oversight

The Housing Authority of the County of Butler, Butler, PA, Needed to Improve Administration of Its Section 8 Housing Choice Voucher Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-04-20.

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

                                                                Issue Date
                                                                      April 20, 2006
                                                                Audit Report Number
                                                                      2006-PH-1010




TO:        James D. Cassidy, Director, Office of Public Housing, Pittsburgh Field Office,
            3EPH


FROM:



SUBJECT:   The Housing Authority of the County of Butler, Butler, PA, Needed to Improve
            Administration of Its Section 8 Housing Choice Voucher Program


                                 HIGHLIGHTS

 What We Audited and Why

           We audited the Housing Authority of the County of Butler’s (Authority) Section 8
           Housing Choice Voucher program. The audit was conducted as part of our fiscal
           year 2006 annual audit plan. Our objective was to determine whether the
           Authority was properly administering its Section 8 program.

 What We Found

           The Authority generally administered its Section 8 Housing Choice Voucher
           program properly, but some improvements were needed. The Authority issued
           vouchers and provided housing assistance to eligible families from its waiting list.
           It also inspected housing units annually to ensure its Section 8 clients were
           provided decent, safe, and sanitary housing. However, the Authority did not
           allocate administrative salary and employee benefit costs to the Section 8 program
           on a reasonable and fair basis. As a result, it could not support $229,460 in
           expenditures for administrative salaries and associated employee benefits over a
           three-year period. This occurred because the Authority did not have a formal cost
           allocation plan, nor did it use personnel activity reports or equivalent
           documentation to allocate salary and benefit costs for its senior management and
           accounting staff for years 2002 to 2004.

           In addition, the Authority did not always calculate housing assistance payments
           correctly or maintain adequate documentation in its client files to demonstrate
           compliance with U.S. Department of Housing and Urban Development (HUD)
           requirements. Generally, this occurred because of administrative errors by the
           Authority’s staff. However, the Authority did not have written procedures for
           Section 8 employees to calculate housing assistance payments correctly and
           maintain client files adequately. The Authority also did not have written
           procedures for conducting quality control reviews of the client files that would
           have alerted the Authority to the deficiencies. As a result, it made housing
           assistance overpayments of $501 and underpayments of $1,100 in the 21 client
           files reviewed and did not have adequate assurance that the housing assistance
           payments it made to landlords were reasonable.

What We Recommend

           We recommend that HUD direct the Authority to provide documentation to
           support the $229,460 in questioned employee salary and benefit costs or
           reimburse the Section 8 program from the programs that benefited from the
           erroneous cost allocations. Additionally, we recommend that HUD require the
           Authority to develop and implement a reasonable method for allocating costs to
           the Section 8 program, thereby putting $76,487 to better use over a one-year
           period. We further recommend that HUD direct the Authority to repay its Section
           8 program $501 from its earned Section 8 administrative fees, and reimburse
           clients $1,100 from its earned Section 8 administrative fees, for housing
           assistance underpayments. Lastly, we recommend that HUD direct the Authority
           to develop and implement procedures for calculating rents correctly, maintaining
           client files adequately, performing quality control reviews of its client files, and
           performing adequate rent reasonableness determinations.

           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 report with the Authority during the audit and at an exit
           conference on April 10, 2006. The Authority provided written comments to our
           draft report on April 17, 2006. The Authority disagreed with the findings, but
           provided no documentation to support its disagreement.



                                            2
The complete text of the Authority’s response, along with our evaluation of that
response, can be found in appendix B of this report.




                                 3
                            TABLE OF CONTENTS


Background and Objectives                                                       5

Results of Audit
      Finding 1: The Authority Could Not Support $229,460 in Expenditures for   6
                 Administrative Salary and Benefit Costs
      Finding 2: The Authority Did Not Always Follow HUD Requirements           9

Scope and Methodology                                                           13

Internal Controls                                                               14

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use            16
   B. Auditee Comments and OIG’s Evaluation                                     17




                                            4
                     BACKGROUND AND OBJECTIVES


The Housing Authority of the County of Butler (Authority) was established in 1965 under the
Housing Authorities Law of the Commonwealth of Pennsylvania. The Authority entered into an
annual contributions contract in 1966 with the U.S. Department of Housing and Urban
Development (HUD) and agreed to provide affordable housing for qualified individuals in
accordance with the rules and regulations prescribed by HUD. A five-member board of
commissioners governs the Authority. The executive director is Perry O’Malley. The
Authority’s main administrative office is located at 114 Woody Drive, Butler, Pennsylvania.

The Authority owned and operated 466 public housing units and administered 1,339 housing
vouchers under annual contributions contracts with HUD during our audit period. The annual
contributions contract defines the terms and conditions under which the Authority agrees to
develop and operate all projects under the agreement. HUD provided the Authority the
following financial assistance from fiscal years 2002 to 2005:

   •   $23.1 million to provide housing assistance through tenant-based Section 8 vouchers,
   •   a $2.2 million operating subsidy to operate and maintain its housing developments, and
   •   a $2.2 million Public Housing Capital Fund program to modernize public housing units.

Under the Section 8 program, the Authority makes rental assistance payments to landlords on
behalf of eligible low-income families. HUD compensates the Authority for the cost of
administering the programs through administrative fees.

The Authority listed nine affiliated nonfederal entities in its financial statements. The
Authority’s chairman and executive director serve as officers for eight of these entities. The
Authority formed these corporations in an effort to increase affordable housing opportunities
throughout Butler County, and it provides management and consulting services for the entities.
In addition, the Authority is the developer, management agent, and service provider for the 139
housing units associated with these entities.

The overall objective of our audit was to determine whether the Authority was properly
administering its Section 8 program.




                                               5
                                       RESULTS OF AUDIT


Finding 1: The Authority Could Not Support $229,460 in Expenditures
for Administrative Salary and Benefit Costs
The Authority did not allocate administrative salary and employee benefit costs to the Section 8
program on a reasonable and fair basis. It did not have a formal cost allocation plan, nor did it
use personnel activity reports or equivalent documentation to allocate salary and benefit costs for
its senior management and accounting staff for years 2002 to 2004. As a result, the Authority
could not support $229,460 in expenditures for administrative salaries and associated employee
benefits over a three-year period. By developing and implementing a reasonable method for
allocating costs to the Section 8 program, the Authority can put $76,487 1 to better use over a
one-year period.



    The Authority Did Not Allocate
    Costs on a Reasonable and Fair
    Basis


                   Contrary to its consolidated annual contributions contract, 2 the Authority could
                   not support $229,460 in expenditures for administrative salary and employee
                   benefit costs in years 2002 to 2004. The consolidated annual contributions
                   contract limits Section 8 funds provided by HUD to be used to pay program
                   expenditures.

                   For years 2002 to 2004, the Authority used a percentage-of-units methodology to
                   support the percentage it used to allocate administrative salary and employee
                   benefit costs for its senior management and accounting staff. It selected the
                   percentage arbitrarily; the percentage only needed to be less than the percentage
                   of Section 8 units (vouchers) managed by the Authority (approximately 70
                   percent). The Authority did not have a formal cost allocation plan, nor did it use
                   personnel activity reports or equivalent documentation to support allocations for
                   salary and benefit costs for its senior management and accounting staff. The
                   Authority used the following percentages:




1
    $229,460/3 years = $76,487 annually.
2
    Section 11.a.


                                                    6
                              Charged to     Charged to     Charged to
                               Section 8      Section 8      Section 8
                                 2002           2003           2004
           Employee
       Executive director        49%            58%            68%
       Comptroller               49%            58%            68%
       Executive secretary        0%            58%            32%
       Accountant                 0%            58%            43%

However, in 2005, these employees began using time sheets to record their time
spent working on the Authority’s various programs. The Authority’s comptroller
stated that the Authority would use the time sheets as the basis for allocating
salary and benefit costs for 2005. We obtained the completed time sheets for the
period January through October 2005 for the four employees identified above.
The percentage of time they spent working on tasks that benefited the Section 8
program was significantly lower than those used to allocate salary costs in years
2002 to 2004. The 2005 percentages of time charged to Section 8, supported by
time sheets, were as follows:

                                         Time charged to
                   Employee                 Section 8
               Executive director             26%
               Comptroller                    31%
               Executive secretary             1%
               Accountant                      7%

Since there was no significant growth in the Authority’s programs during the
period 2002 to 2005, 2005 was a representative year for the Authority. The
Authority apparently overcharged the Section 8 program $229,460 for salary and
benefit costs over the three-year period from 2002 to 2004. The following chart
shows the details.

                      Amount           Amount           Amount
                    overcharged      overcharged      overcharged
                    to Section 8     to Section 8     to Section 8
    Employee            2002             2003             2004           Total
 Executive
 director              $21,452          $38,538           $40,974     $100,964
 Comptroller            $9,515          $20,358           $23,625      $53,498
 Executive
 secretary                  $0          $32,593           $19,172      $51,765
 Accountant                 $0          $11,164           $12,069      $23,233
 Total                 $30,967         $102, 653          $95,840     $229,460




                                 7
           We discussed this issue with the Authority during the audit. Although the
           Authority disagreed with our conclusion, it provided no documentation to
           demonstrate that the questioned costs were justified.

           To ensure that administrative salary and employee benefit costs it charges to the
           Section 8 program are reasonable and fair, the Authority needs to develop and
           implement a reasonable method for allocating administrative costs to the program.
           In doing so, it can put $76,487 in Section 8 funds to better use over a one-year
           period.


The Authority Is Addressing
Deficiencies

           The Authority is addressing the deficiencies identified. As mentioned above, the
           Authority stated that it would use time sheets to support salary and benefit costs
           for 2005. In addition, it hired a consultant to develop a cost allocation plan. The
           Authority expects the consultant to deliver the plan in April 2006. The Authority
           informed us it will use the plan retroactively to January 1, 2006.

Recommendations



           We recommend that HUD direct the Authority to

           1A.    Provide documentation to support the $229,460 in questioned costs
                  identified in this finding and, if the costs cannot be supported, reconcile
                  the allocations of salary and benefit costs it made for years 2002 to 2004
                  and reimburse the Section 8 program from the programs that benefited
                  from the erroneous allocations.

           1B.    Develop and implement a reasonable method for allocating costs to the
                  Section 8 program and, thereby, put $76,487 to better use over a one-year
                  period.




                                            8
Finding 2: The Authority Did Not Always Follow HUD Requirements

The Authority did not always calculate housing assistance payments correctly or maintain
adequate documentation in its client files to demonstrate compliance with HUD requirements.
Generally, this occurred because of administrative errors by the Authority’s staff. However, the
Authority did not have written procedures for Section 8 employees to calculate housing
assistance payments correctly and maintain client files adequately. The Authority also did not
have written procedures for conducting quality control reviews of the client files that would have
alerted the Authority to the deficiencies. Further, the Authority believed that the limited rent
reasonableness reviews it performed satisfied HUD requirements. 3 As a result, the Authority
made housing assistance overpayments of $501 and underpayments of $1,100 in the 21 client
files that we reviewed. The Authority also did not have adequate assurance that the housing
assistance payments it made to landlords were reasonable.




    The Authority Did Not Always
    Calculate Rents Correctly or
    Maintain Adequate File
    Documentation



                 The Authority did not always calculate housing assistance payments correctly or
                 maintain adequate documentation in its client files to demonstrate compliance
                 with HUD requirements. We noted the following deficiencies in our review of 21
                 Section 8 client files:

                     •    In 19 files, there was no evidence of an adequate rent reasonableness
                          review. HUD regulations 4 and the Authority’s Section 8 administrative
                          plan 5 required the reviews to be completed. HUD regulations require the
                          decision and the basis for it (i.e., information on the unassisted units
                          compared) to be documented in the client’s file.

                     •    In eight files, the Authority incorrectly calculated the housing assistance
                          payment and/or the utility assistance payment amount. We determined
                          that the overpayments totaled $501 and the underpayments totaled $1,100
                          through November 2005 for a total difference of $1,601. The Authority
                          made these errors because it

3
  24 CFR [Code of Federal Regulations] 982.507 and HUD Handbook 7420.10g, chapter 9.
4
  24 CFR [Code of Federal Regulations] 982.507 and 982.158(f)(7) and HUD Handbook 7420.10g, chapter 9.
5
  Chapter 12, section C, Authority’s Section 8 administrative plan, revised September 2004. 24 CFR [Code of
Federal Regulations] 982.54(c) requires the Authority to administer its program in accordance with its
administrative plan.


                                                        9
                              o Used outdated utility allowance schedules (two files),
                              o Used an outdated utility allowance schedule and an incorrect
                                payment standard (one file),
                              o Underestimated income and used an outdated utility allowance
                                schedule (one file),
                              o Underestimated income (one file),
                              o Overestimated income (one file),
                              o Gave credit for a disability allowance that was unsupported (one
                                file), and
                              o Did not give credit for a disability allowance that was supported
                                (one file).

                     •    In eight files, there were no copies of Social Security cards and/or birth
                          certificates. HUD regulations 6 require clients to disclose and provide
                          proof of Social Security numbers and evidence of citizenship or eligible
                          immigration status.

                     •    In seven files, there was no evidence of third-party verification of income
                          or assets or documentation explaining why third-party verification was not
                          available. HUD regulations 7 require the Authority to obtain and document
                          in the client files third-party verification of income or why third-party
                          verification was not available.

                     •    In three files, a HUD Form 9886 (Authorization for the Release of
                          Information/Privacy Act Notice) was not signed. The Authority’s Section
                          8 administrative plan 8 requires all adult household members to sign the
                          form.

                     •    In one file, the Authority did not obtain a certification for the zero income
                          that a client reported or require the client to report to the Authority
                          periodically. The Authority’s Section 8 administrative plan 9 requires
                          clients disclosing zero income to sign a notarized declaration and to report
                          to the Authority every 90 days.




6
  24 CFR [Code of Federal Regulations] 982.551(b).
7
  24 CFR [Code of Federal Regulations] 982.516(a)(2).
8
  Chapter 4, section E, Authority’s Section 8 administrative plan, revised September 2004. 24 CFR [Code of
Federal Regulations] 982.54(c) requires the Authority to administer its program in accordance with its
administrative plan.
9
  Chapter 6, section D, Authority’s Section 8 administrative plan, revised September 2004. 24 CFR [Code of
Federal Regulations] 982.54(c) requires the Authority to administer its program in accordance with its
administrative plan.


                                                       10
     The Authority Needed to
     Establish Procedures and
     Strengthen Its Quality Control



                 Although the deficiencies the audit disclosed were caused by administrative errors
                 made by the Authority’s staff, the Authority’s lack of written procedures for its
                 Section 8 employees contributed significantly to this situation. Prudent business
                 practice prescribes that procedures should be communicated in writing. The lack
                 of written procedures makes it difficult for new employees to effectively do their
                 jobs. The Authority has experienced turnover in its Section 8 staff. For example,
                 the Authority had three different employees in the position of Section 8
                 coordinator over a four month period. The Authority filled the two most recent
                 vacancies in the coordinator position by promoting an existing Section 8
                 employee and reorganizing its staff to accommodate the resultant vacancy.

                 The Authority also did not have written procedures for conducting quality control
                 reviews of its client files, despite the requirement in its Section 8 administrative
                 plan that at least 25 percent of all files be reviewed annually. 10 According to
                 Authority officials, the Section 8 supervisor performed quality control reviews of
                 the files. However, the Authority could not provide a listing of the files reviewed.
                 It stated that supervisory notations in the files showed that the reviews were
                 performed. However, the supervisory notations were intermittent and dependent
                 on the preferences of the supervisor. Further, the Authority stated that its Section
                 8 administrative plan contained an error. The executive director explained that,
                 rather than requiring “at least 25 percent of all files to be reviewed annually,” the
                 administrative plan should have required 25 files to be reviewed annually. These
                 reviews, if properly performed, would have alerted the Authority to the
                 deficiencies identified in the audit.

     The Authority Needed to
     Strengthen Its Process for
     Determining Rent
     Reasonableness



                 The Authority believed that it performed adequate rent reasonableness reviews.
                 However, the documentation supporting those reviews showed they did not fully
                 comply with HUD regulations. 11 The documentation did not always demonstrate

10
   Chapter 19, section A, Authority’s Section 8 administrative plan, revised September 2004. 24 CFR [Code of
Federal Regulations] 982.54(c) requires the Authority to administer its program in accordance with its
administrative plan.
11
   24 CFR [Code of Federal Regulations] 982.507 and HUD Handbook 7420.10g, chapter 9.


                                                       11
          that the Authority compared the rent for the voucher unit to rents for similar
          unassisted units in the marketplace or similar units on the premises.

          The Authority can remedy the deficiencies noted above by correcting the
          calculation errors and developing and implementing procedures to (1) ensure
          quality in its client files, including preparing reports to show the results of file
          reviews and any actions taken, and (2) demonstrate that rents paid to landlords are
          reasonable.

Recommendations



          We recommend that HUD direct the Authority to

          2A.     Correct the errors in the client files identified by the audit.

          2B.     Repay its Section 8 program $501 from its earned Section 8 administrative
                  fees.

          2C.     Reimburse applicable clients $1,100, from its earned Section 8
                  administrative fees, for the housing assistance underpayments, thereby
                  putting these funds to better use.

          2D.     Develop procedures for Section 8 employees to calculate housing
                  assistance payments correctly and maintain client files adequately.

          2E.     Require the Authority to implement its Section 8 administrative plan and
                  develop and implement procedures for performing quality control reviews
                  of files and documenting the results of those reviews and any actions
                  taken.

          2F.     Require the Authority to develop and implement procedures to document
                  rent reasonableness determinations before approving housing assistance
                  payments contracts.




                                             12
                         SCOPE AND METHODOLOGY


We performed the audit at the Authority in Butler, Pennsylvania, from October 2005 through
April 2006. The audit was done in accordance with generally accepted government auditing
standards and included tests of internal controls that we considered necessary under the
circumstances.

The audit covered transactions representative of operations current at the time of the audit and
included the period January 2003 through May 2005. We expanded the scope of the audit as
necessary. We reviewed the Authority’s Section 8 consolidated annual contributions contract
with HUD and applicable program regulations and guidance. We discussed operations with
management and staff personnel at the Authority and key officials from HUD’s Pittsburgh,
Pennsylvania, field office.

To determine whether the Authority was properly administering its Section 8 program, we

   •   Reviewed the Authority’s internal control structure.

   •   Reviewed the Authority’s independent auditor’s reports for fiscal years 2002 through
       2004.

   •   Reviewed minutes of the Authority’s board of commissioners meetings.

   •   Reviewed the Authority’s Section 8 year-end settlement statements for years 2002
       through 2004.

   •   Reviewed HUD and Authority correspondence related to a rental housing integrity
       monitoring review conducted by the Pittsburgh field office in 2003.

   •   Reviewed HUD and Authority correspondence related to the Real Estate Assessment
       Center’s review of the Authority’s electronically submitted financial data for its fiscal
       year ending December 31, 2003.

   •   Used audit software to randomly select and review 21 Section 8 client files.

   •   Interviewed Authority personnel.

   •   Reviewed Section 8 general ledger accounts, accounting transactions, and supporting
       documentation.

   •   Corresponded with personnel from HUD’s Financial Management Center.




                                                13
                             INTERNAL CONTROLS


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

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

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

              •   Policies, procedures, and other controls implemented by the Authority to
                  ensure it administered the Section 8 program properly.

              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:

              The Authority did not

              •   Ensure that salary and benefit costs were properly allocated to the Section 8
                  program.

              •   Establish procedures to ensure that rents were correctly calculated and client
                  files were properly maintained.




                                               14
•   Maintain adequate documentation to demonstrate that rents paid to landlords
    were reasonable.




                                15
                                    APPENDIXES


Appendix A

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

       Recommendation          Ineligible 1/        Unsupported 2/      Funds to be put
              number                                                     to better use 3/
                      1A                              $229,460
                      1B                                                   $76,487
                      2B           $501
                      2C                                                    $1,100
                    Total          $501               $229,460             $77,587



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
     policies 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
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                               16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2


Comment 3




                         17
Comment 4




            18
                         OIG Evaluation of Auditee Comments


Comment 1   As stated in the audit report, HUD provided the Authority $23.1 million over the
            four year period 2002 to 2005 for its tenant-based Section 8 program. Our audit
            included reviewing the Authority's administration of the program over that period.
            The results from our review were sufficient to demonstrate that there were
            systemic deficiencies that needed to be addressed. Accordingly, we
            recommended that the Authority develop and implement procedures and controls
            to improve its administration of the program.

Comment 2   As stated in the audit report, we discussed this issue with the Authority during the
            audit. The Authority provided no documentation to support the questioned salary
            and benefit costs for years 2002 to 2004 nor did it provide documentation to
            support the expansion of its non-HUD initiatives in 2005 that would have affected
            salary and benefit costs that it charged to the Section 8 program.

Comment 3   The auditors considered the documentation that the Authority provided to support
            its allocations of salary and benefit costs to the Section 8 program. The Authority
            is required to maintain complete and accurate books supported by records and
            documents permitting speedy and effective audit. The Authority did not provide
            documentation to demonstrate that the questioned costs were justified.

Comment 4   As stated in the audit report, the Authority did not always follow HUD
            requirements. For example, based on our review of 21 client files, we found the
            Authority did not adequately document rent reasonableness decisions in 19 files
            (90 percent). Further, the Authority incorrectly calculated housing assistance
            and/or utility assistance payments in 8 files (38 percent). The frequency of these
            and the other deficiencies noted in our review calls for the Authority to establish
            procedures and strengthen its processes to improve the administration of its
            Section 8 program.




                                             19