Issue Date November 7, 2005 Audit Report Number 2006-LA-1002 TO: Cecilia Ross, Director, Office of Public Housing, 9DPH FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA SUBJECT: The Housing Authority of the City of Los Angeles, Los Angeles, California, Did Not Adequately Determine and Support Section 8 Rents HIGHLIGHTS What We Audited and Why We reviewed the Housing Authority of the City of Los Angeles’ (Authority) Section 8 rent reasonableness determination for its Section 8 housing choice voucher program. The Authority’s new Executive Director requested we review various aspects of its Section 8 program due to his concerns regarding the prior administration of the program. The objective of the audit was to determine whether the Authority administered its Section 8 rent reasonableness determinations in accordance with HUD rules and regulations. What We Found The Authority did not administer its Section 8 rent reasonableness determinations in accordance with HUD rules and regulations. We determined the Authority did not adequately document rent reasonableness determinations to ensure Section 8 rents were reasonable before entering into housing assistance payment contracts. We attributed these conditions to the Authority not following HUD approved policies and procedures. In addition, the Certifications for Rent Reasonableness forms used to document the rent reasonableness determination were incomplete, missing, and/or contained erroneous information. What We Recommend We recommend that HUD’s director of the Office of Public and Indian Housing require the Authority to (1) support or reimburse HUD $186,881 in unsupported Section 8 housing assistance payments, and (2) follow HUD-approved policies and procedures when performing rent reasonableness determinations, as well as ensuring the Certifications for Rent Reasonableness are complete. 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 provided the Authority a draft report on October 6, 2005, and held an exit conference with the Executive Director on October 6, 2005. The Authority provided written comments on October 20, 2005. The written comments fully agreed with our report findings. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix D of this report. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The Authority Did Not Adequately Determine and Support Section 8 5 Rents Scope and Methodology 9 Internal Controls 10 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 11 B. Schedule of Deficiencies and Unsupported Housing Assistance Payments 12 C. U.S. Code of Federal Regulation requirements – Rent Reasonableness 13 D. Auditee Comments and OIG’s Evaluation 14 3 BACKGROUND AND OBJECTIVES The Authority was organized as a public housing authority in 1938 to provide low-cost housing to individuals meeting established criteria. The Authority is a state-chartered public agency that provides the largest stock of affordable housing in the Los Angeles area. The Authority gets the majority of its funding from HUD. However, the Authority has built numerous key partnerships with city and state agencies, nonprofit foundations, community-based organizations, as well as private developers. As of January 2005, the Authority had 45,237 housing choice vouchers issued and was over leased by about three percent. During 2003 and 2004, the Authority paid over $690 million in housing assistance payments to landlords participating in the program. In addition, the Authority received over $73 million in administrative fees for administering the Section 8 program for both years. The Authority administers its Section 8 program under HUD’s housing choice voucher program. The housing choice vouchers allow very low-income families to obtain affordable, decent, and safe housing. The Authority is already aware there is a problem in its determination of rent reasonableness. In a letter dated March 27, 2005, the Authority requested the Office of Inspector General to perform an audit of this area. During 2004, MD Strum Housing Services, an independent contractor, conducted a review of the housing quality standards inspection function of the Authority’s Section 8 Department. In its report, dated February 17, 2005, MD Strum identified the need to improve uniformity with rent comparable functions. MD Strum stated a HUD issued mandate to the Authority, requiring the Authority to meet its lease-up rate, could have caused higher rents to be paid than were justified. In the 2004 Section Eight Management Assessment Program submission prepared by the Authority, it stated it did not have and, therefore had not implemented, a reasonable written method to determine and document for each unit leased that the rent to an owner was reasonable based on current rents for comparable unassisted units. The Authority gave itself zero points for this SEMAP indicator. The Los Angeles Office of Public Housing Assessment for the same year confirmed this and required a corrective action plan to fix the deficiencies shown for rent reasonableness. However, we determined the Authority had a reasonable written method, but it did not document the steps performed and it lacked a common database from which to draw comparables. The objective of the audit was to determine whether the Authority administered its Section 8 rent reasonableness determinations in accordance with HUD rules and regulations, and consequently, supported housing assistance payments. 4 RESULTS OF AUDIT Finding 1: The Authority Did Not Adequately Determine and Support Section 8 Rents The Authority did not adequately perform rent reasonableness in order to determine and support Section 8 rents paid through housing assistance payments. We attribute this to the Authority not following HUD-approved policies and procedures in performing rent reasonableness reviews. As a result, the Authority spent $186,881 in unsupported housing assistance payments. HUD Requires Rent Reasonableness Determinations The Code of Federal Regulations requires housing authorities to determine whether rents are reasonable prior to approving a lease. In order to determine whether Section 8 rents are reasonable, Authority housing inspectors compare the rent for the subject unit to rents for similar unassisted units in the marketplace. In addition, they must compare the subject rent to rents for any similar units on the premises. Rent reasonableness determinations are performed at various times. These include, but are not limited to, prior to entering into a housing assistance payment contract, before any increase in rent, and on an annual basis. The Authority must ensure Section 8 rents are neither too high nor too low. If the rents are too high, the limited housing assistance payments are wasted and eligible individuals and families are not served. If rents are too low, there is the risk that property owners may not participate in the program. There are a number of factors used to determine comparability. Among the factors housing authorities must consider include: • Location • Quality • Size • Unit type • Unit age • Amenities • Housing services • Maintenance • Utilities the owner pays 5 Housing authorities are required to document the rent reasonableness decision and maintain records showing the basis for it for three years. The Authority’s HUD-approved Section 8 administrative plans for 2003 and 2004 showed the above factors would be used to determine comparability. An additional factor entitled facilities, which includes the availability of playgrounds, storage, parking, etc., was added. The plans also state, whenever possible, comparable units should be located within a one-mile radius of the subject unit. The housing inspector is allowed to go outside the area as long as the comparable unit “is located in a like and similar neighborhood” and there is documentation showing the reason for the deviation. In addition, the plans discuss acceptable sources for comparable rents. If the inspector does not obtain data from on-site visits to comparable unassisted units in comparable areas, alternative sources for obtaining comparable units could be used. For these the inspectors are required to drive by the units to determine whether the units are in fact comparable to the subject unit. These alternative sources include data provided by real estate publications services such as the Multiple Listing Service or the California Market Data Cooperative. Unsupported Rent Reasonableness Determinations Our review determined the documentation in the tenant files was incomplete, missing, and/or erroneous. We also determined housing inspectors used alternative sources for comparables, such as publications showing properties for sale, without driving by the units to verify if they were comparable. Therefore, there was no assurance the purported comparable properties were like and similar to the subject unit as is required. Authority housing inspectors are required to document rent reasonableness determinations using a form called Certification of Rent Reasonableness. The form is prepared by the housing inspector to document the determination that the Section 8 rent is reasonable based on comparable properties. During interviews with various Authority Section 8 employees, we determined that comparable rents were expected to equal or exceed the subject unit’s rent. For instance, we interviewed the Authority’s Acting Director of Section 8 who stated comparable unit rents were “expected” to justify the rents requested by the landlord of the subject unit, and that inspectors routinely used the highest comparables. We reviewed 33 tenant files and determined 30 (91 %) of the Certification of Rent Reasonableness forms were incomplete, missing, and/or contained erroneous information. For example, the certification forms often did not support whether the subject unit and its comparables were the same unit size, type, or age, as well as whether 6 they had the same amenities, facilities, or housing and maintenance services. Therefore, neither we nor the Authority staff could determine that properties were comparable to the subject unit. The following two clients are representative of the problems we found in the client files: Client #206393 The Certification of Rent Reasonableness form was dated July 23, 2002, and showed the subject unit type was a multi-unit building; however, the two units shown as comparables were both triplexes. In addition, both of the comparable units were outside of the one- mile radius. There was no justification for obtaining the comparable units outside of the one-mile radius. One of the comparable units was 1578 square feet while the subject unit was 1080 square feet, a significant size difference of 498 square feet. Neither the subject unit nor the two comparable units showed any information regarding the quality, services, and utilities paid by owner, amenities, or facilities. The age of the subject unit was estimated at five years old, and the two comparable units were estimated at 40 years old and 92 years old, respectively. In addition, the housing inspector used a real estate publication called the California Market Data Cooperative as the source for obtaining the comparables. This publication provides information on residential and investment properties offered for sale rather than for rent. We interviewed the housing inspector who could not adequately explain the above omissions, but agreed mistakes were made during the rent reasonableness determination. As a result, we determined the Authority paid $5,166 in unsupported housing assistance payments to the landlord of client #206393. Client #237744 The Certification of Rent Reasonableness form was dated July 8, 2003. The form did not show the square footage or source of the comparable for either of the units. In addition, the form did not show the building age of the first comparable unit, and the form was missing the unit type information for the second comparable. The first comparable showed a rent of $950; however, we determined the rent was inflated. We researched the Authority’s Wintegrate computer system to determine whether properties used as comparables were assisted. We determined the first comparable for the subject unit was indeed a HUD-assisted unit, and the rent was actually $850 instead of the $950 reported on the Certification of Rent Reasonableness form. Based on this erroneous information, both comparable units were actually $850 a month. Therefore, the contract rent of $925 was unsupported. We were not able to interview the housing inspector who performed the rent reasonableness determination because he was on administrative leave. However, we were able to determine the Authority paid $9,816 in unsupported housing assistance payments to the landlord of client #237744. 7 See Appendix B for a summary of all deficiencies noted during the review. See Appendix C for the Code of Federal Regulations that apply to rent reasonableness determinations. Conclusion The Authority did not adequately perform rent reasonableness in order to determine and support Section 8 rents paid through housing assistance payments. We attribute this to the Authority not following HUD-approved policies and procedures in performing rent reasonableness reviews. As a result, the Authority paid $186,881 in unsupported Section 8 housing assistance payments to the landlords of 30 of the 33 files reviewed. Recommendations We recommend that the director, Office of Public and Indian Housing, require the Authority to 1A. Support or reimburse HUD $186,881 for unsupported Section 8 housing assistance payments from nonfederal funds. 1B. Ensure HUD-approved policies and procedures are followed when performing rent reasonableness determinations, as well as completing the Certifications for Rent Reasonableness. 8 SCOPE AND METHODOLOGY To accomplish our objective, we • Reviewed 33 tenant files; • Interviewed inspectors, eligibility interviewers, eligibility advisors, and Section 8 and financial management personnel; • Reviewed HUD and the Authority’s Section 8 Management Assessment Program reports; and • Conducted on-site visits to selected Section 8 units and their comparable units. We interviewed appropriate Authority and HUD Office of Public and Indian Housing management staff. We performed onsite work at the Authority’s administrative office at 2600 Wilshire Boulevard, Los Angeles, California, from April through August 2005. The audit covered the period of January 1, 2003, through December 31, 2004. We performed our review in accordance with generally accepted government auditing standards. 9 INTERNAL CONTROLS Internal controls are 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, or 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 internal controls over the following areas were relevant to our audit objectives: • Administration of the Section 8 program as relates to rent reasonableness determination in compliance with HUD regulations, • Maintaining complete and accurate records , and • Safeguarding Section 8 program resources. 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, the following internal control is considered a significant weakness: • Authority did not follow policies and procedures in effect to properly administer the rent reasonableness determinations or safeguard Section 8 resources (finding 1). 10 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation number Unsupported 1/ 1A $186,881 1/ Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity, and eligibility cannot be determined at the time of the audit. The costs are not supported by adequate documentation or there is a need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a future 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. These costs were calculated based on the monthly rents paid since the last recertification. 11 Appendix B SUMMARY OF DEFICIENCIES Client # 1 2 3 4 5 6 7 8 9 10 11 1 108328 X X X $ 5,850.00 2 143238 X X $ 7,620.00 3 061274 X X X X X X X $ 4,392.00 4 231817 $ - 5 *156572 $ 2,290.00 6 206393 X X X X X X X X X $ 5,166.00 7 127687 X X X X $ 954.00 8 246897 X X X X $ 2,921.00 9 131860 X X X X X X X $ 4,536.00 10 070367 X X X X X X X X $ 1,568.00 11 245344 X X X X $ 10,484.00 12 245042 X X X X X X $ 10,614.00 13 102183 X X X X X X $ 4,740.00 14 254605 X X X X X X $ 6,899.00 15 037860 X X $ 5,160.00 16 039150 X X X X X X X X X X $ 7,908.00 17 250792 $ - 18 249285 $ - 19 204095 X X X X $ 7,572.00 20 098173 X X $ 5,316.00 21 020490 X X X X X X X $ 3,430.00 22 254764 X X X X X $ 12,517.00 23 217723 X X X X X X X X X X $ 1,329.00 24 039289 $ 4,311.00 25 237744 X X X X X X $ 9,816.00 26 258024 X X X $ 9,012.00 27 266273 X X X X X $ 5,180.00 28 131800 X X X X X X X X X $ 3,275.00 29 255235 X X X X $ 9,680.00 30 266082 X X X X X X $ 8,298.00 31 246470 X X X $ 9,680.00 32 232072 X X X X X $ 8,097.00 33 027169 X X X X $ 8,266.00 Totals 10 19 11 14 13 23 23 12 10 16 % of Total 30% 58% 33% 42% 39% 70% 70% 36% 30% 48% $ 186,881.00 *Client # 156572 tenant file had no Certification of Rent Reasonableness form, therefore, we were unable to determine whether the comparables supported the rent. LEGEND 1. Location 5. Unit Age 9. Utilities 2. Unit Size 6. Amenities 10. Source of Comparables 3. Unit Type 7. Facilities 11. Unsupported HAP 4. Quality 8. Housing Services & Maintenance Services 12 Appendix C APPLICABLE CODE OF FEDERAL REGULATIONS _______________________________________________ The following sections of the Code of Federal Regulations apply to rent reasonableness determinations: • 24 CFR 982.507 states housing authorities may not approve a lease until the rent has been determined reasonable and that the rent determination is based on other comparable unassisted units. • 24 CFR 982.158 requires housing authorities to keep records for three years documenting its determination that rent paid to an owner is reasonable. • 24 CFR 982.54 requires housing authorities to prepare a written administrative plan establishing local policies for administering the Section 8 program in accordance with HUD guidelines. 13 APPENDIX D AUDITEE COMMENTS AND OIG’S EVALUATION 14 15 16 OIG Evaluation of Auditee Comments An OIG evaluation was not necessary since the auditee fully agreed with all findings and recommendations. 17
The Housing Authority of the City of Los Angeles, Los Angeles, California, Did Not Adequately Determine and Support Section 8 Rents
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)