oversight

Pickaway Metropolitan Housing Authority, Circleville, Ohio, Improperly Used Homeownership Sales Proceeds to Fund Its Nonprofit Development Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-26.

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

                                                                 Issue Date
                                                                          September 26, 2006
                                                                 Audit Report Number
                                                                          2006-CH-1016




TO:         Thomas S. Marshall, Director of Public Housing Hub, 5DPH


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

SUBJECT: Pickaway Metropolitan Housing Authority, Circleville, Ohio, Improperly Used
          Homeownership Sales Proceeds to Fund Its Nonprofit Development Activities

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Pickaway 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 2006 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 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.

 What We Found

             The Authority improperly loaned nearly $256,000 in 5(h) Homeownership Plan
             (program) sales proceeds to its nonprofit, Building Affordable Housing
             Corporation (Corporation). The two loans occurred without HUD approval and
             did not follow federal requirements regarding the use of the program proceeds.
             Because of the Authority’s improper use of these proceeds, its program also lost
             more than $60,000 in interest income that would have been realized if the
             proceeds had been invested.

             Further, the Authority paid more than $22,000 in expenses that would not have
             been incurred if it had conducted the Corporation’s development activities. The
           improper expenses included real estate taxes, accounting fees for the
           Corporation’s tax returns, and directors’ and officers’ liability insurance for the
           Corporation. The Corporation used nearly $2,400 in program proceeds to pay
           legal expenses related to its development activities that were not adequately
           supported by detailed invoices.

What We Recommend

           We recommend that the director of HUD’s Cleveland Office of Public Housing
           require the Authority to reimburse its program from nonfederal funds for the
           improper use of program funds, provide documentation or reimburse its program
           from nonfederal funds for the unsupported payments cited in this report, and
           implement adequate procedures and controls to correct the cited weaknesses.

           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 schedules of the improper use of program proceeds and lost interest
           income cited in this audit report to the Authority’s executive director and the
           director of HUD’s Cleveland Office of Public Housing during the audit. We also
           provided the discussion draft audit report to the Authority’s executive director, its
           board chairman, and HUD’s staff during the audit. We held an exit conference
           with the executive director on September 5, 2006.

           We asked the Authority’s executive director to provide comments on our
           discussion draft audit report by September 18, 2006. The Authority provided its
           written response dated September 18, 2006. The Authority generally agreed with
           our finding, but disagreed with the interest income not realized and the
           recommendation regarding implementing procedures and controls. The complete
           text of the auditee’s written response, along with our evaluation of that response,
           can be found in appendix B of this report.




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                           TABLE OF CONTENTS

Background and Objective                                                   4

Results of Audit

      Finding: The Authority Improperly Loaned More Than $255,000 to Its   5
               Nonprofit

Scope and Methodology                                                      8

Internal Controls                                                          9

Appendixes

   A. Schedule of Questioned Costs                                         11
   B. Auditee Comments and OIG’s Evaluation                                12
   C. Federal Requirements                                                 15




                                           3
                       BACKGROUND AND OBJECTIVE

The Pickaway Metropolitan Housing Authority (Authority) was established under Section
3735.26 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 provides 108 public housing
units and 635 Section 8 Housing Choice Voucher units. A five-member board of commissioners
governs the Authority. The Authority’s books and records are located at 176 Rustic Drive,
Circleville, Ohio. The Authority established the Building Affordable Housing Corporation
(Corporation), a 501(c)(3) nonprofit, to further affordable housing and family self-sufficiency for
low- and very low-income families in Ohio.

In accordance with its agency plan, a public housing agency may form and operate wholly
owned or controlled subsidiaries or other affiliates. Such wholly owned or controlled
subsidiaries or other affiliates may be directed, managed, or controlled by the same persons who
constitute the board of directors or similar governing body of the public housing agency, or who
serve as employees or staff of the public housing agency, but remain subject to other provision of
laws and conflicts of interest requirements. Further, a public housing agency, in accordance with
its agency plan, may enter into joint ventures, partnerships, or other business arrangements with
or contract with any person, organization, entity, or governmental unit with respect to the
administration of the programs of the public housing agency such as developing housing or
providing supportive/social services subject to either Title I of the United States Housing Act of
1937, as amended, or state law.

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
resources subject to its annual contributions contract, other agreement, or regulation for the
benefit of non-HUD developments.




                                                4
                                RESULTS OF AUDIT

Finding: The Authority Improperly Loaned More Than $255,000 to Its
                            Nonprofit
The Authority improperly loaned $255,665 of its 5(h) Homeownership Plan program (program)
proceeds to the Corporation. The Authority received $313,320 in proceeds from seven program
properties sold between May 1996 and January 1998. The sales proceeds were pooled and
invested in bank accounts and certificates of deposit, accumulating interest until 2000 when the
proceeds were loaned to the Corporation. The loans occurred contrary to the Authority’s
program agreement with HUD and without HUD approval. The loans occurred because the
Authority believed the program’s plan was completed when the properties were sold and the
proceeds could be used for any housing purpose. As a result, fewer funds were available to serve
the Authority’s low-income residents.



 Inappropriate Use of Federal
 Funds

              The Authority inappropriately loaned its program proceeds to pay the expenses of
              development activities for the Corporation. The proceeds were received from the
              sale of seven program properties from May 1996 through January 1998. The
              Authority inappropriately loaned $255,665 in sales proceeds to the Corporation in
              February 1999 ($150,000) and September 2000 ($105,665).

              According to 24 CFR [Code of Federal Regulations] Part 906, program 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 program’s requirements and its agreement with HUD, the
              Authority loaned sales proceeds to the Corporation. The funds were loaned to the
              Corporation without HUD approval and the Authority did not follow federal
              requirements regarding the use of the funds. The Authority’s former executive
              director and its board of commissioners believed that HUD’s approval was not
              needed. They also believed the Authority was using the proceeds in accordance
              with its approved program plan when the funds were loaned to the Corporation.

 Interest Income Not Realized

              The Authority’s program lost $60,604 in interest income that should have been
              realized. In February 1999, the Authority executed a demand note agreement
              with the Corporation for the repayment of $150,000 with no interest due. The
              Authority entered into another demand note agreement with the Corporation in
              September 2000 for $107,000 at a 6 percent annual interest.

                                               5
           When the Corporation was dissolved in May 2005, the Authority’s board passed a
           resolution to forgive the September 2000 loan’s accrued interest. We determined
           the imputed interest for the February 1999 loan using the Corporation’s checking
           account interest rate and when the Corporation dissolved, the Authority’s other
           business activity general account interest rate. As of July 2006, the Authority’s
           program had lost the benefit of the imputed interest of $31,802 and the accrued
           interest of $28,802 that the board resolved to forgive on the September 2000 loan.

Returned Program Assets Not
Accounted for Properly or
Restricted for Future Program
Use

           When the Corporation dissolved, it owned a parcel of vacant land and had cash
           remaining from the loaned program funds it received. The Corporation owed the
           Authority an outstanding balance on the loans and transferred the land and cash
           ($42,322) back to the Authority’s other business activity account rather than the
           program account. Additionally, the Authority accepted an appreciated value
           ($155,194) that was $44,121 more than the Corporation paid for the land
           ($111,073), using the improperly loaned program funds. Since the program funds
           were inappropriately used, the Corporation should not benefit from the land’s
           appreciation, and the program’s participants should not lose the future use of the
           program funds.

           According to 24 CFR [Code of Federal Regulations] Part 906 and the Authority’s
           approved program, the assets should have been returned to the Authority’s
           program to be used for sales and administrative costs that are necessary and
           reasonable for carrying out a homeownership plan and/or retained by the
           Authority and used for housing assistance to low-income families.

Unnecessary Expenses Incurred
by the Authority

           HUD has encouraged the formation of new and innovative private and public
           partnerships to ensure the long-term sustainability of public housing
           developments. A housing authority must determine the best way to accomplish
           this development using its available resources in the most effective and efficient
           manner while avoiding violations of existing requirements. As previously
           mentioned, the Authority loaned its program sales proceeds to the Corporation to
           develop low-income housing contrary to its approved program plan. By
           reviewing the Authority’s and the Corporation’s general ledgers, invoices, and
           bank statements, we determined that the Corporation incurred $22,158 in
           additional expenses that would not have been incurred if the Authority had
           conducted the development activity. The improper expenses included real estate
           taxes, accounting fees for the Corporation’s tax returns, and directors and
           officers’ liability insurance for the Corporation. The Corporation used nearly

                                            6
          $2,400 in program proceeds to pay legal expenses related to its development
          activities that were not adequately supported by detailed invoices.

          The Authority’s program requires the sales proceeds be used in an economical
          and efficient manner without excessive administrative overhead costs. By
          incurring unnecessary expenses, the Authority had fewer funds to benefit low-
          income residents.

Recommendations

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

          1A.     Reimburse its program $236,157 ($31,802 in imputed interest, $28,802 in
                  forgiven interest, $111,073 for the land purchase, $42,322 in cash, and
                  $22,158 in improper expenses) from nonfederal funds for the
                  inappropriate use of its sales proceeds for the Corporation.

          1B.     Provide supporting documentation or reimburse its program $2,350 from
                  nonfederal funds for the unsupported legal expenses cited in this finding.

          1C.     Implement procedures and controls to ensure that its use of program
                  proceeds meet federal requirements.




                                            7
                         SCOPE AND METHODOLOGY

We conducted the audit at HUD’s Columbus Office of Public Housing and the Authority’s office
from March to June 2006.

To accomplish our objective, we reviewed

   •   Applicable laws; regulations; and HUD program requirements at 24 CFR [Code of Federal
       Regulations] Parts 85 and 906, HUD Handbook 7475.1, and Office of Management and
       Budget Circular A-87;

   •   The Authority’s accounting records; general ledgers; bank statements; annual audited
       financial statements for 2003, 2004, and 2005; board meeting minutes and resolutions for
       2005 and 2006; policies and procedures; organizational chart; cost allocation plans for 2005
       and 2006; program plan implementation agreement; and annual contributions contract with
       HUD;

   •   The Corporation’s accounting records, general ledgers, bank statements, board meeting
       minutes and resolutions for 1999 through 2005, articles of incorporation, organizational
       bylaws, and organizational chart; and

   •   HUD’s files for the Authority.

We also interviewed Authority, Corporation, and HUD staff.

The audit covered the period from January 1, 2005, through February 28, 2006. This period was
adjusted as necessary. We performed our audit in accordance with generally accepted
government auditing standards.




                                                 8
                             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.




 Significant Weakness


                                                9
Based on our audit, we believe the following item is a significant weakness:

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




                                 10
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS
                      Recommendation
                          number            Ineligible    Unsupported
                            1A             $236,157
                            1B                              $2,350
                           Totals          $236,157         $2,350


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.




                                            11
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1

Comment 2




                         12
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




                         13
                         OIG Evaluation of Auditee Comments

Comment 1   Section 3735.34 of the Ohio Revised Code states that all property, both real and
            personal, acquired or owned by a metropolitan housing authority and used for the
            purposes of exercising the powers set forth in sections 3735.27 to 3735.50 of the
            Revised Code, shall be public property used exclusively for a public purpose
            within the meaning of Section 2 of Article XII, Ohio Constitution, and shall be
            exempt from all taxation. If the Authority had held the vacant land in its name,
            the land would have been exempt from taxes until such time as it was determined
            that the land was no longer for a public purpose.

Comment 2   We agree with the position that had the property development occurred within the
            Authority that program funds would have been used and would not have been
            available to earn interest. However, the Authority loaned the program funds to
            the Corporation in accordance with loan agreements, including one loan
            agreement that called for the payment of interest. HUD’s position is that
            agreements between public housing agencies and their related affiliates must be
            economically reasonable for both parties. The agreements must base the rates for
            services on those available in the open market. Additionally, the Authority was
            required to use its program sales proceeds in an economical and efficient manner.
            As of July 2006, the Authority’s program had lost the benefit of $60,604 in
            interest (imputed interest of $31,802 and accrued interest of $28,802) that the
            board resolved to forgive.

Comment 3   We were aware that the Authority received Ohio Community Development
            Finance funds in 2002. These expenses were discussed with the Authority’s
            finance director and at no time did she state the expenses were paid using Ohio
            Community Development Finance funds or provide documentation to support
            them being paid with Ohio Community Development Finance funds. If indeed
            the legal expenses were paid using Ohio Community Development Finance funds,
            the Authority needs to provide the supporting documentation to HUD.

Comment 4   We agree with the Authority that procedures and controls may exist. However,
            the Authority did not provide documentation to support that written procedures
            and controls were implemented. Therefore, the Authority should implement
            procedures and controls to ensure that its future use of program sales proceeds
            meet federal requirements.




                                            14
Appendix C

                           FEDERAL REQUIREMENTS

Section 3.1 of the program implementing agreement, between HUD and the Authority states that
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 3.6 requires the Authority to obtain HUD approval 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 sales 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. Section 906.31 states that the public housing authority must use any net
proceeds of any sales under a homeownership program remaining after payment of all costs of
the sale for purposes relating to low-income housing and in accordance with its plan.

In accordance with Office of Management and Budget Circular A-87, costs must be necessary
and reasonable for proper and efficient performance and administration of federal awards, be
allocable to federal awards under the provisions of this circular, be authorized or not prohibited
under state or local laws or regulations, and conform to any limitations or exclusions set forth in
these principles, federal laws, terms and conditions of the federal award, or other governing
regulations as to types or amounts of cost items.




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