oversight

The Palacios Housing Authority, Palacios, Texas, Did Not Fully Comply with HUD's Standards

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-22.

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

                                                                  Issue Date
                                                                           December 22, 2005
                                                                  Audit Report Number
                                                                               2006-FW-1003




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


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

SUBJECT: The Palacios Housing Authority, Palacios, Texas, Did Not Fully Comply with
           HUD’s Standards


                                    HIGHLIGHTS

 What We Audited and Why

             We conducted a review of the Palacios Housing Authority’s (Authority) low-rent
             and Section 8 programs to determine whether the Authority operates the programs
             in accordance with U.S. Department of Housing and Urban Development (HUD)
             requirements.

 What We Found


             The Authority did not comply with HUD regulations because it could not fully
             support fund transfers between its Section 8 and its low-rent housing programs,
             made minor errors in its tenant files, and needed to improve its inspection process.
             However, the Authority’s lack of compliance did not materially affect the
             Authority’s housing programs, and it can easily correct its lack of compliance.

 What We Recommend


             We recommend HUD require the Authority to implement a budget-based
             approach in its operations, including using an approved documented cost
           allocation plan, which will result in the Authority supporting an estimated
           $44,657 in future fund transfers. Further, HUD should require the Authority to
           implement a quality control program to review all new tenant rent calculations,
           obtain additional inspection training, and include an exterior conditions
           assessment when it conducts unit inspections.

           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 or directives issued because of the
           audit.

Auditee’s Response


           The auditee agreed with the report and said it was taking appropriate measures.
           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 Objectives                                                4

Results of Audit
      Finding: The Authority Did Not Fully Comply with HUD’s Standards   5

Scope and Methodology                                                    8

Internal Controls                                                        9

Appendixes
   A. Schedule of Funds to Be Put to Better Use                          10
   B. Auditee Comments and OIG’s Evaluation                              11




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                     BACKGROUND AND OBJECTIVES

The City of Palacios is located in Matagorda County on the southern coast of Texas. It
established the Palacios Housing Authority in 1979 under the laws of the State of Texas. The
Authority’s primary objective is to provide housing to low-income residents. The mayor
appoints the five-member board of commissioners (board) that governs the Authority. The
Authority has only three employees: an executive director hired by the board to manage the
Authority’s day-to-day operations, a Section 8 administrator, and a maintenance person.

The small Authority is responsible for 101 HUD housing units. It administers a Section 8
Housing Choice Voucher program, consisting of 57 vouchers. It also operates Seacrest Estates, a
44-unit, low-income public housing complex, and maintains its office and records in this
complex located at 45 Seashell Boulevard, Palacios, Texas. Since the Authority only has a three-
member staff, the executive director performs tenant certifications for the low rent tenants and
the Section 8 administrator performs tenant certifications for the voucher tenants.

During fiscal year 2004, HUD awarded the Authority $269,347 to operate four housing
programs:

                     Program                Award Amount
                     Low-rent                 $ 55,555
                     Section 8                 165,339
                     Capital Fund                46,453
                     HOME grant                   2,000
                     Total funding            $269,347


The Authority’s troubled performance prompted HUD in July 2005 to hire a consultant to help
the Authority improve its operations. HUD used the consultant’s report to prepare guidance that
addresses deficiencies at the Authority and steps that the Authority must take to correct those
deficiencies. HUD intends to monitor the Authority’s compliance with the guidance for one
year.

We selected the Authority for review because it was the most troubled public housing authority
under the Houston Public Housing Office’s jurisdiction at the beginning of fiscal year 2005.
HUD designated the Authority as a troubled agency due to low management assessment scores
in both its Section 8 and public housing low-rent programs during 2004. HUD’s public housing
staff in Houston attributed the Authority’s problems to a high turnover in the executive director
position and the ineffectiveness of past directors. The objective of this review was to determine
whether the Authority operates its Section 8 and low-rent housing programs in accordance with
HUD requirements.




                                                4
                                RESULTS OF AUDIT

Finding: The Authority Did Not Fully Comply with HUD’s Standards
The Authority did not properly document expenses, miscalculated tenant assistance, and did not
ensure the livability of assisted units. This occurred because the Authority did not properly
match revenues and expenses, and did not have an effective quality control system or well-
trained staff. Consequently, the Authority may not have used its assistance funds in the most
efficient or effective manner. However, the effects were not material to the Authority’s housing
programs, and the Authority can easily correct its noncompliance.



 The Authority Could Not Fully
 Support Fund Transfers


              During the review period, the Authority transferred at least $44,657 from the
              Section 8 account to the low-rent account without using a written cost allocation
              plan. HUD allows transfers of federal funds between the two programs but requires
              an authority to use a written cost allocation plan to determine the amount of funds to
              transfer. Since the Authority did not use a written cost allocation plan, it cannot
              show how the transfers match each program’s revenues to that program’s expenses
              in accordance with its agreement with HUD and with sound financial management
              principles.

              The Authority should implement a budget-based approach, including a written
              cost allocation plan, in its operations. Section 11 of the low-rent annual
              contributions contract between the Authority and HUD requires that the Authority
              prepare and its board approve an operating budget. A documented cost allocation
              plan detailing the costs to be charged to each program is a necessary component
              of any budget or expense management system. However, the Authority’s fee
              accountant and HUD’s consultant confirmed that the Authority does not use a
              budget-based approach in its operations and does not have an operating budget,
              appropriate budget controls, or an expense management system. If the Authority
              implements the budget-based approach, including a written cost allocation plan in
              its operations, it should be able to support future allocation transfers estimated at
              $44,657 per year and should be better able to match program revenues to program
              expenses.




                                                5
The Authority Made Minor Errors
in the Tenant Files


           The Authority did not reconcile contradictory information and miscalculated income
           and utility allowances in the tenant files, resulting in incorrect tenant recertifications
           that led to erroneous tenant assistance payments. The Authority needs to improve its
           rent calculation process because overassisting tenants prevents the Authority from
           operating its programs efficiently, while underassisting tenants could cause the
           Authority to violate HUD regulations that limit a tenant’s share of rent. Although
           there were errors, the impact of the errors was not material, ranging between $2.20
           and $7.00 per month for each tenant. The errors occurred because the Authority
           does not have sufficient staff to include a completely independent quality control
           function. However, it can minimize file errors if it requires both the executive
           director and the Section 8 administrator to conduct a quality control review of all
           tenant recertifications before implementing them.

The Authority Needed to
Improve Its Inspections


           The Authority enforced good overall housing conditions and livability but needed
           to improve its inspection process, especially in the area of exterior hazards. Ten
           of the eleven low-rent units and nine of ten Section 8 Housing Choice Voucher
           units failed inspection; however, there were few failure items per unit. The
           Authority’s housing units averaged 2.1 to 2.5 failure items per unit, with only one
           unit having more than four failed items. Although the Authority’s inspectors
           properly conducted inspections on the inside of units, many of the failed items
           occurred because the inspectors did not pay enough attention to conditions on the
           outside of those units. For example, the following pictures show two Section 8
           units in which the Authority’s inspectors had passed the units on their previous
           inspection and did not note old bare electrical wires hanging in the utility room of
           one unit or the ponding water under another unit.




                                               6
          Although the failure rate for the Authority’s low-rent and Section 8 units was
          high, the number of failure items per unit was low. Further, most of the fail items,
          like frozen window screen locks, which would not open in an emergency, could
          be easily repaired. The Authority needs to improve its inspection process by
          increasing its inspection training, implementing a quality control review process
          to review a percentage of the units that it inspects, and paying more attention to
          conditions on the outside of each unit’s living area.

Recommendations



          We recommend that HUD require the Authority to

          1A. Implement a budget-based approach in its operations, including a
              documented approved cost allocation plan, so that it can properly support an
              estimated $44,657 in future transfers.

          1B. Implement a quality control program in which both the executive director and
              the Section 8 administrator verify all new rent calculations.

          1C. Provide its staff with additional housing quality standards inspection
              training, implement a quality control review process to review a percentage
              of the units that it inspects, and include an assessment of the exterior
              conditions of each unit that it inspects.

          1D. Notify HUD when it has corrected the inspection issues identified during the
              review.




                                           7
                        SCOPE AND METHODOLOGY

We conducted the review at the Authority’s offices in Palacios, Texas, and the local HUD office
in Houston, Texas. Our review period was from October 1, 2003, through July 31, 2005. During
the review, we performed the following steps:

          •   Reviewed background information and the criteria that control the Authority’s
              Section 8 and low-rent programs.

          •   Reviewed information on existing conditions at the Authority. The data included
              management assessment scores for both programs and a report prepared by an
              outside contractor hired by HUD to review the Authority’s management of its
              low-rent program.

          •   Selected and reviewed a random sample of tenant files from the Section 8 and
              low-rent programs to verify tenant eligibility and conducted inspections to
              determine unit habitability.

          •   Performed a cursory review of the Authority’s accounting records to gain an
              understanding of the type of expenses incurred by the Authority and determine
              whether there were any expenses that appeared questionable.

          •   Conducted interviews with Authority and HUD staff.

We performed the review at the Authority during two weeks in August and September 2005.
Due to the effects of Hurricane Rita on the South Texas coast in September, we shortened
portions of our planned review. We conducted our review 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, 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 review
              objectives:

                  •   Policies and procedures that the Authority put into place to reasonably
                      ensure that its accounting system accurately matched program revenues
                      with program expenses;

                  •   Policies and procedures that the Authority put into place to reasonably
                      ensure that it calculated assistance payments accurately and properly
                      supported the calculations; and

                  •   Policies and procedures that the Authority put into place to reasonably
                      ensure that assisted units met or exceeded the minimal standards for
                      decent, safe, and sanitary housing.

 Significant Weaknesses


              Based on our review, we believe the following item was a significant weakness:

                  •   The Authority’s policies did not ensure that its procedures were consistent
                      with its written policies and HUD’s requirements.




                                               9
                                    APPENDIXES

Appendix A

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




                             Recommendation         Funds to be
                                 number             put to better
                                                       use 1/

                                     1A               $44,657




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




                                              10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1

Comment 2




                         11
12
                         OIG Evaluation of Auditee Comments

Comment 1   The Authority agreed with the report and said that it was taking steps to correct
            the problems that we identified.

Comment 2   Although the Authority is obtaining UPCS inspection training, the UPCS training
            is not the same as HQS training. The Authority should obtain both UPCS and
            HQS inspection training.




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