oversight

Fairfield Metropolitan Housing Authority; Lancaster, Ohio

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-30.

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

               AUDIT REPORT




FAIRFIELD METROPOLITAN HOUSING AUTHORITY’S
     NONPROFIT DEVELOPMENT ACTIVITIES

                  LANCASTER, OHIO

The Authority Used Annual Contributions Contract Funds for
 Development Activities Outside Its Annual Contributions
                        Contract

                     2006-CH-1005

                  DECEMBER 30, 2005

                OFFICE OF AUDIT, REGION V
                    CHICAGO, ILLINOIS
                                                                  Issue Date
                                                                           December 30, 2005
                                                                  Audit Report Number
                                                                           2006-CH-1005




TO:         Thomas S. Marshall, Director of Public Housing Hub, 5DPH
            Lana Vacha, Director of Community Planning and Development, 5ED


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Fairfield Metropolitan Housing Authority; Lancaster, Ohio; The Authority Used
            Annual Contributions Contract Funds for Development Activities Outside Its
            Annual Contributions Contract

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Fairfield Metropolitan Housing Authority’s (Authority) activities
             with its related nonprofit organization. The review of housing authorities’
             development activities is set forth in our fiscal year 2005 annual audit plan. We
             selected the Authority for audit because it was identified as having high-risk
             indicators of nonprofit development activity. Our objective was to determine
             whether the Authority diverted or pledged resources subject to its annual
             contributions contract, other agreement, or regulation for the benefit of non-U.S.
             Department of Housing and Urban Development (HUD) developments without
             specific HUD approval.


 What We Found

             The Authority improperly transferred $520,169 of its HOPE 1 and 5(h)
             Homeownership Plan sales proceeds to its nonprofit, the Lancaster Community
             Housing Corporation (Corporation). The Authority received $337,191 from 10
             HOPE 1 properties sold in 1995 and $78,000 from two 5(h) Homeownership Plan
             properties sold in 1996. The sales proceeds were pooled and invested in
             certificates of deposit accumulating interest until 2004 when the Authority
             transferred the proceeds to the Corporation. The transfer occurred without HUD
           approval and did not follow federal requirements regarding the use of the
           proceeds.

           The Authority also transferred ownership of three properties that were
           rehabilitated using HUD’s McKinney grant funds to the Corporation without
           HUD approval. The Corporation sold one property in 2004. The Authority
           and/or the Corporation did not reimburse HUD $23,314 used to rehabilitate the
           property.

           We informed the Authority’s executive director and the director of HUD’s
           Cleveland Public Housing Hub of minor deficiencies through a memorandum,
           dated December 21, 2005.

What We Recommend

           We recommend that the director of HUD’s Cleveland Public Housing Hub and/or
           the director of HUD’s Columbus Office of Community Planning and
           Development require the Authority to (1) reimburse its HOPE 1 and 5(h)
           Homeownership Plan programs collectively $520,169 from nonfederal funds for
           the improper transfer of the sales proceeds to its Corporation, (2) reimburse HUD
           $23,314 from nonfederal funds for the McKinney grant funds used to rehabilitate
           the one property, and (3) implement procedures and controls to correct the
           weaknesses cited in this report.

           For each recommendation 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 issued because of the audit.

Auditee’s Response


           We provided our discussion draft audit report to the Authority’s executive
           director and HUD’s staff during the audit. The Authority’s executive director
           declined our offer for an exit conference. We requested the Authority’s executive
           director to provide written comments on our discussion draft audit report by
           December 17, 2005.

           The Authority’s executive director provided written comments to the discussion
           draft audit report dated December 14, 2005. The Authority disagreed with our
           findings and recommendations. The complete text of the Authority’s written
           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 Improperly Transferred $520,169 to Its Nonprofit   5

      Finding 2: The Authority Improperly Transferred Three Properties to Its
                 Nonprofit, and One Property Was Later Sold                       7

Scope and Methodology                                                             9

Internal Controls                                                                 10

Appendixes

   A. Schedule of Questioned Costs                                                12
   B. Auditee Comments and OIG’s Evaluation                                       13
   C. Federal and State Requirements                                              23




                                             3
                     BACKGROUND AND OBJECTIVES

The Fairfield Metropolitan Housing Authority (Authority) was established under Section
3735.27 of the Ohio Revised Code. The Authority contracts with the U.S. Department of
Housing and Urban Development (HUD) to provide low- and moderate-income persons with
safe and sanitary housing through rent subsidies. The Authority’s public housing program
consists of 96 units. A five member board of commissioners governs the Authority. During the
audit, the Authority’s books and records were located at 1506 Amherst Place, Lancaster, Ohio.
As of October 2005, the books and records were moved to 315 North Columbus Street,
Lancaster, Ohio.

The Authority established the Lancaster Community Housing Corporation (Corporation), a
501(c)(3) nonprofit, to further affordable housing and family self-sufficiency for low- and very
low-income families in central Ohio. The Corporation has no shareholders, and the sole member
of the Corporation is the Authority.

We selected the Authority for audit because it was identified as having high-risk indicators of
nonprofit development activity. Our objective was to determine whether the Authority diverted
or pledged resources subject to its annual contributions contract, other agreement, or regulation
for the benefit of non-HUD developments without specific HUD approval.




                                                4
                                 RESULTS OF AUDIT

Finding 1: The Authority Improperly Transferred $520,169 to Its
                             Nonprofit
The Authority improperly transferred $520,169 of its HOPE 1 and 5(h) Homeownership Plan
funds to its Corporation. The Authority received $337,191 in proceeds from 10 HOPE 1
properties sold in 1995 and $78,000 from two 5(h) Homeownership Plan properties sold in 1996.
The sales proceeds were pooled and invested in certificates of deposit accumulating interest until
2004 when the proceeds were transferred to the Corporation. The transfer occurred without
HUD approval and did not meet federal requirements regarding the use of the funds. The
transfer occurred because the Authority’s executive director believed the sales proceeds were not
HUD funds. As a result, fewer funds were available to serve the Authority’s low-income
residents.



 Inappropriate Transfer of
 Federal Funds

               The Authority inappropriately transferred HUD funds to pay the expenses of
               development activities not under an annual contributions contract for its nonprofit
               Corporation. The monies received from the sale of the HOPE 1 and 5(h)
               Homeownership Plan properties were pooled and invested in certificates of
               deposit accumulating interest until 2004. The Authority inappropriately
               transferred $520,169 in sales proceeds to the Corporation from June to August
               2004.

               The HOPE 1 grant agreement, between HUD and the Authority, required the
               Authority to use sale proceeds from the initial sale of units to eligible families for
               the cost of a homeownership program. The costs include operating expenses,
               improvements to the project, business opportunities for low-income families,
               supportive services related to the homeownership program, additional
               homeownership opportunities, and other activities approved by HUD, either as
               part of the approved application or as later approved by HUD. According to 24
               CFR [Code of Federal Regulations] Part 906, 5(h) Homeownership Plan sales
               proceeds may be used for sale and administrative costs that are necessary and
               reasonable for carrying out a homeownership plan and/or retained by a public
               housing authority and used for housing assistance to low-income families.

               Contrary to the HOPE 1 and 5(h) Homeownership Plan requirements, the
               Authority transferred sales proceeds to its nonprofit Corporation. The funds were
               transferred to the Corporation without HUD approval, and the Authority did not
               follow federal requirements regarding the use of the funds. The Authority’s
               executive director believed that HUD’s approval was not needed. She also
               believed the sales proceeds were not federal funds because HUD signed the

                                                 5
          release of declaration of trusts for the properties. As a result, fewer funds were
          available to serve the Authority’s low-income residents.

Recommendations


          We recommend that the director of HUD’s Cleveland Public Housing Hub require
          the Authority to

          1A.     Reimburse its HOPE 1 and 5(h) Homeownership Plan programs
                  collectively $520,169 from nonfederal funds for the improper transfer of
                  the sales proceeds to its nonprofit Corporation.

          1B.     Implement procedures and controls to ensure the Authority’s use of the
                  properties and/or sales proceeds meets HOPE 1 and/or 5(h)
                  Homeownership Plan requirements.




                                            6
Finding 2: The Authority Improperly Transferred Three Properties Its
           Nonprofit, and One Property Was Later Sold
The Authority was awarded a $136,286 State of Ohio Permanent Housing Program for
Handicapped Homeless Grant (Grant) in December 1989. The Grant was funded with
McKinney funds from HUD. The Authority was responsible for acquiring and renovating three
properties for chronically mentally disabled persons. The Grant required a 20-year commitment
after initial occupancy of the properties.

In 2001, the Authority requested permission from HUD to sell one unit and also requested that
the remaining two properties be used for an alternate use for the direct benefit of lower income
persons. HUD agreed but asked that the Authority notify it if the Authority decided to dispose of
a HUD-funded property. Without HUD approval, the Authority transferred ownership of the
three properties to its nonprofit Corporation in May 2004. In September 2004, the Corporation
sold one unit for more than $146,000. The Authority failed to notify HUD of the sale and
reimburse HUD the funds used to rehabilitate the sold unit. As a result, HUD did not receive its
share of the sales proceeds and has no assurance the two remaining properties will continue to
benefit low to moderate-income families.


 Federal Funds Were Not Used
 Properly


              Without HUD approval, the Authority transferred ownership of the three
              properties to its nonprofit Corporation in May 2004. The Corporation sold the
              property located at 841 East Main Street in September 2004. It did not notify
              HUD that the unit was sold and failed to reimburse HUD $23,314 as required by
              the Grant agreement. The Authority’s executive director said HUD was not
              notified because the Corporation was the owner of the unit at the time of the sale.

              The Authority was responsible for acquiring and renovating three properties for
              chronically mentally disabled persons under the Grant. In February 2001, the
              Authority sent a request to HUD to withdraw from further participation in the
              Grant. The Authority included five possible uses of the properties in its request.
              One possible use was to sell one property so it could pay off the mortgage held by
              the Ohio Department of Mental Health, which provided required matching funds
              for the Grant. The Authority also requested that the two remaining properties be
              used for an alternate use for the direct benefit of lower income persons.
              In August 2001, HUD responded to the Authority’s request and agreed that it
              could use the properties for the stated alternate use. However, HUD cited federal
              regulations requiring that the Authority repay the full amount of the
              acquisition/rehabilitation advance if the properties were used for less than 10
              years following the date of initial occupancy. For each full year that the
              properties are used for permanent housing following the expiration of the 10-year
              period, the amount that the Authority will be required to pay will be reduced by
              one-tenth of the original advance. HUD declared that the Authority had met the


                                               7
          original 10-year commitment but had 9 years remaining for the 20-year
          commitment. The Authority would be required to pay back a percentage of the
          original advance if it disposed of any of the properties before the expiration of the
          20-year commitment. HUD requested the Authority to notify it if the Authority
          decided to dispose of the properties so HUD could discuss what documentation
          the Authority would be required to submit to finalize the Grant process.

          We notified HUD of the one property sale and calculated that $23,314 should be
          reimbursed to HUD. The property was sold 14 years into the 20-year
          commitment. The Authority drew down $96,497 in Grant funds. It used $38,856
          in Grant funds for improvements for the 841 East Main Street property.
          Therefore, the amount the Authority would be required to repay HUD is reduced
          by four-tenths (40 percent). The amount the Authority would be required to repay
          HUD is 60 percent of the Grant funds for the sold unit (60 percent times $38,856).

Recommendations

          We recommend that the director of HUD’s Columbus Office of Community
          Planning and Development require the Authority to

          2A.     Reimburse HUD $23,314 from nonfederal funds for the Grant funds used
                  for the sold property cited in this finding.

          2B.     Implement procedures and controls to ensure the Authority’s use of the
                  remaining two properties and/or any future sales proceeds meet federal
                  and state requirements.




                                            8
                         SCOPE AND METHODOLOGY

We conducted the audit at the Authority’s Lancaster, Ohio office from May to October 2005.

To determine whether the Authority diverted or pledged resources subject to its annual
contributions contract, other agreement, or regulation for the benefit of non-HUD developments
without specific HUD approval, we reviewed

   •   Applicable laws, regulations, and HUD program requirements at 24 CFR [Code of Federal
       Regulations] Parts 841 and 906, and Appendix A, Section 725; the State of Ohio’s Grant
       agreement; Office of Management and Budget Circular A-87; and HUD’s release of
       declaration of trusts;

   •   The Authority’s accounting records, annual audited financial statements for 2003 and 2004,
       general ledgers, bank statements and cancelled checks, policies and procedures, board
       meeting minutes and resolutions for 2003 and 2004, cost allocation plans for 2003 and 2004,
       voucher for payment of annual contributions and operating statements for 2003 and 2004,
       HOPE 1 and 5(h) Homeownership Plan agreements, annual contributions contract number
       C-5106; settlement statements, and organizational chart;

   •   The Corporation’s accounting records, general ledgers, bank statements, board meeting
       minutes and resolutions for 2003 and 2004, articles of incorporation, and organizational
       chart; and

   •   HUD’s files for the Authority.

We also interviewed the Authority’s and the Corporation’s employees and board members, and
HUD staff.

The audit covered the period from January 1, 2003, through December 31, 2004. This period
was adjusted as necessary. We performed our audit in accordance with generally accepted
government auditing standards.




                                                 9
                             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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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 objective:

              •       Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

              It is a significant weakness if internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet an organization’s objectives.




                                               10
Significant Weakness


           Based on our audit, we believe the following item is a significant weakness:

               •   The Authority lacked procedures and controls to ensure that federal funds
                   were used in accordance with applicable requirements (see findings 1 and
                   2).




                                            11
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                             Recommendation
                                 number           Ineligible 1/
                                    1A             $520,169
                                    2A               23,314
                                   Totals          $543,483


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.




                                            12
Appendix B

         AUDITEE COMMENTS AND OIG EVALUATION


Ref to OIG Evaluation               Auditee Comments




                        G Evaluation of Auditee Comments


Comment 1

Comment 2




                                      13
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         14
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         15
Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 6




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 7




                         17
Ref to OIG Evaluation   Auditee Comments




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9




                         19
Ref to OIG Evaluation   Auditee Comments




                         20
                         OIG Evaluation of Auditee Comments

Comment 1   As previously mentioned in finding 1, the grant agreements for both the HOPE 1
            and 5(h) Homeownership programs contain explicit language regarding the use of
            sales proceeds. The HOPE 1grant agreement states that the sales proceeds may be
            used for other activities approved by HUD, either as part of the approved
            application or as later approved by HUD. The 5(h) implementing agreement,
            between HUD and the Authority, states that sales proceeds shall be used in
            accordance with the Authority’s homeownership plan and must obtain HUD
            approval to modify any provisions of the plan. However, the Authority failed to
            follow the grant agreements

Comment 2   We agree that HUD encouraged housing authorities to use available funds to
            leverage other funds to aid in the development of affordable housing. However,
            as previously mentioned, the Authority must obtain HUD approval to modify any
            provisions to its homeownership plan. The Authority’s plan submitted to HUD
            discussed the Authority’s efforts to sell up to 20 single family public housing
            units to low and lower income families.

Comment 3   The Authority incorrectly cited HUD’s requirements at 24 CFR [Code of Federal
            Regulations] Part 906.31(a) regarding the Authority’s use of net sales proceeds
            for its 5(h) Homeownership program. The regulations for the 5(h) program were
            revised effective April 1, 2004. However, 24 CFR [Code of Federal Regulations]
            Part 906.3, requirements applicable to homeownership programs previously
            approved by HUD, states in section (a) that any existing section 5(h)
            homeownership program continues to be governed by the requirements of Part
            906 or Part 904 of this title, respectively, contained in the April 1, 2002, edition of
            24 CFR [Code of Federal Regulations] Parts 700 to 1699. The April 1, 2002,
            edition of 24 CFR [Code of Federal Regulations] Part 906.15 governs the use of
            sale proceeds from the Authority’s 5(h) program. The Authority cited Part 906.15
            in its comments on page 1 and 2. Part 906.15 requires the Authority to obtain
            HUD approval to modify any provisions of its plan.

Comment 4   The Authority was required by its HOPE 1grant agreement to have other activities
            approved by HUD, either as part of the approved application or as later approved
            by HUD prior to its use of sales proceeds outside the grant agreement.

Comment 5   According to the Authority’s records, the Authority transferred $25,078 on June
            18, 2004, and $495,091 on July 30, 2004, for a total of $520,169. These transfers
            clearly occurred prior to the Authority’s July 28, 2004, letter to HUD’s director of
            the Cleveland Public Housing Hub. The subject of the Authority’s July 2004
            letter provided to us during the audit was acquisition of office space. The letter
            stated that the Authority’s nonprofit organization reserved funds that will be
            adequate for the purchase of this facility. Additionally, the letter stated that the
            Authority worked with its nonprofit to set up development accounts to further
            current and future programs. The letter did not reference the HOPE I or 5(h)
            program funds.



                                              21
                         OIG Evaluation of Auditee Comments

Comment 6   We agree that the Authority’s 2003 audit report gave full disclosure of the transfer
            of funds. However, the transfers did not occur until June and July of 2004. The
            financial statements are misstated as reported. The Authority also misstated its
            financial statements for 2004 when it reported that a $100,000 transfer of equity
            was made to its nonprofit corporation. As of October 13, 2005, this transfer had
            not occurred.

Comment 7   In section 1 of the 5(h) implementing agreement, sale proceeds includes all
            payments made by the purchasers for credit to the purchase price, together with
            any amounts payable upon resale under the regulations, and interest earned on all
            such receipts. We agree that the HOPE I agreement does not include a reference
            to interest earned. However, the Authority pooled its HOPE I and 5(h) funds
            together in a certificate of deposit to accumulate interest income. The Authority
            must provide adequate documentation to support the interest earned by each
            source of funds.

Comment 8   The Authority provided a request to HUD discussing the Authority’s desire to opt
            out of the McKinney program on February 28, 2001. On August 23, 2001, HUD
            provided a response to the Authority’s request. On page 2 of HUD’s response,
            HUD specifically stated that its records showed that the project began occupancy
            in May 1990 and had met the 10 year commitment benchmark. The letter also
            stated that nine years remained of the 20 year commitment that will require the
            Authority to pay back a percentage of the original advance. The letter went on to
            state that the Authority notify HUD if the Authority decides to proceed with the
            disposition of the HUD funded property.

Comment 9   We do not agree with the Authority’s statement that there was no intent to
            deceive. As previously mentioned, the Authority misstated its audited financial
            statements for the years ended December 31, 2003, and 2004. Additionally, the
            Authority prepared Section 8 year end settlement statements for the years ended
            December 31, 2003, and 2004 that did not accurately depict the financial
            transactions the Authority made with its Section 8 operating reserve funds. The
            misstatements were mentioned above in comment 6. These misstatements were
            done in an effort to avoid the possible recapture of Section 8 operating reserve
            funds by HUD.




                                             22
Appendix C

                FEDERAL AND STATE REQUIREMENTS

Finding 1
The HOPE 1 implementation grant agreement states in article X that the grantee shall use the
proceeds, if any, from the initial sale of units to eligible families for the costs of a
homeownership program, including operating expenses, improvements to the project, business
opportunities for low-income families, supportive services related to the homeownership
program, additional homeownership opportunities, and other activities approved by HUD, either
as part of the approved application or as later approved by HUD. The use of sales proceeds
under article X (1) shall be governed by the requirements of 24 CFR [Code of Federal
Regulations] Appendix A, Section 725 as they may from time to time be amended.

According to 24 CFR[Code of Federal Regulations] appendix A, section 725, the entity that
transfers ownership interests in units to eligible families or another entity specified in the
approved application shall use the proceeds, if any, from the initial sale for costs of a
homeownership program, including operating expenses, improvements to the project, business
opportunities for low-income families, supportive services related to the homeownership
program, additional homeownership opportunities, and other activities approved by HUD, either
as part of the approved application or later on request.

Section 3 of part I of the 5(h) implementing agreement between HUD and the Authority, states
the Authority agrees that sales proceeds shall be used only in accordance with the plan and the
requirements and provisions of the agreement and certifies that the plan complies with 24 CFR
[Code of Federal Regulations] 905.15, as applicable, governing the use of sales proceeds.
Section 3 also requires the Authority to obtain HUD approval under section 17.2 to modify any
of the provisions of the plan.

According to 24 CFR [Code of Federal Regulations] 906.15(a), sales proceeds may, after
provision for sale and administrative costs that are necessary and reasonable for carrying out a
homeownership plan, be retained by the public housing authority and used for housing assistance
to low-income families.

Finding 2
The State of Ohio Permanent Housing Program for Handicapped Homeless grant agreement
(HUD Number OH16P89-303) with the Authority incorporates by reference HUD’s permanent
housing program regulations at 24 CFR [Code of Federal Regulation] Part 841, the application
and any modifications to the application that were made with the approval of HUD and the
grantor, and the notifications of funding approval and any later amendments made by HUD. The
agreement states that for each full year that the project is used for permanent housing for the
handicapped homeless following the expiration of the 10-year period, the amount of the
acquisition/rehabilitation advance that the grantee will be required to repay will be reduced by
one-tenth of the original advance.


                                               23
According to 24 CFR [Code of Federal Regulations] 841.310(b)(2), the recipient must repay the
full amount of the acquisition/rehabilitation advance if the project is used for permanent housing
for less than 10 years following the date of initial occupancy. For each full year that the project
is used for permanent housing following the expiration of this 10-year period, the amount that
the recipient will be required to pay will be reduced by one-tenth of the original advance. If the
project is used for permanent housing for 20 years following the date of initial occupancy, the
recipient will not be required to repay any portion of the acquisition/rehabilitation advance under
this section.

According to 24 CFR [Code of Federal Regulations] 841.315(a), if assistance in the form of an
acquisition/rehabilitation advance or a moderate rehabilitation grant is provided for a project and
the project is sold or otherwise disposed of during the 20 years following the initial occupancy of
the project, the recipient must comply with such terms and conditions as HUD may prescribe to
prevent the recipient from unduly benefiting from the sale or the disposition.




                                                24