation of Auditee Comments

Comment 1     Funds were expended as corrective action in response to the condition identified
              during the audit (see Finding 2).

Comment 2     As noted in this report, $550,000 of the transferred administrative fee reserve
              funds were committed or planned for use in December 2003. However, these
              funds had not been expended by the Authority as of the start of our audit, in
              January 2006, nor did the Authority have a specific or intended use.

Comment 3     In transferring the administrative fee reserve funds from the Section 8 program to
              its local program account, the Authority implicitly assured HUD that these funds
              would be used, in a timely manner, for other housing purposes. In its response to
              our report, the Authority acknowledged that it was able to avoid risks associated
              with the homeownership development project by using PHDC funds instead of
              the transferred funds. Admittedly, this arrangement was “extremely favorable” to
              the Authority, but it violated the basis of the agreement between the Authority and
              HUD in regards to the use of administrative fee reserve funds transferred from the
              Section 8 program. The overall purpose of the transfer was not to enrich the
              Authority by avoiding risks associated with development projects; the purpose in
              this instance was to use the funds for other housing purposes, and to do so in a
              timely manner.

Comment 4     As noted in Comment 3, the purpose of the transfer was not to enrich the
              Authority by accruing interest income on the funds that were unspent. Rather the
              purpose was to use the funds for other housing purposes, and to do so in a timely
              manner.

Comment 5 OIG Audit did not direct the Authority to any particular course of action. We did
          however recommend, verbally and in writing, that the Authority delay transferring
          or otherwise using the funds until it had received our draft report. We noted that
          our report would address the funds in question, and that it would be advisable for
          the Authority to consider our comments before any of the funds were used.

Comment 6     The Board resolution referred to in the Authority’s response occurred in
              December 2003. As of the beginning of our audit, in January 2006, the Authority
              still had not expended the $550,000. The period of our audit (January – May
              2006), and the failure to transfer the funds in question during this period, is not
              the essence of Finding 1. The failure to use, or expend the funds between
              December 2003 and January 2006 is the essence of Finding 1. Any delay in the
              transfer or expenditure of the funds was unrelated to the timing or the duration of
              our review.

Comment 7     The wording in the Report has been changed to “local programs account.”


                                               23
Appendix B
                           OIG Evaluation of Auditee Comments

Comment 8     The Authority did intend to use $550,000 of the total funds that were available by
              transferring them to the PHDC. Although the plan could be considered “formal”
              in that it was identified in a resolution by the Board of Commissioners, the funds
              were never expended, or used, by transferring them to PHDC. The Board
              resolution was to transfer the funds “for the purpose of creating and maintaining
              decent, safe, and sanitary housing for families of low to moderate income.” The
              wording in the Report was changed from “formal plan” to “specific plan.”

Comment 9     As we recommended, once the Authority submits the supporting documentation
              to HUD showing that the $158,034 has been transferred back to the Section 8
              program account, we will consider this recommendation partially closed. For the
              remaining $489,780 ($647,814 less $158,034), the Authority needs to transfer
              these funds back to the Section 8 program account, and provide the supporting
              documentation of the transfer to HUD. Also, the cost for the building as shown in
              the Authority’s accounting records for this purchase transaction was $180,000,
              which included a $5,000 down-payment plus the $175,000 the Authority indicated
              as the actual cost of the building. The Authority was advised that the difference
              was a $5,000 down-payment, but failed to provide documentation for the
              $175,000 or explain why their accounting records were incorrect.

Comment 10 As of the start of our audit, the $647,814 in funds were not “expended” as defined
           by HUD regulations. These funds were initially transferred from the Section 8
           program to the Authority’s local programs account in February 2003 in
           accordance with a Board resolution to develop affordable homeownership
           opportunities for eligible clients. However, these funds were not spent or used for
           the purpose indicated in the Board resolution because PHDC used it own funds.
           As of January 2006, approximately three years later, these funds remained
           unspent in the Authority’s local program account, and the Authority did not have
           a specific plan for its use after they failed to use the funds for the purpose
           indicated. We do not consider three years to be timely.

Comment 11 The Authority had planned to use $550,000 of the funds by transferring them to
           the PHDC from the local program account and using (expending) the funds for
           developing homeownership opportunities. This did not occur because the PHDC
           used (expended) its own fund for developing the homeownership opportunities.
           Therefore, once the PHDC used its own funds, the Authority did not have a use
           for the $550,000. Also, the Authority had not identified any use, formal or
           otherwise, for the remaining $97,814 ($647,814 less $550,000).

Comment 12 The funds reported to HUD were identified and labeled as funds in the
           Authority’s local programs account, not as Section 8 reserve funds. HUD was not
           aware that the funds reported by the Authority represented funds that had been
           transferred in 2003, and had not yet been expended.

                                              24
Appendix B
                           OIG Evaluation of Auditee Comments

Comment 13 The condition cited within Finding 2 supports the comment in Finding 1 that
           internal controls were not sufficient to ensure program expenses were met before
           transferring the reserve funds. If the controls had been operating properly, then
           the Authority’s Capital Fund program would not have been charged for Section 8
           (inspector’s) expenses.

Comment 14 The data obtained from the Authority during the audit substantiates the $180,000
           as the cost of the renovation for the Washington Avenue property. Also see
           Comment 9.

Comment 15 See Comment 9.

Comment 16 The total amount shown in Appendix A (Schedule of Questioned Costs) does not
           reflect double-counting. It reflects the total monetary effect of the conditions
           identified as existing at the start of our audit. The conditions cited in Finding 1
           and Finding 2 is separate and distinct from each other, and their combined effect
           on the Authority’s Section 8 program is $850,184.

Comment 17 The expenditure of $550,000 would have been a legitimate use for an affordable
           homeownership program, had they been used (expended) for that purpose. They
           were not.

Comment 18 The Authority’s Attachment 1 was not included. It was a copy of Appendix C
           (Selected Criteria-Administrative Fee Reserve) on page 27 of this report.

              Regardless of excess receipts, according to Finding 2, this does apply (use of the
              reserves to pay the inspectors salary that had been incorrectly charged to the
              Capital Fund program). The criteria cited emphasizes the point that the primary
              use of Section 8 administrative fee reserves is for the payment of Section 8
              administrative expenses. The use of these reserves for other housing purposes is
              secondary to their primary purpose.

Comment 19 The Authority generally administered its Section 8 program in accordance with
           HUD regulations and procedures, with the exception of the conditions cited in
           Finding 1 and Finding 2 that describe how the Authority did not adequately
           administer the Section 8 program in accordance with HUD requirements.

Comment 20 The criteria cited emphasizes the point that reserve funds must be expended to be
           considered used. Merely transferring funds from the federal account to the
           Authority’s local programs account does not constitute “use” (expenditure) of the
           funds.


                                               25
Appendix B
                           OIG Evaluation of Auditee Comments

Comment 21 The criteria cited emphasizes the point that the Authority’s books of account for
           the Section 8 program must be complete and accurate. The Section 8
           administrative fee reserves that the Authority transferred in 2003 were reported to
           HUD in such a way that it was unclear to HUD what these funds represented;
           namely transferred reserve funds that had not yet been used (expended). As a
           result, the data reported was not accurate.

Comment 22 Our report asserts that a plan to use (expend) the transferred funds, formal or
           otherwise, must exist in some form before a substantial expenditure of funds
           ($647,814) is made. Our report does not state that the funds in question had to
           have been expended at the time of transfer. The requirement was for the funds to
           have been expended in a timely manner. We do not consider three years to be
           timely.

Comment 23 The essence of the Finding 1 is the fact that the funds were not used or expended
           for Section 8 administrative expenses or other housing purposes, and they should
           have been. Underlying this is the fact that the funds were not expended in a
           timely manner because they were not used as intended after they where
           transferred. Also any definition of “timeliness” may be considered subjective, but
           the funds in question were clearly not expended in a timely manner. It is likely
           that a time limit for expenditures of 90 days or six months after the transfer may
           have been readily considered as occurring in a timely manner. The funds in
           question were not spent and remained unused for approximately three years,
           which we do not consider to be timely.

Comment 24 The HUD Office of Public Housing has maintained its position that it is generally
           well understood, within HUD and by PHAs, that funds must be expended to
           considered used. It was never HUD’s intention that Section 8 administrative fee
           reserve funds, transferred from the program, were to be held indefinitely by
           PHAs. The transferred funds were to be used (expended) for Section 8
           administrative expenses or other housing purposes in a timely manner.

Comment 25 OIG does not approve or endorse the completion of HUD housing related
           programs by PHAs. OIG does review the operation of HUD programs at PHAs,
           and other recipient entities, and when conditions warrant, OIG prepares finding
           and draft reports that address noted deficiencies. Our review at the Portland
           Housing Authority identified the conditions described in Finding 1 and Finding 2.
           Regarding the transfer of funds, the Authority should address the transfer of funds
           with HUD program staff after it repays the reserves to the Section 8 program
           account.

Comment 26 See Comment 9.


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Appendix C

                              SELECTED CRITERIA
                             Administrative Fee Reserve

Housing Choice Voucher Program - Consolidated Annual Contributions Contract (HUD Form
52520, par. 12 Administrative Fee Reserve). The Housing Authority must use funds in the
administrative fee reserve to pay administrative expenses in excess of program receipts. If any
funds remain in the administrative fee reserve, the Housing Authority may use the administrative
reserve funds for other housing purposes. If the Housing Authority is not adequately
administering any Section 8 program funds in accordance with HUD requirements, HUD may
(1) direct the Authority to use the funds to improve administration of the Section 8 program, or
for reimbursement of ineligible expenses, or (2) prohibit the Authority from using administrative
fee reserve funds.

HUD-PIH Notice 2004-07, and HUD Handbook 7420.7. (Re: reserve funds must be expended
to be considered used). The transfer of amounts from the operating reserve to another non-
Section 8 program account does not constitute use of the operating reserve for other housing
purposes, even if the account to which funds would be transferred is designated for housing
purposes...Reserve funds must be expended to be considered used for other housing purposes.

HUD-PIH Notice 2005-01, and Housing Choice Voucher Program - Consolidated Annual
Contributions Contract (HUD Form 52520, par. 2.5.A). PIH Notice 2005-01 reiterates the
procedures identified in previously issued HUD Handbook 7420.7 requirements re:
unauthorized transfers). Paragraph 2.5.A of the AAC requires PHAs to maintain complete and
accurate books of account for the Section 8 program in accordance with HUD requirements.

HUD Handbook 7420.6 (HAP Accounting Handbook) identifies account #2826 for the
Operating reserve. The ACC, par. 2.4.C provides that this account must be maintained and used
for the administrative expenses in excess of program receipts.




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