oversight

Baytown Housing Authority, Baytown, TX, Improperly Advanced, Transferred and Encumbered Its Public Housing Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-13.

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

                                                              Issue Date
                                                                       December 13, 2005
                                                              Audit Report Number
                                                                       2006-FW-1002




TO:        Dan Rodriguez
           Program Center Coordinator, Office of Public Housing, 6EPH

FROM:
           Frank E. Baca
           Regional Inspector General for Audit, 6AGA

SUBJECT: Baytown Housing Authority, Baytown, Texas, Improperly Advanced,
           Transferred, and Encumbered Its Public Housing Funds

                                 HIGHLIGHTS

 What We Audited and Why

            Due to concerns expressed by your office, we audited Baytown Housing
            Authority (Authority). Our objectives were to determine whether the
            Authority (1) advanced, transferred, or encumbered resources subject to the
            annual contributions contract (contract) to the benefit of other entities without
            U.S. Department of Housing and Urban Development (HUD) approval and (2)
            equitably distributed salary costs between the Authority’s HUD and non-HUD
            activities in accordance with federal requirements.


  What We Found

            The Authority violated its contract with HUD by inappropriately advancing,
            transferring, and encumbering public housing funds to support its nonprofit
            and related entities. For some of the transfers, the Authority’s executive
            director knowingly altered transfer documentation. As of March 31, 2005, the
            Authority owed the low-rent and Section 8 programs $792,360, and it could
            not support an additional $134,831 in transfers and encumbrances. The
            improper conveyances occurred because the Authority ignored its contract
            requirements and its board of Commissioners did not establish sufficient
            controls.

            Further, the Authority cannot demonstrate that it equitably distributed salary
            costs between its HUD and non-HUD activities because it did not support
           salary payments with required activity reports or equivalent documentation.
           The Authority lacked support because its management was not aware of the
           federal requirements. As a result, the Authority cannot support $1.1 million in
           salary costs allocated to its HUD programs from April 2002 to March 2005.

What We Recommend


           We recommend that the program center coordinator, Houston Office of Public
           Housing (HUD), require the Authority to (1) repay its HUD programs at least
           $792,360 for improper advances, transfers, and encumbrances; (2) repay or
           provide support for $134,831 in transfers and encumbrances; (3) repay or
           provide documentation to support $1.1 million in salary costs allocated to its
           HUD programs from April 2002 to March 2005; and (4) implement
           procedures and controls to correct the weaknesses cited in this report. Proper
           procedures and controls should help ensure that the Authority puts to better
           use the $5,956,761 in HUD funding it will receive next year.

           For each recommendation without management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06 REV-3.
           Please furnish us copies of any correspondence or directives issued because of
           the audit.


Auditee’s Response


           We provided a draft to the Authority on November 7, 2005. The Authority’s
           comments were due when the exit conference was held on November 28,
           2005. At the exit conference, the Executive Director verbally asked for an
           extension and we provided one until December 9, 2005. At the exit and in its
           request for a second extension, the Authority’s Executive Director stated he
           disagreed with the conclusions in the audit. The Executive Director refused to
           discuss the report and findings at the exit conference. On December 9, 2005,
           the Executive Director asked for additional time to respond, in addition to the
           extension already granted, and indicated he would be meeting with the fee
           accountant in January 2006 to develop a response. We declined the extension
           request because we had previously informed the Authority in writing that we
           would issue our report if we did not receive written comments on December 9,
           2005. The complete text of the Authority’s 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 Conveyed HUD Funds to Its Nonprofit    5
                 and Related Entities
      Finding 2: The Authority Did Not Support Its Allocation of Salary Costs   13

Scope and Methodology                                                           15

Internal Controls                                                               16

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            18
   B. Auditee Comments and OIG Evaluation                                       19
   C. Criteria                                                                  23




                                          3
                   BACKGROUND AND OBJECTIVES

The City of Baytown established the Baytown Housing Authority (the Authority) in 1938
under the laws of the State of Texas. Its primary objective is to develop and operate public
housing units and provide housing for qualified individuals in compliance with its annual
contributions contract (contract) and the rules and regulations prescribed by the U.S.
Department of Housing and Urban Development (HUD). The mayor appoints a five-member
board of commissioners (board) to govern the Authority. The board hires an executive
director to manage the Authority’s day-to-day operations. The Authority keeps its records at
its central office at 805 W. Nazaro Street, Baytown, Texas.

The Authority manages 150 dwelling units under its low-rent housing program. In fiscal
year 2004, the Authority received or spent $306,803 in operating subsidies and $442,326 for
its Public Housing Capital Fund program. The Authority also administers a Section 8
Housing Choice Voucher program with a total of 727 units and received $5,251,726 from
HUD in fiscal year 2004.

The Authority has one active affiliated nonprofit corporation created in 1982: Baytown
Properties Management & Development Corporation (Baytown Properties). Baytown
Properties currently owns one project: Forest View Apartments. The Authority owns two
other projects, which are related entities: Sam Houston Courts and Lincoln Courts. The
Authority opted these two low-rent housing projects out of its public housing program and
converted them to market rent when they became debt free in the late 1970s. Additionally,
the Authority administered a Section 8 new construction program for Bay Terrace, a
nonrelated project, until December 2004.

We selected the Authority for audit because of concerns expressed by the Houston HUD
Office of Public Housing. Our objectives were to determine whether the Authority (1)
advanced, transferred, or encumbered resources subject to the contract to the benefit of other
entities without HUD approval and 2) equitably distributed salary costs between the
Authority’s HUD and non-HUD activities in accordance with federal requirements.




                                              4
                                    RESULTS OF AUDIT

Finding 1: The Authority Improperly Conveyed HUD Funds to Its
Nonprofit and Related Entities
The Authority violated its contract with HUD by inappropriately advancing, transferring, and
encumbering public housing funds to support the operations of its nonprofit and related
entities. As of March 31, 2005, the Authority owed its low-rent and Section 8 programs as
much as $927,191 because of the ineligible or unsupported conveyances and encumbrances.
Further, the executive director knowingly altered transfer documentation. This occurred
because the Authority ignored its contract requirements and its board did not establish
sufficient controls. As a result, the Authority had fewer funds available to serve its low-
income residents, and Authority operations and HUD funds are at risk.




    Inappropriate Advances of
    Public Housing Funds



                  The Authority violated its contract with HUD by inappropriately advancing
                  more than $2 million in public housing funds to pay the expenses of its
                  nonprofit’s and related entities’ activities. The Authority still owes its low-
                  rent Program $97,360 of the $2 million.

                  The Authority’s contract allows it to use its general fund to make payment for
                  other activities but only to the extent that those activities have cash on deposit
                  in the general fund. 1 The Authority advanced funds from its HUD- funded
                  low-rent program account to pay the bills for Forest View Apartments,
                  Lincoln Courts, Sam Houston Courts, and Baytown Properties. Rather than
                  have cash on deposit in the general fund, the nonprofit and related entities
                  repaid the HUD-funded advances the following month. However, these
                  entities did not always fully reimburse the low-rent program account the
                  following month because they lacked sufficient funds to operate. As a result,
                  the Authority had outstanding advances every month to its nonprofit and
                  related entities.

                  From April 2002 to March 2005, the Authority advanced $2,049,766 to its
                  nonprofit and related entities, and these entities only reimbursed $1,952,406
                  of that amount to the Authority. The Authority continued to make advances,
                  even though in January 2004, its independent auditor informed the Authority

1
     Part A, section 10(C), see appendix C.

                                                  5
                  that it should not advance funds to its non-HUD programs. As of March 31,
                  2005, the Authority's nonprofit and related entities owed the low-rent program
                  account $97,360 for the advances.


                                  Advances from April 2002 to March 2005
                                           Amount            Amount       Outstanding
                    Project or entity low-rent paid for reimbursed to       amount
                                           expenses          low-rent     Mar. 31, 2005
                  Forest View Apts.           $1,224,305       $1,192,171       $32,134
                  Sam Houston Courts             260,608          200,900         59,708
                  Lincoln Courts                 257,834          252,396          5,438
                  Baytown Properties             307,019          306,939             80
                         Totals               $2,049,766       $1,952,406       $97,360



    Inappropriate Transfers of
    HUD Funds


                  The Authority made ineligible transfers of HUD funds totaling $795,000 to its
                  nonprofit or related entities, of which $300,000 has been repaid, leaving
                  $495,000 still owed the Authority. Part of these transfers involved the
                  executive director altering records documenting the transfers. Further,
                  unsupported transfers of $34,846 are due to the Authority unless it can
                  provide evidence to justify the transfers.

                  The Authority Made $795,000 in Ineligible Transfers and Knowingly
                  Altered Documentation

                  The Authority improperly transferred $795,000 to its nonprofit and related
                  entities. The transfers included $640,000 from its low-rent program (of which
                  $200,000 was repaid) and two transfers from its Section 8 Housing Choice
                  Voucher program of $100,000 (which was repaid) and $55,000.

                  Transfer of $640,000 from the low-rent program. In violation of HUD’s
                  Section 8 Housing Choice Voucher program regulations and the Authority’s
                  administrative plan, 2 the Authority transferred $560,000 to its low-rent
                  program account in March 2002: $320,000 from its Section 8 administrative
                  fee reserve and $240,000 from Bay Terrace's Section 8 administrative fee
                  reserve. That same month, the Authority transferred $640,000 from the low-
                  rent program account to its nonprofit, Baytown Properties.

2
      24 CFR [Code of Federal Regulations] 982.153 and 982.155 and The Baytown Housing Authority,
      Administrative Plan for Section 8 Housing Programs, chapter 1.Q. See appendix C.

                                                    6
                The Authority falsely recorded the transfers to and from the low-rent program
                account in its financial records. According to the bank statements, the
                transfers occurred in March 2002, when the transfer to the Baytown Properties
                was made. However, the executive director backdated the transfers in the
                Authority’s books and records. The checks, which he signed, and the entries
                in the general ledger were recorded as occurring in December 2001, which
                was before he was hired as the interim executive director in January 2002.

                The transfers violated the Section 8 program regulations and the Authority’s
                administrative plan because neither the Authority’s board nor HUD approved
                them. In addition, the Authority did not establish the maximum amount that
                may be charged against the administrative fee reserves without specific board
                approval as required by HUD’s regulations and the Authority’s Section 8
                administrative plan.

                Baytown Properties repaid the Authority $200,000 in May 2002. 3 Therefore,
                the Authority needs to repay the remaining amount of $440,000 to its low-rent
                program account and/or Section 8 Housing Choice Voucher program.

                Loan of $100,000 from Section 8 program to nonprofit. On April 22, 2005,
                after we started the audit of the Authority’s nonprofit activities, the Authority
                transferred $100,000 from its Section 8 Housing Choice Voucher program
                funds to Baytown Properties to purchase the San Jacinto Methodist Hospital.
                The Authority plans to convert the hospital into a center for senior citizens.
                Section 8 program funds must be used for Section 8 program purposes only.
                Later, the Authority borrowed $100,000 and repaid the Section 8 program.

                Inappropriate transfer of $55,000 from the Section 8 program. The Authority
                transferred $55,000 from its Section 8 Housing Choice Voucher program to
                Baytown Properties in March 2003. In February 2004, the executive director
                wrote off the $55,000 transfer without approval from the board or HUD.
                Since Section 8 program funds must be used for Section 8 program purposes
                only, the Authority needs to repay its Section 8 Housing Choice Voucher
                program $55,000.




3
    See “Inappropriate Encumbrance of HUD Funds” below for additional details concerning this $200,000
    repayment.

                                                   7
                  The Authority Had No Evidence to Support Transfers of $34,846

                  The Authority had no evidence to support $24,846 owed to its nonprofit, nor
                  could it support a $10,000 transfer to a related entity. These funds need to be
                  repaid to the Authority’s low-rent program unless it can provide evidence to
                  justify the transfers.

                  Incorrectly recorded low-rent program liability of $24,846. The Authority’s
                  general ledgers showed its low-rent program owed Baytown Properties
                  $24,846 in November 2002. However, the Authority’s records do not reflect
                  that a payment of that amount was ever made to the low-rent program account
                  from Baytown Properties or its project, Forest View. The Authority also
                  incorrectly recorded the transaction as an accounts receivable from its low-
                  rent program. Therefore, the Authority needs to repay its low-rent program
                  account $24,846 unless it can provide evidence showing Baytown Properties
                  or its project transferred $24,846 to the low-rent program account.

                  Unsupported transfer of $10,000 from low-rent program to related entity.
                  The Authority transferred $10,000 from its low-rent program account to Sam
                  Houston and recorded the transfer as "Reimbursement of Benefits and
                  Salaries" and not as an interprogram accounts receivable/payable. The
                  Authority could not provide supporting documentation for the transfer and
                  needs to repay its low-rent program account $10,000 unless it can provide
                  supporting documentation to justify the transfer.


    Inappropriate Encumbrance
    of HUD Funds


                  Without HUD’s approval and in violation of its contract, 4 the Authority
                  inappropriately encumbered $200,000 of HUD’s funds in a certificate of
                  deposit used as collateral for a November 2000 bank loan to purchase Forest
                  View Apartments, a Baytown Properties project. The Authority secured the
                  bank loan with two certificates of deposit, which were both in the Authority’s
                  name: one for $200,000 and another for $99,985. The Authority’s records
                  showed funds for the $200,000 certificate of deposit came from the low-rent
                  program account. The Authority could not provide documentation showing
                  the source of funds for the $99,985 certificate of deposit, even though its
                  contract required it to maintain records identifying the source and allocation
                  of federal funds. 5




4
     Part A, section 7, see appendix C.
5
     Part A, section 9(C), see appendix C.

                                                 8
                The Authority later extended and modified the loan and also combined the
                two certificates of deposit into one. As of March 31, 2005, the principal of the
                certificate of deposit was $233,492. According to the Authority’s executive
                director, the original principal of the certificates of deposit was reduced
                annually to correspond to the current outstanding loan balance. The Authority
                deposited the $66,493 in principal reductions and the investment income from
                the certificate of deposit into its nonprofit’s bank account rather than its HUD
                program accounts as required. The Authority improperly used the HUD funds
                as collateral and deposited HUD funds and investment income into its
                nonprofit bank account because its board did not establish sufficient controls
                to monitor the nonprofit and ensure transactions followed federal regulations.

                The Authority’s records show Baytown Properties repaid the Authority’s low-
                rent program $200,000 from May to August 2002 to correct the improper
                encumbrance of the certificate of deposit. The executive director claimed that
                the funds to repay the $200,000 came from nonfederal funds: the proceeds of
                the sale of mortgages. However, shortly before the Authority made
                repayment, it improperly transferred $640,000 in low-rent program funds to
                Baytown Properties in March 2002 (see discussion under transfers section).
                Also, Baytown Properties commingled advances from the Authority’s low-
                rent and Section 8 program accounts with funds from its other activities.
                Since Baytown Properties commingled federal and nonfederal funds, the
                Authority could not provide evidence to show that the nonprofit repaid the
                certificate of deposit with nonfederal funds. Further, this transfer merely
                reduced the amount inappropriately transferred from the low-rent program
                account. 6 Thus, Baytown Properties still needs to repay the Authority
                $200,000 for the certificate of deposit and provide evidence that it used
                nonfederal funds for the $99,985 certificate of deposit.

Authority Operations and HUD
Funds at Risk

                Apart from having fewer funds available to serve its low-income residents, the
                Authority’s improper advances, transfers, and encumbrances put its operations
                and HUD funds at risk of loss.

                According to its financial statement, the nonprofit and related entities are
                considered component units within the Authority’ reporting entity. The
                component units are reported as if they were part of the Authority because
                their sole purpose is to work in conjunction with the Authority to provide
                housing for low- and moderate-income individuals. Part of the criteria for
                including organizations as component units within the Authority’s reporting
                entity is whether the organization has the potential to impose a financial

6
    See “Inappropriate Transfers of HUD Funds” above, in which the $640,000 amount of transfers to be
    repaid was reduced by the $200,000 transferred to the low-rent program account.

                                                    9
    benefit/burden on the Authority or whether there is a fiscal dependency by the
    organization on the Authority.

    The Authority regularly conveyed funds to its nonprofit and related entities
    because they did not have sufficient funds to operate. The following table
    shows that just taking into account advances, excluding transfers and
    encumbrances, the nonprofit and related entities owed the low-rent program
    account more than they had in their combined bank accounts.

                               As of March 31, 2005

                          Lincoln       Sam          Forest      Baytown
                          Courts       Houston       View       Properties   Totals
Funds available in bank
accounts                       554          5,395       3,311       34,673     43,933
Advances owed to low-
rent                          5,438         59,707     32,134           80     97,360
Insufficient funds           -4,884        -54,313    -28,823       34,593    -53,427

    Additionally,

        •   As of July 31, 2005, Baytown Properties’ project, Forest View, was
            seven months delinquent in paying its mortgage.

        •   Forest View has a balloon note with a final payment amount of
            $298,186 due on June 5, 2006, unless it refinances or modifies it
            before it matures.

        •   The Authority’s outstanding advances from the low-rent program
            account to Forest View were steadily increasing over the audit period.

    The precarious position of the nonprofit and related entities in turn affects the
    Authority and related HUD funding. For example, Authority operations
    showed a $524,692 net income in fiscal year 2002, a $60,862 net loss in fiscal
    year 2003, and a $287,874 net loss in fiscal year 2004. We question whether
    the Authority will be able to meet its delinquent and current obligations and
    repay the $927,191 questioned in this report. The Authority’s board needs to
    exercise more control over its operations, including implementing more
    financial and procedural controls. Further, HUD should perform additional
    monitoring and technical assistance to ensure that the Authority’s nonfederal
    operations do not have a negative impact on its HUD-funded programs.




                                      10
Conclusion


             The Authority violated its contract with HUD when it advanced, transferred,
             and encumbered public housing funds to support its nonprofit and related
             entities. The Authority owes its low-rent and Section 8 programs up to
             $927,191 for the improper conveyances. This resulted in fewer HUD funds
             being available to serve the Authority’s low-income residents and put
             Authority operations and HUD funds at risk. The improper conveyances
             indicate the Authority often ignored HUD’s requirements prohibiting the use
             of HUD funds for non-HUD activities and did not have adequate controls to
             prevent these violations from occurring.


Recommendations


             We recommend that the program center coordinator, Houston Office of Public
             Housing (HUD), require the Authority to

             1A. Repay from nonfederal funds $97,360 or the current amount of advances
                 to the low-rent program for improper advances, and $495,000 to its
                 Section 8 and low-rent programs for improper transfers made to its
                 nonprofit and related entities.

             1B. Provide documentation to support $34,846 transferred to its nonprofit or
                 related entities or repay its public housing program from nonfederal
                 funds.

             1C. Repay its public housing program from nonfederal sources $200,000 for
                 a certificate of deposit used to encumber HUD funds, repay its low-rent
                 program from nonfederal sources $99,985 for a second certificate of
                 deposit unless the Authority can provide evidence that it purchased the
                 certificate of deposit with non-HUD funds, and repay its low-rent
                 program account for any interest income from the certificates of deposit
                 improperly paid to the nonprofit.

             1D. Transfer ownership of the certificate of deposit to Baytown Properties
                 once the Authority’s low-rent program has been repaid.

             1E. Provide assurance that it will make no further advances, transfers, or
                 encumbrances of HUD funds on behalf of its nonfederal activities
                 without prior HUD approval. HUD should take sanctions against the
                 Authority if the transfers continue.



                                           11
We also recommend that the program center coordinator, Houston Office of
Public Housing (HUD),

1F. Take appropriate sanctions against the executive director for altering the
    books and records of the Authority.

1G. Require the Authority’s board to exercise control over the Authority’s
    operations, including implementing more financial and procedural
    controls, which will ensure that the $5,956,761 the Authority receives
    from HUD next year will be put to better use.

1H. Perform additional monitoring and provide technical assistance to the
    Authority to ensure that its nonfederal programs do not have a negative
    financial impact on its HUD-funded programs.




                              12
Finding 2: The Authority Did Not Support Its Allocation of Salary
Costs
The Authority did not support its allocation of administrative and maintenance salaries and
benefits with activity reports or equivalent documentation as required. The Authority lacked
support because its management was not aware that its salary had to be based on activity or
other supporting reports. As a result, HUD has no assurance that the Authority used $1.1
million in salary costs charged to its federal programs for HUD-funded activities.




    The Authority Did Not Keep
    Activity Reports


                  The Authority had a salary cost allocation plan as required by federal
                  regulations. However, it did not support its allocation of $2.04 million in
                  administrative and maintenance salaries and benefits with activity reports or
                  equivalent documentation as required. 7 In addition, the Authority’s
                  distribution of salaries to programs or entities did not coincide with the salary
                  allocation plan. Therefore, some programs may have paid a disproportionate
                  share of the salary costs.


    The Executive Director’s
    Estimate Was Used to Allocate
    Salary Costs

                  The Authority’s executive director determined how salary costs were
                  allocated among the Authority’s programs and entities, including conventional
                  public housing, Public Housing Capital Fund, Section 8, a nonprofit
                  corporation and related entities. However, he was unaware the Authority’s
                  salary costs had to be based on activity or other supporting reports. The
                  executive director did not ask the employees how much time they were
                  spending on various programs and projects. Instead, he based the salary
                  allocation plan on how much time he thought the staff spent on various
                  programs or other entities.




7
     Circular A-87, attachment B, paragraph 11h(4), see appendix C.

                                                     13
 The Authority May Have Paid a
 Disproportionate Share of Salary Costs


             Since the Authority lacked support, some programs may have paid a
             disproportionate share of the salary costs. From April 2002 to March 2005,
             the Authority paid $2.04 million in salary costs, excluding benefits. The
             Authority allocated $1.38 of the $2.04 million to its federal programs. Some
             of the Authority’s employees worked exclusively on HUD-funded programs,
             and their salaries totaling $279,705 are supported. However, the Authority
             cannot support the remaining $1,103,042 in salary costs for employees who
             were dividing their time between federal and nonfederal programs. The
             Authority needs to have a justifiable method of supporting allocated salary
             costs, including daily activity reports or equivalent documentation. Without
             an acceptable method of charging salary costs, the Authority will annually pay
             an estimated $367,681 in unsupported salary costs.


Recommendations


             We recommend that the program center coordinator, Houston Office of Public
             Housing (HUD), require the Authority to

             2A. Provide documentation to justify the $1,103,042 in unsupported salary
                 costs allocated to HUD’s programs from April 1, 2002, to March 31,
                 2005, and for later periods and reimburse HUD programs for any
                 misallocated salary costs.

             2B. Develop a reasonable method for allocating its future costs, including
                 daily activity reports or equivalent documentation for services
                 performed by its staff.

             2C. Implement controls to prevent future unsupported salary costs from
                 being charged to the federal programs, which we estimate to be about
                 $367,681 per year.




                                           14
                       SCOPE AND METHODOLOGY

To accomplish our audit objective, we reviewed the following:

       •   Applicable laws, regulations, and other HUD program requirements;

       •   The Authority’s contracts; and

       •   HUD’s and the Authority’s program files.

We reviewed various documents, including financial statements, general ledgers, bank
statements, minutes from board meetings, check vouchers, invoices, loan documents, and
reports from the independent public accountant. We also reviewed all related nonprofit
entities’ bylaws and incorporation documents. In addition, we obtained an understanding of
the Authority’s accounting system as it related to our review objective.

We reviewed the cost allocation plans and all of the salary records available for the period
from April 2002 through March 2005 to determine whether salary costs charged to HUD
programs were supported. We also interviewed the Houston Office of Public Housing’s
program officials, and the Authority’s management and staff.

We assessed the reliability of the computer-processed data in the Authority’s electronic
check registers. We determined that the data were unreliable because we were unable to
trace and confirm all of the transactions in the registers to the bank statements for March
2005. Therefore, we did not rely on the check registers. Instead, we reviewed bank
statements, canceled checks, and general ledgers for the improper disbursements.

We performed the audit from April through August 2005. Our audit covered the period from
April 1, 2002, through March 31, 2005, but we expanded our review of the nonprofit’s
general ledgers and bank statements back to October 1, 2001, because we identified a
significant amount of transfers occurring to and from the bank accounts during that time.

We performed our audit in accordance with generally accepted government auditing
standards.




                                              15
                            INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


               We determined the following internal controls were relevant to our audit
               objectives:

               •   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 of 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.

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

 Significant Weaknesses


               Based on our review, we believe the following items are significant
               weaknesses:




                                              16
•   The Authority did not have a system to ensure that federal funds were
    properly used and not put at risk (finding 1).

•   The Authority did not have a system to ensure that costs charged among
    its various programs were properly supported (finding 2).




                              17
                                           APPENDIXES

Appendix A

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


           Recommendatio                                                       Funds to be put
             n number                Ineligible 1/         Unsupported2/       to better use 3/

                    1A                     $592,360
                    1B                                             $34,846
                    1C                     $200,000                $99,985
                    1G                                                               $5,589,080 8
                    2A                                         $1,103,042
                    2C                                                                  $367,681




1/       Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
         activity that auditor believes are not allowable by law; contract; or federal, state, or
         local policies 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 classification of departmental policies and procedures.

3/       "Funds to be put to better use" are quantifiable savings that are anticipated to occur if
         an Office of Inspector General (OIG) recommendation is implemented, resulting in
         reduced expenditures at later time for the activities in question. This includes costs
         not incurred, deobligation of funds, withdrawal of interest, reductions in outlays,
         avoidance of unnecessary expenditures, loans and guarantees not made, and other
         savings.



8
     Represents $5,956,761 in annual HUD funds the Authority will receive in the next year less the $367,681
     claimed in recommendation 2C.

                                                      18
Appendix B

      AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                        19
Comment 1


Comment 2




Comment 3




Comment 1




            20
Comment 1




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                       OIG Evaluation of Auditee Comments

Comment 1   The Authority asked for additional time to respond. The Authority’s response
            did not indicate when its response would be complete but stated that it would
            begin developing it in January 2006. Since we had already granted the
            Authority an extension to formulate its response and informed it that we
            would issue the report if we did not have its comments by December 9, 2005,
            we have declined the Authority’s request for an extension. As the Authority
            accurately states, it can respond to the final report to the director of the HUD
            Houston Public Housing Office.

Comment 2   The Authority indicated it has provided sufficient backup for every question
            asked during the audit. We reviewed all of the information provided by the
            Authority and reached our conclusions based on the information provided and
            the criteria for the various programs.

Comment 3   The Authority indicated it was in total disagreement with the conclusions in
            the audit. However, the Authority was not able to provide evidence during the
            audit or in this response to refute the conclusions and findings.




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Appendix C
                                       CRITERIA
Consolidated Annual Contributions Contract between HUD and the Authority, Part A

Section 7 of the contract between the Authority and HUD states that the Authority shall not
in any way encumber any project or portion thereof without prior HUD approval. Section 7
of the contract further prohibits the Authority from pledging assets of any project covered
under the contract as collateral for a loan.

Section 9(C) of the contract states in part that the Authority shall maintain records that
identify the source and application of funds in such a manner as to allow HUD to determine
that all funds are and have been expended in accordance with each specific program
regulation and requirement. Funds may only be withdrawn from the general fund for (1) the
payment of the costs of development and operation of the projects under contract with HUD;
(2) the purchase of investment securities as approved by HUD; and (3) such other purposes
as may be specifically approved by HUD.

Section 10(C) of the contract states that the Authority shall not withdraw from any of the
funds or accounts authorized under this section amounts for the projects under the contract,
or for the other projects or enterprises, in excess of the amount then on deposit in respect
thereto.

24 CFR [Code of Federal Regulations] 982.153,"HUD – Chapter IX Public and Indian
Housing,” requires that “The PHA [public housing authority] must comply with the
consolidated ACC [contract], the application, HUD regulations and other requirements, and
the PHA administrative plan."

24 CFR [Code of Federal Regulations] 982.155, “Chapter IX Public and Indian Housing”
requires the Authority to determine that all existing reserves are not needed to cover public
housing authority administrative expense. Only then can reserves be classed as "excess"
reserves eligible for other uses. Once excess reserves are established, the public housing
authority board must determine the amount of excess reserves that management can disburse
without specific board approval. Section 982.155 (b)(3) states that "The PHA [public housing
authority] Board of Commissioners or other authorized officials must establish the maximum
amount that may be charged against the administrative fee reserve without specific
approval."

The Baytown Housing Authority, Administrative Plan for Section 8 Housing Programs,
chapter 1.Q, “Operating Reserves of the Administrative Plan,” states that the board shall set a
minimum balance for operating reserve and set a maximum amount management can
disburse without specific board approval annually.




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Office of Management Budget Circular A-87, attachment B, paragraph 11 h (4), states, in
part, when employees work on multiple activities or costs objectives, a distribution of their
salaries or wages will be supported by personnel activity reports or equivalent
documentation.




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