Issue Date
November 28, 2006
Audit Report Number
2007-FW-1002
TO: Justin R. Ormsby
Director, Office of Public Housing, 6APH
Margarita Maisonet
Director, Department Enforcement Center, CV
FROM:
Frank E. Baca
Regional Inspector General for Audit, Fort Worth Region, 6AGA
SUBJECT: The Lubbock Housing Authority, Lubbock, Texas, Inappropriately Advanced
Federal Funds to Support Its Nonprofit Entities
HIGHLIGHTS
What We Audited and Why
We audited the Lubbock Housing Authority’s (Authority) financial relationship
with its nonprofits because we found problem indicators when reviewing the
Authority’s overall operations. Our audit objective was to determine whether the
Authority was operating its nonprofits in accordance with U.S. Department of
Housing and Urban Development (HUD) requirements and if not, to determine
the extent, cause, and impact of any violations.
What We Found
The Authority made $672,395 in inappropriate advances from its low-rent fund to
its two nonprofits because management did not follow HUD’s requirements and
written instructions. One nonprofit has no assets to repay the $367,907 advanced
to it. The second nonprofit still owes $304,488 to the Authority’s low-rent
program fund and reportedly lacks the resources to repay the amount.
What We Recommend
We recommend that HUD require the Authority to either repay the $367,907 that
it advanced to the first nonprofit or seek forgiveness for it. We further
recommend that HUD require the Authority to repay its low-rent fund for the
$304,488 balance due from the second nonprofit. Finally, we recommend that
HUD take applicable administrative actions against the appropriate parties.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided a draft to the auditee on November 7, 2006, and requested a
response by November 20, 2006. The Authority provided a written response on
November 16, 2006, and did not disagree with our finding. The Authority’s
response detailed steps that the Authority has taken to resolve the $367,907 in
advances it made to one nonprofit, and outlined the Authority’s plan to repay
$304,488 in advances it made to a second nonprofit. HUD’s Fort Worth Office of
Public Housing agreed with the report and stated it would provide management
decisions within 120 days.
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: The Authority Inappropriately Advanced Federal Funds to Support Its 5
Nonprofit Entities
Scope and Methodology 9
Internal Controls 10
Appendixes
A. Schedule of Questioned Costs 11
B. Auditee Comments and OIG’s Evaluation 12
3
BACKGROUND AND OBJECTIVES
The City of Lubbock (City) is the ninth largest city in Texas and the largest city in West Texas. The
Lubbock Housing Authority (Authority) was established in 1939 to provide decent, safe, and
sanitary housing for families of low to moderate income. The Authority is governed by a seven-
member board of commissioners appointed by the mayor for two-year terms. It administers both
public housing and Section 8 programs. Its staff works and maintains administrative records and
tenant files in its main office at 1708 Avenue G in Lubbock, Texas.
The Authority created two nonprofits–the City of Lubbock Housing Initiative and the
Management Development Corporation. These nonprofits are component units of the Authority,
and the Authority’s financial statements include the operations of the nonprofits.
• City of Lubbock Housing Initiative (Initiative) – In January 1993, the Authority
incorporated this nonprofit public benefit corporation. The Initiative is a 501c(3)
nonprofit corporation created to provide additional affordable housing and services to the
lower income community by acquiring funds that are not available to the Authority in the
normal course of business. The Authority purchased and operated several Resolution
Trust Corporation properties through the Initiative. It sold the final property in June
2005. The Initiative is currently only a receivable on the Authority’s general ledger
because it has no assets to repay the operating advances the Authority made to it.
However, the Authority has not dissolved the Initiative, and it plans to use the nonprofit
to operate non-U.S. Department of Housing and Urban Development (HUD)-funded
projects in the future.
• Management Development Corporation (Corporation) – In June 2002, the Authority
created the Corporation as a nonprofit under the Texas Public Facilities Corporation Act
to further the goals and objectives of the Authority by providing market rate housing.
Through the Corporation, the Authority built and operates a 184-unit multifamily project
called the Preserve at Prairie Point. Greystar Management manages the property for the
Authority.
During January 2006, HUD’s Fort Worth Office of Public Housing identified the Authority as a
candidate for an Office of Inspector General (OIG) audit. It considered the Authority troubled
and placed it under a memorandum of agreement to improve its operations. It also questioned
whether the Authority had the capacity to operate its housing programs effectively.
The objective of this audit was to determine whether the Authority was operating its nonprofits
in accordance with HUD requirements and if not, to determine the extent, cause, and impact of
any violations. This is the second of three audit reports on the Authority’s housing programs.
4
RESULTS OF AUDIT
Finding: The Authority Inappropriately Advanced Federal Funds to
Support Its Nonprofit Entities
The Authority violated its contract with HUD by inappropriately advancing public housing funds
to support the operations of its nonprofit entities. As of August 24, 2006, the Authority owed its
low-rent program $672,395 because of improper advances to its nonprofits. The Authority made
the advances because its prior management wanted to increase its nonfederal revenues by having
the nonprofits purchase and operate properties. In making the advances, prior Authority
management did not follow HUD’s requirements and written instructions. As a result, the
Authority had fewer funds available to serve its low-income residents, and the Authority’s
operations and HUD’s funds are at risk.
The Authority Created Two
Nonprofits and Made Improper
Advances of Federal Funds to
Them
To increase its revenue stream, The Authority created two nonprofits–the Initiative
and the Corporation. The nonprofits are wholly owned subsidiaries of the Authority,
and the Authority created them so that it would not have to be as reliant on HUD for
funding. HUD allows housing authorities to operate nonprofits as long as HUD’s
projects and funds are not encumbered1 or used to operate the nonprofit entities.2
However, the Authority’s nonprofits were never self-sufficient. Therefore, the
Authority improperly advanced federal funds to the Initiative and the Corporation to
cover their operations.
The Authority made indirect advances of federal funds from the low-rent account to
the Initiative because the Authority used its low-rent account as a general fund
which included the Initiative’s operations. HUD allows authorities to use a general
fund as an operating account. However, the Authority’s annual contributions
contract with HUD prohibited the Authority from allowing its nonprofits to
withdraw more from the fund than they had on deposit. 3 Since the Initiative was not
profitable, the Authority deposited less in rents from Initiative properties than it
1
Section 7 of the annual contributions contract prohibits the Authority from encumbering any project subject to
the contract without HUD’s prior approval and prohibits the Authority from pledging any project assets subject
to the contract as collateral for a loan.
2
Section 9, paragraphs (B) and (C), of the annual contributions contract prohibit the Authority from using funds
subject to the contract for any purpose other than for contract operations or any other purpose not specifically
approved by HUD.
3
Section 10, paragraph (C), of the annual contributions contract prohibits the Authority from withdrawing funds
from the general fund for a project in excess of the funds that the project has on deposit in the general fund.
5
spent in expenses for the Initiative’s operations, which caused advances from the
Authority’s low-rent program to be accrued. The Authority sold the Initiative’s
properties and used part of the proceeds to repay its low-rent program for some of
the advances. However, rather than repaying its low-rent program, the Authority
loaned $310,000 of the proceeds to the Corporation to purchase the land on which
the Corporation’s sole asset, a 184-unit market rent apartment complex, the Preserve
at Prairie Pointe, was built.
HUD Tried to Help the
Authority
HUD recognized that the Authority was experiencing difficulties and declared the
Authority to be troubled based on poor Public Housing Assessment System scores
for the period ending September 30, 2003. HUD hired Quadel Consulting, Inc.
(Quadel), to perform an independent assessment of the Authority’s operations.
Quadel’s final report, issued in October 2004, indicated that the Authority was
financially troubled, partially due to the purchase of the Corporation’s land and to
interfund borrowing by the Initiative. The Quadel report prompted HUD to draft a
memorandum of agreement with the Authority to improve the Authority’s
operations. In the memorandum, HUD told the Authority that it would have to
repay the funds that it improperly advanced to the nonprofits.
The Prior Executive Director
Ignored HUD’s Instructions
Despite HUD’s instructions to the Authority to cease making advances to the
nonprofits, the Authority continued to make indirect advances to the Initiative
through its general fund during 2005. In a letter, dated January 31, 2005, HUD
warned the Authority against using low-rent funds to pay for its nonprofit activities.
On that date, the Initiative owed the low-rent account $625,447. The Authority
continued to advance funds to cover the operating losses of the Initiative, and by
May 5, 2005, the nonprofit owed the low-rent fund $690,996. On May 4, 2005,
HUD sent the Authority a second letter reminding it that it could not use low-rent
funds to pay for its nonprofit activities. The Authority immediately transferred
$170,000 from the Initiative’s account to the low-rent fund and reduced the balance
to $520,996. However, the Authority again began advancing funds from the low-
rent account to the Initiative to cover its operating losses, and on June 1, 2005, it
owed the low-rent account $550,926. The Authority sold the remaining Initiative
property in June 2005, which stopped the recurring advances. Since June 2005, the
Authority has made some transfers from the Initiative’s account to the low-rent fund
and, as of August 24, 2006, had reduced the outstanding balance to $367,907.
6
The prior executive director apparently made these advances without the board of
commissioners’ approval. A review of the meeting minutes for 2004 and 2005
showed no indication that the board members were aware of HUD’s warning letters
or of the Authority’s continued advances to the Initiative.
The Authority and Its Current
Executive Director Are
Working to Correct the
Problems
The Authority and its current executive director are working with the Fort Worth
Office of Public Housing to correct the problems identified in this report. The
Authority has made staffing and operational changes during the past year. The
board of commissioners terminated the prior executive director’s employment in
November 2005. The City loaned the Authority one of its city managers for two
years to be the executive director. Under the current executive director’s leadership,
the Authority has removed or accepted the resignation of the director of finance, the
Section 8 administrator, and the public housing administrator. The current executive
director agreed that the transfers were improper. He indicated that he is seeking
HUD’s forgiveness for the Initiative’s debt, valued at $367,907 as of August 24,
2006, and intends to sell the Corporation’s asset and repay the $304,488 that the
Corporation owed to the low-rent fund as of August 24, 2006.
7
Recommendations
We recommend that the director of the Fort Worth Office of Public Housing
1A. Refer the Authority’s actions to the HUD Headquarters Office of Public
Housing for a determination as to whether the Authority has committed a
significant violation of its annual contributions contract.
1B. Require the Authority to either repay or seek the HUD Headquarters Office
of Public Housing’s forgiveness of the $367,907 improperly advanced to the
Initiative from the Authority’s low-rent fund.
1C. Require the Authority to repay the low-rent fund the $304,488 improperly
advanced to the Corporation.
Further, we recommend that the director of the Departmental Enforcement Center
1D. Implement applicable administrative actions against the appropriate
Authority parties.
8
SCOPE AND METHODOLOGY
We conducted our audit from March through October 2006 at the Authority, the Fort Worth
Office of Public Housing, and our office in Houston, Texas. Our audit period was from
January 1, 2004, through December 31, 2005. We expanded the scope as necessary to review
those nonprofit transactions that were outside the audit period. During the audit, we performed
the following steps:
• Reviewed background information and the criteria that control the Authority and its
operations.
• Reviewed various reports, databases, and documents to determine existing conditions
at the Authority. The data included the independent public accountant’s report for
fiscal year 2004, the prior OIG audit report (98-FW-206-1001) and audit resolution
information, and monitoring reports maintained by Fort Worth Office of Public
Housing.
• Reviewed data in the Authority’s accounting and operating systems, including the
general ledger, check register, and tenant lists.
• Reviewed the Authority’s relationships with its nonprofits to determine whether the
Authority was inappropriately supporting the nonprofit operations with federal funds.
• Conducted interviews with Authority staff, the independent public accountant, and
Fort Worth Office of Public Housing personnel tasked with oversight of the
Authority’s operations.
We performed our audit in accordance with generally accepted government auditing standards.
9
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:
• Compliance with laws and regulations – policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
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 Weakness
Based on our review, we believe the following item is a significant weakness:
• The Authority did not have effective policies, procedures, or controls to
reasonably ensure that its federal resource use was consistent with laws and
regulations.
10
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation
number Ineligible 1/
1A $367,907
1B $304,488
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.
11
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
12
13
OIG Evaluation of Auditee Comments
Comment 1 The Authority did not disagree with our finding. Their response detailed the steps
they will take and are taking to address the deficiencies.
14
The Lubbock Housing Authority, Lubbock, Texas, Inappropriately Advanced Federal Funds to Support Its Nonprofit Entities
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-11-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)