oversight

Saginaw Housing Commission, Saginaw, Michigan Improperly Used Public Housing Funds to Purchase Property

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-28.

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

                                                                  Issue Date
                                                                           September 28, 2006
                                                                  Audit Report Number
                                                                           2006-CH-1018




TO:        Robert E. Nelson, Director of Public Housing Hub, 5FPH
           Margarita Maisonet, Director of Departmental Enforcement Center, CV


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

SUBJECT: Saginaw Housing Commission, Saginaw, Michigan Improperly Used Public
           Housing Funds to Purchase Property

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Saginaw Housing Commission’s (Commission) Public Housing
            Operating Fund program (program). We initiated the audit based on a request
            from the Detroit Office of Public Housing for the U.S. Department of Housing
            and Urban Development (HUD). The audit was also part of the activities in our
            fiscal year 2006 annual audit plan. Our objective was to determine whether the
            Commission properly used its program funds subject to its annual contributions
            contract, other agreements, or federal regulations for the benefit of its program
            residents.

 What We Found

            The Commission improperly acquired the Saginaw County Fairgrounds property
            (property), which included a harness raceway, using its program funds. Without
            required HUD approval, the Commission used nearly $536,000 in program funds to
            pay for the property’s acquisition costs. Because of the Commission’s improper use
            of these funds, its program also lost more than $25,000 in interest income that would
            have been realized if the funds had been invested. The Commission failed to file a
            required declaration of trust to evidence its covenant not to convey or encumber the
            property and to protect HUD’s rights and interests.
           Further, the Commission entered into eight rooftop lease agreements without
           required HUD approval and did not restrict more than $12,000 in revenue to pay for
           program expenses. Instead, the revenue paid for inappropriate expenses such as
           meals and refreshments for its board meetings, appraisal services related to the
           purchase of the property, and contributions to the mayor of the City of Saginaw’s
           (City) college scholarship fund and other events honoring the City’s mayors.

What We Recommend

           We recommend that the director of HUD’s Detroit Office of Public Housing
           require the Commission to (1) reimburse its program for the inappropriate use of
           funds and lost interest income cited in this report, (2) file a declaration of trust on
           the property if it has not been sold, (3) submit its current rooftop lease agreements
           to HUD for approval, and (4) implement adequate procedures and controls to
           address the findings contained in this report.

           We also recommend that the director of HUD’s Departmental Enforcement
           Center pursue administrative sanctions against the Commission’s former
           executive director and its board members involved in the improper purchase of
           the property.

           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 funds and revenue plus
           lost interest income cited in this audit report to the Commission’s current
           executive director and the director of HUD’s Detroit Office of Public Housing
           during the audit. We also provided the discussion draft audit report to the
           Commission’s current executive director, its board chairman, and HUD’s staff
           during the audit. We held an exit conference with the current executive director
           on August 30, 2006.

           We asked the Commission’s current executive director to provide comments on
           our discussion draft audit report by September 25, 2006. The Commission
           provided its written response dated September 21, 2006. The Commission
           generally agreed with finding 1 and disagreed with finding 2. The complete text
           of the auditee’s 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 1: The Commission Improperly Used Its Program Funds to Purchase   5
                 Property without HUD Approval

      Finding 2: The Commission Failed to Obtain HUD Approval and
                 Inappropriately Used Funds Regarding Its Rooftop Leases        8

Scope and Methodology                                                           10

Internal Controls                                                               11

Appendixes

   A. Schedule of Questioned Costs                                              13
   B. Auditee Comments and OIG’s Evaluation                                     14
   C. Federal Requirements                                                      19




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                       BACKGROUND AND OBJECTIVE

The Saginaw Housing Commission (Commission) was established in July 1947 by the Saginaw
City Council as a public corporation under the State of Michigan’s Public Act 18. The
Commission signed an annual contributions contract with the U.S. Department of Housing and
Urban Development (HUD) to provide public housing to low-income residents of the City of
Saginaw, Michigan (City). The Commission managed 628 public housing units, 1,197 Section 8
Housing Choice Voucher program units, and 51 Shelter Plus Care units as of July 2006. It
receives Public Housing Operating Fund program (program) funds from HUD to operate its
public housing units. A five-member board of commissioners appointed by the City’s mayor
governs the Commission. During our audit, the Commission’s books and records were located at
1803 Norman Street, Saginaw, Michigan.

The Saginaw Urban Development, LLC (company), was established by the Commission’s
former executive director on December 7, 2001, to assist in housing development. The
company’s articles of incorporation signed by the Commission’s former executive director on
December 3, 2001, state that the company will be managed by one or more managers. However,
the company had no federal tax identification number, operating agreement, or evidence of who
should be a member or a manager and was inactive as of July 2006. The company was to consist
of a group of developers/investors who would be investing funds, along with the Commission
through grants, to purchase the Saginaw County Fairgrounds property (property) and be
completely independent of the Commission. However, the developers/investors backed out of
the company, and it did not receive any grants. The company purchased the property in
December 2002. Immediately following the property’s closing, all rights to the property were
transferred to the Commission.

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
law and conflict 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.

Our objective was to determine whether the Commission properly used its program funds subject
to its annual contributions contract, other agreements, or federal regulations for the benefit of its
program residents.




                                                 4
                               RESULTS OF AUDIT

Finding 1: The Commission Improperly Used Its Program Funds to
              Purchase Property without HUD Approval
The Commission improperly used nearly $536,000 of its program funds to pay for the property’s
acquisition costs. Because of the Commission’s improper use of these funds, its program also
lost more than $25,000 in interest income that would have been realized if the funds had been
invested. The Commission also failed to file a required declaration of trust to evidence its
covenant not to convey or encumber the property and to protect HUD’s rights and interests. The
former executive director and the board of commissioners did not exercise prudent oversight of
the Commission’s use of program funds to ensure that federal requirements were followed. As a
result, fewer funds were available to serve the Commission’s public housing residents and
HUD’s interest in the property was not secured.



 Use of Program Funds to
 Purchase Property Was
 Inappropriate

              The Commission improperly used its program funds to pay for the property’s
              acquisition costs. Without HUD approval, the Commission’s former executive
              director and board of commissioners entered into a purchase agreement for the
              property through the company. The Commission did not file a declaration of trust
              protecting HUD’s rights and interests as required by its annual contribution
              contract. After the property’s closing on December 26, 2002, the company
              transferred its property rights to the Commission.

              During the Commission’s board meeting on May 21, 2001, the board president
              recommended authorizing negotiations and executing an agreement for the
              purchase of the property from the Saginaw County Agricultural Society (Society),
              the property’s former owner. HUD’s approval to purchase the property was not
              obtained.

              In June 2002, the Commission used its program funds to make an earnest money
              deposit with the First American Title Insurance Company toward the purchase of
              the property. In July 2002, the former executive director entered into an
              agreement with the Society to purchase the property. On December 26, 2002, the
              former executive director and the board president signed a settlement statement
              on behalf of the company, finalizing the acquisition of the property.

              Immediately after the closing, all rights to the property were transferred to the
              Commission as well as all lease agreements made by the Society. One of the
              property’s lease agreements included a harness track raceway. By reviewing the
              Commission’s general ledgers, invoices, cancelled checks, and bank statements,

                                               5
           we determined that nearly $508,000 in program funds was used to purchase the
           property and more than $28,000 in program funds paid for the legal expenses
           associated with the purchase. The use of program funds did not comply with
           HUD’s regulations, the Commission’s annual contributions contract, and Office
           of Management and Budget Circular A-87. As of July 2006, the Commission was
           attempting to sell the property at HUD’s direction to reimburse its program for the
           improper use of funds related to the purchase.

Interest Income Was Not
Realized

           The Commission’s program lost more than $25,000 in interest income that would
           have been realized had the funds been invested instead of improperly used. The
           Commission’s annual contributions contract requires that if at any time, the funds
           on deposit in the general operating fund are in excess of the Commission’s
           prudently estimated needs for the next 90 days, such excess funds shall be
           approved and invested in investment securities. The investing of excess program
           funds allows the Commission to generate additional income to pay for program
           expenses.

Former Executive Director and
Board Did Not Perform Their
Duties Appropriately

          The board of commissioners and the former executive director did not exercise
          prudent oversight of the Commission’s use of program funds to ensure that federal
          requirements were followed. They failed to perform their duties appropriately
          regarding the Commission’s use of program funds to purchase the property. As a
          result, fewer funds were available to serve the Commission’s public housing
          residents and HUD’s interest in the property was not secured.

          Public housing authority commissioners have a responsibility to HUD to ensure that
          national housing policies are carried out, and to the Commission’s management staff
          and employees to provide sound and manageable directives. The commissioners are
          accountable to their locality and best serve it by monitoring operations to be certain
          that housing programs are carried out in an efficient and economical manner.

          The responsibility for carrying out the commissioners’ policies and managing the
          Commission’s day-to-day operations rests with the Commission’s executive director.
          The executive director must maintain the Commission’s overall compliance with its
          policies and procedures and federal, state, and local laws. As of July 2006, the former
          executive director was the chief operating officer for the Housing Authority of the
          City of Charlotte, North Carolina. Given the former executive director’s involvement
          in the misuse of program funds and his current position, HUD funds may be at risk.




                                              6
Recommendations

          We recommend that the director of HUD’s Detroit Office of Public Housing
          require the Commission to

          1A.     Reimburse its program $535,903 from nonfederal funds ($507,860 for the
                  property purchase plus $28,043 for legal costs) for the improper use of
                  program funds to pay for the property’s acquisition costs.

          1B.     File a declaration of trust on the property to protect HUD’s interest and
                  rights if the property has not been sold.

          1C.     Reimburse its program $25,132 from nonfederal funds for the lost income
                  cited in this finding.

          1D.     Implement procedures and controls to ensure that it follows federal
                  requirements to include HUD’s approval when purchasing property in the
                  future and the investing of excess program funds.

          We also recommend that the director of HUD’s Departmental Enforcement
          Center

          1E.     Pursue administrative sanctions against the Commission’s former
                  executive director and the board of commissioners involved with the
                  improper purchase of the property.




                                            7
Finding 2: The Commission Failed to Obtain HUD Approval and
       Inappropriately Used Funds Regarding Its Rooftop Leases
The Commission entered into eight rooftop lease agreements without HUD’s approval. It also
improperly used more than $12,000 in revenue from the agreements to pay for expenses not
related to its program. The revenue paid for inappropriate expenses such as meals and
refreshments for its board meetings, appraisal services related to the property purchase, and
contributions to the mayor’s college scholarship fund and other events honoring the City’s
mayors. The former executive director and the board of commissioners did not exercise
adequate oversight of the lease agreements and related revenue to ensure that federal
requirements were followed. As a result, fewer funds were available for the Commission’s
program operations.


 Lease Agreements Were Not
 Submitted to HUD for
 Approval

              Contrary to HUD’s requirements, the Commission entered into lease agreements
              with eight communications companies for the installation of communication
              equipment on its public housing property. The former executive director
              recommended entering into the rooftop leases as a way to raise revenue for the
              Commission. Between February 1998 and July 2003, the Commission entered
              into eight rooftop lease agreements, of which six were signed by the former
              executive director, one was approved by the former executive director via
              electronic mail, and one was not signed. The board of commissioners’ motion to
              enter into this type of lease agreement was recorded in the May 21, 2001, board
              meeting minutes. The communications equipment was located at the
              Commission’s Davenport Manor, Maplewood Manor, and Rosin Towers public
              housing properties and installed without HUD approval. According to the
              Commission’s annual contributions contract with HUD, unless otherwise
              approved by HUD, dwellings in the projects are solely for the purpose of housing
              families of low income. Without HUD approval, the Commission shall not grant
              any concessions, licenses, or permits to use any nondwelling space or facility for
              temporary public, charitable, or similar use.

 Lease Revenue Was Not
 Restricted

              The Commission did not restrict revenue from its communication leases for
              program expenses or to benefit its public housing residents. The Commission
              used the revenue to pay $8,000 for appraisal services for the property purchase,
              $3,000 for meals and refreshments for board members during board meetings, and
              nearly $1,200 for the mayor’s scholarship program, a farewell reception and
              dinner, and an inaugural ball honoring the City’s mayors. The inappropriate


                                               8
          expenses occurred between June 2001 and April 2005. The former executive
          director and the board of commissioners initiated the improper use of revenue and
          did not assure the revenue was used in accordance with federal requirements. The
          Commission violated its annual contributions contract with HUD and failed to
          comply with the United States Housing Act of 1937’s requirements. In addition,
          the Commission failed to comply with federal requirements for expenditures to be
          necessary and reasonable for proper and efficient performance and administration
          of its program. As a result, fewer funds were available to benefit the
          Commission’s program residents.

Recommendations

          We recommend that the director of HUD’s Detroit Office of Public Housing
          require the Commission to

          2A.     Reimburse its program $12,289 from nonfederal funds ($8,000 for the
                  appraisal services for the unauthorized property purchase, $3,097 for
                  meals and refreshments for board members, and $1,192 for contributions)
                  for the improper use of program revenue cited in this finding.

          2B.     Submit its current communication lease agreements to HUD for approval.

          2C.     Implement adequate procedures and controls to ensure that it follows
                  HUD’s requirements regarding the use of its program revenue and
                  applicable lease agreements.




                                           9
                        SCOPE AND METHODOLOGY

We conducted the audit at HUD’s Detroit Office of Public Housing and the Commission’s office
from April to June 2006.

To accomplish our objective, we reviewed

   •   Applicable laws; regulations; and HUD program requirements at 24 CFR [Code of Federal
       Regulations] Parts 24 and 941, the United States Housing Act of 1937, Office of
       Management and Budget Circular A-87, and the November 1990 Program Integrity
       Bulletin regarding responsibilities of public housing executive directors and
       commissioners;

   •   The Commission’s accounting records, annual audited financial statements for fiscal years
       ending 2002 through 2005, general ledgers, bank statements, cancelled checks and invoices,
       policies and procedures, board meeting minutes and resolutions for May 21, 2001, cost
       allocation plan through March 2006, annual contributions contract, general depository
       agreement, rooftop lease agreements, declarations of trust, and organizational chart; and

   •   HUD’s files for the Commission.

We also interviewed the Commission’s employees and board members and HUD staff.

The audit covered the period from July 1, 2002, through March 31, 2006. This period was
adjusted as necessary. We performed our audit in accordance with generally accepted
government auditing standards.




                                               10
                             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 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                  Based on our audit, we believe the following item is a
              significant weakness:




                                               11
•   The Commission’s former executive director and board of commissioners
    did not exercise prudent oversight regarding the use of program funds and
    revenue to ensure that federal requirements were followed (see findings 1
    and 2).




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                             Recommendation
                                 number           Ineligible 1/
                                   1A                $535,903
                                   1C                   25,132
                                   2A                   12,289
                                  Total              $573,324


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.




                                            13
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION


Ref to OIG Evaluation                Auditee Comments




                        OIG Evaluation of Auditee Comments




                                       14
Ref to OIG Evaluation                Auditee Comments




                        OIG Evaluation of Auditee Comments




                                       15
Ref to OIG Evaluation                Auditee Comments




Comment 1




                        OIG Evaluation of Auditee Comments




Comment 2




                                       16
Ref to OIG Evaluation                Auditee Comments




Comment 3




                        OIG Evaluation of Auditee Comments




                                       17
                         OIG Evaluation of Auditee Comments

Comment 1   HUD’s Real Estate Assessment Center previously determined, and the Detroit
            Office of Public Housing agreed, that the Commission was improperly using the
            lease revenues.

Comment 2   The Commission did not provide any documentation to support that the use of the
            lease revenues benefited its public housing residents.

Comment 3   We agree that Michigan Complied Laws state that a member of the commission
            board may receive compensation for actual expenses incurred in serving as a
            member of the commission in an amount determined by the commission. The
            Laws also state that the governing body of an incorporating unit may adopt a
            resolution establishing limitations on the amounts of actual expenses that may be
            paid to a member of a commission. The Commission did not provide
            documentation to support that a resolution was adopted to compensate its board
            members for actual expenses. Additionally, the Commission’s expenditures for
            the board’s meals and refreshments are not in accordance with the Commission’s
            annual contributions contract with HUD and Office of Management and Budget
            Circular A-87.




                                            18
Appendix C

                           FEDERAL REQUIREMENTS

Finding 1
According to 24 CFR [Code of Federal Regulations] 941.205(a) and (c)(1), in order to be
considered as eligible expenses, all development-related contracts entered into shall provide for
compliance with the provisions of the annual contributions contract. HUD approval is required
for all forms of site or property acquisition contracts regardless of development method.

The consolidated annual contributions contract between the Commission and HUD requires that
all funds withdrawn from the general operating fund be for payment of development costs,
payment of operating expenditures (i.e., administration, maintenance, establishment of reserves,
and other costs and charges which are necessary for the operation of such project), purchase of
investment securities, purposes specified in the contract and other purposes specifically
approved. If at any time the funds on deposit in the general operating fund are in excess of the
Commission’s prudently estimated needs for the next 90 days, such excess funds shall be
approved and invested in investment securities. Such securities shall be purchased, held, and
disposed of from time to time by the depository of the general fund under the terms of the
general depository agreement. Further, upon the acquisition of the site of any project, a
declaration of trust, a trust indenture, or such other document as may be approved shall be
executed evidencing a covenant not to convey or encumber the project and to protect the rights
and interests of the government.

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.

According to 24 CFR [Code of Federal Regulations] 24.100, HUD can take administrative
sanctions against employees or recipients under HUD assistance agreements that violate HUD’s
requirements. Sections 24.700, 24.800, and 24.1100 of the regulations authorize the sanctions,
which include suspension, debarment, or limited denial of participation, respectively. HUD may
impose administrative sanctions under the following conditions:

   •   Failure to honor contractual obligations or to proceed in accordance with contract
       specifications or HUD regulations (limited denial of participation);

   •   Violation of any law, regulation, or procedure relating to the application for financial
       assistance, insurance, or guarantee or to the performance of obligations incurred following a
       grant of financial assistance or a conditional or final commitment to insure or guarantee
       (limited denial of participation);



                                                19
   •   Violation of the terms of a public agreement or transaction so serious that it affects the
       integrity of an agency program, such as a history of failure to perform or unsatisfactory
       performance of one or more public agreements or transactions (debarment); or

   •   Any other cause so serious or compelling in nature that it affects the present responsibility of
       a person (debarment).

Finding 2

The annual contributions contract, section 203, states that a local authority shall, unless
otherwise approved by the government, use the dwellings in the projects solely for the purpose of
housing families of low income as provided in this contract. It shall not, without the approval of
the government, grant any concessions, licenses, or permits to use any nondwelling space or
facility in any project at less than fair rental value except for programs conducted by or primarily
for the occupants of the project or for temporary public, charitable, or similar use. Section 401
states that all funds and investment securities received by or held for account of the local
authority in connection with the projects, except such funds as are deposited with the fiscal agent
or with paying agents for the payment of temporary notes pursuant to this contract, shall
constitute the “general fund”; and the local Authority shall, except as otherwise provided in this
contract, deposit promptly with such bank or banks, under the terms of the general depositary
agreement, all funds and investment securities constituting the general fund. Section 406 states
with respect to each project that operating expenditures shall mean all costs incurred by the local
authority for administration, maintenance, establishment of reserves, and other costs and charges
(including but not limited to payments in lieu of taxes and operating improvements), which are
necessary for the operation of such project in such a manner as to provide decent, safe, and
sanitary dwellings within the financial reach of families of low income, and to promote
serviceability, efficiency, economy, and stability provided that operating expenditures shall not
include any costs incurred as a part of the development cost or the payment of principal of the
bonds or note or, unless approved by the government, interest on the bonds or notes.

The United States Housing Act of 1937, section 9(l), states that public housing agency that
receives income from nonrental sources (as determined by the secretary of HUD) may retain and
use such amounts without any decrease in the amounts received under this section from the
capital or operating fund. Any such nonrental amounts retained shall be used only for low-
income housing or to benefit the residents assisted by the public housing agency.




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