oversight

The Housing Authority of the City of Passaic, Passaic, New Jersey, Has Allegations of Mismanagement That Needs to Be Addressed

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-22.

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

                                                                  Issue Date
                                                                      September 22, 2006
                                                                  Audit Report Number
                                                                      2006-NY-1012




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 Passaic, Passaic, New Jersey, Has
         Allegations of Mismanagement That Need to Be Addressed

                                    HIGHLIGHTS

 What We Audited and Why

             In response to a hotline complaint that the Housing Authority of the City of
             Passaic (Authority) was being mismanaged, we audited the Authority’s Section 8
             and Public Housing Capital Fund programs. We also audited controls over
             disbursements and costs allocated to different programs. The objective of the
             audit was to determine whether the allegations of hotline complaint were valid.
             We also determined if Section 8 units complied with housing quality standards.

 What We Found
             Some complaint allegations were valid, and others could not be substantiated.
             The Authority did not adequately manage its Section 8 program from 2002
             through 2005. Contrary to federal regulations, the Authority made ineligible
             transfers of program funds by transferring Section 8 administrative fee reserves to
             the low-rent housing program without U.S. Department of Housing and Urban
             Development (HUD) approval and capital funds to the Section 8 program.
             Section 8 administrative fee reserves were transferred to prevent HUD from
             reducing the fee reserves, and capital funds were transferred to cover shortfalls in
             the Section 8 program. As a result, the Section 8 administrative fee reserves were
             understated by $1 million, and $590,042 was not available for recapture by HUD,
             while the capital fund was understated by $401,046.
           While the Authority’s financial management system generally safeguarded funds,
           weaknesses in its controls need to be addressed. Contrary to federal regulations,
           the Authority did not maintain adequate documentation to support (1) rental
           payments charged to the Section 8 program, (2) employee benefit charges
           allocated to the Section 8 program, and (3) payments to the City of Passaic for
           police services. As a result, the Authority has no assurance that $883,813 charged
           to the Section 8 program and $521,000 in payments to the City of Passaic are
           reasonable and necessary. Further, Section 8 administrative fee reserves may
           need to be recaptured.

           Furthermore, The Authority’s Section 8 units did not always meet housing quality
           standards. Of 65 units statistically selected for inspection, 44 failed due to
           material noncompliance with housing quality standards. Based on the result of
           our statistical sample, at least 823 units may have been in material
           noncompliance. As a result, tenants lived in units that were not decent, safe, and
           sanitary, and the Authority made housing assistance payments for units that did
           not meet standards.

           The complete results of our evaluation of the individual allegations are contained
           in appendix C of this report.

What We Recommend
           We recommend that the director, New Jersey Office of Public Housing, instruct the
           Authority to (1) reimburse the Section 8 administrative fee reserve for the $1
           million transferred to the low-rent housing program and recapture or reduce
           Section 8 administrative fees by $590,042, (2) reimburse the capital fund
           $401,046 from the Section 8 program, (3) provide additional supporting
           documentation for rent expenses, employee benefits costs, and payments for
           police services and repay any unsupported costs determined to be ineligible, and
           (4) develop and implement procedures to ensure that units meet housing quality
           standards.

           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 discussed the results of our review during the audit and at an exit conference
           held on September 5, 2006. Authority officials provided their written comments
           on September 12, 2006. The complete text of the auditee’s response, along with
           our evaluation of that response, can be found in appendix B of this report.




                                           2
                           TABLE OF CONTENTS

Background and Objectives                                                           4

Results of Audit
      Finding 1: The Authority Made Ineligible Transfers of Program Funds           5

      Finding 2: The Authority Had Control Weaknesses in Its Financial Management   9
                 System

      Finding 3: Tenants Lived in Units That Were Not Decent, Safe, and Sanitary    13

Scope and Methodology                                                               19

Internal Controls                                                                   21


Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                23
   B. Auditee Comments and OIG’s Evaluation                                         24
   C. Summary Audit of Complaint Allegations                                        29
   D. Schedule of Units in Material Noncompliance with Housing Quality Standards    32




                                           3
                     BACKGROUND AND OBJECTIVES


The Housing Authority of the City of Passaic (Authority) was established in 1950 after the
passage of the Federal Housing Act of 1937 to build and manage public housing developments
for residents of the City of Passaic. 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 city council, and one member is appointed by the New Jersey Department
of Community Affairs as delegated by the governor. The former executive director of the
Authority is Mr. Eric Kolbe, who retired June 30, 2006.

The Authority owns approximately 700 low-income housing units and assists an additional 1,792
families through the Section 8 Housing Choice Voucher program. The Authority reported total
operating revenue of more than $13.3 million for the period ending December 31, 2005.

We received a hotline complaint pertaining to the Authority on November 20, 2005. The
complainant alleged that the executive director (1) mismanaged the Housing Choice Voucher
program, (2) forged the chairperson’s signature on the five-year plan, (3) submitted an audit
report to the U.S. Department of Housing and Urban Development (HUD) without board audit
and approval, (4) used funds from the capital fund to pay housing choice voucher landlords, (5)
made fund transfers from the Housing Choice Voucher program that may not have been proper,
(6) provided HUD with a capital fund amendment form without board approval, (7) targeted
African-American employees for job termination, and (8) managed the Authority in an autocratic
style. Therefore, the complainant believed that there was a need for more oversight of the daily
operations of the Authority by the board of commissioners. Appendix C contains a summary of
the results of our evaluation of these allegations.

The objective of the audit was to determine whether the allegations of hotline complaint were
valid. We also determined if Section 8 units complied with housing quality standards.




                                              4
                                RESULTS OF AUDIT

Finding 1: The Authority Made Ineligible Transfers of Program Funds
Contrary to federal regulations, the Authority made ineligible transfers of program funds. It
transferred Section 8 administrative fee reserves to the low-rent housing program without HUD
approval and capital funds to the Section 8 program. Section 8 administrative fee reserves were
transferred to prevent HUD from reducing the fee reserves, and capital funds were transferred to
cover shortfalls in the Section 8 program. As a result, the Section 8 administrative fee reserves
were understated by $1 million, and $590,042 was not available for recapture by HUD, while the
capital fund was understated by $401,046.



 Ineligible Section 8
 Administrative Fee Transfers


              In March 2003, Authority officials transferred $1 million from the Section 8
              administrative fee reserve to the low-rent housing program without obtaining
              HUD’s or its board of commissioners’ approval. A letter from the Authority’s
              executive director, dated March 13, 2003, and addressed to the board of
              commissioners, contained the following statement: “This week the housing
              authority’s fee accountant transferred $1 million to the low rent housing
              program.”

              Although, the funds were transferred in March 2003, Authority officials included
              the transaction in the fiscal year 2002 general ledger as an adjustment on
              December 31, 2002, because the fiscal year 2002 general ledger was not closed
              until the end of March 2003. Authority officials stated that they transferred the $1
              million to avoid the reduction in the fiscal year 2003 ongoing Section 8
              administrative fee reserves imposed by HUD in an effort to increase program
              savings and efficiency.

              PIH [Public and Indian Housing] Notice 2002-7 provides that “a PHA [public
              housing authority] that has not achieved at least a 95 percent lease-up rate (i.e.,
              has not leased at least 95 percent of its contracted units that have been under
              annual contributions contract for 12 months or has not spent at least 95 percent of
              its budget authority) is not authorized to use any funds in its administrative fee
              reserve for any purpose, unless explicitly authorized in writing to use its reserves
              by the HUD field office. Upon approval of the year end settlement statement, the
              Financial Management Center will advise the field office if a PHA has not
              achieved a 95 percent lease-up rate. Until the PHA reaches the 95 percent lease-



                                              5
up threshold, the PHA may only use the administrative fee reserve for expenses
related to on-going program administration.”

Since the Section 8 Management Assessment Program indicated that the
Authority’s lease-up rates for fiscal years 2002 and 2003 were 75 and 89 percent,
respectively, to comply with PIH [Public and Indian Housing] Notice 2002-7,
Authority officials had to obtain HUD’s approval before using its administrative
fee reserves for any purpose that was not related to the Housing Choice Voucher
program

Further, PIH [Public and Indian Housing] Notice 2005-30 provides that
“notwithstanding any other provision of law or regulation, the amount of fiscal
year 2003 fee payments otherwise authorized pursuant to the first proviso in this
paragraph for a public housing agency shall be reduced accordingly by any such
amount remaining in such agency’s administrative fee reserve account as of
January 31, 2003, which exceeds 105 percent of the amount of fee paid to such
agency from funds made available in fiscal year 2002.” “... provided further, that
hereafter, the Secretary shall recapture any funds provided in this paragraph from
a public housing agency, which are in excess of the amounts expended by such
agency for the Section 8 tenant-based rental assistance program and not otherwise
needed to maintain an administrative fee reserve balance of not to exceed 5
percent.”

Therefore, in compliance with the above notice, we calculate that $590,042
should have been available for recapture by HUD on January 31, 2003, as
follows:
 Excess funds in the Section 8 administrative fee reserve as of January 31,
 2003

 Section 8 administrative fee reserves as of December 31, 2002       $ 886,087
 Add
 Unallowable funds transferred to low-rent housing                  $1,000,000

 Total Section 8 administrative fee reserves as of December 31, 2002 $1,886,087

 Subtract

 105% of Authority's ongoing administrative fee earned in          $(1,296,045)
  fiscal year 2002 ($1,234,329 x 105%)
 Excess funds in the Section 8 reserves above 105% of
 fiscal year 2002 administrative fee                                 $590,042

 Amount of ongoing administrative fees earned that should
 have been recaptured                                                $590,042



As a result of transferring the $1 million from Section 8 administrative fee
reserves in March 2003, the Section 8 administrative fee reserves recorded on the
general ledger were understated by $1 million, and the Authority’s ongoing


                                 6
                  Section 8 administrative fee for fiscal year 2003 was not reduced by the excess
                  administrative fee reserve amount that was above 105 percent of the ongoing
                  administrative fees earned for fiscal year 2002, or $590,042.

  Ineligible Transfer of Funds
  from the Capital Fund to the
  Section 8 Program

                  Authority officials stated that they transferred more than $1.1 million from the
                  capital fund to the Section 8 program to cover a shortfall in Section 8 housing
                  assistance payments in fiscal year 2005. Authority officials stated that the $1.1
                  million was a reimbursement to the Section 8 program to cover Section 8 funds
                  that were used for housing-related capital improvements in fiscal years 2002,
                  2003, and 2004. However, $401,046 of this amount did not qualify as a
                  reimbursement to the Section 8 program because the Section 8 program had not
                  paid these costs. Consequently, it was an ineligible use of the capital funds.

                  According to 24 CFR [Code of Federal Regulations] 968.112, public housing
                  modernization funds used for public housing operating assistance is an ineligible
                  use of capital funds. When physical or management improvements, including
                  administrative cost, will benefit programs other than public housing, such as
                  Section 8 or local revitalization programs, eligible costs are limited to the amount
                  directly attributable to the public housing program.

                  Based on the above, since part of the capital fund transfers were not originally
                  transferred from the Section 8 program, we calculated that $401,046 in capital
                  fund transfers, which is the amount that exceeded the allowable Section 8
                  reimbursable amount, is ineligible as follows:

Ineligible capital funds transferred to the Section 8 program in fiscal year 2005

Total allowable Section 8 funds used to pay for capital improvements in fiscal year 2002.       $409,958
Total allowable Section 8 funds used to pay for capital improvements in fiscal years 2003&2004. $293,769
                                                                                                 ========
Total allowable Section 8 funds to pay for capital improvements in fiscal years 2002,
2003, and 2004                                                                                    $703, 727
                                                                                                 ========
Total amount of allowable reimbursement to Section 8 fund in fiscal year 2005
                                                                                                   $703,727

Less:

Total amount of funds transferred from capital fund to Section 8 program in fiscal year 2005.   ($1,104,773)
                                                                                                ==========
Total ineligible capital funds transferred to Section 8 program in fiscal year 2005               ($401,046)
                                                                                                ==========




                                                         7
             Because of the ineligible funds transferred in fiscal year 2005, the capital fund is
             understated by $401,046, and the Authority was deprived of the use of these funds
             for capital improvements.

Conclusion

             In March 2003, the Authority transferred $1 million from the Section 8
             administrative fee reserves to the low-rent housing program without obtaining
             HUD’s or its board of commissioners’ approval. As a result, the Authority’s
             fiscal year 2003 ongoing administrative fee reserve was not reduced by $590,042,
             and HUD was deprived of program savings.

             Further, in fiscal year 2005, the Authority transferred more than $1.1 million from
             the capital fund to the Section 8 program to cover a funding shortfall in Section 8
             housing assistance payments. However, $401,046 of that amount was an
             ineligible use of capital funds. Consequently, the capital fund is under funded by
             $401,046, and this amount is not available for capital improvements.

Recommendations

             We recommend that the director, New Jersey Office of Public Housing, instruct the
             Authority to

             1A.    Reimburse the Section 8 administrative fee reserve for the $1million that
                    was transferred to the low-rent housing program.

             1B.    Recapture or reduce the Section 8 administrative fee reserve account by
                    $590,042 to comply with the requirements of PIH [Public and Indian
                    Housing] Notice 2005-30.

             1C.    Establish and implement internal control procedures that will ensure
                    compliance with HUD’s Section 8 reporting requirements.

             1D.    Reimburse the capital fund from the Section 8 program the $401,046 in
                    excess/ineligible capital fund transfers.

             1E.    Establish and implement internal control procedures to ensure that capital
                    funds are used for eligible purposes according to 24 CFR [Code of Federal
                    Regulations] 968.112.




                                             8
Finding 2: The Authority Had Control Weaknesses in Its Financial
           Management System

Contrary to federal regulations, the Authority did not maintain adequate documentation to
support (1) rental payments charged to the Section 8 program, (2) employee benefit charges
allocated to the Section 8 program, and (3) payments to the City of Passaic for police services.
These deficiencies occurred because the Authority did not develop procedures to ensure that all
payments were adequately supported. As a result, it has no assurance that $883,813 charged to
the Section 8 program and $521,000 in payments to the City of Passaic are reasonable and
necessary. Further, Section 8 administrative fee reserves may need to be recaptured.



 Unsupported Rent Expenses
 Charged to the Section 8
 Program

               In fiscal years 2003 and 2004, the Section 8 program was charged a total of
               $612,000 ($306,000 per year) for rental expenses. The rent was related to office
               space for the Authority’s administrative offices located at a low-rent housing
               project that was used by the Section 8 and low-rent housing programs; however,
               these charges were not adequately supported.

               The consolidated annual contributions contract requires the Authority to maintain
               records in such a manner as to allow HUD to determine that all funds have been
               expended in accordance with each specific program regulation and requirement.
               The contract also requires the Authority to maintain complete and accurate books
               of account for the projects of the Authority to permit the preparation of statements
               and reports and to allow for speedy and effective audits in accordance with HUD
               requirements.

               Authority officials stated that they hired a fee accountant who prepared cost
               allocation plans in fiscal years 2003 and 2004; however, they did not have any
               cost allocation plans to support the distribution of the rent expenses charged to the
               Section 8 and the low-rent housing programs. As a result, they cannot determine
               whether the rent charges to the Section 8 program were reasonable or necessary.
               Consequently, the $612,000 in rental expenses charged to the Section 8 program
               is questioned pending a HUD review for eligibility.




                                               9
Unsupported Employee Benefit
Costs Charged to the Section 8
Program


         The Authority charged $360,183 and $336,223 in employee benefit costs, respectively,
         for fiscal years 2003 and 2004 to the Section 8 program. However, it did not allocate
         the employee benefit costs in a manner that was adequately supported by salaries
         charged. The Authority’s management officials stated that they only had a cost
         allocation plan for salaries and they allocated the salaries according to the plan.
         However, the Authority did not maintain any documents to support the actual time
         distribution for employees who worked on the Section 8 and low-rent housing
         programs. The Authority should developed procedures to record time logged by
         employees to various activities involving multiple programs in order for the allocation
         of employee benefits to be more accurate.

         Using the same ratio as the allocation of salary costs, we determined that the employee
         benefit costs that should have been charged the Sections 8 program for fiscal years
         2003 and 2004 were $216,005 and $208,555, respectively. As a result, excessive
         employee benefit costs amounting to $271,813 ($144,178 in fiscal year 2003 and
         $127,635 in fiscal year 2004) were charged to the Section 8 program. Consequently,
         since the allocation of the $271,813 in employee benefit costs charged to the Section 8
         program is not adequately supported, this amount is questioned pending a HUD
         eligibility determination.


Section 8 Administrative Fee
Funds Subject to Recapture

          Since the above questionable rental costs and employee benefit costs were charged
          to the Section 8 administrative fee reserve account in fiscal years 2003 and 2004,
          the Section 8 administrative fee reserve balance at each year’s end may have been
          understated if these costs are unallowable. Therefore, once HUD has determined
          the allowable costs for employee benefits and office rental expense, the Section 8
          administrative fee reserve balances for each year should be recalculated. In
          addition, a determination should be made of whether the recalculated administrative
          fee reserve balances for each year should be subject to reduction or recapture in
          accordance with requirements of PIH [Public and Indian Housing] Notice 2005-30.




                                            10
Unsupported Payments to the
City of Passaic

           In fiscal years 2003, 2004, and 2005, the Authority entered into several contracts
           with the City of Passaic and paid it a total amount of $750,000 for police services
           beyond those services that should have been furnished at no cost under the terms
           of a cooperation agreement between the City of Passaic and the Authority. The
           cooperation agreement called for the Authority to make payments in lieu of taxes
           in exchange for additional city police services to be provided to the Authority.
           However, $521,000 of the $750,000 was not supported with adequate
           documentation to justify the costs. Consequently, $521,000 of the payments for
           police services did not comply with the HUD annual contributions contract
           requirements.

           The Authority did not have adequate controls to ensure compliance with the
           annual contributions contract requirement to maintain records in such a manner as
           to allow HUD to determine that all funds have been expended in accordance with
           each specific program regulation and requirement. Further, the Authority did not
           ensure that the City of Passaic complied with the terms and conditions of the
           contracts. For instance, all of the contracts stated that two or three officers would
           be guaranteed for Friday, Saturday, Sunday, and Monday, but the police daily
           assignment reports provided as support for these costs showed that officers were
           not working on Sundays or Mondays. Also, the contracts stated that “in the event
           any officers shall become disabled or sick for any period in excess of three weeks
           during the term of this contract, said officer shall be replaced by the City, or the
           Authority shall receive a credit of $48 per hour for the period during which said
           officer is sick or disabled.” However, the police daily assignment reports showed
           that an officer was sick or disabled for two months in fiscal year 2005, the
           Authority did not receive any credit for the unfurnished services, and the City of
           Passaic did not replace the disabled officer.

           Most of the available daily assignment reports provided did not include the
           required information such as the number of hours worked at each public housing
           development and the ending time of each police officer’s shift or assignment. As
           a result, since adequate supporting documents to justify these costs were not
           maintained, the $521,000 is questioned pending an eligibility determination by
           HUD.




                                           11
Recommendations

          We recommend that the director, New Jersey Office of Public Housing, instruct the
          Authority to

          2A.     Provide HUD with documents supporting the $612,000 rent expense charged
                  to the Section 8 program in fiscal years 2003 and 2004 and determine what
                  amount of the rent is eligible. Moreover, the director should instruct the
                  Authority to reimburse the Section 8 administrative fee reserve for any ineligible
                  cost identified.

          2B.     Provided HUD with documentation to support the $271,813 of excessive
                  employee benefit costs in fiscal years 2003 and 2004 charged to the
                  Section 8 Housing Choice Voucher Program and reimburse the Section 8
                  Housing Choice Voucher Program from the low-rent housing program for
                  the amount that is determined to be ineligible.

          2C      Develop and implement a formal cost allocation methodology to support
                  employee benefit contributions charged to various HUD programs.

          2D.     Determine if any retroactive adjustment should be made to the Section 8
                  administrative fee reserve balance and recapture or reduce the Section 8
                  administrative fees to comply with Public Indian Housing Notice 2005-30,
                  based on the reimbursement of ineligible rent expenses and employee
                  benefits costs from the low rent housing program.

          2E.     Provide HUD with adequate and complete documents to support the
                  payment of $521,000 to the City of Passaic for additional police services and
                  have the City of Passaic reimburse the Authority for any payments
                  determined to be ineligible.

          2F.     Establish and implement adequate internal control procedures to ensure that
                  municipal contracts applicable to HUD funds are performed in compliance
                  with HUD requirements, federal regulations, and the consolidated annual
                  contributions contract prior to funds being paid.




                                           12
Finding 3: Tenants Lived in Units That Were Not Decent, Safe, and
           Sanitary
Our inspection of 65 Section 8 units showed that 55 units (85 percent) did not meet HUD’s
minimum housing quality standards. Of the 55 units, 44 units were in material noncompliance.
Projecting the results of the statistical sample to the population would indicate that at least 1,091
units of the Authority’s 1,410 units did not meet minimum housing quality standards and 823
units were in material noncompliance. This condition occurred because the Authority’s
management did not place sufficient emphasis on housing quality standard requirements and did
not implement an adequate internal control plan to ensure compliance with HUD requirements at
all times. As a result, tenants lived in units that were not decent, safe, and sanitary, and the
Authority made housing assistance payments for units that did not meet standards.



 HUD Will Pay More Than $ 6.5
 Million for Units in Material
 Noncompliance

           The Authority’s management did not implement an effective internal control plan,
           which ensured that it complied with HUD requirements at all times. Therefore, units
           were not decent, safe, and sanitary, and the Authority made housing assistance
           payments for units that did not meet standards. We estimate that over the next year,
           the Authority will pay housing assistance payments of more than $6.5 million for
           units that are in material noncompliance with housing quality standards if it does not
           implement adequate controls.

           We inspected a statistical sample of 65 units with a HUD Office of Inspector General
           (OIG) appraiser and found that 55 units (85 percent) did not meet minimum housing
           quality standards. Of the 55 units, 44 units with 275 total deficiencies were in
           material noncompliance with housing quality standards. Of the 275 deficiencies,
           Authority inspectors did not identify 25 deficiencies or did not report them as failing
           conditions during their most recent inspections. These deficiencies included window
           and door problems, blocked exits, gas stove health and safety issues, and electrical
           hazards. Appendix E provides additional details of the deficiencies for the 44 units
           that were in material noncompliance with standards.

           The following table lists the most frequently occurring deficiencies for the 55 units
           that did not meet minimum housing quality standards.




                                                13
                                Number of                          Percentage of
         Type of deficiency                    Number of units
                               deficiencies                            units
         Doors                      53                30                55
         Window                     25                18                33
         Gas stove health
                                    22                21                 38
         and safety
         Blocked exits              24                14                 25
         Electrical hazards         23                12                 22
         Continuous
         running water/             15                12                 22
         water leaks



Door and Window Deficiencies
Were Predominant


      The most predominant deficiencies were doors and windows that did not operate
      properly or could not be secured.




                Damaged entry door with significant splits and missing
                strike pad.




                                         14
          Damaged main entrance door with damaged door frame and
          strike pad.



We found a number of fire hazards, such as blocked exits and inoperable smoke
detectors.




          Furniture and personal effects block the window in a bedroom,
          preventing exit or fire department entry in an emergency.




                                  15
     We found 23 instances of electrical hazards, such as exposed wires and missing outlet
     covers.




                Exposed fuse covered with dirt.


The Authority Did Not Have
Adequate Internal Controls

     The Authority’s management did not have an effective internal control plan that
     ensured units met minimum housing quality standards and inspections complied with
     requirements. Regulations at 24 CFR [Code of Federal Regulations] 982.54 provide
     that the Authority must adopt a written administrative plan that establishes local
     policies for administration of the program in accordance with HUD requirements.
     The plan should include procedural guidelines and performance standards for
     conducting required housing quality standard inspections. Section 982.401 provides
     the performance and acceptability criteria that assisted units must meet to comply
     with HUD’s housing quality standards. Section 982.405 provides that the Authority
     must inspect leased units before the initial term of the lease and at least annually to
     determine whether the unit meets housing quality standards and further provides that
     the Authority must conduct supervisory quality control housing quality standard
     inspections.

     The internal control plan should include written policies and procedures that provide
     detailed guidance and a quality control plan that ensures policies and procedures are
     followed. The internal control plan should also require an analysis to determine
     whether management employed sufficient staff to perform inspections. It should


                                         16
      provide guidance on how to properly conduct inspections and identify corrective
      measures for inspectors who perform poorly. These policies and procedures are not
      included in the Authority’s administrative plan.

      The Authority employs one Section 8 inspector who is responsible for inspecting
      more than 1,400 Section 8 units. The Authority also employs a public housing
      inspector who assists in inspecting Section 8 units one day per week. The inspectors
      are responsible for annual inspections, reinspections, special inspections, and all
      initial inspections. The Authority’s full-time Section 8 inspector is also responsible
      for scheduling each inspection and mailing notices to tenants and landlords. The
      director of management and operations is responsible for performing a supervisory
      inspection, which he performs once a year for the Section 8 Management Assessment
      Program due to his other responsibilities in overseeing the Section 8 and low-rent
      housing programs. Further, according to the Authority’s inspector, because there are
      not enough inspectors to meet the workload requirements, the director of management
      and operations sometimes helps in conducting annual or special inspections.

      According to the Authority’s inspectors, they inspect 13 units per day on average, and
      the time allotted for each inspection is less than a half hour including travel time.
      The Section 8 program inspector inspects new units for initial move-ins on Tuesdays
      and Thursdays to increase the time allotted for new inspections to approximately 45
      minutes.

      Based on the above facts, Authority officials need to assess whether they have
      enough inspectors and consider performing quality control audits at least quarterly to
      improve the quality of their inspections for housing quality standards. The Authority
      has begun requesting landlords and tenants to correct the deficiencies on the 55 units,
      and its inspectors have begun conducting reinspections.


Conclusion

      The inadequate inspections occurred because the Authority (1) did not develop an
      effective internal control plan to ensure inspections complied with HUD regulations,
      (2) conducted supervisory inspections for the Section 8 Management Assessment
      Program but did not use them as a tool to enhance inspector performance and identify
      whether inspections were performed properly, and (3) did not perform an analysis to
      determine whether it employed adequate inspection staff to perform all required
      inspections. Therefore, the Authority cannot be assured that it has an adequate
      number of inspectors or that inspectors have enough time to perform a detailed
      inspection of all units. As a result, tenants lived in units that were not decent, safe,
      and sanitary, and the Authority made housing assistance payments for units that did
      not meet housing quality standards. By making necessary improvements, the
      Authority will assure that at least $6.5 million in Section 8 funds will be spent on
      units that are decent, safe, and sanitary.




                                          17
Recommendations


      We recommend that the director, New Jersey Office of Public Housing, instruct the
      Authority to

      3A. Inspect the 55 units that did not meet minimum housing quality standards to
          verify that the owners took appropriate actions to make the units decent, safe,
          and sanitary. If appropriate corrective actions were not taken, the Authority
          should abate the housing assistance payment or terminate the housing
          assistance payment contracts. The Authority should also terminate tenants that
          cause deficiencies in the units.

      3B. Develop and implement an internal control plan, which ensures that units meet
          housing quality standards and inspections meet HUD requirements to prevent
          $6.5 million from being spent on units that are in material noncompliance
          with standards.




                                        18
                  SCOPE AND METHODOLOGY


Our audit was conducted at the Authority, located at 333 Passaic Street, Passaic, New
Jersey. To accomplish our objectives, we performed the following:

•   Audited applicable laws, regulations, and other HUD program requirements.
•   Audited the Authority’s Section 8 policies, procedures, and administrative plan.
•   Audited the Authority’s annual contributions contracts, records, and financial reports
    for Section 8, public housing, and the Public Housing Capital Fund programs.
•   Examined HUD and the Authority’s program files for the low-rent housing and
    Section 8 programs.
•   Interviewed HUD officials and officials of the Authority.
•   Obtained a download of the Authority’s Section 8 housing stock for the Housing
    Choice Voucher program as of April 1, 2006.
•   Selected a statistical sample of units for inspection from the Authority’s Section 8
    housing stock.
•   Audited previous Authority inspection reports.
•   Inspected 65 units with a HUD OIG appraiser from the Technical Oversight and
    Planning Division.

We audited various documents including financial statements, ledgers, bank statements,
invoices, purchase orders, contracts, check vouchers, and prior OIG and HUD reports on
the Authority. We audited documentation regarding service agreements with the City of
Passaic including activity reports and other supporting documents furnished by the
Authority and the City of Passaic. We also audited the Authority’s financial and
administative records.

The download of the Authority’s Section 8 housing stock for the Housing Choice
Voucher program resulted in 1,410 active units. We used a statistical software program
to select a random sample of 65 units. The 65 units were selected to determine whether
they met HUD’s housing quality standards. Our sampling criteria used a 90 percent
confidence level, 50 percent estimated error rate, and precision of plus or minus 10
percent.

Our sampling results determined that 44 of the 65 units (67.7 percent) materially failed to
meet HUD’s housing quality standards. Units are considered to be in material
noncompliance with housing quality standards because of the overall poor condition of
the unit; one of the fail conditions was a 24-hour emergency deficiency; the fail condition
was a preexisting condition that either was not identified or not reported at the time of the
Authority’s last inspection; and/or the unit had inadequate repairs.




                                        19
Projecting the results of the 44 units that were in material noncompliance with housing
quality standards to the population yields the following:

The most conservative statistical projection or lower limit is that 823 units were in
material noncompliance with housing quality standards (58.37 percent X 1,410 units).

The Authority’s April 1, 2006, housing assistance payments register showed that the
average monthly housing assistance payment was $663. Using lower limit of the
estimate of the number of units and the average monthly housing assistance payment, we
estimate that the Authority will annually spend at least $6,547,788 (823 units X $663
average payment X 12 months) for units that are in material noncompliance with housing
quality standards. This estimate is presented solely to demonstrate the annual amount of
Section 8 funds that could be put to better use on decent, safe, and sanitary housing if the
Authority implements our recommendations. While these benefits would recur
indefinitely, we were conservative in our approach and only included the initial year in
our estimate. We also considered (1) that the Authority did not identify many of the past
conditions during its most recent inspections, (2) the circumstances, and (3) that it would
take the Authority at least a year to complete all inspections under an improved
inspection process.

We conducted our fieldwork from February through June 2006 at the Authority’s offices
in Passaic, New Jersey. Our audit covered the period January 1, 2003 through December
31, 2005. However, we extended the period as necessary to achieve our objectives.

We performed our audit in accordance with generally accepted government auditing
standards and included tests of management controls that we considered necessary.




                                        20
                              INTERNAL CONTROLS

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

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding of assets and segregation of duties.

Internal controls relate to management’s plan of organization, methods, and procedures adopted
to meet its missions, goals, and objectives. Internal controls include the process 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.




                                               21
Significant Weaknesses


  Based on our audit, we believe the following items are significant weaknesses:

              •     The Authority’s controls were not adequate to ensure that program
                    objectives were achieved (see findings 1 and 3).

              •     The Authority’s controls did not ensure that the use of resources complied
                    with laws and regulations when it made ineligible transfers of funds and
                    allowed units not to meet housing quality standards (see findings 1 and 3).

          •         The Authority’s controls do not adequately safeguard assets due to
                    weaknesses in its financial management system that allowed charges to be
                    inadequately supported and ineligible transfers to be made (see findings 1
                    and 2).




                                             22
                                    APPENDIXES

Appendix A

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

             Recommendation             Ineligible 1/    Unsupported       Funds to be put
                    number                                        2/        to better use 3/

                            1A           $1,000,000
                            1B             $590,042
                            1D            $ 401,046
                            2A                         $612,000
                            2B                         $271,813
                            2E                         $521,000
                            3B       ____________ ____________                 $ 6,547,788
                          Total        $ 1,991,088  $ 1,404,813                $ 6,547,788


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. In this instance, if the Authority
     implements our recommendations, it will cease to incur Section 8 costs for units that are
     not decent, safe, and sanitary and will expend those funds for units that meet HUD’s
     housing quality standards. Once the Authority successfully implements its controls, this
     will be a recurring benefit. Our estimate reflects only the initial year of these recurring
     benefits.




                                             23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3


Comment 4

Comment 5

Comment 6




                         25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 7




                         26
                         OIG Evaluation of Auditee Comments


Comment 1   The auditee disagreed with our computation of the amount of excess
            administrative fee reserves that were subject to recapture on January 31, 2003.
            The auditee indicated that the administrative fee reserve balance as of December
            31, 2002, should have been reduced by $409,958 because these funds were used
            for capital improvements in fiscal year 2002; therefore, this should have reduced
            the amount of funds subject to recapture from $590,042 to $180,084.

            However, PIH Notice 2002-7 prohibited the Authority from transferring funds
            from the Section 8 administrative fee reserves during the period March 31, 2002
            through March 31, 2003 without HUD’s explicit approval because the PHA’s
            lease-up rate was below 95% for fiscal years 2002 and 2003. As a result, the
            entire $1,000,000 which had been transferred to the low rent housing program in
            2002 was not an approved transfer, therefore, it had to be added back to the
            December 31, 2003, administrative fee reserve balance to determine the amount
            of Section 8 administrative fees subject to recapture at January 31, 2003. As
            such, $590,042 was subject to recapture as computed in the report.

Comment 2   The auditee disagreed that the capital fund was under funded by $401,046 due to
            ineligible expenses associated with operating costs. The auditee indicated that
            based on a simple accounting transaction where $1,000,000 had been moved
            from the capital fund to the Section 8 program and $1,100,000 had been
            reimbursed to the Section 8 program from the capital fund, the maximum liability
            to the capital fund should be $100,000. However, as shown in the report,
            although $1,104,773 was transferred to the Section 8 program in fiscal year 2005,
            only $703,727 of the amount transferred was an eligible reimbursement for the
            capital improvements that had been paid for by the Section 8 program. The
            remaining $401,046, which had been transferred from the capital fund to the
            Section 8 program was not an allowable reimbursable cost because these funds
            were used for the payment of housing assistance, which is an ineligible use of
            capital funds per 24 CFR [Code of Federal Regulations] 968.12.

Comment 3   The auditee’s actions are responsive to our recommendations, however, in
            obtaining market data to document the reasonable rents that should be charged to
            Section 8 program, the auditee needs to consider the time period of the estimate
            used for the costs or rent amounts.

Comment 4   The auditee’s actions are responsive to our recommendations, however, they need
            to provide HUD with documentation to support the $271,813 of excessive
            employees benefit costs charged to the Section 8 program in fiscal years 2003 and
            2004 and reimburse the Section 8 program from the low rent housing program for
            any amount determined to be ineligible.




                                            27
Comment 5   Auditee officials stated that the Authority does not believe that there were
            excessive administrative fee reserve balances at 12/31/2003 and 2004. However,
            if any of the reimbursed rent expenses and cost benefits are determined to be
            ineligible, a retroactive adjustment to the Section 8 administrative fee reserve
            balance should be made and the Section 8 administrative fees should be
            recaptured or reduced to comply with Public Housing Notice 2005-30.

Comment 6   The auditee’s actions are responsive to our recommendations.

Comment 7   Auditee officials generally agreed with our recommendations and have begun
            taking corrective action, yet, they believe that some units were failed because
            drop ceilings were installed in the kitchens and bathrooms, even though this was
            an acceptable practice per the BOCA code. However, no units were failed just
            based on having a drop ceiling. Although the conditions of some drop ceilings
            were cited as an HQS violation there were other material deficiencies that caused
            these units to not meet housing quality standards.




                                           28
Appendix C


       SUMMARY AUDIT OF COMPLAINT ALLEGATIONS

Allegation 1


The executive director mismanaged the Housing Choice Voucher program.

Evaluation: There is evidence that the Housing Choice Voucher program was mismanaged.
The Authority was underfunded for its Housing Choice Voucher program for 2005 and 2006
because HUD could not calculate the 2005 renewal funding needs due to the nonsubmission of
2004 Voice Management System data to HUD. As a result, there was a $1.8 million shortfall in
the amount needed to operate the program. HUD determined the funding level for 1,489 units,
while the total number of units under lease was 1,670. The Authority has reported the
information regarding the funding level and the units under lease; however, HUD has not
increased the level of funding.

The Authority transferred $1 million from the Section 8 administrative fee reserve to the low-
rent housing program in fiscal year 2003 to avoid recapture of excess administrative fee reserves
by HUD. However, the required approvals from HUD and the board of commissioners were not
obtained for this transfer. As a result, $590,042 in Section 8 administrative fee reserves is
subject to recapture (see finding 1).

The Authority used another $1 million in Section 8 administrative fee reserves to make capital
improvements for the low-rent housing program, which were allowable uses of the reserve at the
time the disbursements were made (see finding 1).

The Authority received a Section 8 Management Assessment Program score of 93, which would
indicate that its performance was satisfactory. However, our inspection of units revealed that
additional attention is required to ensure units meet housing quality standards (see finding 3).


Allegation 2

The executive director forged the chairperson’s signature on the public housing authority
certification that had been attached to the five-year plan and submitted to HUD in
Washington, DC.

Evaluation: This allegation could not be substantiated because there was no evidence that the
executive director forged a signature on the public housing authority certification. We noted that
the Authority submitted the five-year plan electronically on October 18, 2005, because it was the


                                               29
deadline for submission. However, the plan was never approved by HUD because the Authority
never certified the public housing authority plan.


Allegation 3

The executive director and the independent public accountant submitted the audit report
to the clearinghouse in Indiana, HUD’s Newark field office, and the Real Estate Assessment
Center without board knowledge, approval, and audit.

Evaluation: This allegation is true. The independent public accountant submitted the 2004
audit report to HUD before it was audited or approved by the board of commissioners. However,
management was approaching the deadline for the submission of the 2004 audit report. Housing
authorities face sanctions for not submitting audit reports within nine months after the housing
authority’s fiscal year end.


Allegation 4

The executive director used capital fund money in 2002, 2003, 2004, and 2005 to pay
Section 8 landlords.

Evaluation: This allegation is true. In fiscal year 2005, the Authority transferred $1,104,773 to
cover a Section 8 fund shortage in housing assistance payments. The executive director and
finance officer stated that the funds transferred were a reimbursement to the Section 8 program
because Section 8 funds were used in fiscal years 2002, 2003, and 2004 to pay for capital
improvements. Based on our audit, we determined that $703,727 was a reimbursement for
capital improvements that had been paid with Section 8 funds but that $401,046 was not.
Therefore, $401,046, which does not represent a reimbursement of Section 8 funds, is ineligible
(see finding 1).

Allegation 5


The executive director made fund transfers from the Housing Choice Voucher program
that may not have been proper.

Evaluation: This allegation is true. The Authority transferred Section 8 administrative fee
reserves to the low-rent housing program without HUD approval. As a result, the Section 8
administrative fee reserves were understated by $1 million, and $590,042 was not available for
recapture by HUD, while the capital fund was understated by $401,046 (see finding 1).




                                               30
Allegation 6


The executive director provided a capital fund amendment form to HUD without board
approval and knowledge.

Evaluation: This allegation could not be substantiated. Our audit disclosed that the board of
commissioners passed a resolution on September 20, 2005, approving a budget amendment and
revisions to the Public Housing Capital Fund program budget for 2002, 2003, and 2004. After
receiving board approval, the Authority submitted the budget amendments and revisions to the
capital fund budget to HUD on September 21, 2005, for HUD’s approval.

Allegation 7


The executive director targeted African-American employees for job termination.

Evaluation: This allegation could not be substantiated. The Authority maintained complete and
adequate employee files and compiled valid documentation of the cause for terminations. We
did not note any instances in which the Authority terminated an employee based on race,
religion, sex, or creed.

Allegation 8


The executive director managed the Authority in an autocratic style, and there is a need for
more oversight of the daily operations of the Authority by the board of commissioners.

Evaluation: This allegation could not be substantiated. There was not enough evidence to
determine that the executive director was managing in an autocratic style. However, regarding
providing more oversight of daily operations, the executive director on December 16, 2005,
wrote a letter to the management of the HUD Newark office requesting a limited management
audit with respect to governance issues as they relate to the Authority. We determined through
personal observation and discussions with the executive director and commissioners that there
were disagreements over the responsibilities of the board of commissioners and the executive
director. However, the executive director retired on June 30, 2006.




                                              31
Appendix D

  SCHEDULE OF UNITS IN MATERIAL NONCOMPLIANCE
        WITH HOUSING QUALITY STANDARDS

     Sample      Total        24-hour       Preexisting   Inadequate
     number   deficiencies   emergency      conditions      repairs
                             deficiencies
        1          8               2
        3          2               1
        4          3               1
        7          4               1
        8         16               3            2
       10          6               3            1
       12          3               2
       14          3               2
       15          4               2            1
       16          6               2
       17          8               2            2
       19         10               3
       21         14               2            5             1
       22          3               1
       24         10               3            3
       25          9               2
       26          8               2
       27         12               3            2
       30          5               2            1
       31          5               2
       32          5               1
       34         11               6            1
       36          6               2            1
       37          7               1
       38          3               1
       39          4               1            2
       40          3               1
       42         10               1            2
       44          5               2            1
       45          9               1            1
       54          4               1
       55          5               1
       56          3               2
       58          8               4



                                  32
Sample      Total        24-hour       Preexisting   Inadequate
number   deficiencies   emergency      conditions      repairs
                        deficiencies
  60          5               2
  63         10               5
  65          5               1
  66          7               2
  67          9               3
  69          2               1
  70          2               1
  71          2               1
  73          2               1
  74          9               2




                             33