oversight

The Housing Authority of the City of Denton, Texas, Made Subsidy Calculation Errors and Overhoused Tenants

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-26.

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

                                                          Issue Date
                                                              July 26, 2006
                                                          Audit Report Number
                                                                       2006-FW-1013




TO:         Justin Ormsby
            Director, Office of Public Housing, 6APH


FROM:

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

SUBJECT: The Housing Authority of the City of Denton, Texas, Made Subsidy Calculation
         Errors and Overhoused Tenants


                                   HIGHLIGHTS

 What We Audited and Why

             As part of the inspector general’s annual audit plan, we audited the Section 8
             program administered by the Housing Authority of the City of Denton
             (Authority). We wanted to determine whether the Authority followed U.S.
             Department of Housing and Urban Development (HUD) regulations when
             calculating subsidy amounts and the extent to which the Authority overhoused
             tenants and made ineligible subsidy overpayments.


 What We Found


             The Authority did not follow HUD regulations when calculating subsidy amounts
             because it applied its decreased payment standards without granting the required
             grace period. Further, the Authority did not grant disability allowances for six
             eligible tenants in determining adjusted income. As a result of these subsidy
           calculation errors, the Authority underpaid an estimated $126,180 in subsidy for
           447 tenants.

           The Authority did not overhouse the majority of its tenants. However, 29 tenants
           were overhoused because the Authority assigned a voucher size that exceeded its
           subsidy size standards with either no explanation or questionable justification.
           The Authority paid $50,917 in ineligible or unsupported subsidy payments for
           these tenants.

What We Recommend


           We recommend that you require the Authority to (1) repay tenants for subsidy
           underpayments caused by decreasing payment standards too early and not
           granting disability allowances, (2) repay its Section 8 account for overpayments
           from overhousing tenants, (3) strengthen its quality control process, and (4)
           develop and implement controls to ensure the procedural errors identified during
           the audit are corrected and avoided in the future.

           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


           We discussed the audit results with the Authority during the audit. We provided a
           copy of the draft report to Authority officials on June 27, 2006, for their
           comments and discussed the report with them at the exit conference on July 6,
           2006. The Authority provided written comments on July 19, 2006. The
           Authority agreed with the report findings and recommendations and indicated it
           has already initiated corrective action. The complete text of the Authority’s
           response, along with our evaluation of that response, can be found in appendix B
           to this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
        Finding 1: The Authority Made Subsidy Calculation Errors                 5
        Finding 2: The Authority Paid Excess Subsidy for 29 Overhoused Tenants   9

Scope and Methodology                                                            13

Internal Controls                                                                15

Appendixes
   A. Schedule of Questioned Costs                                               17
   B. Auditee Comments and OIG’s Evaluation                                      18




                                            3
                      BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Denton (Authority) operates the U.S. Department of
Housing and Urban Development’s (HUD’s) Section 8 Housing Choice Voucher program. The
Authority's projected 2006 funding was more than $10 million for housing assistance payments
and $814,756 for fees to administer 1,358 Section 8 housing choice vouchers. The Authority
maintains its records at its administrative offices located at 1225 Wilson Street, Denton, Texas.

The Authority uses its Section 8 funding to provide housing subsidies in the private market.
Participants may choose any housing that meets program requirements. The Authority pays a
housing subsidy directly to the landlord on behalf of the participating family; the family pays the
difference between the actual rent and the subsidy amount. The Authority determines eligibility
based on income and family size in accordance with its administrative plan. It verifies family
income and composition annually and ensures the unit meets minimum housing quality
standards. A five-member board of commissioners appointed by the mayor and one client of the
Section 8 program oversee the Authority.

Our audit objectives were to determine the extent to which the Authority overhoused tenants and
made ineligible subsidy overpayments and whether the Authority followed HUD regulations
when calculating subsidy amounts.




                                                 4
                                     RESULTS OF AUDIT

Finding 1: The Authority Made Subsidy Calculation Errors
The Authority did not follow HUD regulations in calculating rental subsidy for all tenants. It
prematurely decreased the payment standards used to calculate the subsidy amount for all tenants
because it misinterpreted HUD’s controlling regulations. It also neglected to grant disability
allowances for some tenants when it made errors in classifying disabled tenants. As a result, the
Authority underpaid an estimated $126,180 in subsidy because of the decreased payment
standards and $1,280 from not granting disability allowances.



    Decreased Payment
    Standards Led to
    Underpayments

                 The Authority did not follow HUD regulations when it applied its decreased
                 payment standards without granting the required one-year grace period.1 This
                 occurred because the Authority misinterpreted HUD’s controlling regulations.
                 The Authority decreased its payment standards for some bedroom sizes in fiscal
                 year 2005 and for all bedroom sizes in fiscal year 2006 in response to changes in
                 the HUD-published fair market rents for the area. HUD regulations provided that
                 a decrease in the payment standard amount generally would not become effective
                 for existing tenants until the second annual reexamination following the effective
                 date of the change, which normally results in at least a one-year grace period for
                 existing tenants. The following table shows how the Authority’s payment
                 standards decreased from 2004 through 2006.

                 2004 – 2006 Payment Standards

                                  Fiscal      Fiscal                Fiscal
                                   year        year    Increase      year    Increase
                   Bedrooms       2004        2005    (Decrease)    2006    (Decrease)
                       0             $589        $633        $44       $575      ($58)
                       1              678         713         35        640       (73)
                       2              871         868         (3)       777       (91)
                       3            1,205       1,147       (58)      1,031      (116)
                       4            1,425       1,412       (13)      1,249      (163)

                 Because the Authority applied the decreased payment standards for existing
                 tenants without granting the one-year grace period, it underpaid an estimated
                 $126,180 in subsidy from October 2004 through March 2006 for 447 tenants. Of
                 this amount, $78,297 is associated with the 2005 payment standards and $47,883
1
     24 CFR [Code of Federal Regulations] 982.505(c)(3).


                                                       5
                  is associated with the 2006 payment standards. If the Authority continues to
                  apply the decreased payment standards without granting the grace period, it will
                  underpay an estimated $637,236 over 12 months for 647 tenants not yet
                  reexamined since the 2006 payment standards became effective. For tenants
                  already affected, if the Authority corrects the payment standards and subsidy
                  calculations, it will avoid accumulation of an estimated $166,514 in subsidy
                  underpayments for 318 tenants.2 If the Authority does not correct the errors, it
                  will continue to accrue liability on a monthly basis for amounts due tenants
                  resulting from the underpayments.

    The Authority Did Not Grant
    Disability Allowances


                  In 11 of the 64 tenant files reviewed, the Authority did not classify tenants as
                  disabled when the file contained documentation and certifications that the tenant
                  was disabled. Elderly or disabled families receive a $400 income deduction and
                  are eligible for a medical expense allowance in determining their adjusted
                  income.3 Five tenants received the deductions because they were also elderly;
                  however, the error caused subsidy underpayment of $1,280 for six tenants during
                  the audit period. If the Authority does not classify a tenant as disabled, it denies
                  the tenant the opportunity to report medical expenses which could further reduce
                  the total tenant payment. The Authority should verify tenants’ disability status
                  and correct the disability indictors and adjusted income, as necessary, for these
                  tenants.

                  The Authority should repay tenants for the errors and review each tenant’s history
                  at reexamination to determine whether eligible families received the disability
                  allowance. For affected tenants, the Authority should calculate and repay tenants
                  amounts in error for the entire assisted period the family was eligible to receive
                  the allowance but did not. The tenant files reviewed were selected based on
                  analysis designed to identify overhoused tenants. Therefore, the error rate for
                  disabled tenants in the files reviewed is not necessarily representative of the
                  overall tenant population. Nevertheless, the Authority should implement controls
                  to ensure it properly classifies disabled tenants and grants eligible participants the
                  required disability allowance and medical expense deductions.




2
     The number of tenants with projected underpayments (318) is less than the number affected (447) because of
     turnover in the program. In addition, some tenants were not affected because their gross rent was already less
     than the decreased payment standard.
3
     24 CFR [Code of Federal Regulations] 5.611(a)(2) and (3).


                                                          6
Conclusion


             The Authority did not follow HUD regulations when it prematurely decreased the
             payment standards used to calculate the subsidy amount and neglected to grant
             disability allowances. As a result, it underpaid an estimated $126,180 in subsidy
             because of the decreased payment standards and $1,280 from not granting
             disability allowances. If the Authority immediately corrects the payment
             standards for affected tenants, it could avoid $166,514 in subsidy underpayments
             which could otherwise become a liability. For tenants not yet affected by the
             2006 payment standards, the Authority could avoid $637,236 in underpayments
             over 12 months if it ensures it phases in the payment standards in accordance with
             the regulations.


The Authority Implemented
Corrective Actions


             The Authority has taken steps to ensure it uses the correct payment standards for
             all tenants with annual reexaminations effective April 2006 and later. It is in the
             process of correcting payment standards and subsidy calculations for tenants with
             annual reexaminations effective October 2005 through March 2006. The
             Authority has agreed to reimburse tenants for subsidy underpayments associated
             with this finding. It has also taken steps to ensure case specialists classify
             disabled tenants appropriately and grant the $400 disability allowance in
             determining adjusted income.

Recommendations


             We recommend that HUD require the Authority to

             1A. Reimburse tenants for an estimated $126,180 in subsidy underpayments
                 caused by decreasing payment standards too early.

             1B. Reimburse tenants $1,280 for subsidy underpayments caused by not
                 granting disability allowances in determining adjusted income.

             1C. Correct payment standards and subsidy calculations for tenants prematurely
                 affected by the decreased payment standards to avoid potential liabilities of
                 $166,514.

             1D. Adopt and implement controls to ensure it applies payment standards in
                 accordance with HUD regulations to avoid potential liabilities of $637,236.



                                              7
1E. At reexamination for each tenant, review tenant disability status and correct
    the disability indicator and adjusted income calculation, as necessary. For
    disabled tenants who qualified for but did not receive the disability
    allowance in the past, calculate and repay amounts owed to the tenant for
    the duration the tenant qualified for the deduction.




                                8
Finding 2: The Authority Paid Excess Subsidy for 29 Overhoused
Tenants
Generally, the Authority did not overhouse tenants. However, it overhoused as many as 29 tenants
because staff made procedural errors or granted questionable exceptions to the Authority’s subsidy
size standards. As a result, the Authority paid as much as $50,917 in excess subsidy between
October 2003 and March 2006.



    The Authority Generally
    Housed Tenants
    Appropriately

                  During the audit period, the Authority assisted 1,871 tenants, of which 64
                  appeared overhoused based on data analysis that compared voucher size and
                  family composition to the Authority’s subsidy size standards in its administrative
                  plan.4 In 35 cases, further testing showed the Authority had adequate
                  documentation in the tenant file to justify the assignment of additional space for
                  the family.

    Twenty-Nine Tenants May
    Have Been Overhoused

                  In 29 of the 64 cases,5 the Authority had no explanation or questionable
                  justification for the exception to its subsidy size standards. In 18 cases, the tenant
                  was clearly overhoused, resulting in $24,813 in ineligible overpayments. In 11
                  cases, there was questionable justification for allowing tenants to have an
                  additional bedroom, resulting in $26,104 in unsupported payments. If the
                  Authority immediately corrects the subsidy sizes and calculations for all 29
                  tenants, it can avoid an estimated $18,024 in future subsidy overpayments over 12
                  months associated with these errors.6

                  The Authority clearly overhoused 18 of the 29 tenants. In nine cases, the family
                  size decreased to a number that required the Authority to decrease the voucher
                  size, but the Authority neglected to do so. One elderly tenant had a doctor’s note
                  at admission in 1999 stating the tenant requested a two-bedroom apartment
                  because she was concerned she might need medical assistance in the future. The
                  Authority granted the additional bedroom but the tenant continues to live
                  independently seven years later. Two other tenants had notes that said they

4
     24 CFR [Code of Federal Regulations] 982.153 requires the Authority to administer its program in accordance
     with its administrative plan.
5
     This represents 1.5 percent of tenants assisted during the audit period.
6
     Refer to Scope and Methodology section for a description of how we calculated funds to be put to better use.


                                                        9
                 required a private bedroom for medical reasons, but the tenants lived alone. In six
                 cases, there was no justification for the larger voucher in the tenant file. Ineligible
                 overpayments for these 18 tenants totaled $24,813.

                 The Authority’s files for the remaining 11 tenants contained documents that
                 provided questionable justification for an additional bedroom. Five cases
                 involved people not residing in the unit full time, three cases involved inadequate
                 documentation, and three cases involved unapproved live-in aides. The Authority
                 made unsupported payments totaling $26,104 for these tenants.

                 Five tenants with questionable justifications had letters from doctors or nurses
                 indicating the tenant would need assistance occasionally or requesting additional
                 bedrooms to accommodate frequent caregivers. The assignment of a larger
                 voucher to accommodate persons not residing in the unit full time is a
                 questionable use of limited rental assistance funds. However, the Authority
                 assigned larger vouchers for these tenants based on the letters. The Authority
                 should take steps to ensure requests for additional bedrooms are reasonable and
                 necessary to make the program accessible to individuals with disabilities in
                 compliance with federal nondiscrimination and fair housing laws.7

                 In three cases, the only documents addressing the need for additional space were
                 medical verification forms the Authority mailed to doctors requesting information
                 about the tenant’s anticipated medical expenses in the coming 12 months. The
                 forms contained a question about whether the tenant required an additional
                 bedroom for medical reasons. The doctors checked yes in response to this
                 question on the form. This provided inadequate information for the Authority to
                 make a determination about whether the space was needed as a reasonable
                 accommodation. We discussed this situation with HUD staff who agreed that this
                 was inadequate documentation and commented that the Authority should remove
                 this question from its medical verification forms. The Authority’s procedures
                 should allow the tenant to request additional space, but the Authority should not
                 initiate the process itself.

                 There was no indication in three files that a live-in aide resided with or otherwise
                 made the program accessible to the tenant. In these instances, the tenant was the
                 only person on the lease. HUD regulations required the Authority to approve a
                 live-in aide if needed as a reasonable accommodation to make the program
                 accessible to a person with a disability,8 HUD regulations also required live-in
                 aides to be listed on the lease and housing assistance payment contract9 and
                 required the Authority to perform a criminal history background check.10 The
                 Authority should implement procedures to ensure that a live-in aide resides in the

7
     Refer to 24 CFR [Code of Federal Regulations] Part 8, Nondiscrimination Based on Handicap in Federally
     Assisted Programs and Activities of the Department of Housing and Urban Development.
8
     24 CFR [Code of Federal Regulations] 982.316.
9
     24 CFR [Code of Federal Regulations] 982.308(f)(1)(ii).
10
     24 CFR [Code of Federal Regulations] 982.553(2)(i).


                                                       10
                   unit and is on the lease before assigning a larger voucher to accommodate that
                   individual. One additional tenant file contained evidence there was a live-in aide
                   residing with the tenant, but the aide was not listed on the family report, lease, or
                   housing assistance payment contract, and there was nothing to show the Authority
                   approved the individual as a member of the assisted household. The Authority
                   should strengthen its procedures for approving and reporting live-in aides.

     Quality Control Reviews Did
     Not Identify Errors


                   The Authority had performed quality control reviews for three tenant files that
                   contained errors; however, this process did not identify errors in voucher size or
                   disability status and allowances11 in two of the files. It did identify an error in one
                   file and the Authority took corrective action. The Authority should improve its
                   quality control process to include a more in-depth review of tenant eligibility,
                   income, deductions, and rent calculations.

     Conclusion

                   The Authority overhoused as many as 29 tenants and overpaid as much as
                   $50,917 in assistance as a result. If the Authority immediately corrects the
                   subsidy sizes and calculations for all 29 tenants, it can avoid an estimated $18,024
                   in future subsidy overpayments associated with these errors. The Authority
                   should take steps to ensure these conditions do not occur in the future.


     Recommendations


                   We recommend that HUD require the Authority to

                   2A. Reimburse its Section 8 housing assistance payments account for $24,813 in
                       ineligible overpayments caused by overhousing 18 tenants.

                   2B. Support questioned payments of $26,104 for 11 possibly overhoused tenants
                       or reimburse its Section 8 housing assistance payments account for the
                       overpayments.

                   2C. Correct voucher sizes and subsidy calculations for all overhoused tenants,
                       which would allow it to avoid $18,024 in subsidy overpayments.


11
      Refer to finding 1 for more information on errors involving disability status and allowances. We also identified
      occasional errors in calculating income or deduction amounts, which we did not report separately but
      considered when calculating subsidy overpayments, as discussed in the Scope and Methodology section.


                                                          11
2D. Implement controls to ensure it applies its subsidy size standards as defined
    in its administrative plan and fully documents any exceptions granted in
    accordance with its written policy.

2E. Implement procedures to review requests for additional bedrooms to ensure
    the request is reasonable and necessary to make the program accessible to
    individuals with disabilities in compliance with federal fair housing laws.

2F. Improve its quality control process to include a more in-depth review of
    tenant eligibility and calculations of income, deductions, and rental subsidy.

2G. Strengthen procedures for approving and reporting live-in aides.




                                12
                            SCOPE AND METHODOLOGY

The audit covered the period from October 2003 through March 2006. To meet our audit
objectives, we reviewed federal regulations, the Authority’s administrative plans, and its audited
financial statements. We reviewed tenant files and interviewed Authority and HUD program
staff. We performed field work at the Authority’s administrative offices in Denton, Texas, from
March to April 2006.

We obtained current12 data from HUD’s PIH Information Center (PIC) that contained housing
assistance and related data for all tenants during the audit period. We validated the data for
reliability in accordance with professional standards.13 We analyzed the data to identify tenants
whose vouchers were larger than allowed based on family composition and the Authority’s
subsidy size standards in its administrative plan. This resulted in the identification of 64 tenants
whose vouchers were possibly too large during the audit period.

We reviewed all 64 tenant files to determine whether there was a reasonable justification in the
file for the assignment of the larger subsidy size. We considered a portion of the subsidy amount
ineligible if there was no justification in the file for an extra bedroom. We considered a portion
of the subsidy amount unsupported if the file contained documentation that provided
questionable justification for the additional bedroom. To determine the portion of the subsidy
questioned, we calculated the amount of subsidy the Authority would have paid if it had issued
the correct subsidy size and compared it with the amount the Authority paid. If we identified
errors in income or deduction calculations, we used the corrected figures in our comparative
calculation. We estimated the amount of subsidy that would have been improperly paid over the
next 12 months by multiplying the estimated current monthly overpayment by 12.

We analyzed historical PIC data to estimate amounts due tenants because the Authority applied
its decreased payment standards too soon, causing subsidy underpayments. We used computer
formulas to recalculate the subsidy amount using the correct payment standards. For each tenant
who had already been subjected to the decreased payment standards in error, we multiplied the
monthly subsidy underpayment by the number of months that improper calculation was
effective. We then totaled the amount underpaid for each tenant. Because of the limitations of
the data, this is only an estimate of the amount due each tenant. The Authority will need to
determine the actual amount based on the individual history for each affected tenant. To
estimate amounts the Authority will underpay if it does not correct the payment standards and
subsidy calculations for tenants already affected, we determined the number of months
remaining in each tenant’s annual reexamination cycle and multiplied the result by the current
monthly underpayment.

We estimated the amount of subsidy underpayment over the next 12 months by calculating the
potential monthly underpayment for tenants not yet reexamined under the 2006 payment
12
     Data were current as of January 24, 2006.
13
     Government Accountability Office, “Assessing the Reliability of Computer-Processed Data,” GAO-03-273G,
     October 2002.


                                                     13
standards but whose subsidy will be incorrect if the Authority continues to apply the payment
standards in a manner contradictory to HUD regulations. We then multiplied the estimated
monthly underpayment per tenant by 12 months to determine the potential impact of not granting
the one-year grace period. The Authority will avoid underpayments for these tenants by
ensuring it grants the one-year grace period required by regulation.

We conducted the audit in accordance with generally accepted government auditing standards.




                                             14
                             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:

              •       Effectiveness and efficiency of program operations - Policies and
                      procedures that management has implemented to reasonably ensure that a
                      program meets its objectives.
              •       Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure resources are used
                      consistent with laws and regulations.
              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure valid and reliable data are obtained.

              We assessed the relevant controls identified above.

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

 Significant Weakness


              Based on our review, we believe the following items (as reported in the findings)
              are significant weaknesses:

              The Authority does not have adequate internal control procedures to




                                              15
•   Ensure the accuracy of income and subsidy calculations in compliance
    with HUD regulations (finding 1);
•   Ensure quality control reviews identify errors in determining tenant
    eligibility and calculations of income, deductions, and rental subsidy
    (findings 1 and 2);
•   Ensure staff assigns subsidy size in accordance with its policies and
    documents the reasons for any exceptions (finding 2); and
•   Approve individual live-in aides and include them as members of assisted
    households (finding 2).




                            16
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS




        Recommendation Ineligible 1/            Unsupported2/ Funds to be put
            number                                            to better use 3/
              1A                                                      $126,180
              1B                                                         $1,280
              1C                                                      $166,514
              1D                                                      $637,236
              2A            $24,813
              2B                                      $26,104
              2C                                                             $18,024
             Totals         $24,813                   $26,104               $949,234




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
     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 clarification 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 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. In this
     situation, funds to be put to better use also includes repayment to program participants for
     underpayments caused by noncompliance with regulations and avoidance of continued
     underpayments the Agency will realize by correcting the noncompliance issue.


                                              17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 2


Comment 2



Comment 2


Comment 2




                         18
                      OIG Evaluation of Auditee Comments

Comment 1   The Authority acknowledged miscalculation of subsidies resulting from
            decreased payment standards beginning in October 2005. The audit showed the
            underpayments began when the Authority decreased its payment standards
            effective October 2004. The Authority should ensure it reimburses affected
            tenants for subsidy underpayments beginning in October 2004.

Comment 2   The Authority agreed with the findings and recommendations in the report and
            noted that amounts may be revised. The Authority indicated it has initiated
            corrective action in response to the findings. We acknowledge that amounts
            reported are estimates based on the data and documentation available and are
            subject to revision based on actual tenant history. We commend the Authority
            for its prompt action to correct the errors noted during the audit.




                                         19