oversight

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)

                                                                 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.




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