oversight

The Columbus Housing Authority of Columbus, Nebraska, Improperly Expended and Encumbered Its Public Housing Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-08-30.

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

                                                               Issue Date
                                                                        August 30, 2006
                                                               Audit Report Number
                                                                            2006-KC-1013




TO:        Debra L. Lingwall, Coordinator, Omaha Public Housing
             Program Center, 7DPHO

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: The Columbus Housing Authority of Columbus, Nebraska, Improperly
           Expended and Encumbered Its Public Housing Funds


                                  HIGHLIGHTS

 What We Audited and Why

            We reviewed the development activities of the Columbus Housing Authority,
            Columbus, Nebraska (Authority), to determine whether the Authority expended or
            encumbered U.S. Department of Housing and Urban Development (HUD) assets
            for development activities without HUD approval. We conducted the audit
            because HUD told us the Authority had improperly used public housing funds to
            subsidize a multifamily housing facility.

 What We Found


            The Authority inappropriately spent more than $204,000 of public housing funds
            to develop Crown Villa, a non-HUD multifamily housing development. The
            Authority also improperly encumbered its public housing assets when it signed
            Crown Villa loan documents containing set-off provisions that allowed the bank
            to take Authority bank account funds in the event of default on the loans. The
            Authority defaulted on the loans, and the bank seized more than $88,000 in public
            housing funds.
What We Recommend


           We recommend that HUD require the Authority to repay its public housing
           program from nonfederal sources, continue to pursue recovery of the funds seized
           in the bank set-off, and ensure that no additional HUD funds are used for
           nonfederal purposes without HUD approval.

           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 Authority agreed with our findings and recommendations. We provided the
           audit report to the Authority on July 27, 2006, and requested a response by
           August 24, 2006. The Authority provided written comments on August 22, 2006.

           The complete text of the auditee’s 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 Improperly Expended and Encumbered Public Housing    5
                Funds for Development Activities

Scope and Methodology                                                             7

Internal Controls                                                                8

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use              9
   B. Auditee Comments                                                           10




                                            3
                     BACKGROUND AND OBJECTIVES

The Columbus Housing Authority (Authority) is a small public housing authority located in
Columbus, Nebraska. It is a municipal corporation created by state law and is funded almost
exclusively by the U.S. Department of Housing and Urban Development (HUD). It owns and
operates 84 units of public housing in Columbus and administers approximately 100 Section 8
housing vouchers for HUD’s Housing Choice Voucher program.

To participate in HUD’s public housing programs, the Authority executed an annual
contributions contract with HUD on January 31, 1996. The annual contributions contract defines
the terms and conditions under which the Authority agreed to develop and operate all projects
under the agreement. The contract defines a project as any public housing developed, acquired,
or assisted by HUD under the United States Housing Act of 1937, as amended. The contract
says the Authority may withdraw public housing funds only for the payment of the costs of
development and operation of the projects under the contract or other purposes approved by
HUD. It also provides that the Authority shall not in any way encumber any project, or portion
thereof, without the prior approval of HUD.

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

Between 2000 and 2003, the Authority developed Crown Villa, a multifamily housing facility for
senior residents. In May 2000, the Authority requested HUD approval to borrow $50,000 from
its public housing funds to assist in purchasing the land for Crown Villa. HUD approved the
request, conditioned on repayment, but did not approve any additional use of HUD funds for the
development. The Authority obtained bank financing, constructed the property, retained direct
ownership, and began managing its daily operations in September 2003.

Our audit objective was to identify development costs for Crown Villa and determine whether
the Authority expended or encumbered HUD assets for Crown Villa development activities
without HUD approval.




                                                4
                               RESULTS OF AUDIT

Finding: The Authority Improperly Expended and Encumbered Public
         Housing Funds for Development Activities
The Authority violated its annual contributions contract with HUD when it expended and
encumbered public housing funds for Crown Villa, its nonfederal multifamily development.
This occurred because its former executive director and board of commissioners disregarded
HUD regulations. The Authority also lacked adequate controls to keep it from expending or
encumbering public housing assets for nonfederal ventures. As a result, it inappropriately
expended or encumbered more than $204,000 in public housing funds.



 The Authority Used Public
 Housing Funds to Pay
 Development Expenses


              The Authority improperly expended nearly $151,000 in public housing funds for
              start-up costs before and during construction of the development. According to
              HUD regulations, the Authority may withdraw funds from the public housing
              general fund only for the payment of the costs of development and operation of
              the projects under an annual contributions contract with HUD. Crown Villa was
              not an approved project under the Authority’s annual contributions contract.

              The public housing money was expended primarily for architect fees, legal fees,
              marketing studies, property surveys, and the land purchase for Crown Villa. The
              Authority had not obtained start-up financing from outside sources when it began
              planning the development. As a result, it spent public housing funds on the
              nonfederal development and never repaid the money.

              Further, the former executive director of the Authority and his assistant spent time
              managing the development during the planning and construction phases. The
              Authority paid their full salaries and related benefits from public housing funds,
              but Crown Villa did not reimburse the public housing account for time spent on
              development activities. In 2004, the Authority conducted a time study showing
              that the executive director spent 23 percent of his time and his assistant spent 8
              percent of her time on the development. Based on the time study, Crown Villa
              failed to reimburse the public housing account at least $53,000 for their salaries.




                                               5
    The Authority Encumbered Its
    Public Housing Funds

                 The Authority encumbered its public housing assets when its former executive
                 director and former board chairman signed development loan documents
                 containing set-off provisions, which allowed the bank to take the Authority’s
                 depository funds in the event of default on the loans. The annual contributions
                 contract with HUD says that the Authority shall not in any way encumber any
                 project without the prior approval of HUD. The Authority did not have approval
                 from HUD to sign the loan documents containing set-off provisions. It defaulted
                 on the development loans, and the bank exercised its right of set-off when it
                 seized more than $88,0001 in public housing funds from the Authority’s
                 depository accounts for payment of Crown Villa’s development debt.

Authority Management Ignored
HUD Regulations

                 The former executive director and board of commissioners had a general
                 disregard for HUD regulations, and the Authority lacked adequate controls to
                 ensure that it did not expend or encumber public housing assets for nonfederal
                 activities. The board chairman told us that the board knew it did not have
                 approval to spend the public housing funds for the development. However, the
                 Authority had development debts that needed to be paid so it used public housing
                 funds with the intention of paying back the funds when the development had a
                 positive cash flow. Crown Villa never reached a positive cash flow, and no funds
                 were repaid to the public housing account.

    Recommendations

                 We recommend that the coordinator of the Omaha Public Housing Program
                 Center

                 1A. Require the Authority to repay its public housing program $204,162 from
                     nonfederal sources ($150,696 in start-up costs and $53,466 in salaries).

                 1B. Require the Authority to pursue recovery of the $88,063 seized from the
                     Authority’s bank accounts.

                 1C. Require the Authority to implement adequate procedures to ensure that it
                     does not expend or encumber HUD assets without HUD approval.

1
  The bank seized $88,063 from the Authority’s bank accounts as a result of the set-off provisions. HUD determined
that it had a direct interest in $80,200 of the seized funds. HUD is pursuing recovery of the funds directly tied to
HUD.


                                                         6
                         SCOPE AND METHODOLOGY

Our review generally covered the period from January 2000 through September 2003. To
achieve our audit objective, we conducted interviews with the Authority’s current and former
staff; members of its board of commissioners; and its fee accountant, attorney, bank
representative, consultant, and property appraisers. Additionally, we conducted interviews with
HUD staff at the Omaha, Nebraska, Office of Public Housing.

We reviewed the Authority’s policies and procedures, Crown Villa development files, general
and subcontractor construction files, time studies of Authority staff, general ledgers, and audited
financial statements. We also reviewed the Authority’s five year administrative plan, board of
commissioners meeting minutes, correspondence with HUD, annual contributions contracts,
bank statements, and bank loan documents. In addition, we reviewed federal regulations and
HUD’s monitoring reports.

We reviewed reports generated from the Authority’s computerized accounting system for
evidence of expending or encumbering public housing assets without prior HUD approval. We
used the computerized data for background information purposes only. We did not conduct tests
of the data or controls governing the data. We did not use the data to support audit conclusions
but used only original source documents to reach our conclusions.

We performed on-site work from March through June 2006 at the Authority’s office located at
2554 40th Avenue in Columbus, Nebraska. We performed our review in accordance with
generally accepted government auditing standards.




                                                 7
                             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 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 Weaknesses


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

              •       The Authority did not have adequate controls in place to safeguard its federal
                      resources and ensure compliance with the annual contributions contract (see
                      finding).




                                                8
                                   APPENDIXES

Appendix A

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

                           Recommendation            Ineligible 1/
                                  number
                                         1A            $204,162
                                         1B              88,063


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     polices or regulations.




                                              9
Appendix B

                  AUDITEE COMMENTS




Note:
We redacted
sensitive legal
information.




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