oversight

The Housing Authority of the City of Newark Controls Over Bond Financing Activities, Obtaining Supporting Documentation, and Legal Settlements Require Improvement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-02-14.

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

                 AUDIT REPORT




         The Housing Authority of the City of Newark
Controls Over Bond Financing Activities, Obtaining Supporting
 Documentation, and Legal Settlements Require Improvement

                    Newark, New Jersey

                      2006-NY-1003
                     February 14, 2006

                  OFFICE OF AUDIT
               New York/New Jersey Region
                                                                  Issue Date
                                                                     February 14, 2006
                                                                  Audit Report Number
                                                                     2006-NY-1003




TO:         Edward T. De Paula, Director, Office of Public Housing, 2FPH



FROM:       Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: The Housing Authority of the City of Newark, Newark, New Jersey, Controls
         Over Bond Financing Activities, Obtaining Supporting Documentation, and
         Legal Settlements Require Improvement


                                    HIGHLIGHTS

 What We Audited and Why
           Pursuant to a request from the former U.S. Department of Housing and Urban
           Development (HUD) New York/New Jersey regional director, we performed a
           second audit of the Housing Authority of the City of Newark (Authority) to cover
           areas of concern, identified in our first audit as being high risk. The objectives of
           this audit were to determine whether the Authority’s (1) Housing Finance
           Corporation conducted its operations in accordance with HUD regulations, (2)
           payments made to the City of Newark in addition to the payments in lieu of taxes
           for municipal services were allowable, (3) costs for legal settlements were
           properly authorized, and (4) self-insurance program is cost effective.

 What We Found
              In our opinion, the Authority did not conduct its bond financing activities in
              accordance with HUD requirements. It did not ensure that its Housing Finance
              Corporation (1) placed all excess funds for specific projects into the debt service
              reserves, (2) remitted amounts to HUD when required, (3) properly certified and
              reported its McKinney Act activities to HUD, and (4) disbursed all McKinney Act
              funds in a timely manner and/or made disbursements only for eligible items. As a
         result, more than $1.8 million was either not placed into project’s(s’) debt service
         reserves or remitted to HUD as required. In addition, more than $1.9 million in
         McKinney Act funds were not spent in a timely manner for proper purposes.

         Contrary to the requirements of its annual contribution contract, cooperation
         agreement, and federal regulations, the Authority did not maintain adequate
         documentation to support various payments made to the City of Newark. It could
         not substantiate that the services the Authority paid for were in addition to those
         services that the City was obligated to provide under the cooperation agreements
         the Authority has with the City, or that the payments made were reasonable. As a
         result, Authority officials cannot substantiate that the $6.9 million paid to the City
         of Newark was necessary.

         Contrary to HUD requirements, the Authority settled general liability claims
         without obtaining prior written HUD approval. As a result, HUD could not be
         assured that more than $1.2 million in legal settlements paid under the self-
         insurance program were processed in a cost-effective manner.

What We Recommend
         We recommend that HUD obtain a legal opinion as to whether the citations of 24
         CFR [Code of Federal Regulations] 811.105 and 811.108 are applicable to the
         projects in question and as to the disposition of $3.7 million in funds being
         retained by the Authority and its Housing Finance Corporation. If it is determined
         that the cited regulations are applicable then the Authority should deposit $1.5
         million into the debt service reserves of the applicable projects and HUD should
         determine whether $320,859 should be recaptured and the proper disposition of
         the $1.9 million in McKinney Act savings/funds being held by the Authority and
         its Housing Finance Corporation. The Authority should establish controls to
         ensure that McKinney Act Savings/funds are disbursed and reported in
         accordance with applicable requirements, and the Authority should also provide
         documentation or reimbursement for the $67,524 in questioned disbursements
         made by the Housing Finance Corporation. We further recommend that HUD
         review the documentation provided to determine if the evidence supports that city
         services were provided that exceeded the services that were to be provided in
         accordance with the cooperation agreement and seek reimbursement for any
         amounts not supported. In addition, we recommend that procedures be
         established to ensure that a) service agreements with the city are properly
         executed and monitored, services are provided, and costs are reasonable, b) prior
         HUD approval is obtained for general liability settlements, and c) contract
         services are provided as required.

         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.



                                           2
Auditee’s Response
           Officials of the Authority generally disagreed with our findings. They stated that
           the regulations cited (24 CFR [Code of Federal Regulations] 811.105 and
           811.108) are not applicable to the projects in question and that there is no
           provision in the old regulations that require unspent McKinney Act savings/funds
           to be returned to HUD. As a result, we added a recommendation for HUD to
           obtain a legal determination to identify the regulations that are applicable, and to
           determine the proper disposition of the funds being retained by the Housing
           Finance Corporation. Authority officials believe that they provided enough
           evidence to substantiate the issues in finding two, and they agreed with finding
           three and have begun making corrective actions by developing procedures to
           request HUD approval before settling general liability claims.

           We discussed the results of our review with Authority officials during the audit
           and at an audit exit conference held on January 5, 2006. Authority officials
           provided their written comments on January 10, 2006. The complete text of the
           Authority’s response, along with our evaluation of that response, can be found in
           appendix B of this report. The Authority’s response included a number of
           exhibits and documents that were too voluminous to be included in our final
           report, but were provided to your office.




                                             3
                            TABLE OF CONTENTS

Background and Objectives                                                           5

Results of Audit
      Finding 1: In Our Opinion, the Authority Did Not Conduct Its Bond Financing   6
                 Activities in Accordance with HUD Regulations and Requirements

      Finding 2: The Authority Did Not Maintain Adequate Documentation to Support   12
                 Payments to the City of Newark

      Finding 3: The Authority Settled General Liability Claims without Obtaining   16
                 HUD’s Written Approval

Scope and Methodology                                                               19

Internal Controls                                                                   20

Followup on Prior Audits                                                            22

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                23
   B. Auditee Comments and OIG’s Evaluation                                         24




                                             4
                      BACKGROUND AND OBJECTIVES


The Housing Authority of the City of Newark (Authority) was established in 1938 after the
passage of the Federal Housing Act of 1937 to build and manage public housing developments
for residents of the City of Newark, New Jersey. The Authority owns approximately 7,800 low-
income housing units, assists an additional 6,383 families through the Section 8 program, and
operates various urban renewal programs. In addition, the Authority’s board of commissioners
established the Housing Finance Corporation to sponsor the issuance of tax-exempt bonds to
finance the construction of Section 8 housing. The Authority reported total operating revenue of
more than $150 million for the period ending March 31, 2005.

The Authority’s board of commissioners is comprised of seven members, who serve five-year
terms; one member is appointed by the mayor, five members are appointed by the mayor with
city council approval, and one member is appointed by the New Jersey Department of
Community Affairs as delegated by the governor. The executive director of the Authority is Mr.
Harold Lucas.

The former U.S. Department of Housing and Urban Development (HUD) regional director had
requested a full operational audit of the Authority as a result of media allegations of questionable
business practices. We performed an audit and issued an audit report on May 26, 2005. This is
our second audit of the Authority, which is being performed to address the issues that were
identified in the initial audit as high risk but not reported on. Our objectives for this audit were
to determine whether the Authority’s (1) Housing Finance Corporation conducted its operations
in accordance with HUD regulations, (2) payments made to the City of Newark in addition to the
payments in lieu of taxes for municipal services were allowable, (3) costs for legal settlements
were properly authorized, and (4) self-insurance program is cost effective.




                                                 5
                                  RESULTS OF AUDIT

Finding 1: In Our Opinion, the Authority Did Not Conduct Its Bond
           Financing Activities in Accordance with HUD Regulations
           and Requirements
The Authority did not ensure that its Housing Finance Corporation (1) placed all excess funds for
specific projects into the debt service reserves, (2) remitted amounts to HUD when required, (3)
properly certified and reported its McKinney Act activities to HUD, and (4) disbursed all
McKinney Act funds in a timely manner and/or made disbursements only for eligible items. As
a result, more than $1.8 million was either not placed into the project’s (s’) debt service reserves
or remitted to HUD as required. In addition, more than $1.9 million in McKinney Act funds
were not spent in a timely manner or properly used to provide decent, safe, and sanitary housing
to very low-income persons. These problems occurred because the Authority did not have
controls in place to ensure that all bond-financing activities were conducted in accordance with
applicable regulations. Further, Authority officials believe that the regulations were not
applicable to the projects in question since the effective date of the regulations was after the bond
issue dates, and that the regulations allowed them ten years to disburse McKinney Act Savings.
Consequently, to ensure that the Authority complies with the regulations, we recommend that
HUD obtain a legal determination as to the proper disposition of funds being retained by the
Housing Finance Corporation.


 Criteria

            Federal regulations at 24 CFR [Code of Federal Regulations] 811.105(a)(2)(iii)(b)
            provides that the applicant shall receive no compensation in connection with the
            financing of a project except for its expenses. Should the applicant receive any
            compensation in excess of such expenses, the excess is to be placed in the debt
            service reserve. In addition, 24 CFR [Code of Federal Regulations] 811.108, which
            relates to debt service reserves, provides that the debt service reserve and its
            investment income shall be available only for the purpose of paying principal or
            interest on the obligations. Upon full payment of the principal and interest on the
            obligations (including that portion of the obligations attributable to the funding of the
            debt service reserve), any funds remaining in the debt service reserve shall be
            remitted to HUD.

 Funds Were Not Placed into the
 Debt Service Reserve

            During the period April 1, 1978, to March 31, 2005, the Authority’s Housing Finance
            Corporation earned management service and interest income from various activities.
            The source of most of the management service income was not identified. The
            Authority’s staff believed that the income was the result of financing services the


                                                  6
        Housing Finance Corporation provided to Section 8 projects. They stated that the
        financing services may have included bond floating, short-term financing, or conduit
        bond financing. The Housing Finance Corporation generated interest income by
        investing the management service income in various short-term financing
        instruments; nevertheless, net income from management services plus applicable
        interest income amounted to $1,865,103 as of March 31, 2005. Although the Code of
        Federal Regulations provides that the Housing Finance Corporation may not receive
        any compensation in connection with the financing of a project except for its
        expenses and that the excess compensation should have been placed in the debt
        service reserves of the individual projects, these funds were not placed into specific
        projects’ debt service reserves. As a result, debt service reserves for specific projects
        were under funded, and these projects were deprived of the use of funds that could
        have been used for the payment of principal and interest on the projects’ obligations.


Funds Were Not Remitted to
HUD as Required

        Part of the above management service income and interest, which was not placed into
        debt service reserves, is applicable to financing activities for four of the Authority’s
        projects that had their 1980 bonds redeemed in 2002. One of the projects whose
        bonds were redeemed, Livingston Homes, has $59,450 of the $1,865,103. If these
        funds had been properly deposited in the debt service reserve for Livingston Homes,
        they would have been remitted to HUD as required by federal regulations when the
        bond issue that financed the project was redeemed or paid off in 2002; consequently,
        HUD was deprived of the use of $59,450.

        In addition, $261,409 of the $1,865,103 pertains to three projects (Fairview, Saint
        Mary’s Villa, and Broadway Manor) that had their bond issues refinanced under the
        McKinney Act. After the refinancing, HUD generated refunding agreements for
        these projects, which may be inaccurate since the $261,409 was not available or
        deposited into the individual projects’ debt service reserves. Therefore, HUD may
        have inaccurately determined the amount needed to pay off the outstanding bonds and
        fund the debt service reserves before approving the refunding agreements.
        Accordingly, HUD needs to review the debt service reserves and refunding
        agreements for these three projects and determine whether any funds should be
        recaptured.

        To properly account for the above management service interest and income, HUD
        needs to review and make a determination on how to handle the $261,409, while the
        Authority needs to remit the $59, 450 to HUD and ensure that the remaining
        $1,544,244 is deposited into the project’s (s’) debt service reserve, which would
        represent funds being put to better use .




                                              7
McKinney Activities Were Not
Certified in a Timely Manner
and Reported to HUD

        The Stewart B. McKinney Act was designed to provide funding for housing related to
        the homeless and very low-income persons. McKinney Act savings are defined as
        savings resulting from the reduction in Section 8 contract rents related to project
        bonds that have been refinanced. Regarding the Authority and its Housing Finance
        Corporation, HUD approved refinancing of four bond issues under the provisions of
        the McKinney Act between 1993 and 1995. HUD determined the amount of savings
        on the Section 8 contract rents that resulted from the refinancing and approved
        refunding agreements, which provided for semiannual payments to the Housing
        Finance Corporation for 50 percent of the Section 8 savings resulting from the
        refinancing.

        The refunding agreements provide that the Housing Finance Corporation must submit
        a written requisition to the trustee and HUD stating that the refunding payments
        (together with any interest earned) have been expended or are expected to be
        expended within the next six months. Further, the Housing Finance Corporation must
        provide annual certifications to HUD that the refunding payments are being used in
        accordance with their approved housing plan, together with a report setting forth the
        uses of the refunding payments and the nature of the assistance provided, within 90
        days of the end of its fiscal year.

        From April 1, 1994, to March 31, 2005, the Housing Finance Corporation received
        financial adjustment factor refunding payments (also known as McKinney Act
        savings) of $2,289,284 and earned interest income of $469,444 by investing the
        funds. Thus, the total amount of the refunding payments and applicable interest was
        $2,758,728 through March 31, 2005. Yet despite having received this funding since
        1994, the Authority did not submit its initial report to HUD until May 31, 2005. This
        report provided that the McKinney Act savings/fund balance was $2,950,991 as of
        March 31, 2005. However, this balance was overstated and was later corrected by the
        Authority during our review on October 12, 2005. The Authority did not certify that
        the funds had been used in accordance with the refunding agreements and inform
        HUD on what these funds would be used for (in this case the funds were supposed to
        be used for security costs) until May 2005. Thus, the Authority did not report or
        certify to HUD in a timely manner.

McKinney Act Funds Were Not
Disbursed in a Timely Manner

        By not providing the above reports in a timely manner, HUD was not made aware
        that the Housing Finance Corporation was not disbursing these funds in a timely
        manner. Further, from the $2,758,728 balance of McKinney Act savings/funds or
        refunding payments received, the Housing Finance Corporation had disbursed a total



                                            8
        of $802,299 through March 31, 2005, leaving $1,956,429 of McKinney Act
        savings/funds that had not been disbursed as of March 31, 2005. Since the Housing
        Finance Corporation did not expend these funds for eligible purposes within six
        months of receiving them as required, it was not in compliance with the requirements
        of the refunding agreements. Consequently, HUD needs to determine the proper
        disposition of the remaining McKinney Act funds.

Questionable Disbursements

        The Authority’s Housing Finance Corporation inappropriately disbursed $67,524 on
        costs not related to the corporation’s mission and not in accordance with federal
        regulations. These funds were used to reimburse the Authority’s operating account for
        legal costs stemming from litigation and for consulting services in connection with real
        estate acquisitions. Contrary to the requirements, these costs were not related to
        financing or refinancing the debt obligations of Section 8 projects or to providing
        housing for low-income families.

        The refunding agreement provides that McKinney Act funds should only be used in
        the city of Newark, New Jersey, to provide decent, safe, and sanitary housing
        affordable to very low-income families or persons. Such funds may be applied (i)
        directly to assist very low-income families or persons or (ii) to pay the development
        costs of dwelling units to be occupied by persons and families of very low income but
        only to the extent that these costs would be chargeable to the project’s capital account
        for income tax purposes. The refunding agreements also state that McKinney Act
        funds shall not be used to pay administrative costs of the corporation.

        Further, 24 CFR [Code of Federal Regulations] 811.108 provides that non-
        McKinney-Act funds (which were received before April 1, 1993) should all have
        been deposited in debt service reserves and only used for the payment of principal or
        interest on the obligations. Costs that are not related to the financing of the bond
        issues would not be eligible costs .

        The $67,524 in questioned disbursements is considered unsupported as follows:

                                        Date of
          Legal fees                    disbursement            Amount
          Lawsuit Authority vs.         Mar. 27, 1992           $13,312.78       1/
          City Construction
                      “                 Aug. 27, 1992           $12,722.59       1/

          Consultant fees

          Feasibility study Section     Nov. 14, 2000           $9,786.75        1/
          8 project acquisition
                       “                Aug. 13, 2000           $20,833.33       1/
                       “                Feb. 21, 2003           $10,868.45       1/
          Total                                                 $67,523.90

                                              9
      1/     These items are considered unsupported because there was insufficient
             documentation to determine whether the costs were eligible and reasonable or
             could be considered allowable development costs that would be charged to the
             project’s capital account for income tax purposes.
Conclusion

           Authority officials submitted comments (see Appendix B) that state that the
           criteria cited in this finding is not applicable to the projects in question because
           the bonds for these projects were issued before the effective date of the
           regulations, and therefore, the Housing Finance Corporation was entitled to the
           payments per the indenture of trust. In a prior OIG audit (92-NY-204-1009),
           HUD’s legal counsel ruled that the cited regulations are applicable and the
           Authority and its Housing Finance Corporation agreed to abide by all regulations;
           however, to date the legal opinion could not be located. As a result, to clarify this
           issue HUD needs to obtain a new legal opinion on whether the regulations are
           applicable and to determine the proper disposition of these funds.

           Nevertheless, based on the above deficiencies, and the prior legal opinion, it is
           clear that the Authority needs to strengthen its controls over bond financing
           activities to ensure that its Housing Finance Corporation is following all
           applicable regulations. As such, not until all bond-financing funds are placed into
           the debt service reserves in a timely manner as required, disbursed for eligible
           items in accordance with the housing plan, and certified and reported to HUD in a
           timely manner will the Authority’s bond program be efficiently managed.

Recommendations

           We recommend that the director of HUD’s Office of Public Housing

           1A.    Obtain a legal opinion to determine whether the citations of 24 CFR [Code
                  of Federal Regulations] 811.105 and 811.108 are applicable to the projects
                  in question and to determine the proper disposition of the funds being
                  retained by the Housing Finance Corporation.

           If it is determined that the cited regulations are applicable, we recommend that the
           director of HUD’s Office of Public Housing instruct the Authority to

           1B.    Deposit $1,544,244 into the debt service reserves of the individual projects
                  from where the funds originated .

           1C.    Remit $59,450 to HUD for the funds that were applicable to the bond
                  issue for Livingston Homes, which was redeemed in 2002.



                                             10
1D.    Submit information to HUD regarding the underfunding of debt service
       reserves for the three projects (Fairview, Saint Mary’s Villa, and
       Broadway Manor) amounting to $261,409 so that HUD can determine
       whether these funds should be recaptured and the refunding agreements
       should be adjusted for these three projects.

1E.    Provide direction to its Housing Finance Corporation (based on the legal
       determiniation) as to the proper disposition of the $1,956,429 in
       McKinney Act savings/funds that was not disbursed in a timely manner,
       per the refunding agreements.

We also recommend that the director of HUD’s Office of Public Housing require
the Newark Housing Authority to:

1F.    Establish controls to ensure that McKinney Act savings/funds are
       disbursed and reported in accordance with the applicable requirements.

1G.    Provide documentation to the Office of Public Housing regarding the
       questioned disbursements amounting to $67,524 so that an eligibility
       determination can be made. The cost of all ineligible disbursement should
       then be repaid to the applicable project’s(s’) debt service reserve .

1H.    Establish procedures to ensure that its Housing Finance Corporation
       conducts it operations in accordance with all federal regulations .




                               11
Finding 2: The Authority Did Not Maintain Adequate Documentation to
           Support Payments to the City Of Newark

Contrary to the requirements of its annual contribution contract, cooperation agreement, and
federal regulations, the Authority did not maintain adequate documentation to support various
payments made to the City of Newark. It could not substantiate that the services the Authority
paid for were in addition to those services that the city was obligated to provide under the
cooperation agreements the Authority has with the city, or that the payments made were
reasonable. This occurred because the Authority did not have a signed agreement in place that
set forth, in sufficient detail, the quantity and cost of the additional services to be performed, nor
did it have controls in place to ensure that proper supporting documentation was obtained before
making the payments. As a result, Authority officials cannot substantiate that $6.9 million paid
to the City of Newark was necessary.

 Criteria

               The annual contribution contract requires the Authority to operate in an
               economical and efficient manner. It requires the Authority to perform and
               comply with all the applicable provisions of the cooperation agreement including
               the making of payments in lieu of taxes and to at all times enforce its rights under
               the cooperation agreement and not terminate or amend the agreement without the
               prior written approval of HUD. The annual contributions contract also requires
               the Authority to maintain records in a manner that permits HUD to determine
               whether all funds have been expended in accordance with each specific program
               regulation and requirement.

               The cooperation agreement between the Authority and the City of Newark states
               that the Authority will pay 10 percent of the annual shelter rent to the city as a
               payment in lieu of taxes and that the city will provide, without additional charge
               to the Authority and its tenants, public services and facilities as furnished from
               time to time without charge to other dwellings and inhabitants in the municipality.

 Payments Made in Addition to
 Payment in Lieu of Taxes

               The Authority said they entered into two memorandums of understanding with the
               City of Newark whereby the city agreed to provide special services to the
               Authority and its residents. These memorandums of understanding, which were
               not signed, provided that the City would provide special services to the Authority
               in excess of the City’s responsibility under various cooperation agreements. Such
               services were to include:

                   •   Services and facilities related to supervision of special police officers
                       employed by the Authority.



                                                  12
   •   Services for manning two stabilization vans owned by the Authority and
       used to provide around the clock patrolling at the housing sites of the
       Authority.
   •   Special police services during the implosion/demolition of major housing
       complexes owned by the Authority.
   •   Additional police services at various low rise and high rise developments
       and buildings.
   •   Additional police services at large common areas of the Authority etc.

The agreements did not specify the quantity and cost of the additional services to
be provided at each project nor what constituted normal services. We requested
additional information and supporting documents to determine the eligibility and
reasonableness of the costs. Although the Authority officials provided additional
information, we could not determine from the documents that the services
provided were in addition to the level of services the the City was already
obligated to provide under the cooperation agreements. Moreover, since the
Authority was unable to provide signed copies of the agreements, HUD lacks
assurance that formal agreements were made.

The Authority said they entered into these memorandums of understanding
because Authority and city officials believed that a combination of high density
and poverty in the Authority’s developments exerted greater than normal demands
on city departments, especially for the police and the health and human services
departments. This was intended to be in addition to what services are normally
required by other apartment dwellings and residents throughout the city. The
agreements called for the Authority to make a one-time “up front” payment to the
city, reflecting the expected reasonable cost of said services. The agreements
further provided that the Authority could conduct an audit of the costs of the
services and facilities provided by the city within six months of the
commencement of the agreement. If the services were determined to not benefit
the Authority and its residences, the city was to return a prorated amount to the
Authority.

On August 14, 2001, the Authority paid the City of Newark $1.4 million for
additional services. Further, without conducting an audit to determine if the
initial payment was reasonable, on April 9, 2002 the Authority made another
payment of $5.5 million to the City, bringing the total of the payments to $6.9
million. These payments were in addition to the $884,074 payments in lieu of
taxes that the Authority paid the City between April 2001 and March 2004 for
baseline services. Moreover, Authority officials paid the $6.9 million without
documentation to substantiate that the costs were for services specified in the
memorandums of understanding.




                                13
 Health and Human and
 Emergency Service Costs.

            Authority officials provided documents indicating that the city incurred $778,508
            in costs by the Department of Heath and Human Services and Emergency Medical
            Services for health care services; meals provided seniors and children, and
            ambulance services. A supporting schedule reflected that these costs were derived
            by taking the percentage of Authority residents in relation to the percentage of the
            total population of the city of Newark and applying it to the city’s total cost for
            health and human services and emergency medical services for the year.
            However, without providing statistics on the number of Authority residents who
            received these services, the appropriateness of this amount cannot be determined,
            especially since under the cooperation agreement, the city, in exchange for
            payments in lieu of taxes, was required to provide the Authority and its residents
            at no additional charge the same services and facilities that it provided to other
            dwellings and inhabitants.

 Police Services

            The Authority also provided documents reflecting $6,393,346 in costs for
            additional police services purportedly provided to the Authority. This included a
            schedule showing summary salary and benefit costs for 85 police officers who
            purportedly provided police coverage at four low-income housing projects from
            September 1, 1998, through September 1, 1999. However, another schedule from
            the city provided as support for the total payments indicated that the services were
            for the years 2000 and 2001. Moreover, the term of the unsigned memorandum of
            understanding agreements provided to us was from April 1, 2001 to March 31,
            2003. After we requested explanations for the above discrepancies, on July 18,
            2005 the Authority’s board of commissioners approved amended resolutions that
            after the fact asserted that the services were provided from 1998 to 2003.

Monitoring and Audits

            Although the memorandums of understanding allowed the Authority to audit and
            monitor charges for services provided, monitoring reports provided by the
            Authority did not indicate that additional services were provided. Further, there
            was no indication that a cost benefit analysis was performed six months after
            commencement of the service agreements, as set forth in the memorandums of
            understanding and the Authority’s resolution No. 01-08-22. Authority officials
            stated that the benefits received from such services are intangible, and, therefore,
            they did not have any physical records of the benefits received. We disagree that
            the Authority does not have or could not obtain physical records to show the
            benefits of the services. Arrest records, complaint logs, service calls, etc could all
            be used to evaluate the need for and frequency of the special services.



                                              14
Conclusion

             The former executive director and the board of commissioners did not provide
             proper oversight over initiation and implementation of service agreements with
             the City of Newark. Because the Authority failed to maintain adequate
             supporting documentation, monitor the services provided, or audit the support
             when received, HUD can not be assured the $6.9 million paid to the City of
             Newark was for special services provided in addition to what should have been
             provided under the cooperation agreements or whether the payments were
             reasonable.

Recommendations

             We recommend that the director of the HUD Office of Public Housing

             2A. Review the documentation provided by the Authority, determine if the
                 evidence supports that services were provided that exceeded the services
                 that were to be provided in accordance with the cooperation agreements and
                 seek reimbursement of any amounts that are not supported.

             We recommend that the director of the HUD Office of Public Housing require the
             Authority to:

             2B. Establish procedures that will ensure that service agreements with the City
                 of Newark are properly executed and monitored to ensure that services have
                 been provided, and that costs charged to the Authority are reasonable,
                 necessary, and properly documented.




                                            15
Finding 3: The Authority Settled General Liability Claims without
           Obtaining HUD’s Written Approval
Contrary to HUD requirements, the Authority settled general liability claims without first
obtaining written approval from HUD as required. This occurred because Authority officials
believed that HUD approval had already been obtained since insurance settlements are a line
item in the Authority’s budget, which HUD approved. As a result, HUD could not be assured
that legal settlements amounting to more than $1.2 million were processed in the most cost-
effective manner. Further, the Authority contracted with a firm to review the settlements and
provide an assessment of settlement levels and litigation management but only received the
services for the first year of a three-year contract.


 No HUD Approval for Legal
 Settlements

              The Authority has a self-insurance program through which it pays up to the first
              $200,000 of general liability and workman’s compensation claims, with an
              insurance company paying the claim amounts in excess of $200,000. We
              examined Authority claims paid in excess of $10,000 and found that from April 1,
              2001, through March 31, 2005, the Authority paid $1,233,735 to settle 17 general
              liability claims. However, the Authority entered into settlement agreements for
              these claims without obtaining the prior written approval of the HUD regional
              counsel .

              HUD Litigation Handbook 1530.01, REV-5, paragraph 5-3(c), states that a public
              housing authority shall accept no settlement arising out of litigation without the
              prior written concurrence of HUD. The terms of any such offer shall be
              communicated in writing to the regional counsel together with the
              recommendations of the public housing authority for disposition and the
              arguments in support of those recommendations.

              Paragraph 5-3(c) further states that if the opportunity for a settlement arises in the
              course of a trial, counsel for the public housing authority shall inform the court of
              these requirements and, in an appropriate case, shall respectfully move for a
              continuance to allow for an opportunity to obtain HUD concurrence in the terms
              of the proposed settlement .

              Authority officials stated that local HUD field office approval is not required or
              sought during the process of settling claims since the costs for insurance
              settlements are included in the Authority’s HUD-approved annual budget.
              However, local HUD officials informed us that although the Authority’s overall
              expenditures or funding level is approved for performance funding, HUD does not
              review the general line items in the budget; therefore, approval was not obtained.




                                                16
             The HUD regional counsel indicated that the requirements for prior written
             approval by HUD for general liability claims are applicable. The consolidated
             annual contributions contract, part A, section 5, requires the Authority to comply
             with all applicable statutes, executive orders, and regulations issued by HUD.
             Since advance written approval from the HUD regional counsel was not sought or
             obtained, HUD was not able to provide guidance on how to defend or settle
             various law suits, and could not be assured that these cases were resolved in the
             most economical or efficient manner.

Contracted Reviews Were Not
Performed


             On January 31, 2002, the Authority entered into a two-year contract with a
             consulting firm to provide broker consulting services for the purpose of enhancing
             the Authority’s loss control services under its property and casualty insurance
             program at a total cost of $151,450. The contract was later renewed for a third
             year for $78,200, and the consultant was paid $229,650. The contract required
             the consultant to perform an annual claims audit of the self-insured workers’
             compensation and general liability claims operations. However, the claims audit
             was only performed for the first year. The audit’s scope should have included
             assessments of litigation management and settlement levels and identification of
             opportunities for improvement. The audits were not provided for the second and
             third years of the contract although the full amount of the contract was paid. This
             occurred because the Authority lacked controls to ensure that contractor complied
             with all requirements of the contract before being paid. However, Authority
             officials state (see comments in Appendix B), that although the audits were not
             conducted other services were provided that can substitute for the audits; further,
             since the audits were only valued at $7,000 per year only $14,000 should be at
             issue. Nevertheless, not only did HUD not review the claim settlements made,
             but the Authority’s hired consultant also did not review the claim settlements;
             therefore, HUD could not be assured that settlements were reasonable.

Conclusion

             Due to the lack of controls, HUD could not be assured that the Authority’s self-
             insurance program was cost effective as prior approval from HUD was not
             obtained and risk management audits were not conducted. Therefore, procedures
             should be established to ensure that contracted services for risk management are
             provided, and the Authority should either seek the contracted risk management
             audits from the consultant, submit evidence to HUD so that HUD could determine
             whether the additional services provided were adequate in lieu of the claims
             audits, or obtain a price adjustment/refund for this contract. In addition, HUD
             needs to review the support for the 17 claims paid to ensure that the settlements
             were proper.



                                             17
Recommendations

          We recommend that the director of HUD’s Office of Public Housing instruct the
          Authority to

          3A. Establish procedure to ensure that HUD approval is obtained before settling
              general liability claims.

          3B. Submit support for the 17 general liability claims amounting to $1,235,735
              to the HUD regional counsel for review and approval. If any of the claims
              are determined to be unallowable, the amount of that claim should be repaid
              from nonfederal funds.

          3C. Establish procedures that will ensure the contracted services for loss control
              are provided in accordance with terms of the broker/consultant contract.

          3D. Either seek performance of the loss control audits that are required to be
              performed by the loss management-consulting contractor, submit evidence
              to HUD so that HUD could determine whether the additional services
              provided by the contractor were enough to forgo the two claims audits that
              were not performed, or obtain a refund for the services not performed in
              accordance with the contract.




                                          18
          SCOPE AND METHODOLOGY

Our review was conducted at the the Housing Authority of the City of Newark
located at 500 Broad Street, Newark, New Jersey. To accomplish our objectives,
we interviewed HUD officials and officials of the Authority and its Housing
Finance Corporation. In addition, we reviewed the following :

•   Applicable laws, regulations, and other HUD program requirements;
•   The Authority’s annual contribution contracts, trust indentures, and
    cooperation agreements; and
•   HUD’s and the Authority’s program files for the low-rent housing and Section
    8 programs.

We reviewed various documents including financial statements, ledgers, bank
statements, invoices, purchase orders, contracts, check vouchers, and prior Office
of Inspector General (OIG) and HUD reports on the Authority. We reviewed
documentation regarding service agreements with the City of Newark, including
activity reports and other supporting documents furnished by the Authority and
the city. We also reviewed the Authority’s financial and administative records
related to its Housing Finance Corporation, including bond trust indentures and
refunding agreements, cooperation agreements and the memorandums of
understanding with the City of Newark, and documentation related to liability
claims that were paid by the Authority.

We performed the audit from May through October 2005. The audit covered the
period from April 1, 2001, through March 31, 2005, but was extended as
necessary to periods before and after these dates.

We performed our review in accordance with generally accepted government
auditing standards.




                                19
                             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, 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:

              •       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 that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              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 items are significant weaknesses:




                                               20
•   The Authority did not have an adequate system to ensure compliance with
    laws and regulations related to the disposition of the proceeds of bond
    financing activities, obtaining support for payments made to the City of
    Newark, complying with cooperation agreements, and obtaining HUD
    approval for legal settlements (see findings 1, 2, and 3).

•   The Authority did not have an adequate system to ensure that resources were
    properly safeguarded when its Housing Finance Corporation made
    questionable payments of $67,524, it paid $6.9 million to the City of Newark
    for services provided under the cooperation agreements, it did not obtain
    HUD approval for legal settlements, and it did not ensure that risk
    management services were provided (see findings 1, 2, and 3).




                             21
                   FOLLOWUP ON PRIOR AUDITS


Report No. 2005-NY-1005
Dated: May 26, 2005

           We issued the above audit report entitled “The Housing Authority of the City of
           Newark Bond Financing Activities and Section 8 Housing Choice Voucher
           Administrative Fee Reserves.” The report contained two audit findings with
           recommendations for corrective action. The finding involved the Authority’s
           retaining of funds remaining after a bond issue had been redeemed and the use of
           housing choice voucher administrative fee reserves for ineligible purposes. The
           Authority has reimbursed the housing choice voucher administrative fee reserve
           account for the $3,991,350 expended for the acquisition of properties; however, the
           recommendations are still open. The Authority is appealing the recommendation
           that HUD be paid the $2,533,536 in funds that remained after the Authority’s 1980
           mortgage revenue bonds were redeemed. The Office of Public Housing has
           established December 31, 2006, as the target date for the Auditee to complete its
           corrective actions and for HUD to verify the corrective actions taken.




                                            22
                                    APPENDIXES

Appendix A

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


       Recommendation                                                Funds to be put
           number             Ineligible 1/        Unsupported 2/    to better use 3/
             1B                                                           $1,544,244
             1C                                                              $59,450
             1D                                          $261,409
             1E                                                           $1,956,429
             1G                                           $67,524
             2A                                        $6,900,000



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/   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
     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.




                                              23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




Comment 6




                         25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7




Comment 8




                         26
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9



Comment 10




                         27
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 11




Comment 12




                         28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 12




                         29
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 12




                         30
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 12




Comment 13


Comment 14



Comment 13




Comment 15




Comment 16



                         31
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 16




Comment 17




                         32
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         33
                  OIG Evaluation of Auditee Comments

            The report scope has been corrected to reflect that our audit covered the
Comment 1   period April 1, 2001 through March 31, 2005, and was extended to cover
            periods before and after these dates as necessary. Therefore, although our
            testing has led us to earlier years, the Authority’s current management is still
            responsible for the issues disclosed in this report.

Comment 2   Although a prior OIG finding was resolved in an earlier year, it does not
            follow that the conditions that caused the finding do not exist today. Various
            issues described in this report do exist today, resulting in the current audit
            findings. In finding 1 funds still have not been deposited in debt service
            reserves and McKinney Act savings were still not being reported or
            expended in accordance with the requirements of the refunding agreements.
            In finding 2 the Authority has still not been able to obtain adequate
            supporting documentation for payments to the City of Newark for services
            that may have been provided as recently as 2003. In finding 3 HUD approval
            was not sought or obtained for general liability claims that occurred from
            2003 through 2005.

            It is understood that the former executive director and board members may
Comment 3   have initiated policy that led to some of the control weaknesses cited in this
            report; however, when the current executive director and board members
            assumed responsibility over the Authority it became their job to correct the
            control weaknesses. Nevertheless, we revised our finding to reflect that the
            former executive director was involved in the deficiencies noted.

            Finding 1

            Debt Service Reserves

            In 1992 OIG chose to audit the flow of funds related to certain bonds issued
Comment 4   by the City of Newark’s Housing Finance Corporation (Report No. 92-NY-
            204-1009), and as a result, the Authority agreed to reimburse its Housing
            Finance Corporation the ineligible cost it received and to follow federal
            regulations pertaining to the receipt and use of excess compensation.
            However, as in 1992, the Authority did not fund the debt service reserves of
            the individual projects for which it had received excess compensation for,
            therefore, we are readdressing this issue. Further, the report requested that
            $1.5 million in excess management service income be placed into the
            individual projects’ debt service reserves. We requested that $320,959
            ($59,450 and $261,409) be either returned to HUD or for HUD to determine
            whether it should be returned.




                                      34
            The Authority indicated that the citations of 24 CFR [Code of Federal
Comment 5
            Regulation] 811.105 and 811.108 were not applicable to bond issues under
            the old regulations. The old regulations did not require that surplus funds
            in the debt service reserve be remitted to HUD. The Authority also
            indicated that 44 Federal Register 12360, (March 6, 1979) stated the new
            regulations are only effective for those projects for which the Section 8
            notification of selection of the preliminary proposal was issued on or after
            April 5, 1979, the effective date of the new regulations. The Authority
            stated that it had not been able to locate any notifications of selection and
            wanted to know our basis for applying the new regulations. The citations
            in 24 CFR [Code of Federal Regulations] Part 811 apply because all of the
            bonds other than Aspen Temple were issued after the effective date of the
            new regulations.

            Further, during our prior audit (92-NY-204-1009), HUD’s counsel
            verbally opined that the regulations were applicable. However, since we
            could not locate a formal opinion addressing this issue, we have added a
            recommendation for HUD to obtain a formal legal opinion regarding the
            applicability of the cited regulations and advise the Authority on the
            proper disposition of the funds in excess of expenses related to Aspen
            Temple and the other projects.

Comment 6   The Authority indicated that the citations of 24 CFR [Code of Federal
            Regulations] 811.105(a) (2) (iii) (b) and 811.108 were not applicable for the
            bond issue for Aspen Temple which closed on November 21, 1978 before
            the April 5, 1979 effective date of the new regulations. However, the
            indenture of trust for Aspen Temple, section 103 provides that it is agreed
            among the Housing Finance Corporation, the trustee, and the Authority that
            all terms and provisions of the regulations, Federal Housing Administration
            regulations, and the National Housing Act are hereby incorporated by
            reference in the indenture and that they shall be controlling to the extent that
            they are in conflict with or in addition to the terms and provisions of the
            indenture and in the event of any inconsistency with the provisions of the
            indenture. Thus, it appears that the new regulations are applicable.

            The Housing Finance Corporation is entitled to reimbursement for its
            expenses including costs related to the bond issuance. Therefore, our review
            is only requesting that the total compensation that is in excess of the Housing
            Finance Corporation’s allowable costs be deposited in the debt service
            reserves of the individual projects. For Aspen Temple, the excess
            management service income was earned between June 30, 1980, and
            February 9, 1993 (after the effective date of the new regulations). Further,
            section 706 of the indenture of trust provides that the Aspen Temple
            Apartments Company may pay each of its fiduciaries reasonable
            compensation for services rendered under the indenture including
            reimbursement for all reasonable expenses incurred in the performance of



                                       35
            duties under the indenture. The Housing Finance Corporation recorded
            $491,369 in management services income applicable to Aspen Temple from
            June 30, 1980, through February 9, 1993. However, because no expenses
            were noted after June 30, 1980, on the Housing Finance Corporation’s
            records for management services provided to this project, this compensation
            does not appear to be reasonable according to the terms of the indenture of
            trust. Accordingly, we requested a legal determination regarding the
            disposition of these funds.

            The Housing Finance Corporation’s financial records (cash receipts
Comment 7   journals) showed that the $50,778 was recorded as management services
            income pertaining to Fairview Homes not to the development Norfolk
            Square. Further, OIG’s prior audit report (Audit Report 92-NY-204-1009)
            questioned the fact that the Housing Finance Corporation did not place the
            excess funds into the project’s debt service reserves. Instead, funds
            ($125,800) were placed into the Authority’s general revolving fund. Upon
            our audit, the Authority returned these funds to the Housing Finance
            Corporation, although, a review of the records showed that the Housing
            Finance Corporation did not place these funds into the debt service
            reserves as required. However, based on the Authority’s claim that the
            regulations are not applicable, we revised our finding to include a
            recommendation for HUD to obtain a legal determination as to the proper
            disposition of the funds being retained by the Housing Finance
            Corporation. Thus, recommendation 1A, 1B, and 1C of the draft report
            are still applicable and are now 1B, 1C, and 1D.

            McKinney Act Savings

Comment 8   The Housing Finance Corporation was required to report semiannually
            that it had expended the McKinney Act funds/savings within six months.
            Since it did not report on the use of these funds as required for a 10-year
            period, HUD was not aware that the funds were not being expended in a
            timely manner. Therefore, HUD was unable to apply a remedy to the
            Housing Finance Corporation’s default of possibly suspending the
            payment of future McKinney Act savings/payments until the default was
            resolved. Consequently, all of the McKinney Act savings/funds
            installments had been paid to the Housing Finance Corporation before
            HUD became aware of the default. Thus OIG recommended that the
            remaining McKinney Act savings that had not been spent be repaid to
            HUD due to the default on the requirements for reporting and spending the
            McKinney Act savings/funds. Further, the requirements do not state that
            the Authority has 10 years to expend the funds; however, they do state that
            the savings/funds are subject to specific use requirements for 10 years.
            The funds must be expended within six months of receiving each
            installment payment according to the refunding agreement.




                                     36
             In addition, the Authority’s September 3, 2004, submission of its proposal
             on how the McKinney Act funds would be expended did not resolve the
             default of not reporting. In HUD’s September 27, 2004, response, HUD
             stated that the Authority’s letter satisfied the 90 day deadline for an initial
             progress report and that HUD looked forward to receiving timely reports
             in the future to the extent the Authority continued to receive McKinney
             Act savings installments. This letter did not state that HUD had approved
             the proposed use of funds. Nevertheless, since Authority officials state
             that repayment or recapture is not an option for not expending the funds in
             a timely manner in accordance with the regulations and the refunding
             agreement, we have revised our recommendation to require the Office of
             Public Housing to obtain a legal determination as to the proper disposition
             of the unspent McKinney Act savings/funds being retained by the Housing
             Finance Corporation. We further recommend that in the event the
             Housing Finance Corporation is allowed to retain the McKinney Act
             savings, controls should be established to ensure compliance with the
             spending and reporting requirements of the refunding agreements and
             regulations. We also removed the statement that the Authority did not
             respond until OIG began its inquiry during the audit. Further,
             recommendation 1D of the draft report is now 1E, and it now reflects that
             the funds in question should be disposed in accordance with the legal
             determiniation.

             Questionable Disbursements

Comment 9    In this section the costs that are being questioned represent items paid with
             non-McKinney Act funds, which should only be used for the payment of
             principal and interest on the obligation or for expenses related to the
             financing of the project. Since some of the funds used for these expenses
             may have been from McKinney Act savings, the draft report states that
             these funds could also be used for providing housing for low-income
             families. However, the $26,035 paid for the lawsuit was paid with non-
             McKinney Act funds, and since these costs were not directly related to
             financing activities, they appear to be ineligible costs. However, based on
             the documents submitted at the exit conference, we classify these costs as
             unsupported pending an eligibility determination by HUD.

Comment 10   We have accepted the $80,000 in costs paid to the borrower as being an
             allowable financing-related cost based on the Authority’s explanation and
             review of the supporting documents. These questioned costs have been
             eliminated from the finding.

             Regarding the $41,489 for consulting services, we could not determine
Comment 11   whether it was paid with McKinney Act or Non-McKinney Act funds.
             These costs would not be allowable if paid with non-McKinney funds
             since the costs were not directly related to financing activities. Further, if



                                       37
             the funds were classified as McKinney Act disbursements, a determination
             would have to be made by HUD that they are allowable development
             costs. Therefore, we classify these costs as unsupported pending an
             eligibility determination by HUD. Regarding the recommendations, they
             are valid because the Housing Finance Corporation has not conducted its
             operations in accordance with the applicable regulations. However, we
             have revised our recommendations; recommendation 1E is now 1G, which
             reflects that the amount of questioned costs is now $67,524.


             Finding 2

             The Authority’s comments allude that OIG looked at the additional
Comment 12   payments to the City of Newark because the initial resolution authorizing
             the services contained discrepancies in the time of performance of these
             services, which was addressed, after the fact, by a board resolution made
             during the audit (July 2005); however, this was not the only reason we
             examined these costs. Authority officials provided three boxes of
             documents related to the police services; however, as mentioned in the
             audit finding, the information did not provide the basis for determining the
             costs, nor did the Authority substantiate that the services provided were in
             addition to the normal services required of the city under the cooperation
             agreementThe supporting documents provided did not contain payroll-
             related information about salary or wages, time distribution records signed
             and approved by a responsible official. Moreover, there were no periodic
             certifications signed or certified by employees or supervisors having first
             hand knowledge of the work performed. More importantly, the
             documentation provided by the City indicated that the costs charges were
             based on a rate of $50 per hour, yet the actual salary costs for the periods
             in question were never provided.

             The Authority also asserts that additional police services were needed as
             evidenced by HUD providing them with a Drug Elimination Grant during
             the period. However, Drug Elimination Grants are not necessarily for
             additional police services. In this case, the Drug Elimination Grants were
             provided from 1998 to 2001 for the employment of security and
             investigators, voluntary tenant patrols, physical improvements, drug
             prevention, special initiatives, gun buyback programs, and other program
             costs. The Drug Elimination Grants did not mention additional police
             services.

             Further the report does not state that police services were not provided or
             that the Authority should monitor the activities of the police. The report
             indicates that the services may have been routine, and that the cost of these
             services is not documented. Although the Authority as stated in their
             reponse provided three boxes of documents and two binders at the exit



                                      38
             conference, stating that the city incurred over $12 million in costs, there
             was insufficient evidence to substantiate the cost of these services, that the
             services were in addition to what was required under the cooperation
             agreement, and that the services were worth more than the $800,000
             already provided to the city in payments in lieu of taxes. As such, the
             auditors asked for cost data, such as payroll records etc., that could be
             used to justify the additional payments made to the city. As mentioned in
             the finding, the schedules provided documented routine items such as
             traffic stops, auto accidents, domenstic disputes and reported roberies, etc.,
             however, the documentation was inadequate to make a determination that
             the costs were reasonable. Therefore, contrary to the requirement of its
             annual contribution contract, cooperation agreement, and federal
             regulations, the Authority did not maintain adequate documentation to
             support the additional payments made to the City of Newark.




Comment 13   After consultation with the Newark HUD Office of Public Housing, draft
             recommendation 2B that required the Authority to obtain HUD approval
             before entering into any agreements with the City of Newark has been
             deleted. In addition, we have deleted draft recommendation 2D that
             required sanctions against the board and the executive director. Further,
             OIG never stated that the Authority should oversee law enforcement
             activities; however, the Authority should ensure that documents submitted
             to request reimbursement for services are adequately reviewed before
             payment.


             The Authority did not have procedures in place to ensure that service
Comment 14   agreements were properly monitored; that the services were provided and
             that the costs were reasonable, necessary and properly documented. Note
             that recommendation 2C in the draft report is still applicable and is now
             2B.

             Finding 3

Comment 15   The Authority’s actions are responsive to the audit finding.


             The Authority’s comments admit that the claims audits were not performed
Comment 16
             for two of the years. However, Authority officials state that in lieu of these
             audits the contractor performed other services related to asbestos problems at
             the Authority’s headquarters office and at one project. Authority officials
             further stated that since the audits only cost $7,000 per year only $14,000
             should be at issue. However, although we accept most of the Authority’s
             comments that other services may have been provided; the additional



                                       39
             documentation provided indicated that the claims audits that were not
             performed might be valued at $21,300 ($10,380 and $10,920). Nevertheless,
             to clarify this issue HUD needs to make a determination on whether the
             equivalent services provided were adequate in lieu of the audits that were not
             performed, and on whether any funds should be repaid.


Comment 17   The significant weaknesses identified in the Internal Control section of the
             report, which relate to the Authority not having adequate systems to
             ensure compliance with laws and regulations and to ensure resources are
             properly safeguarded are valid conclusions that still exist today based on
             the results of the audit (see examples in the evaluation of comment 2).
             Further, we have evaluated the Authority's comments and supporting
             documentation and made appropriate revisions to the findings and
             recommendations.




                                       40