oversight

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)

                                                             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.




                                         28
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



                                          29
            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,




                                         30
                    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)


                                                       31
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.




                                          32