oversight

The Columbus Housing Authority, Columbus, Nebraska, Improperly Spent and Encumbered Public Housing Funds for Its Non-HUD Development Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-27.

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

                                                               Issue Date
                                                                        September 27, 2006
                                                               Audit Report Number
                                                                            2006-KC-1014




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

           Margarita Maisonet, Director, Departmental Enforcement Center, CV

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

SUBJECT: The Columbus Housing Authority, Columbus, Nebraska, Improperly Spent and
         Encumbered Public Housing Funds for Its Non-HUD Development Activities


                                  HIGHLIGHTS

 What We Audited and Why

             We reviewed the development activities of the Columbus Housing Authority,
             Columbus, Nebraska (Authority), because the U.S. Department of Housing and
             Urban Development (HUD) reported that the Authority had improperly used
             public housing funds to subsidize a multifamily housing facility for senior
             residents. Our objective was to determine whether the Authority complied with
             HUD rules and regulations when operating and managing Crown Villa, a non-
             HUD multifamily development.

 What We Found
             The Authority inappropriately spent more than $62,000 in public housing funds
             to operate its non-HUD development, Crown Villa. It also inappropriately
             signed Crown Villa loan documents that contained setoff provisions allowing
             the bank to take Authority deposits in the event of default. The Authority
             defaulted, and the bank seized more than $88,000 in public housing funds to
           satisfy the defaulted loans. The Authority still owes nearly $112,000 on a
           remaining loan. It is now at significant risk of being unable to continue
           administering HUD housing programs.

What We Recommend
           We recommend that HUD require the Authority to repay its public housing
           program from nonfederal sources, ensure that no additional HUD funds are used
           for nonfederal activities without prior HUD approval, terminate the bank
           agreement that is encumbering public housing funds, and implement controls to
           protect federal funds. We also recommend that HUD impose administrative
           sanctions against the Authority, its former executive director, and members of
           its board of commissioners for placing the Authority in its current position.

           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 Columbus Housing Authority agreed with our audit conclusions. We
           provided the report to the Authority on August 30, 2006, and requested a
           response by September 20, 2006. The Authority provided written comments on
           September 18, 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 Spent and Encumbered Public Housing Funds to    6
                  Operate a Nonfederal Development

Scope and Methodology                                                       10

Internal Controls                                                           11

Followup on Prior Audits                                                    12

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use        13
   B. Auditee Comments                                                      14




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                    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 contract defines the terms and
conditions under which the Authority agreed to develop and operate all projects under the
agreement. A project is any public housing developed, acquired, or assisted by HUD under the
United States Housing Act of 1937, as amended. 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. Further, the Authority cannot 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.
HUD allowed the Authority to borrow $50,000 from its public housing funds to assist in
purchasing the land for Crown Villa, conditioned on repayment. HUD did not approve any
additional use of HUD funds for the development. The Authority completed Crown Villa,
retained direct ownership, and began managing its daily operations in September 2003.

In July 2004, HUD became aware that the Authority was spending public housing funds for
Crown Villa expenses and formally forbade it from continuing to do so. Soon thereafter, the
Authority defaulted on the Crown Villa construction loan, and the bank foreclosed. Crown
Villa was sold at a trustee’s sale at a loss to the bank of $1.6 million. The Authority is
currently the defendant in a lawsuit brought by the bank to recover its losses.

HUD designated the Authority as troubled for fiscal year 2004, based on its Public Housing
Assessment System scores. In July 2005, HUD conducted an on-site review and identified
problems significant enough to require the Authority to enter into a one-year memorandum of
agreement meant to assist the Authority in improving its operations.


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Our audit objective was to determine whether the Authority complied with HUD rules and
regulations when operating Crown Villa, including staffing and managing the property and
paying its operating expenses.




                                          5
                               RESULTS OF AUDIT

Finding: The Authority Spent and Encumbered Public Housing Funds
           to Operate a Nonfederal Development
The Authority spent and encumbered public housing funds to operate Crown Villa, a
nonfederal multifamily development. This occurred because the former executive director and
board of commissioners mismanaged Crown Villa, disregarded HUD regulations, and had no
controls in place to safeguard its federal assets. As a result, more than $62,000 in public
housing funds are no longer available for their intended purposes, and nearly $112,000 more in
public housing funds related to a defaulted bank loan are at risk. Overall, the Authority is at
significant risk of being unable to continue administering HUD housing programs.



 The Authority Used Public
 Housing Funds for Crown Villa
 Expenses

              The Authority inappropriately spent and encumbered public housing funds for
              Crown Villa operations and has not repaid its public housing accounts.
              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.
              There was no annual contributions contract associated with the Crown Villa
              development.

              The Authority spent more than $12,000 in public housing funds for operating
              expenses of the development. The public housing money was used primarily
              for legal fees, water and phone service, and accounting fees. The Authority also
              used public housing funds to pay Crown Villa payroll expenses for October
              through December 2003, which totaled nearly $19,000. Further, the Authority
              spent more than $5,500 in public housing funds to pay unemployment expenses
              for former Crown Villa employees.

              In addition, the former executive director of the Authority and his assistant
              spent significant time managing Crown Villa’s operations. The Authority paid
              their full salaries and related benefits from public housing funds, but Crown
              Villa did not reimburse the public housing funds for time spent operating Crown
              Villa. 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 program more than $25,000 for their salaries.




                                            6
           In another audit report on the Authority (2006-KC-1013), we identified similar
           misuse of HUD funds used to benefit Crown Villa. The Authority spent more
           than $204,000 in public housing funds to plan and develop Crown Villa without
           HUD approval and did not repay the public housing accounts.

The Authority Encumbered Its
Public Housing Funds

           The Authority encumbered its public housing funds when its former executive
           director and board chairman signed two loan documents for Crown Villa that
           contained setoff provisions. These provisions allowed the bank to take the
           Authority’s depository funds in the event of default on the loans. The annual
           contributions contract with HUD states 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 setoff
           provisions.

           The Authority defaulted on the loans, and the bank exercised its right of setoff
           when it seized public housing funds from the depository accounts of the
           Authority for payment on the debts. The bank used the funds to pay off one
           loan, but the Authority remains indebted to the bank for the remaining loan
           balance of nearly $93,000 plus interest of nearly $19,000 that had accrued as of
           September 30, 2005.

           In the audit report mentioned previously, we identified more than $88,000 in
           HUD funds that the Authority improperly encumbered and later forfeited when
           its bank seized deposited funds as repayment on the defaulted loans obtained for
           the benefit of Crown Villa. The Authority has not replaced the public housing
           funds, nor has it recovered these funds from the bank.


The Authority Mismanaged
Crown Villa

           Authority administrators did not properly manage Crown Villa, and the
           development failed. The development did not have sufficient cash flow or cash
           reserves from nonfederal sources to support operations. To pay the
           development’s expenses, the Authority inappropriately used public housing
           funds. In addition, Crown Villa was unable to meet its construction loan
           repayment obligations so the bank foreclosed and sued the Authority in an
           attempt to recover its losses. The lawsuit had not been not settled as of the end
           of our audit.

           Real estate professionals familiar with Crown Villa told us that the Authority
           did not adequately market the property during construction to get the units



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             occupied quickly enough after opening to provide sufficient cash flow to pay
             Crown Villa’s operating expenses. The development consultant told us that the
             property should have been marketed eight months before opening, but the
             former executive director did not begin marketing the development until three
             months before opening. When applying for bank financing for Crown Villa, the
             Authority estimated that it could have the property fully occupied within 12
             months of completing construction. However, more than 19 months after
             opening, the Authority had leased only 21 of the 60 units.


Authority Management Ignored
HUD Regulations

             The former executive director and board of commissioners ignored HUD
             regulations, and the Authority lacked controls to prevent its administrators from
             spending federal funds on nonfederal activities.

             The former executive director told us that he knew the Authority used public
             housing funds on Crown Villa expenses without HUD approval. The board
             chairman told us that the board knew it did not have approval to spend the
             public housing funds for Crown Villa. However, the Authority had Crown Villa
             debts that needed to be paid so it used public housing funds with the intention of
             repaying the funds when the development had a positive cash flow. Therefore,
             the former executive director and board of commissioners willfully failed to
             perform in accordance with the annual contributions contract when spending
             and encumbering public housing funds for the benefit of Crown Villa.

             According to 24 CFR [Code of Federal Regulations] Part 24, HUD can impose
             administrative sanctions against the former executive director and the board of
             commissioners for willfully failing to comply with the annual contributions
             contract.

Conclusion

             The Authority is at significant risk of being unable to administer HUD housing
             programs because of the improper, willful actions of the former executive
             director and board of commissioners. During the five years that the Authority
             planned, constructed, and managed Crown Villa, it repeatedly violated its
             annual contributions contract. It spent more than $266,000 in public housing
             funds, lost an additional $88,000 when the bank seized its bank accounts, and
             remains at risk of losing nearly $112,000 more in public housing funds for
             amounts owed on a defaulted loan.

             The $466,000 in misspent and encumbered public housing funds is significant
             to the Authority. Considering that HUD provided the Authority with an average



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          of $100,000 annually in public housing operating funds in recent years, the
          misused funds represent more than four years of funding.

Recommendations

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

             1A. Require the Authority to repay its public housing program $62,135
                 from nonfederal sources ($12,279 in operating expenses and $49,856
                 in salaries and unemployment expenses).

             1B. Require the Authority to pursue terminating the bank agreements that
                 encumber public housing funds for unpaid loan balances so that at
                 least $111,894 in HUD funds will not be at risk.

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

             1D. Impose administrative sanctions against the Authority for violating the
                 annual contributions contract with HUD.

          Based upon the results of this audit and our previous audit of the Authority
          (Report Number 2006-KC-1013), we recommend that the director of the
          Departmental Enforcement Center

             1E. Impose administrative sanctions against the Authority’s former
                 executive director and members of its board of commissioners who
                 placed the Authority in its current position.




                                       9
                        SCOPE AND METHODOLOGY

Our review generally covered the period from September 2003 through May 2005. 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, and Kansas City, Kansas, Offices of Public Housing.

We reviewed the Authority’s policies and procedures, Crown Villa development files and
marketing studies, time studies of Authority staff, general ledgers, and audited financial
statements. We also reviewed board of commissioners meeting minutes, 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.

During the audit, we identified nearly $112,000 in public housing funds that are currently at
risk of not being used for the purposes intended. If HUD implements our recommendation for
the Authority to pursue terminating the agreements that encumber public housing funds, those
funds will be available for the purposes intended by HUD. The funds at risk relate to two loans
that the Authority entered into for the benefit of Crown Villa. The agreements contained setoff
provisions that the bank could seize Authority funds on deposit to satisfy the loans in the event
of default. One loan was for $81,000. The second loan was a line of credit for $100,000 on
which the Authority borrowed the full amount. When the Authority defaulted on the loans, the
bank exercised the setoff provisions and seized $88,000 that the Authority had on deposit.
From the seized funds, the bank paid off the smaller loan and applied the remainder to the line
of credit. After the setoff, the Authority still owed about $93,000. As of September 30, 2005,
the remaining balance had accrued about $19,000 in interest, creating a total outstanding
balance of nearly $112,000, which is currently encumbering public housing assets.

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.




                                            10
                            INTERNAL CONTROLS

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

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, 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 Weakness


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

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




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                  FOLLOWUP ON PRIOR AUDITS


The Columbus Housing
Authority of Columbus,
Nebraska, Improperly Expended
and Encumbered Its Public
Housing Funds, #2006-KC-1013


           Based on a related audit of the Authority’s planning and development of Crown
           Villa, we reported that the Authority violated its annual contributions contract
           with HUD when it expended and encumbered more than $204,000 in public
           housing funds for Crown Villa.

           The Authority spent nearly $151,000 in public housing funds for development
           start-up costs before and during construction of Crown Villa. It also spent at
           least $53,000 for salary and related benefit costs of Authority personnel who
           spent significant time on Crown Villa but who had been paid from public
           housing funds.

           In addition, the Authority improperly encumbered its public housing assets
           when its former executive director and former chairman of the board signed
           development loan documents containing setoff 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 from the Authority’s depository accounts for payment of
           Crown Villa’s development debt.

           We recommended that HUD require the Authority to repay its public housing
           program from nonfederal sources for the misspent funds, pursue recovery of the
           funds seized from the Authority’s bank accounts, and implement adequate
           procedures to ensure that it does not expend or encumber HUD assets without
           HUD approval. The deficiencies are not yet corrected because we recently
           issued the report and HUD has not had sufficient time to take corrective action.




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                                     APPENDIXES

Appendix A

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

                Recommendation                              Funds to be put to
                       number               Ineligible 1/        better use 2/

                                1A              $62,135
                                1B                                   $111,894


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.

2/   “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.

     The $111,894 represents the outstanding balance of principal and interest as of
     September 30, 2005, that the Authority owed on the defaulted loans that benefited
     Crown Villa. If HUD requires the Authority to follow through with the
     recommendation to pursue terminating the bank agreements that encumbered public
     housing funds, HUD funds will no longer be at risk and can be used for their intended
     purposes.




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Appendix B

             AUDITEE COMMENTS




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