oversight

The Marion Housing Authority, Marion, Indiana, Improperly Used HUD Funds for Nonprofit Development Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-12-13.

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

                                                                 Issue Date
                                                                        December 13, 2006
                                                                 Audit Report Number
                                                                        2007-CH-1001




TO:        Thomas S. Marshall, Director of Public Housing Hub, 5DPH


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Marion Housing Authority, Marion, Indiana, Improperly Used HUD Funds
            for Nonprofit Development Activities

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Marion Housing Authority’s (Authority) nonprofit development
             activities. The review of public housing authorities’ development activities is set
             forth in our fiscal year 2006 annual audit plan. We selected the Authority because
             it was identified as having high-risk indicators of nonprofit development activity.
             Our objective was to determine whether the Authority diverted or pledged
             resources subject to its annual contributions contract (contract), other agreement,
             or regulation for the benefit of non-U.S. Department of Housing and Urban
             Development (HUD) developments.


 What We Found

             The Authority, under direction of its former executive director and a considerably
             different board of commissioners (board), defaulted substantially on its contract
             when it inappropriately used public housing operating funds to support the
             activities of the Affordable Housing Corporation (Corporation), a nonprofit
             organization created by the Authority, without HUD approval. As of November
             2006, the Authority owed its public housing program more than $180,000.

             The Authority inappropriately used nearly $19,000 in Housing Choice
             Voucher/Family Self-Sufficiency Program Coordinators (Coordinators) funds
             from January 2003 through June 2004 to pay its former family self-
           sufficiency/housing counselor’s (former counselor) salary and benefits while the
           former counselor worked on the Corporation’s activities. In addition, the
           Authority could not provide adequate documentation to support that its use of
           more than $25,000 in Coordinators funds to pay the former counselor’s salary and
           benefits during the same period was appropriate.


What We Recommend

           We recommend that the director of HUD’s Cleveland Office of Public Housing
           require the Authority to reimburse its public housing operating and Coordinators
           funds from nonfederal funds for the inappropriate disbursements and implement
           adequate procedures and controls to ensure it uses public housing program and
           Coordinators funds appropriately. We also recommend that the director refer the
           Authority’s substantial default of its contract to HUD headquarters and request
           appropriate action be taken against the Authority.

           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 issued because of the audit.

Auditee’s Response

           We provided our discussion draft audit report to the Authority’s executive director,
           its board chairman, and HUD’s staff during the audit. We held an exit conference
           with the Authority’s executive director on November 8, 2006.

           We asked the Authority’s executive director to provide comments on our discussion
           draft audit report by November 20, 2006. The executive director provided written
           comments, dated November 17, 2006. The Authority agreed with our finding and
           recommendations regarding its improper use of $160,000 of public housing
           operating funds to support the activities of the Corporation. However, it disagreed
           with our findings and recommendations regarding its inappropriate use of an
           additional $116,000 of public housing operating funds to support the activities of the
           Corporation and Coordinators funds for its former counselor’s salary and benefits.
           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objective                                                           4

Results of Audit

      Finding 1: The Authority Substantially Defaulted on Its Contract When It     5
                 Improperly Used Public Housing Operating Funds to Support
                 Nonprofit Development Activities

      Finding 2: The Authority Improperly Used Coordinators Funds for Its Former   8
                 Counselor’s Salary and Benefits

Scope and Methodology                                                              11

Internal Controls                                                                  12

Appendixes

   A. Schedule of Questioned Costs                                                 14
   B. Auditee Comments and OIG’s Evaluation                                        15
   C. Federal Requirements                                                         20




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                       BACKGROUND AND OBJECTIVE

The Marion Housing Authority (Authority) is a municipal corporation established by the City of
Marion, Indiana, (City) on September 3, 1968, under section 36-7-18-4 of the Indiana Code to
provide decent, safe, and sanitary housing to low- and moderate-income persons and families
under the U.S. Housing Act of 1937. The Authority is governed by a seven-member board of
commissioners (board) appointed by the City’s mayor to four-year staggered terms. The board’s
responsibilities include overseeing the Authority’s operations. The board appoints the
Authority’s executive director, who is responsible for carrying out the board’s policies and
managing the Authority’s day-to-day operations.

The Authority administers a public housing program, a Public Housing Capital Fund, and a
Section 8 Housing Choice Voucher program (Section 8) funded by the U.S. Department of
Housing and Urban Development (HUD). As of August 24, 2006, the Authority’s public
housing and Section 8 programs consisted of 270 and 421 units, respectively. The Authority also
received Housing Choice Voucher/Family Self-Sufficiency Program Coordinators
(Coordinators) funds to pay the salaries and fringe benefits of Section 8 program staff to
coordinate its Section 8 Family Self-Sufficiency program.

In accordance with its agency plan, a public housing agency may form and operate wholly
owned or controlled subsidiaries or other affiliates, which may be directed, managed, or
controlled by the same persons who constitute the board of directors or similar governing body
of the public housing agency or who serve as employees or staff of the public housing agency
but remain subject to other provisions of law and conflict-of-interest requirements. Further, a
public housing agency, in accordance with its agency plan, may enter into joint ventures,
partnerships, or other business arrangements with or contract with any person, organization,
entity, or governmental unit with respect to the administration of the programs of the public
housing agency, such as developing housing or providing supportive/social services subject to
either Title I of the U.S. Housing Act of 1937, as amended, or state law.

The Authority created the Affordable Housing Corporation (Corporation) in 1995 as a 501(c)(3)
nonprofit organization to provide affordable residential dwelling accommodations for low- and
moderate-income persons and families. The Corporation’s addendum to its original articles of
incorporation and bylaws stated that at least one of the Corporation’s directors shall be appointed
by the Authority. However, the Corporation amended its articles of incorporation, dated July 8,
2004, and bylaws, dated August 12, 2004, to no longer state that at least one of the Corporation’s
directors shall be appointed by the Authority. In addition, none of the Corporation’s current
directors is an Authority employee or board member as of August 2006.

Our objective was to determine whether the Authority diverted or pledged resources subject to its
annual contributions contract (contract), other agreement, or regulation for the benefit of non-
HUD developments.




                                                 4
                                RESULTS OF AUDIT

Finding 1: The Authority Substantially Defaulted on Its Contract When
    It Improperly Used Public Housing Operating Funds to Support
                  Nonprofit Development Activities
The Authority, under direction of its former executive director and a considerably different
board, defaulted substantially on its contract when it inappropriately used public housing
operating funds to support the Corporation’s activities. As of November 2006, the Authority
owed its public housing program more than $180,000. The improper disbursements occurred
because the Authority lacked adequate procedures and controls to ensure that it used its public
housing operating funds appropriately. As a result, fewer funds were available to serve the
Authority’s public housing program residents.


 The Authority Inappropriately
 Used Public Housing Operating
 Funds

               The Authority violated its contract with HUD when it inappropriately disbursed
               $276,000 in public housing operating funds to support the Corporation’s
               activities. The Authority disbursed

                  ™   $116,000 on June 21, 2002, to Springhill of Marion, L.P., as a quasi-loan
                      for the Springhill of Marion project formerly known as Marion Scattered
                      Sites;
                  ™   $100,000 on November 9, 2001, to Insured Closing Specialist, Inc., for the
                      purchase of land for Springhill of Marion, L.P.’s Springhill of Marion
                      project; and
                  ™   $60,000 on December 27, 2001, to the Corporation for the development of
                      Emerson Homes.

               The Corporation is the general partner of Springhill of Marion, L.P. Neither
               Springhill of Marion nor Emerson Homes is a project covered under the contract
               or a mixed-finance project. The Authority considered all of the disbursements to
               be loans. However, it did not enter into written repayment agreements for any of
               the previously mentioned disbursements and only accounted for the disbursement
               to Springhill of Marion, L.P., as a loan.

               The Authority disbursed the public housing operating funds under the direction of
               its former executive director. In addition, only one of the Authority’s current
               board members was on the board when it approved resolutions authorizing the
               November and December 2001 disbursements. Two current members were on the
               board when it authorized the June 2002 disbursement.



                                                5
           The coordinator of HUD’s Indianapolis Office of Public Housing stated that HUD
           did not approve the Authority’s disbursements. Further, HUD would not have
           approved the Authority’s disbursements if the Authority had requested approval.
           An unauthorized disposition of project assets is a substantial default of the
           contract. The distributions were clearly unauthorized. HUD did not approve the
           distributions, which were made for projects not covered by the contract.
           Therefore, the Authority defaulted substantially on its contract by making the
           disbursements.

           As of November 2006, Springhill of Marion, L.P., had repaid $78,487 of the
           $116,000 disbursement. In addition, the Authority had reimbursed its public
           housing operating fund $16,000 of the $60,000 disbursement. Therefore, the
           Authority still owed its public housing operating fund $181,513. The current
           executive director, who started with the Authority in February 2005, has shown an
           interest in recovering the public housing operating funds from the Corporation. In
           addition, the executive director filed a formal complaint pleading on August 28,
           2006, requesting that the Corporation assign the promissory note and mortgage
           interest for Springhill of Marion to the Authority; the Authority be allowed to
           place a lien on the property for $100,000 superior to the Corporation; the
           Corporation pay the Authority $100,000, including prejudgment interest; or the
           note and mortgage for Springhill of Marion held by the Corporation be declared
           void and a commissioner be appointed to convey the land to the Authority.

The Authority Lacked
Adequate Procedures and
Controls over Public Housing
Operating Funds

           The inappropriate disbursements occurred because the Authority lacked adequate
           procedures and controls to ensure that it used its public housing operating funds
           appropriately. The Authority’s former board chair said that the board did not
           know the Authority could not use public housing operating funds to support the
           Corporation’s activities.

           As a result, the Authority has $181,513 less in public housing operating funds
           available to serve the Authority’s public housing program residents as of
           November 2006.

Recommendations

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

           1A.    Reimburse its public housing operating fund $181,513 from nonfederal
                  funds for the inappropriate disbursements cited in this finding.



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1B.    Implement adequate procedures and controls to ensure that it does not
       disburse public housing operating funds to support the Corporation’s
       activities.

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

1C.    Refer the Authority’s substantial default of its contract to HUD headquarters
       and request that appropriate action be taken against the Authority.




                                 7
Finding 2: The Authority Improperly Used Coordinators Funds for Its
               Former Counselor’s Salary and Benefits
The Authority inappropriately used nearly $19,000 in Coordinators funds from January 2003
through June 2004 to pay its former family self-sufficiency/housing counselor’s (former
counselor) salary and benefits while the former counselor worked on the Corporation’s activities.
In addition, the Authority could not provide adequate documentation to support that its use of
more than $25,000 in Coordinators funds to pay the former counselor’s salary and benefits
during the same period was appropriate. The problems occurred because the Authority lacked
adequate procedures and controls to ensure that it used its Coordinators funds appropriately. As
a result, HUD and the Authority lack assurance that the Authority’s use of nearly $44,000 in
Coordinators funds benefited its Section 8 Family Self-Sufficiency program.


 The Authority Improperly Used
 or Lacked Adequate
 Documentation for Its Use of
 Coordinators Funds

              The Authority inappropriately used $18,757 in Coordinators funds from January
              2003 through June 2004 to pay its former counselor’s salary and benefits while
              the former counselor worked on the Corporation’s activities. In addition, the
              Authority could not provide adequate documentation to support that its use of an
              additional $25,033 in Coordinators funds to pay the former counselor’s salary and
              benefits during the same period was appropriate.

              The Authority did not support its allocation of salary and benefits expenses for its
              former counselor with activity reports or equivalent documentation. Further, it
              did not have a job/position description for the former counselor.

              The Authority’s director of administration/chief financial officer, deputy
              executive director, and former counselor said that the former counselor spent 50
              percent of his time working on the Authority’s activities and 50 percent working
              on the Corporation’s activities. The former counselor also said that he worked on
              the Authority’s public housing and Section 8 Family Self-Sufficiency programs
              when he worked on the Authority’s activities and that he provided homebuyer
              assistance and consumer credit counseling when he worked on the Corporation’s
              activities. The former counselor could not determine how much time he spent on
              each of the programs.




                                                8
The Authority Lacked
Adequate Procedures and
Controls over Its Use of
Coordinators Funds


           The Authority lacked adequate procedures and controls to ensure that it used its
           Coordinators funds appropriately. The Authority’s former board chair said that
           the board did not know the Authority could not use Coordinators funds for
           activities other than coordinating the Authority’s Section 8 Family Self-
           Sufficiency program.

           As a result, HUD and the Authority lack assurance that the Authority’s use of
           $43,790 ($18,757 plus $25,033) in Coordinators funds benefited its Section 8
           Family Self-Sufficiency program.

The Authority Did Not
Maintain Complete and
Accurate Books of Record


           Contrary to its contract with HUD, the Authority did not maintain complete and
           accurate books of record. The Authority maintained its Coordinators funds and
           Section 8 administrative fee reserves in the same general fund cash account within
           its general ledger and could not identify the source of the funds in the account.
           While the pooling of funds is permitted by HUD, the Authority must maintain
           records that identify the source and use of the funds. The Authority was not able
           to identify the source of the funds used to pay the former counselor’s salary. The
           Authority received $43,790 in Coordinators funds from January 2003 through
           June 2004.

Recommendations

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

           2A.    Reimburse its Coordinators funds $18,757 from nonfederal funds for the
                  inappropriate payment of salary and benefits cited in this finding.

           2B.    Provide documentation to support the use of $25,033 in salary and benefits
                  expenses for its former counselor was eligible or reimburse its
                  Coordinators funds from nonfederal funds as appropriate.

           2C.    Implement adequate procedures and controls to ensure that it only uses
                  Coordinators funds for the coordination of its Section 8 Family Self-
                  Sufficiency program.



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2D.   Implement procedures and controls so its books and records idenify the
      source and use of pooled funds.




                              10
                        SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

              •   Applicable laws; regulations; the Authority’s annual contributions contracts
                  with HUD; HUD program requirements at 24 CFR [Code of Federal
                  Regulations] Parts 85, 941, 982, and 984; Office of Management and Budget
                  Circular A-87; HUD’s notice of funding availability (notice) for fiscal years
                  2001, 2002, and 2004 Coordinators funds in the Federal Register, dated
                  February 26, 2001, March 26, 2002, and May 14, 2004, respectively; and
                  HUD’s Housing Choice Voucher Guidebook 7420.10.

              •   The Authority’s accounting records; annual audited financial statements for
                  2002, 2003, and 2004; general ledgers; bank statements and cancelled checks;
                  by-laws; policies and procedures; board meeting minutes; organizational
                  chart; affordable housing program application and agreement; and nonprofit
                  development activity documentation.

              •   The Corporation’s articles of incorporation, bylaws, board of directors,
                  organizational chart, and development activity documentation.

              •   HUD’s files for the Authority.

We also interviewed the Authority’s and the Corporation’s employees and/or board members and
HUD staff.

We performed our on-site audit work from January through May 2006 at the Authority’s offices
located at 601 South Adams Street, Marion, Indiana. The audit covered the period July 1, 2004,
through December 31, 2005, and was expanded as determined necessary.

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




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                             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 resources.

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 objective:

                  •   Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                  •   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.

                  •   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.

              We assessed all of 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.




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Significant Weakness

            Based on our review, we believe the following is a significant weakness:

               •   The Authority lacked adequate procedures and controls to ensure that it
                   used its public housing operating and Coordinators funds appropriately
                   (see findings 1 and 2).




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                   Recommendation
                       number            Ineligible 1/   Unsupported 2/
                         1A               $181,513
                         2A                  18,757
                         2B                                 $25,033
                        Totals            $200,270          $25,033

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.




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Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         15
Ref to OIG Evaluation   Auditee Comments




Comments 1,
2, and 3




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




Comment 4




                         17
Ref to OIG Evaluation   Auditee Comments




                         18
                         OIG’s Evaluation of Auditee Comments

Comment 1    The Authority’s executive director did not specify or provide support for the
             current policies and procedures in which he referred. In addition, the Authority
             needs to implement adequate controls.

Comment 2 The Authority’s $116,000 quasi-loan to Springhill of Marion, L.P. is not a HUD-
          approved investment.

Comment 3    Although HUD did not award the Authority fiscal year 2003 Coordinators funds,
             HUD awarded the Authority $32,822 in fiscal year 2001 Coordinators funds
             effective June 2002, $32,822 in fiscal year 2002 Coordinators funds effective
             June 2003, and $33,150 in fiscal year 2004 Coordinators funds effective June
             2004. There was no gap in funding from June 2002 through May 2004. The
             Authority received $43,790 in Coordinators funds from January 2003 through
             June 2004.

Comment 4    The Authority did not provide supporting documentation for its allocation of
             salary and benefits expenses for the former counselor.




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Appendix C

                           FEDERAL REQUIREMENTS

Finding 1

Section 7 of the Authority’s contract with HUD states that the Authority shall not dispose of any
project, or portion thereof, other than in accordance with the terms of the contract and applicable
HUD requirements.

Section 9 of the contract states that the Authority may withdraw funds from its general fund only
for (1) the payment of the costs of development and operation of the projects under contract with
HUD, (2) the purchase of investment securities approved by HUD, and (3) such other purposes
as may be specifically approved by HUD.

Section 17(B) of the contract states that a substantial default is a serious and material violation
by the Authority of any one or more of the covenants contained in the contract. Events of
substantial default include the disposition of any project, or portion thereof, without HUD
approval. Upon the occurrence of a substantial default, as determined by HUD and in
accordance with the contract, HUD shall be entitled to any or all of the remedies set forth in
paragraphs (E), (F), and (H) in this section.

Section 17(C) states that delivery of a notice of substantial default shall be required before HUD
exercises any remedy under the contract. The notice shall identify the specific covenants,
statutes, executive orders, or regulations alleged to have been violated; identify the specific
events, actions, failure to act, or conditions that constitute the alleged substantial default; and
provide a specific timeframe for the Authority to cure the substantial default, taking into
consideration the nature of the default.

Section 17(E) states that upon occurrence of substantial default or expiration of any applicable
cure period provided by HUD, the Authority shall convey to HUD title to the project(s) as
demanded by HUD if, in HUD’s determination, such conveyance of title is necessary to achieve
the purposes of the U.S. Housing Act of 1937, or deliver possession and control of the project(s)
to HUD.

Section 17(F) states that nothing contained in the contract shall prohibit or limit HUD from
exercising any other right or remedy existing under applicable law or available at equity. HUD’s
exercise or nonexercise of any right or remedy under this contract shall not be construed as a
waiver of HUD’s right to exercise that or any other right or remedy at any time.

Section 17(H) states that HUD may at any time by notice to the Authority declare the contract
terminated with respect to any project that at such time has not been permanently financed if a
substantial default exists in connection with any of the projects, provided that no such
termination shall effect any obligation of HUD to make annual contributions pursuant to section
12 of attachment VI, part B, of the contract.




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Finding 2

HUD issued a notice for fiscal year 2001 Coordinators funds in the Federal Register, dated
February 26, 2001. The program overview for the notice states that funding under this notice
may not be used to pay the salary of a public housing Family Self-Sufficiency program
coordinator. Section III(A) of the notice states that HUD is making fiscal year 2001
Coordinators funds available to pay the salaries of Section 8 Family Self-Sufficiency program
coordinators. Section IV(A) states that the Section 8 Family Self-Sufficiency program
coordinator works with a public housing authority’s program coordinating committee and with
local service providers to assure that Section 8 Family Self-Sufficiency program participants are
linked to supportive services they need to achieve self-sufficiency. The Section 8 Family Self-
Sufficiency program coordinator may ensure, through case management, that the services
included in participants’ contracts of participation are provided on a regular, ongoing, and
satisfactory basis and that participants are fulfilling their responsibilities under the contracts.

HUD issued a notice for fiscal year 2002 Coordinators funds in the Federal Register, dated
March 26, 2002. The program overview for the notice states funding under this notice may not
be used to pay the salary of a public housing Family Self-Sufficiency program coordinator.
Section III(A) of the notice states that HUD is making fiscal year 2002 Coordinators funds
available to pay the salaries of Section 8 Family Self-Sufficiency program coordinators. Section
IV(A) states that the Section 8 Family Self-Sufficiency program coordinator works with a public
housing authority’s program coordinating committee and with local service providers to assure
that Section 8 Family Self-Sufficiency program participants are linked to supportive services
they need to achieve self-sufficiency. The Section 8 Family Self-Sufficiency program
coordinator may ensure, through case management, that the services included in participants’
contracts of participation are provided on a regular, ongoing, and satisfactory basis; that
participants are fulfilling their responsibilities under the contracts; and that escrow accounts are
established and properly maintained for eligible families. The Section 8 Family Self-Sufficiency
program coordinator may also perform job development functions for the Section 8 Family Self-
Sufficiency program.

HUD issued a notice for fiscal year 2004 Coordinators funds in the Federal Register, dated May
14, 2004. Section III.C.1 of the notice states that fiscal year 2004 Coordinators funds may only
be used to pay salaries and fringe benefits of Section 8 Family Self-Sufficiency program staff.
Section IV.E.3 states that fiscal year 2004 Coordinators funds may not be used to pay the salary
of a family self-sufficiency coordinator for a public housing Family Self-Sufficiency program or
for services for Family Self-Sufficiency program participants.

Section 14 of the Authority’s contract with HUD states that the Authority must maintain
complete and accurate books of account and records for a program. The books and records must
be in accordance with HUD requirements and must permit a speedy and effective audit.




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