Issue Date
December 13, 2006
Audit Report Number
2007-PH-1002
TO: Malinda Roberts, Director, Office of Public Housing, Philadelphia Regional
Office, 3APH
Margarita Maisonet, Director, Departmental Enforcement Center, CV
FROM:
SUBJECT: The Montgomery County Housing Authority, Norristown, Pennsylvania,
Improperly Used HUD Funds to Purchase, Renovate, and Maintain Its Main
Office
HIGHLIGHTS
What We Audited and Why
We audited the Montgomery County Housing Authority (Authority) because of
complaints we received concerning the propriety of the Authority’s purchase,
renovations, and operation of its main administrative office and regarding its
Section 8 Housing Choice Voucher program. Our audit objective was to evaluate
whether the Authority properly used U.S. Department of Housing and Urban
Development (HUD) funds to purchase, renovate, and maintain its main
administrative office. We also reviewed the adequacy of the Authority’s
administration of its Section 8 Housing Choice Voucher program.
What We Found
The Authority complied with HUD regulations and adequately administered its
Section 8 Housing Choice Voucher program. However, it violated its
consolidated annual contributions contract 1 by improperly acquiring a $1.2
million loan using HUD assets as collateral. It further improperly used HUD
funds to pay the interest and principal on the loan, which it used to renovate its
main office building. The Authority also violated its annual contributions
contract by improperly using HUD funds to purchase, renovate, and maintain its
main office. It improperly used $975,900 2 in Public Housing Homeownership
(Homeownership) program proceeds and $609,363 3 in capital funds to purchase,
renovate, and maintain the building, much of which is vacant, or which the
Authority has been attempting to lease commercially for several years, or has
leased to the Redevelopment Authority of Montgomery County (Redevelopment
Authority).
The Authority improperly used another $9,257 in Homeownership program
proceeds to pay the utilities of the Redevelopment Authority. The Authority’s
improper use of HUD funds contributed to a significant increase in its operating
expenses and caused it to delay and cancel needed repairs at public housing units
in Montgomery County.
What We Recommend
We recommend that the director of the Philadelphia Office of Public Housing
notify the Authority that it has improperly encumbered annual contributions
contract assets and direct it to provide evidence that the financial instruments
encumbering the assets have been changed to exclude the assets and, thereby, put
$1.1 million to better use. We further recommend that if the Authority does not
withdraw its encumbrances of annual contributions contract assets, the director
should advise HUD Headquarters Office of Field Operations that the Authority is
potentially in substantial default of its annual contributions contract (ACC)
because it has improperly encumbered ACC assets and provide all the relevant
information. Further, the Philadelphia Office of Public Housing should request to
be advised on Headquarters’ disposition of the “Notice of Default” to the
Authority. We also recommend that the Department's Enforcement Center initiate
appropriate sanctions against Authority officials responsible for encumbering
annual contributions contract assets to secure a loan.
1
Annual contributions contract, part A, section 7, “Covenant against Disposition and Encumbrances.”
2
$975,900 = ($325,000 used to purchase building + $428,021 used for renovations + $222,879 used to supplement
budget shortfalls).
3
Only $142,812 (6 percent) of the $2,380,196 total renovation costs for the building was eligible to be paid for with
capital funds. Since the Authority spent $752,175 in capital funds to renovate the building, the use of $609,363 of
the funds was ineligible.
2
In addition, we recommend that HUD require the Authority to properly support its
use of $975,900 in Homeownership program proceeds or repay the program
unsupported amounts from nonfederal funds. The Authority should also repay
from nonfederal funds $609,363 in ineligible capital funds spent to be returned to
the United States Treasury. We further recommend that the Authority reimburse
the Homeownership program $9,257 for improperly paying its tenant’s utility
bills. Lastly, we recommend that the Authority begin paying future debt service
on the $1.2 million loan attributable to activities unrelated to its consolidated
annual contributions contract from nonfederal funds and provide adequate support
for $119,139 in interest payments it made on the loan or repay HUD any
unsupported amounts.
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 November 14, 2006. The Authority provided written comments to
our draft report on November 29, 2006. The Authority generally disagreed with
our findings but expressed willingness to work with HUD to resolve the issues
noted in our report. 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 Improperly Used HUD Assets as Collateral on a $1.2 6
Million Loan
Finding 2: The Authority Improperly Used HUD Funds to Purchase, Renovate, 9
and Operate Its Main Office Building
Scope and Methodology 14
Internal Controls 15
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 Montgomery County Housing Authority (Authority) is a governmental, public corporation
created through a resolution of the County of Montgomery, Pennsylvania. It was organized as a
public housing authority. The Authority owns and operates approximately 617 public housing
units and issues approximately 2,597 housing choice vouchers. The annual contributions
contract defines the terms and conditions under which the Authority agrees to develop all
projects under the agreement. The Authority is governed by a board of five members who are
appointed locally. The governing board is essentially autonomous but is responsible to the U.S.
Department of Housing and Urban Development (HUD). The Authority’s main administrative
office is located at 104 West Main Street, Norristown, Pennsylvania.
HUD authorized the Authority the following financial assistance for fiscal years 2004 through
2006:
• $1,878,902 in operating subsidies to operate and maintain its housing developments,
• $1,492,360 in Public Housing Capital Fund program funding to modernize public
housing units, and
• $21,208,915 to provide housing assistance through tenant-based Section 8 vouchers.
In February 2005, an anonymous complaint was received via the Office of Inspector General
(OIG) Hotline alleging that the Authority was not using federal funds in accordance with
applicable regulations.
The objectives of the audit were to evaluate whether the Authority properly used HUD funds to
purchase, renovate, and maintain its main administrative office and to evaluate the adequacy of
the Authority’s administration of its Section 8 Housing Choice Voucher program.
5
RESULTS OF AUDIT
Finding 1: The Authority Improperly Used HUD Assets as Collateral on
a $1.2 Million Loan
The Authority violated its consolidated annual contributions contract 4 with HUD by improperly
acquiring a $1.2 million loan using HUD assets as collateral. This occurred because the
Authority erroneously believed that its main administrative office was not a project asset covered
by its consolidated annual contributions contract. As of August 2006, the Authority owed more
than $1.1 million 5 on the loan, placing significant HUD assets at risk. The Authority used the
loan to renovate its main administrative building, much of which it is attempting to rent or has
rented for activities unrelated to its consolidated annual contributions contract with HUD.
The Authority Put $1.2 Million
in HUD Assets at Risk
The Authority violated its annual contributions contract by obtaining a loan
totaling $1.2 million in January 2002 using HUD assets as collateral. It assigned
its main office building (including its rents, leases, and profits) as collateral. The
building serves as the main office for the Authority’s executive staff and Section
8 department. The Authority purchased the building in November 1999 with
$325,000 in Homeownership program proceeds, and later obtained the $1.2
million loan to renovate the building. As of August 2006, the Authority owed
more than $1.1 million on the loan, placing significant HUD assets at risk. The
annual contributions contract prohibits the Authority from encumbering or
pledging its HUD assets without HUD’s prior approval. Section 7 of the contract
states that the Authority shall not in any way encumber any such project, or
portion thereof, without prior approval of HUD. In addition, the Authority cannot
pledge as collateral for a loan the assets of any project covered under the contract.
The Authority Did Not File a
Required Declaration of Trust
In violation of its consolidated annual contributions contract, the Authority failed
to file a declaration of trust when it purchased its administrative office building.
The contract requires that promptly upon acquisition of any project, the Authority
should execute and publicly file a declaration of trust evidencing the covenant of
the housing authority not to encumber the project to protect the interests of
4
Annual contributions contract, part A, section 7, “Covenant against Disposition and Encumbrances.”
5
The balance on the bank loan as of August 2006 was $1,102,012.
6
HUD. 6 Essentially, the Authority acquired project assets and did not confirm or
evidence its covenant not to encumber the project assets, and it later improperly
encumbered and placed significant HUD assets at risk. In this regard, the contract
further states that encumbering annual contributions contract assets as collateral
for a loan constitutes grounds for declaring the Authority in substantial default of
its annual contributions contract. 7
The Authority Misinterpreted
the Definition of Project Asset
The Authority mistakenly believed that its main administrative office was not a
project asset covered by its consolidated annual contributions contract. The
Authority believed that since the office building did not constitute public housing,
it was not covered by the Authority’s consolidated annual contributions contract.
The Authority believed, therefore, that it was not required to file a declaration of
trust evidencing its covenant not to encumber the project to protect the interests of
HUD. As a result, the Authority also incorrectly believed that it was permitted to
use its administrative offices as collateral on the $1.2 million loan without prior
approval of HUD.
The Authority’s interpretation of “project assets” was incorrect. Section 2 of the
consolidated annual contributions contract specifically states that the term
“project” includes all real and personal property, tangible and intangible, which is
acquired or held by the Authority in connection with a project under the
consolidated annual contributions contract. The Authority purchased the building
at 104 West Main Street, Norristown, Pennsylvania, to be used as the main office
of its executive staff and Section 8 department. Since the building is being held
by the Authority in connection with a project under its consolidated annual
contributions contract (office of its executive staff and Section 8 department), it is
clearly a project asset. Further, the Authority used a significant amount of HUD
funds to maintain, operate, and renovate the building in connection with a project
under its consolidated annual contributions contract.
Recommendations
We recommend that the director of the Philadelphia Office of Public Housing
1A. Notify the Authority that it has improperly encumbered consolidated
annual contributions contract assets and direct it to provide evidence that
the financial instrument encumbering the assets has been changed to
exclude the assets and, thereby, put more than $1.1 million to better use.
6
Annual contributions contract, part A, section 8, “Declaration of Trust.”
7
Annual contributions contract, part A, section 17, “Notices, Defaults, Remedies.”
7
1B. If the Authority does not withdraw its encumbrances of annual
contributions contract assets, advise HUD Headquarters Office of Field
Operations that the Authority is potentially in substantial default of its
annual contributions contract (ACC) because it has improperly
encumbered ACC assets and provide all the relevant information. Further,
the Philadelphia Office of Public Housing should request to be advised on
Headquarters’ disposition of the “Notice of Default” to the Authority.
1C. Require the Authority to implement adequate procedures, including
obtaining a required declaration of trust on its administrative offices, to
ensure it does not encumber HUD assets without HUD approval.
We also recommend to the Department's Enforcement Center that
1D. Appropriate sanctions be initiated against Authority officials responsible
for encumbering annual contributions contract assets to secure a loan.
8
Finding 2: The Authority Improperly Used HUD Funds to Purchase,
Renovate, and Operate Its Main Office Building
The Authority improperly used $975,900 8 in Public Housing Homeownership (Homeownership)
program proceeds and $609,363 9 in capital funds to purchase, renovate, and maintain its 104
West Main Street office building, much of which has remained vacant for several years or is
leased to the Redevelopment Authority of Montgomery County (Redevelopment Authority). It
improperly used another $9,257 in Homeownership program proceeds to pay the utilities of the
Redevelopment Authority, which is a tenant in its building. Further, the Authority improperly
used HUD funds to pay the interest and principal on the $1.2 million loan (discussed under
Finding 1) which it used to renovate the building. These problems occurred because the
Authority misinterpreted applicable requirements and failed to develop and implement adequate
internal controls to ensure that HUD funds were used in accordance with its consolidated annual
contributions contract and with the applicable requirements. Consequently, the additional
expense of renovating and maintaining the building caused delays in the Authority’s needed
capital fund projects. In addition, the significant increase to the Authority’s operating expenses
could have a detrimental effect on its ability to operate HUD programs in the future.
The Authority Improperly Used
$975,900 in Homeownership
Proceeds
The Authority improperly used $975,900 in Homeownership program proceeds to
purchase, renovate, and maintain its 104 West Main Street office building.
Regulations at 24 CFR [Code of Federal Regulations] 906.31(a) require that the
Authority use any net proceeds of any sales under a homeownership program
remaining after payment of all costs of the sale for purposes relating to low-
income housing and in accordance with its homeownership plan.
The Authority is using only one-third (10,000 of 30,000 square feet) of the
building it purchased to be used as its main administrative office. It is leasing
about 3,000 square feet of office space on the second floor to the Redevelopment
Authority. The remaining 17,000 square feet of office space has remained vacant
since the Authority purchased the building in November 1999. Since May 2003,
the Authority has been attempting to lease out at least 4,800 square feet of the
vacant office space in the building using commercial real estate brokers. The
Authority’s listing agreement for the property with its commercial real estate
broker stated that the Authority will pay a broker’s fee if a ready, willing, and
able tenant or buyer is found by the broker or by anyone, including the owner,
during the term of the contract. The agreement defined a willing tenant as one
8
See footnote 2.
9
See footnote 3.
9
who will pay the listed rent or more for the property, and it did not restrict use of
the property to low-income housing-related activities.
The Authority purchased this 30,000-square-foot building for $325,000 using its
Homeownership program proceeds. It later used $428,021 in Homeownership
program proceeds to help renovate the building. In addition, since October 2002,
the Authority has used $222,879 in Homeownership program proceeds to make
up for budget shortfalls created by the upkeep of the building. Overall, the
Authority used $975,900 in Homeownership program proceeds to purchase,
renovate, and maintain its main office building. The Authority’s homeownership
plan, submitted to HUD for review and approval, did not identify the purchase,
renovation, and upkeep of this office building as one of its intended uses.
However, the plan stated that proceeds could be used for activities to support
housing for low-income families. Since only about one-third of the building is
now used to support the Authority’s executive and Section 8 administrative staff,
only one-third of the purchase, renovation, and maintenance of the building could
potentially be funded with Homeownership program proceeds if the Authority can
properly justify this use in its homeownership plan. Nevertheless, there is
currently no evidence to indicate that HUD approved the Authority’s use of
$975,900 in Homeownership program proceeds for the purchase, renovation, and
maintenance of its main office building, or that the Authority used the funds
solely for purposes relating to low-income housing. Therefore, it needs to
adequately justify and obtain approval from HUD to support its use of $975,900
in Homeownership program proceeds or repay any unsupported amounts from
nonfederal funds.
The Authority Improperly Used
$609,363 in Capital Funds to
Renovate the Building
The Authority improperly used $609,363 in capital funds to renovate its 104 West
Main Street office building when it did not ensure that the capital funds spent
directly benefited its public housing program. According to 24 CFR [Code of
Federal Regulations] 968.112, public housing modernization funds can only be
used when the costs can be directly attributed to public housing. The regulation
states that when the physical or management improvement 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.
We estimated the Authority used approximately 1,800 square feet or 6 percent of
the 30,000-square-foot building for public housing purposes. Our estimate was
based on information obtained from the Authority’s operating budgets for 2003,
2004 and 2005. The Authority’s operating budgets for those years indicated it
prorated square footage between its Section 8 and public housing programs in
10
order to allocate office rent. On average, the Authority allocated 81 percent to
Section 8 and 19 percent to public housing over the three years. In 2005, 82
percent and 18 percent were allocated to Section 8 and public housing
respectively. Considering this information, and based on the fact that the
Authority only occupied one-third of the office building, we estimated it used
approximately 1,800 * of the 30,000-square-foot building for public housing
purposes. Therefore, only $142,812 (6 percent) of the more than $2.38 million
total renovation costs for the building was eligible to be paid for with capital
funds. Since the Authority spent $752,175 in capital funds to renovate the
building, the use of $609,363 of the funds was ineligible. The Authority stated
that it had approval from HUD to spend the $752,175 to renovate the building.
However, in a letter, dated May 17, 2001, HUD advised the Authority that the use
of capital funds is prohibited for non-related public housing program use.
Therefore, the 28,200 square feet in this building that were not related to public
housing program use should not have been renovated using capital funds.
The Authority’s use of ineligible capital funds to renovate its office building
diverted funds from planned public housing repair projects. These repairs
included potential health and safety issues such as gas line replacement, sidewalk
repairs, and handrail replacement in a senior citizen complex. Some of these
projects are still not complete, and some have been cancelled due to lack of
available funding.
As discussed above, the Authority improperly used capital funds that did not
benefit its public housing program to renovate its 104 West Main Street office
building. Since the $609,363 in capital funds improperly spent will not meet the
24-month time frame for obligating capital funds as required by Section 9J of the
United States Housing Act, the Authority must repay the funds to the United
States Treasury.
The Authority Improperly Paid
Its Tenant’s Utility Costs of
$9,257
The Authority improperly used Homeownership program proceeds to pay the
utilities of the Redevelopment Authority. Regulations at 24 CFR [Code of
Federal Regulations] 906.31(a) require that the Authority use any net proceeds of
any sales under a Homeownership program remaining after payment of all costs
of the sale for purposes relating to low-income housing and in accordance with its
homeownership plan. In addition, the Authority’s lease agreement with the
Redevelopment Authority required it to pay its own utilities. Nevertheless, from
November 2002 to May 2006, the Authority paid the utilities of the
Redevelopment Authority at a cost of $9,257, using Homeownership program
proceeds. The Authority’s homeownership plan, submitted to HUD for review
* 1,800 square feet = 18% x10,000 square feet (one third of 30,000 square feet)
11
and approval, did not identify the use of Homeownership program proceeds to
pay the utilities of the Redevelopment Authority as one of its intended uses, and
this use does not support low-income housing.
If the Authority develops and implements procedures to preclude these improper
payments from recurring, it will put $2,583 10 to better use annually. Although
this will be a recurring benefit, our estimate reflects only the initial year of these
benefits. After we brought this matter to the Authority’s attention, the Authority
took immediate action and provided us support to show that it had obtained
reimbursement from the Redevelopment Authority for its Homeownership
program. Authority officials also stated that the Authority would develop and
implement procedures to preclude these problems from recurring. Since the
Authority has provided adequate support to show that it obtained reimbursement
from the Redevelopment Authority for its Homeownership program, we consider
recommendation 2C on page 13 closed.
The Authority Improperly Used
HUD Funds to Pay Debt Service
on a $1.2 Million Loan
In addition to the issues discussed under Finding 1, the Authority is improperly
paying the principal and interest on the $1.2 million loan it used to renovate its
104 West Main Street office building with HUD funds. As previously discussed,
the Authority used only 10,000 square feet of its 30,000-square-foot office
building for HUD or low-income housing-related purposes. The Authority’s
comparative financial statement showed that the future interest and principal
payments on the Authority’s $1.2 million loan, which it used to renovate the
building, are more than $1.86 million. Since the Authority only used one-third of
the building for purposes related to its consolidated annual contributions contract,
it should only use HUD funds to pay one-third of the debt service on the loan.
Part A, section 9(C), of the contract states that the Authority may withdraw funds
from the general fund only for the payment of the costs of development and
operation of the projects under the annual contributions contract with HUD, the
purchase of investment securities as approved by HUD, and such purposes as may
be specifically approved by HUD. In this regard, we estimated that the Authority
plans to use more than $1.2 million 11 in future HUD funds to pay the debt service
on this loan for purposes unrelated to its consolidated annual contributions
contract with HUD. Therefore, the Authority should either begin using the
remaining office space for purposes related to its consolidated annual
contributions contract or begin paying the prorated future debt service on this loan
from nonfederal funds.
10
$9,257/43 months = $215.28 x 12 months (to annualize).
11
$1,866,319 multiplied by two-thirds.
12
We reported the outstanding principal on the loan in Finding 1, and, therefore, are
reporting only the prorated future interest payments of $511,135 (two-thirds times
$766,703) in the chart in appendix A. In addition, the Authority should provide
support and obtain approval from HUD for paying $119,139 12 in prior interest
payments with HUD funds or repay the program from nonfederal funds.
Recommendations
We recommend that the director of the Philadelphia Office of Public Housing
require the Authority to
2A. Properly justify and obtain approval from HUD to support its use of
$975,900 in Homeownership program proceeds to purchase, renovate, and
maintain its main office building or repay the program unsupported
amounts from nonfederal funds.
2B. Repay from nonfederal funds $609,363 in ineligible capital funds spent to
renovate and maintain its main office. These funds should be returned to
the United States Treasury because they were not properly obligated
within 24 months.
2C. * * Obtain reimbursement from the Redevelopment Authority for improperly
paying its utility costs and reimburse the Homeownership program $9,257.
2D. Develop and implement procedures to preclude improper utility payments,
thereby putting $2,583 to better use annually.
2E. Use the remaining office space in its 104 West Main Street office building
for purposes related to its consolidated annual contributions contract or
begin paying future debt service on the $1.2 million loan attributable to
activities unrelated to its consolidated annual contributions contract from
nonfederal funds, thereby putting $511,135 to better use.
2F. Properly justify and obtain approval from HUD to support its use of
$119,139 for interest payments it made on the $1.2 million loan used to
renovate space in its 104 West Main Street office building not currently
related to consolidated annual contributions contract activities or repay
any unsupported amounts from nonfederal funds.
2G. Develop and implement adequate internal controls to ensure that HUD
funds are used in accordance with its annual contributions contract and with
applicable regulations.
12
$178,708 total interest payments for 2003, 2004, 2005, and 2006 multiplied by two-thirds.
** This recommendation is closed.
13
SCOPE AND METHODOLOGY
To accomplish our objectives we
• Reviewed the Authority’s internal control structure.
• Reviewed the Authority’s independent auditor’s reports for fiscal years 2002, 2003, 2004,
and 2005.
• Reviewed minutes of the Authority’s board of commissioners meetings.
• Interviewed Authority and Philadelphia Office of Public Housing officials.
• Reviewed records related to the purchase and renovations of the Authority’s main office,
such as contractor records, funding allocations, sales agreements, lease agreements, loan
agreements, real estate contracts, financial records, and other related correspondence
between the Authority and HUD officials.
• Reviewed HUD and Authority correspondence related to the audit objectives and the results
of a hotline investigation conducted by HUD’s Philadelphia Office of Public Housing.
• Obtained a legal opinion from the OIG Office of General Counsel regarding the
Authority’s actions to obtain a $1.2 million loan it used to renovate its main office
building. Counsel opined that the Authority encumbered HUD assets and violated its
annual contributions contract.
• Reviewed records related to the Section 8 Housing Choice Voucher program to include
the Authority’s administrative plan, quality control plan, year-end settlement statements,
Section 8 Management Assessment program certifications, and a random sample of 10
tenant files.
• Reviewed applicable HUD regulations, handbooks, public housing notices, and
consolidated annual contributions contracts.
To achieve our audit objectives, we relied in part on computer-processed data in the Authority’s
database. Although we did not perform a detailed assessment of the reliability of the data, we did
perform a minimal level of testing and found it to be adequate for our purposes.
The audit generally covered the period from January 1999 to December 2005. This period was
expanded to include the most current data while performing our audit. We conducted our
fieldwork from March through May 2006.
We performed our review in accordance with generally accepted government auditing standards.
14
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 control was relevant to our audit objectives:
• Allowable uses of federal funds – Policies and procedures that management has
in place to reasonably ensure that the use of federal funds complies with HUD
program requirements.
We assessed the relevant control 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 item is a significant weakness:
• The Authority lacked adequate internal controls to ensure that HUD funds were
used in accordance with its annual contributions contract and with applicable
regulations. The deficiencies are discussed in detail in the Results of Audit
section of this report.
15
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT
TO BETTER USE
Recommendation Ineligible Unsupported Funds to be put
number costs 1/ costs 2/ to better use 3/
1A $1,102,012
2A $ 975,900
2B $609,363
2C $ 9,257
2D $ 2,583
2E $ 511,135
2F $ 119,139
TOTAL $618,620 $1,095,039 $1,615,730
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/ Recommendations that funds be put to better use are estimates of amounts that could
be used more efficiently if an OIG recommendation is implemented. This includes
reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs not
incurred by implementing recommended improvements, avoidance of unnecessary
expenditures noted in preaward reviews, and any other savings which are specifically
identified. In these instances, if the Authority implements our recommendations, it will
cease improperly encumbering consolidated annual contributions contract assets, cease
improperly using HUD funds to pay the utility costs of its tenants, and cease paying
interest on portions of a loan used for renovations unrelated to its consolidated annual
contributions contract with HUD.
16
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
17
Comment 3
Comment 4
Comment 5
Comment 4
Comment 4
Comment 2
Comment 2
18
Comment 2
Comment 2
Comment 2
Comment 2
19
Comment 2
Comment 2
Comment 2
Comment 6
20
Comment 7
Comment 3
Comment 3
Comment 3
Comment 3
21
Comment 3
Comment 8
Comment 8
Comment 9
Comment 10
Comment 9
Comment 9
22
Comment 9
Comment 9
Comment 10
Comment 9
Comment 9
23
Comment 9
Comment 6
Comment 11
Comment 11
Comment 11
Comment 11
Comment 11
Comment 10
Comment 10
24
Comment 10
Comment 12
Comment 5
Comment 5
Comment 5
Comment 5
25
Comment 5
Comment 6
Comment 8
Comment 13
26
Comment 1
27
OIG Evaluation of Auditee Comments
Comment 1 The audit was performed in accordance with generally accepted government
auditing standards and the conclusions in the report are supported by relevant and
substantial evidence documented in the audit workpapers. As such, the audit team
collectively possessed adequate professional proficiency for the tasks required
and was properly supervised. The audit evidence showed that the Authority
violated its consolidated annual contributions contract by improperly acquiring a
loan using HUD assets as collateral and by improperly using HUD funds to
purchase, renovate and maintain its 104 West Main Street office building.
Overall, the Authority’s written reply submitted by its legal counsel contains
numerous inaccuracies concerning the audit results and conclusions discussed in
the audit report. As such, it raises serious concerns as to whether the Authority is
truly committed to correcting the problems the audit identified.
Comment 2 Counsel’s response regarding the Authority’s use of Homeownership proceeds is
inaccurate and contrary to the audit evidence. Counsel correctly cites HUD
regulations which provide that net sales proceeds be used for purposes related to
low-income housing and in accordance with its Homeownership Plan. However,
in its response counsel ignores relevant and substantial audit evidence, which
showed that the Authority violated the same regulations it is citing. The audit
evidence showed the Authority’s Homeownership Plan and the Implementing
Agreement between the Authority and HUD did not in any way identify the
purchase, renovation and upkeep of the 30,000-square-foot office building as one
of its intended uses. Further, counsel’s assertion that the Authority always
intended to use the entire building to assist low-income families is contrary to the
audit evidence. The audit evidence clearly showed the building has been mostly
vacant since the Authority purchased it in November 1999 and the Authority has
been unsuccessfully attempting to lease at least 4,800 square feet of the property
commercially. The Authority’s counsel confirmed this fact in a May 2005 letter
to HUD in which it was responding to an annonymous complaint regarding issues
surrounding the appropriateness of the Authority’s purchase of the property. In
the letter counsel stated that since at least May 2003, the Authority was
attempting to lease out vacant office space in the building using commercial real
estate brokers. We reviewed the Authority’s listing agreement for the property
with its commercial real estate broker, and the agreement succinctly stated that
the Authority would pay a brokers fee if a ready, willing and able tenant or buyer
was found by the broker or by anyone, including the owner during the term of the
contract. The agreement defined a willing tenant as one who would pay the listed
rent or more for the property and it did not restrict use of the property to low-
income housing related activities.
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Comment 3 As explained in the audit report, the Authority is incorrect in its assertion that its
main administrative office was not a project asset covered by its consolidated
annual contributions contract. As counsel correctly states in its reply, Section 2 of
the consolidated annual contributions contract specifically states that the term
“project” includes all real and personal property, tangible and intangible, which is
acquired or held by the Authority in connection with a project under the
consolidated annual contributions contract. In this regard, the Authority
purchased 104 West Main Street, Norristown, Pennsylvania, to be used as the
main office of its executive staff and Section 8 department, clearly holding the
property in connection with a project under its consolidated annual contributions
contract. Further, the Authority used a significant amount of HUD capital funds
to renovate the building. Since capital funds have been heavily invested in the
building and it is clearly being held by the Authority in connection with a project
under its consolidated annual contributions contract, it is clearly a project asset. It
is important to reemphasize that as of August 2006, the Authority owed more than
$1.1 million on the loan, placing significant HUD assets at risk as a result of this
violation.
Comment 4 HUD did in fact approve the Authority’s annual plans, which included some
rehabilitation of the Main Street building, which it listed in the plans as its
Resource Center. However, the approval was contingent upon the Authority
complying with applicable HUD regulations. In this regard, regulations at 24
CFR [Code of Federal Regulations] 968.112 require that public housing
modernization funds only be used when the applicable costs can be directly
attributed to public housing. HUD regulations also provide that net
Homeownership proceeds be used for purposes related to low-income housing
and in accordance with its Homeownership Plan. The audit evidence showed
however, that the Authority did not comply with these applicable HUD
regulations in regard to its usage of HUD funds. Further, HUD’s approval letters
to the Authority explicitly stated that the approval of the plans did not contitute an
endorsement of the Authority’s strategies and policies.
Comment 5 The Authority could not provide support showing that its payments for principal
and interest on this loan were made from nonfederal funds. The audit did not
summarily conclude that all payments from the operating funds are HUD funds as
the Authority’s counsel mistakenly asserts. If the Authority’s operating funds
also contained rental payments from the Redevelopment Authority, it could not
provide support to substantiate this or that its payments for principal and interest
on this loan were made from these funds or any other non-HUD funds. Since the
Authority only used one-third of the building for purposes related to its
consolidated annual contributions contract we estimated it should only use HUD
funds to pay one-third of the interest on the loan. In calculating our estimate we
multiplied total interest paid of $178,708 by two-thirds. Therefore, the audit
conservatively estimated that the Authority could not support that it properly paid
$119,139 in prior interest payments with non-HUD funds. Additionally, it is
important to note, the Authority also paid an additional $151,904 in prior
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principal on the loan from the operating funds which reasonably, the Authority
also should be able to support. Nevertheless, unsupported costs may require a
decision by HUD program officials. This decision, in addition to obtaining
supporting documentation, may involve a legal interpretation or clarification of
departmental policies and procedures.
Comment 6 The audit evidence showed that the Authority violated its consolidated annual
contributions contract by improperly acquiring a loan using HUD assets as
collateral and by improperly using HUD capital funds and homeownership
proceeds to purchase, renovate and maintain its 104 West Main Street office
building. The intent of this particular audit was not to perform a detailed review
of the work of the Authority’s independent auditors. However, as part of our
continuing charter to perform Quality Assurance Reviews of Independent auditors
performing work for housing authorities receiving HUD funds, we respectfully
reserve the right to do so in the future.
Comment 7 The audit determined that the Authority could not support that it used $975,900 in
Homeownership program proceeds for purposes related to its low-income housing
or its homeownership plan in accordance with HUD regulations. Unsupported
costs may require a decision by HUD program officials. This decision, in
addition to obtaining supporting documentation, may involve a legal
interpretation or clarification of departmental policies and procedures.
Comment 8 We have made our recommendations to the Philadelphia Office of Public Housing
based on our evaluation of relevant and substantial audit evidence. Nevertheless,
we will consider approving alternative suggestions meeting the intent of our
recommendations after they are fully evaluated and provided the alternatives are
agreed to and proposed by the Philadelphia Office of Public Housing.
Comment 9 Counsel’s response regarding the Authority’s use of its capital funds is inaccurate
and contrary to the audit evidence. HUD did in fact approve the Authority’s
annual plans, which included some rehabilitation of the Main Street building,
which it listed in the plans as its Resource Center. While HUD did in fact
approve the Authority’s annual plans, the approval was contingent upon the
Authority complying with all applicable HUD regulations. In this regard,
regulations at 24 CFR [Code of Federal Regulations] 968.112 state that public
housing modernization funds can only be used when the costs can be directly
attributed to public housing. The regulation specifically states that when the
physical or management improvement, 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. Further, in a letter, dated May 17, 2001, HUD stated
that it understood the Authority was planning to rent to other housing agencies in
Montgomery County. HUD warned the Authority at that time that the use of
capital funds is prohibited for nonrelated public housing program use. As such,
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the space in the building that was not related to public housing program use
should not have been renovated using capital funds.
Comment 10 As stated in the audit report, the building is in fact a project asset and therefore,
capital funds may therefore be used to renovate portions of the building relating to
public housing. That being said, counsel’s assertion that the audit report does not
explain the allocation of cost to the public housing program is not quite accurate
and is contrary to the audit evidence and the facts presented in the audit report. As
detailed in the audit report, the Authority improperly used $609,363 in capital
funds to renovate its 104 West Main Street office building when it did not ensure
that the capital funds spent directly benefited its public housing program. The
Authority’s operating budgets for 2003, 2004, and 2005 indicated that it prorated
square footage between its Section 8 and Public Housing programs for allocation
of office rent. On average, the Authority allocated 81 percent to Section 8 and 19
percent to Public Housing over the three years. In 2005, 82 percent and 18
percent were allocated to Section 8 and Public Housing respectively. Considering
this information, and based on the fact that the entire Authority only occupied
one-third of the office building, we estimated the Authority used approximately
1,800 * square feet or 6 percent of the 30,000-square-foot building (including
applicable common areas) for public housing purposes. Therefore, only $142,812
(6 percent) of the more than $2.38 million total renovation costs for the building
was eligible to be paid for with capital funds. Since the Authority spent $752,175
in capital funds to renovate the building, the use of $609,363 of the funds was
ineligible. We have revised and included additional wording in the report to
further clarify how we determined the capital funds eligible to be used for the
Authority’s renovation costs.
Comment 11 Counsel’s calculations that 52 percent of the building could be allocated for the
public housing program is erroneous and not supported by the audit evidence.
Additionally, counsel’s assertion that the Authority had approval from HUD to
spend the $752,175 in capital funds to renovate the building is also not supported
by the audit evidence as detailed in the audit report.
Comment 12 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. We have classifed these funds as ineligible
expenditures because the Authority violated regulations at 24 CFR [Code of
Federal Regulations] 968.112 which require that public housing modernization
funds can only be used when the costs can be directly attributed to public housing.
The regulation specifically states that when the physical or management
improvement, 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.
*
1,800 square feet = 18% x10,000 square feet (one third of the total 30,000 square feet)
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Comment 13 As stated in the audit report, the audit evidence showed that the Authority’s use of
ineligible capital funds to renovate its main office building diverted funds from
planned public housing repair projects. These repairs included potential health
and safety issues such as gas line replacement, sidewalk repairs, and handrail
replacement in a senior citizen complex. Some of these projects are still not
complete, and some have been cancelled due to lack of available funding.
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The Montgomery County Housing Authority, Norristown, Pennsylvania, Improperly Used HUD Funds to Purchase, Renovate, and Maintain Its Main Office
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)