oversight

The Indianapolis Housing Agency, Indianapolis, Indiana, Did Not Effectively Operate Its Section 8 Housing Choice Voucher Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-04-15.

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

                                                                   Issue Date
                                                                            April 15, 2008
                                                                   Audit Report Number
                                                                            2008-CH-1006




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


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

SUBJECT: The Indianapolis Housing Agency, Indianapolis, Indiana, Did Not Effectively
           Operate Its Section 8 Housing Choice Voucher Program

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Indianapolis Housing Agency’s (Agency) Section 8 Housing
             Choice Voucher program (program). The audit was part of the activities in our
             fiscal year 2007 annual audit plan. We selected the Agency based upon our
             analysis of risk factors relating to the housing agencies in Region V’s jurisdiction.
             Our objective was to determine whether the Agency administered its program in
             accordance with the U.S. Department of Housing and Urban Development’s
             (HUD) requirements. This is the second of two audit reports on the Agency’s
             program.

 What We Found

             The Agency’s program administration regarding housing unit conditions, housing
             assistance payments calculations, and adequate documentation to support the
             calculation of households’ housing assistance payments was inadequate. Of the
             65 housing units statistically selected for inspection, 52 did not meet HUD’s
             housing quality standards and the Health and Hospital Corporation of Marion
             County, Indiana’s (Corporation) housing standards, and 38 had 402 violations that
             existed at the time of the Agency’s previous inspections. The 38 units had
             between 2 and 29 preexisting violations per unit. Based on our statistical sample,
             we estimate that over the next year, HUD will pay more than $5.2 million in
           housing assistance payments for units with material housing quality standards
           violations.

           The Agency also failed to properly calculate housing assistance payments, ensure
           that its household files contained required documentation to support its payment
           of housing assistance, and consistently utilize HUD’s Enterprise Income
           Verification system. Of the 67 files statistically selected for review, the Agency
           incorrectly calculated housing assistance payments for 63 (94 percent) and 59 (88
           percent) did not contain the documentation required by HUD and/or the Agency’s
           program administrative plan. From January 2005 through January 2007, the
           Agency overpaid more than $131,000 and underpaid more than $13,000 in
           housing assistance and utility allowances, and was unable to support more than
           $587,000 in housing assistance and utility allowance payments made. Based
           upon our statistical sample, we estimate that over the next year, the Agency will
           overpay nearly $4.7 million. Further, the Agency did not adequately use HUD’s
           Enterprise Income Verification system to determine that its reported zero-income
           households had reported income resulting in more than $47,000 in improper
           housing assistance payments.

What We Recommend

           We recommend that the Director of HUD’s Cleveland Office of Public Housing
           require the Agency to reimburse its program from nonfederal funds for the
           improper use of more than $291,000 in program funds, provide documentation or
           reimburse its program more than $587,000 from nonfederal funds for the
           unsupported housing assistance payments, and implement adequate procedures
           and controls to address the findings cited in this audit report to prevent nearly $10
           million from being spent on units with material housing quality standards
           violations and excessive housing assistance and utility allowance payments over
           the next year.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence issued because of the audit.

Auditee’s Response

           We provided our review results and supporting schedules to the Director of
           HUD’s Cleveland Office of Public Housing and the Agency’s executive director
           during the audit. We provided our discussion draft audit report to the Agency’s
           executive director, its board chairman, and HUD’s staff during the audit. We held
           an exit conference with the executive director on March 24, 2008.

           We asked the executive director to provide comments on our discussion draft
           audit report by April 10, 2008. The executive director provided written
           comments, dated April 10, 2008, and generally agreed with our recommendations.

                                             2
The complete text of the written comments, along with our evaluation of those
comments, can be found in appendix B of this report.




                                3
                           TABLE OF CONTENTS

Background and Objective                                                      5

Results of Audit
      Finding 1: Controls over Housing Unit Inspections Were Inadequate       6

      Finding 2: Controls over Housing Assistance Payments Were Inadequate   13

      Finding 3: The Agency Failed to Include Reported Household Income      17

Scope and Methodology                                                        20

Internal Controls                                                            22

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use         24
   B. Auditee Comments and OIG’s Evaluation                                  25
   C. Federal Requirements and the Agency’s Program Administrative Plan      33




                                            4
                      BACKGROUND AND OBJECTIVE

The Indianapolis Housing Agency (Agency) is a nonprofit governmental entity created by the
City of Indianapolis, Indiana (City), under State of Indiana law in 1964 to provide decent, safe,
and sanitary housing. The Agency became a division of the City’s Department of Metropolitan
Development on January 1, 1986. It was separated as an independent organization in December
1994 but still operates with oversight by the Metropolitan Development Committee of the
combined City and Marion County, Indiana (City/County), government. The Agency’s
jurisdiction encompasses Marion County, Indiana. A nine-member board of commissioners
governs the Agency. The City’s mayor appoints five board members, the City/County council
appoints two members for four-year staggered terms, and the Agency’s resident council appoints
two board members for one-year terms. The Agency’s executive director is appointed by the
board of commissioners and is responsible for coordinating established policy and carrying out
the Agency’s day-to-day operations.

The Agency administers a Section 8 Housing Choice Voucher program (program) funded by the
U.S. Department of Housing and Urban Development (HUD). The Agency provides assistance
to low- and moderate-income individuals seeking decent, safe, and sanitary housing by
subsidizing rents with owners of existing private housing. As of December 31, 2007, the Agency
had 5,427 units under contract with annual housing assistance payments totaling more than $36
million in program funds.

Our objective was to determine whether the Agency administered its program in accordance with
HUD’s requirements. This is the second of two audit reports on the Agency’s program. The first
audit report (report number 2007-CH-1011, issued on July 23, 2007) included one finding. That
finding was not repeated in this audit report.




                                                5
                                RESULTS OF AUDIT

Finding 1: Controls over Housing Unit Inspections Were Inadequate
The Agency did not adequately enforce HUD’s housing quality standards and the Health and
Hospital Corporation of Marion County, Indiana’s (Corporation) housing standards. Of the 65
program units statistically selected for inspection, 52 did not meet minimum housing quality
standards and/or the Corporation’s housing standards, and 38 had material violations that existed
before the Agency’s previous inspections. The violations existed because the Agency failed to
exercise proper supervision and oversight of its program unit inspections. The Agency also
lacked adequate procedures and controls to ensure that its program units met HUD’s housing
quality standards and/or the Corporation’s housing standards. As a result, more than $41,000 in
program funds was spent on units that were not decent, safe, and sanitary. Based on our
statistical sample, we estimate that over the next year, HUD will pay more than $5.2 million in
housing assistance on units with material housing quality standards and/or Corporation housing
standards violations.


 HUD’s Housing Quality
 Standards and the
 Corporation’s Housing
 Standards Not Met

               From the 1,724 program units that were inspected by the Agency between January
               1 and April 30, 2007, we statistically selected 65 units for inspection by using
               data mining software. The 65 units were inspected to determine whether the
               Agency ensured that its program units met HUD’s housing quality standards and
               the Corporation’s housing standards. Our appraiser inspected the 65 units
               between May 7 and May 22, 2007.

               Of the 65 units inspected, 52 (80 percent) had 606 housing quality standards
               and/or Corporation housing standards violations and 429 violations that predated
               the Agency’s previous inspections. In addition, 38 units containing 549 violations
               were considered to be in material noncompliance since they had exigent health
               and safety violations and/or multiple violations that predated the Agency’s
               previous inspections or had a violation that was noted in the Agency’s previous
               inspections but was not corrected. The following table categorizes the 606
               violations in the 52 units.




                                                6
                                                              Number of
                                Category of violations        violations
                         Electrical                              139
                         Exterior surfaces                        72
                         Interior walls/surfaces                  56
                         Security                                 48
                         Windows                                  47
                         Range/refrigerator                       22
                         Other potential hazardous features       22
                         Ventilation                              20
                         Site and neighborhood                    19
                         Roof                                     18
                         Sink                                     18
                         Smoke detector                           17
                         Interior stairs                          15
                         Foundation                               12
                         Access to unit                           12
                         Floor                                    10
                         Water heater                             10
                         Exterior stairs                          9
                         Tub/shower unit                          9
                         Safety of heating equipment              9
                         Ceiling                                  8
                         Lead-based paint                         6
                         Flush toilet in enclosed room            4
                         Infestation                              4
                                         Total                   606

             We provided our inspection results to the Coordinator of HUD’s Indianapolis
             Office of Public Housing Program Center and the Agency’s executive director on
             June 18, 2007.

Electrical Violations


             One hundred thirty-nine electrical violations were present in 35 of the Agency’s
             units inspected. The following items are examples of the electrical violations
             listed in the table: outlets with open grounds, disconnect boxes with exposed
             electrical contacts, exposed wires, ground fault circuit interrupters that did not
             turn off once tripped, exposed electrical outlets, exposed electrical switches, and
             holes or gaps in a breaker box. The following pictures are examples of the
             electrical-related violations.




                                                 7
Unit #25599: Missing
cover plate inside
disconnect box for air
conditioner, exposing
electrical contacts.




Unit #3806: Electrical
outlet pulled out of the
outlet box exposing the
electrical contacts.




Exterior Surface Violations


                Seventy-two exterior surface violations were present in 28 of the Agency’s units
                inspected. The following items are examples of exterior surface violations listed
                in the table: peeling paint, deteriorated boards, and exposed nails. The following
                pictures are examples of the exterior surface-related violations identified.




                                                 8
  Unit #5350: Exterior
  boards deteriorated
  with peeling paint.




  Unit #29221:
  Deteriorated second
  floor wood railing
  separated and unstable.




Interior Walls/Surfaces
Violations


               Fifty-six interior walls/surfaces violations were present in 27 of the Agency’s
               units inspected. The following items are examples of the interior walls/surfaces
               violations listed in the table: damaged walls and holes in the walls. The following
               pictures are examples of interior walls/surface-related violations.




                                                9
    Unit #23203:
    Water damaged
    ceiling and wall.




    Unit #12141:
    Damaged and missing
    wall sections caused
    by plumbing leaks.




Adequate Procedures and
Controls Lacking


              The Agency lacked adequate procedures and controls to ensure that its program
              units met HUD’s and its requirements. It also failed to exercise proper
              supervision and oversight of its program unit inspections. Quality control
              inspections were not conducted from June 2006 through February 2007. They
              began again in March 2007 when the Agency hired a new inspection supervisor to
              oversee its inspection process. The former inspection supervisor’s employment
              was terminated in December 2006 due to poor performance. The current

                                            10
             inspection supervisor recognizes the importance of improving the Agency’s
             inspection staff. In an effort to address the large number of electrical violations,
             the Agency purchased electric continuity testing equipment for its inspection staff
             at the supervisor’s request. The Agency has experienced a high rate of turnover
             in its inspection staff. The supervisor plans to reverse this trend by improving the
             training for staff, as well as providing the necessary feedback to staff from his
             quality control inspections.

Conclusion


             The housing quality standards and/or Corporation housing standards violations
             existed because the Agency failed to exercise proper supervision and oversight of
             its program unit inspections. It also lacked adequate procedures and controls to
             ensure that its program units met HUD’s housing quality standards and/or the
             Corporation’s housing standards. The Agency’s households were subjected to
             health-and-safety related violations, and the Agency did not properly use its
             program funds when it failed to ensure that units complied with HUD’s housing
             quality standards and/or the Corporation’s housing standards. In accordance with
             24 CFR [Code of Federal Regulations] 982.152(d), HUD is permitted to reduce or
             offset any program administrative fees paid to a public housing agency if it fails
             to enforce HUD’s housing quality standards. The Agency disbursed $37,280 in
             housing assistance payments for the 38 units that materially failed to meet HUD’s
             housing quality standards and/or the Corporation’s housing standards and
             received $3,814 in program administrative fees.

             If the Agency implements adequate procedures and controls over its unit
             inspections to ensure compliance with HUD’s housing quality standards and/or
             the Corporation’s housing standards, we estimate this will prevent HUD from
             spending more than $5.2 million in future housing assistance payments on units
             that are not decent, safe, and sanitary over the next year. Our methodology for
             this estimate is explained in the Scope and Methodology section of this audit
             report.

Recommendations

             We recommend that the Director of HUD’s Cleveland Office of Public Housing
             require the Agency to

             1A.    Reimburse its program $41,094 from nonfederal funds ($37,280 for
                    program housing assistance payments and utility allowances plus $3,814
                    in associated administrative fees) for the 38 units that materially failed to
                    meet HUD’s housing quality standards and/or the Corporation’s housing
                    standards.

             1B.    Implement adequate procedures and controls to ensure that all units meet
                    HUD’s housing quality standards and/or the Corporation’s housing

                                              11
      standards to prevent $5,273,100 in program funds from being spent on
      units that do not comply with HUD’s and the Agency’s requirements over
      the next year.

1C.   Implement adequate procedures and controls to ensure that supervisory
      quality control inspections are conducted and documented, along with the
      feedback provided to inspectors to correct recurring inspection
      deficiencies noted.




                              12
Finding 2: Controls over Housing Assistance Payments Were
                             Inadequate
The Agency failed to always compute housing assistance and utility allowance payments
accurately. It incorrectly calculated housing assistance and utility allowance payments and
lacked documentation to support housing assistance and utility allowance payments to program
landlords and households, respectively, because it lacked adequate procedures and controls to
ensure that HUD’s regulations and its program administrative plan were appropriately followed.
As a result, it overpaid more than $131,000 and underpaid more than $13,000 in housing
assistance and utility allowances and was unable to support more than $587,000 in housing
assistance and utility allowance payments made. Based upon our statistical sample, we estimate
that over the next year, the Agency will overpay nearly $4.7 million in net overpayments.


 The Agency Incorrectly
 Calculated Housing Assistance
 Payments

              We statistically selected 67 household files from a universe of 5,052 households
              with income certification examinations conducted after January 1, 2006, using
              data mining software. We reviewed the 67 files to determine whether the Agency
              maintained adequate documentation to support the households’ admission and
              selection for its program and to determine whether the Agency accurately verified
              and calculated the income information received from the households for its
              housing assistance and utility allowance payments for the period January 1, 2005,
              through January 31, 2007. Our review was limited to the information maintained
              by the Agency in its households’ files.

              The Agency’s miscalculations resulted in overpayments of $131,230 and
              underpayments of $13,377 in housing assistance and utility allowances. The
              Agency incorrectly calculated housing assistance and utility allowances for 63 of
              the 67 (94 percent) households in one or more of the annual or interim
              certifications. The 63 files contained the following errors:

                     ¾ 49 had incorrect payment standards for one or more certifications,
                     ¾ 46 had annual income calculation errors for one or more certifications,
                     ¾ 33 had incorrect utility allowance payment calculations for one or
                       more certifications, and
                     ¾ 18 had income calculation errors due to not including interim income.

              According to HUD’s regulations at 24 CFR [Code of Federal Regulations]
              5.240(c), public housing authorities must verify the accuracy of the income
              information received from program households and change the amount of the
              total tenant payment, tenant rent, or program housing assistance payment or
              terminate assistance, as appropriate, based on such information.



                                              13
           The errors occurred because the Agency did not use the appropriate annual
           income figures, program payment standards, and utility allowances and did not
           perform retroactive housing assistance payment adjustments when income was
           identified that had started since the previous certifications. Therefore,
           overpayments and underpayments of housing assistance occurred.

The Agency Lacked
Documentation to Support
More Than $587,000 in Housing
Assistance and Utility
Allowance Payments


           The Agency lacked documentation to support housing assistance and utility
           allowance payments totaling $587,022 for the period January 2005 through
           January 2007. Of the 67 household files statistically selected for review, 59 (88
           percent) were missing or had incomplete documents as follows:

              ¾ 55 were missing or had an inadequate rent reasonableness determination,
              ¾ 53 were missing a disclosure of information on lead-based paint,
              ¾ 50 were missing evidence that the Agency obtained Enterprise Income
                Verification system (system) reports to identify potential unreported
                income,
              ¾ 43 were missing a housing quality standards inspection report,
              ¾ 26 were missing evidence of criminal background checks or had checks
                showing criminal histories that disqualified the household,
              ¾ 24 were missing HUD Form 9886, Authorization for the Release of
                Information and Privacy Act Notice,
              ¾ 14 were missing third-party verifications of cash assets or income,
              ¾ 12 were missing a birth certificate for one or more household members,
              ¾ 10 were missing a current housing assistance payment contract,
              ¾ 6 were missing proof of a Social Security card for one or more household
                members,
              ¾ 4 were missing or had an incomplete declaration of U.S. citizenship, and
              ¾ 4 were missing a current lease.

           The 59 files did not include documentation required by HUD’s regulations and
           the Agency’s program administrative plan.

           HUD performed a consolidated tier 1 review in August 2006, which included a
           Section 8 management assessment confirmation review, rental integrity
           monitoring review, and the system review. The 2006 consolidated review
           identified that the Agency’s household files contained errors similar to the ones
           cited in this finding. HUD identified errors with 19 files (46 percent) out of a
           sample of 41 files, and the Agency had been aware of the household file errors
           since August 2006.




                                            14
             Along with recommendations for improvements in other areas, regarding housing
             assistance payment calculations, HUD specifically recommended that the Agency
             (1) use the system’s variance reports for verification of income status and require
             quarterly affidavits of zero-income status; (2) follow the Agency’s policy for
             notating the system; (3) implement HUD’s verification guidance in Public and
             Indian Housing Notice 2004-1 and provide group training on revised verification
             procedures; (4) implement the use of a file comment form to document its efforts
             to get third-party verifications; and (5) implement quality control systems for
             housing quality standards, utility allowances, and calculation of family income
             and rent.

The Agency’s Procedures and
Controls Had Weaknesses


             The weaknesses regarding incorrect calculations and missing documentation
             occurred because the Agency lacked adequate procedures and controls to ensure
             that HUD’s regulations and its program administrative plan were appropriately
             followed. The Agency did not ensure that HUD’s regulations and the Agency’s
             administrative plan were fully implemented and household certifications and file
             management procedures were standardized. The Agency’s administrative plan
             also did not address how households would be reimbursed when an underpayment
             of housing assistance occurred.

Conclusion

             The Agency did not properly use its program funds when it failed to comply with
             HUD’s regulations. In accordance with 24 CFR [Code of Federal Regulations]
             982.152(d), HUD may reduce or offset any administrative fee to a public housing
             agency in the amount determined by HUD if the agency fails to perform its
             administrative responsibilities correctly or adequately under the program.

             As previously mentioned, the Agency overpaid $131,230 and underpaid $13,377
             in housing assistance and utility allowances and disbursed $587,022 in housing
             assistance and utility allowance payments without supporting documentation. In
             addition, it received $71,439 in program administrative fees related to the
             incorrectly paid and unsupported housing assistance and utility allowance
             payments.

             If the Agency implements adequate procedures and controls over its housing
             assistance and utility allowance payments to ensure compliance with HUD’s
             regulations and its program administrative plan, we estimate that nearly $4.7
             million in net erroneous payments will be prevented over the next year based on
             the error rate found in our sample. Our methodology for this estimate is
             explained in the Scope and Methodology section of this audit report.




                                             15
Recommendations

             We recommend that the Director of HUD’s Cleveland Office of Public
             Housing require the Agency to

             2A.   Reimburse its program $192,854 ($113,973 for overpaid housing
                   assistance, $17,257 for overpaid utility allowances, and $61,624 in
                   associated administrative fees) for the 63 households cited in this
                   finding from nonfederal funds.

             2B.   Reimburse the appropriate households $13,377 for the underpayment
                   of housing assistance ($11,208) and utility allowances ($2,169).

             2C.   Reimburse its program $9,815 from nonfederal funds for the program
                   administrative fees related to the underpaid housing assistance
                   payments.

             2D.   Provide supporting documentation or reimburse its program $587,022
                   from nonfederal funds for the unsupported payments related to the 59
                   households cited in this finding.

             2E.   Determine the appropriate administrative fees for the applicable
                   households for which it is unable to provide supporting documentation
                   cited in recommendation 2D and reimburse its program the applicable
                   amount from nonfederal funds.

             2F.   Implement adequate procedures and controls over its housing
                   assistance and utility allowance payments to ensure that they meet
                   HUD’s regulations and its program administrative plan. The
                   procedures and controls should include but not be limited to ensuring
                   that all required documentation is maintained in the Agency’s current
                   household files to support housing assistance and utility allowance
                   payments and that payment calculations are correct. By implementing
                   adequate procedures and controls, the Agency should help ensure that
                   $4,681,486 in net program funds is appropriately used for future
                   payments over the next year.

             2G.   Revise its program administrative plan to address how households will
                   be reimbursed when an underpayment of housing assistance and/or
                   utility allowance occurs.




                                        16
Finding 3: The Agency Failed to Include Reported Household Income
The Agency incorrectly reported households as having zero income when the Agency’s
household files contained income documentation. It also did not effectively use HUD’s system
or other third-party verification methods to determine whether households it reported as having
zero income had unreported income. This condition occurred because the Agency lacked
adequate procedures and controls to ensure that HUD’s requirements and its program
administrative plan were appropriately followed. As a result, it unnecessarily paid housing
assistance totaling more than $47,000 for households that had the resources to meet their rental
obligations.



 The Agency Failed to Include
 Households’ Reported Income

               We statistically selected 56 household files from a universe of 316 households
               listed as having zero income by the Agency as of October 2006 using data mining
               software. Due to the deficient condition of the Agency’s household files, we
               reviewed the first 20 of the 56 household files to determine whether the Agency
               conducted periodic reviews of the zero-income households and whether the
               households had unreported income according to HUD’s system for the period
               January 1, 2005, through December 31, 2007. Of the 20 household files
               reviewed, the Agency incorrectly listed 17 households as having zero income
               when the Agency’s files contained income documentation.

               The following are examples of households with reported income that the Agency
               failed to include in its housing assistance calculations:

               X   Household 31072 had income according to HUD’s system totaling $18,936.
                   Since the household had income, the Agency overpaid $2,286 and $1,422
                   ($3,708) in housing assistance from May 1, 2006, through November 30, 2007,
                   and November 1, 2005, through April 30, 2006, respectively. The household
                   file contained documentation showing that the household received Social
                   Security income.

               X   Household 9342 had income according to HUD’s system totaling $18,795.
                   Since the household had income, the Agency overpaid $4,379 in housing
                   assistance from May 1, 2005, through January 31, 2007. The household file
                   contained documentation showing that the household received Social Security
                   benefits for the entire period. Additionally, the Agency’s household file
                   contained a verification from HUD’s system showing the household’s income
                   as of November 14, 2007. However, the Agency had not included the income
                   in the household’s housing assistance calculation as of January 31, 2008.

               X   Household 15193 reported income to the Agency for the period November
                   2003 to April 2006. The reported income in April 2006 was for the annual


                                               17
               recertification effective May 1, 2006. There was no evidence in the household
               file that the Agency verified via HUD’s system whether the household had
               income. The Agency would have found the income since it was listed in
               HUD’s system through the first quarter of 2007. The Agency overpaid $5,964
               in housing assistance from January 1 through October 30, 2005, and May 1
               through August 10, 2006.

             According to HUD’s Public and Indian Housing Notice 2005-9, as a possible way
             to reduce costs, program households can be required to report all increases in
             income between reexaminations, and public housing authorities can conduct more
             frequent interim income reviews for families reporting no income. In the
             examples above, the households reported their income correctly to the Agency but
             it failed to include the reported income. Additionally, if the Agency had used
             HUD’s system effectively, as required by Public and Indian Housing Notice
             2004-1, it could have discovered its failure to include households’ income.

Conclusion


             As mentioned in finding 2, HUD performed a consolidated Tier I review of the
             Agency’s program in August 2006. In its September 2006 report, HUD suggested
             that the Agency have the applicable adult household member provide an affidavit
             of the household’s zero-income status. HUD also recommended that the Agency
             use HUD’s system variance reports for verification of income status and require
             quarterly affidavits of zero-income status; follow its policy for notating
             information from HUD’s system in its household files; implement HUD’s
             verification guidance in Public and Indian Housing Notice 2004-1 and provide
             group training on the revised verification procedures; and implement quality
             control systems for housing quality standards, utility allowances, and calculation
             of family income and rent.

             As a result of the Agency’s failure to properly implement HUD’s
             recommendations and verify household income for its zero-income households,
             HUD paid $47,543 in housing assistance and utility allowances for households
             that had the resources to meet their rental obligations.

Recommendations

             We recommend that the Director of HUD’s Cleveland Office of Public Housing
             require the Agency to

             3A. Reimburse its program $47,543 ($36,748 for housing assistance payments
                 and $10,795 for utility allowance payments) from nonfederal funds for the
                 inappropriate housing assistance payments related to the 17 households cited
                 in this finding.




                                             18
3B. Implement adequate procedures and controls to ensure that its households
    listed as having zero income do not have income that would result in
    overpayment of housing assistance.

3C. Review the remaining 296 (316 households listed as having zero income by
    the Agency as of October 2006 minus the 20 households reviewed) zero-
    income households as of October 12, 2006, to determine whether they had
    unreported income or income that was not included by the Agency in the
    calculation of housing assistance payments. For households that the
    Agency incorrectly calculated the housing assistance, it should reimburse its
    program from nonfederal funds the applicable amount of overpaid housing
    assistance and associated program administrative fees.




                               19
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

               •   Applicable laws; the Agency’s program administrative plans effective October
                   2005, June 2006, and January 2007; and HUD’s program requirements at 24
                   CFR [Code of Federal Regulations] Parts 5, 35, 982, and 984; HUD’s Public
                   and Indian Housing Notices 2004-12, 2005-1, 2005-9, 2006-3, and 2006-5; and
                   HUD’s Housing Choice Voucher Guidebook 7420.10.

               •   The Agency’s accounting records; annual audited financial statements for 2003,
                   2004, and 2005; program household files; computerized databases; policies and
                   procedures; board meeting minutes for 2005 and 2006; organizational chart; and
                   program annual contributions contract.

               •   HUD’s files for the Agency.

We also interviewed the Agency’s employees, HUD staff, and program households.

We statistically selected 65 of the Agency’s program units to inspect from the 1,724 units that
were inspected by the Agency and passed from January 1 through April 30, 2007, using data
mining software. The 65 units were selected to determine whether the Agency ensured that its
program units met HUD’s housing quality standards and the Corporation’s housing standards.
Our sampling criteria used a 90 percent confidence level with a 50 percent estimated error rate
and precision level of plus or minus 10 percent.

Our sampling results determined that 38 of the 65 units (58.5 percent) materially failed to meet
HUD’s housing quality standards and/or the Corporation’s housing standards. Materially failed
units were those considered to have exigent health and safety violations and/or multiple
violations that predated the Agency’s previous inspections or those units that had a violation that
was noted in the Agency’s previous inspections but was not corrected.

The Agency’s Voucher Management System reports for the 12-month period October 2006 to
September 2007 showed that the average monthly housing assistance payment was $525.
Projecting our sampling results of the 38 units that materially failed to meet HUD’s housing
quality standards and/or the Corporation’s housing standards to the population indicates that
1,008 units or 58.46 percent of the population contains the attributes tested (would materially fail
to meet HUD’s housing quality standards and/or the Corporation’s housing standards). The
sampling error was plus or minus 9.86 percent. In other words, we are 90 percent confident that
the frequency of occurrence of the attributes tested lies between 48.60 and 68.32 percent of the
population. This equates to an occurrence of between 837 and 1,177 of the 1,724 units in the
population.

   •   The lower limit is 48.60 percent times 1,724 units equals 837 units that materially failed
       to meet HUD’s housing quality standards and/or the Corporation’s housing standards.



                                                 20
   •   The point estimate is 58.46 percent times 1,724 units equals 1,008 units that materially
       failed to meet HUD’s housing quality standards and/or the Corporation’s housing
       standards.
   •   The upper limit is 68.32 percent times 1,724 units equals 1,177 units that materially
       failed to meet HUD’s housing quality standards and/or the Corporation’s housing
       standards.

Using the lower limit of the estimate of the number of units and the average housing assistance
payment, we estimate that the Agency will annually spend $5,273,100 (837 units times $525
average payment times 12 months) for units that materially failed to meet HUD’s housing quality
standards and/or the Corporation’s housing standards. This estimate is presented solely to
demonstrate the annual amount of program funds that could be put to better use on decent, safe,
and sanitary housing if the Agency implements our recommendation. While these benefits
would recur indefinitely, we were conservative in our approach and only included the initial year
in our estimate.

We statistically selected 67 household files from a universe of 5,052 households with income
certification examinations conducted after January 1, 2006, using data mining software. We
reviewed the 67 files to determine whether the Agency maintained adequate documentation to
support the households’ admission and selection for its program. We also reviewed the 67 files
to determine whether the Agency accurately verified and calculated the income information
received from the households for its housing assistance and utility allowance payments for the
period January1, 2005, through January 31, 2007. The Agency incorrectly calculated payments
for 63 of the 67 files reviewed. This error resulted in total miscalculation of payments by
$144,607—to include overpayments of $131,230 and underpayments of $13,377 in housing
assistance and utility allowances.

Unless the Agency improves its calculation process, we estimate that it could make $4,681,486
in net future excessive housing assistance and utility allowance payments over the next year. We
determined this amount by multiplying 13.4 percent (the percentage of the total housing
assistance and utility allowance for the 67 households’ files in the sample that received excessive
payments) times $34,936,463 (the total payments for the population of households served). We
determined the 13.4 percent by annualizing the net excessive payments of $117,853 ($131,230 in
overpayments minus $13,377 in underpayments divided by the audit period of 25 months times
12 months, or $56,569) for our sample of 67 households divided by the $422,100 in housing
assistance and utility allowance payments for one year (67 households times $525 which is the
average monthly housing assistance payment times 12 months). This estimate is presented solely
to demonstrate the annual amount of program funds that could be put to better use on appropriate
payments if the Agency implements our recommendation. While these benefits would recur
indefinitely, we were conservative in our approach and only included the initial year in our
estimate.

We performed our on-site audit work between May and December 2007 at the Agency’s central
office located at 1919 North Meridian Street, Indianapolis, Indiana. The audit covered the period
January 1, 2005, through April 30, 2007, but was expanded when necessary to include other
periods.

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

                                                21
                             INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls

              We determined the following internal controls were relevant to our objective:

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

              •       Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weakness

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

                                               22
•   The Agency lacked adequate procedures and controls to ensure
    compliance with HUD’s requirements and/or its program administrative
    plan regarding unit inspections and housing assistance and utility
    allowance payments (see findings 1, 2, and 3).




                           23
                                   APPENDIXES

Appendix A

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

          Recommendation                                              Funds to be put
              number            Ineligible 1/        Unsupported 2/    to better use 3/
                 1A                 $41,094
                 1B                                                       $5,273,100
                 2A                 192,854
                 2B                                                            13,377
                 2C                    9,815
                 2D                                        $587,022
                 2F                                                         4,681,486
                 3A                  47,543
                Totals             $291,306                $587,022       $9,967,963


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 Office of Inspector General (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 Agency implements our
     recommendations, it will cease to incur program costs for units that are not decent, safe,
     and sanitary and for excessive housing assistance payments and, instead, will expend
     those funds in accordance with HUD’s requirements. Once the Agency successfully
     improves its controls, this will be a recurring benefit. Our estimate reflects only the
     initial year of this benefit.




                                                24
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




                         25
Ref to OIG Evaluation   Auditee Comments




                         26
Ref to OIG Evaluation   Auditee Comments




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 5




                         30
Ref to OIG Evaluation   Auditee Comments




                         31
                         OIG Evaluation of Auditee Comments

Comment 1   The OIG is extremely appreciative of the Agency’s joint efforts with our Office of
            Investigations to address program fraud. The Agency has been commended by
            OIG’s Office of Investigations for its continued commitment to combating
            housing fraud.

Comment 2   The Agency’s former Section 8 director provided the documentation for the
            Agency’s quality control inspections from February 2006 through March 2007.
            The documentation did not contain any inspection information for June 2006
            through February 2007.

Comment 3   The Agency’s proposed actions should greatly improve its procedures and
            controls over its housing quality standards process, if fully implemented.

Comment 4   Page 14 of our discussion draft audit report provided to the Agency on February
            19, 2008, included information that 26 files were missing evidence of criminal
            background checks. In this report, we have clarified that to more accurately state
            that 26 were missing evidence of criminal background checks or had checks
            showing criminal histories that disqualified the household.

Comment 5   The Agency’s actions should greatly improve its procedures and controls over its
            file documentation, if fully implemented.




                                            32
Appendix C

FEDERAL REQUIREMENTS AND THE AGENCY’S PROGRAM
             ADMINISTRATIVE PLAN

Finding 1

In accordance with 24 CFR [Code of Federal Regulations] 982.152(d), HUD may reduce or
offset any administrative fee to a public housing agency in the amount determined by HUD if the
public housing agency fails to perform its administrative responsibilities correctly or adequately
under the program.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.305(a) state that the public
housing agency may not give approval for the family of the assisted tenancy or approve a
housing assistance contract until the agency has determined that the following meet program
requirements: (1) the unit is eligible, (2) the unit has been inspected by the housing agency and
passes HUD’s housing quality standards, and (3) the rent to the owner is reasonable.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.401 require that all program
housing meet HUD’s housing quality standards performance requirements, both at
commencement of assisted occupancy and throughout the tenancy.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.404(a) state that the owner
must maintain the unit in accordance with HUD’s housing quality standards. If the owner fails
to maintain the dwelling unit in accordance with HUD’s housing quality standards, the agency
must take prompt and vigorous action to enforce the owner’s obligations. Remedies for such
breach of the housing quality standards include termination, suspension, or reduction of housing
assistance payments and the termination of the housing assistance payments contract. The
agency must not make any housing assistance payments for a dwelling unit that fails to meet the
housing quality standards unless the owner corrects the defect within the period specified by the
agency and the agency verifies the correction. If a defect is life threatening, the owner must
correct the defect within 24 hours.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.405(a) require public housing
agencies to perform unit inspections before the initial move-in and at least annually. The agency
must inspect the unit leased to a family before the term of the lease, at least annually during
assisted occupancy, and at other times as needed to determine whether the unit meets housing
quality standards.

Finding 2

HUD’s regulations at 24 CFR [Code of Federal Regulations] 5.216(a) state that each assistance
applicant must submit the complete and accurate Social Security number assigned to the
applicant and to each member of the household who is at least six years of age. The
documentation necessary to verify the Social Security number of an individual is a valid Social
Security number issued by the Social Security Administration or such other evidence of the


                                                33
Social Security number as HUD and, where applicable, the authority may prescribe in
administrative instructions.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 5.230(a) require each member of
the family of an assistance applicant or participant who is at least 18 years of age and each
family head and spouse regardless of age to sign one or more consent forms.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 5.508(b) require each family
member, regardless of age, to submit the following evidence to the responsible entity:

(1) For U.S. citizens or U.S. nationals, the evidence consists of a signed declaration of U.S.
citizenship or U.S. nationality. The responsible entity may request verification of the declaration
by requiring presentation of a U.S. passport or other appropriate documentation, as specified in
HUD guidance.

(2) For noncitizens who are 62 years of age or older or who will be 62 years of age or older and
receiving assistance under a Section 214-covered program on September 30, 1996, or applying
for assistance on or after that date, the evidence consists of a signed declaration of eligible
immigration status and proof of age document.

(3) For all other noncitizens, the evidence consists of a signed declaration of eligible immigration
status, one of the documents referred to in 5.510, and a signed verification consent form. For
each family member who contends that he or she is a U.S. citizen or a noncitizen with eligible
immigration status, the family must submit to the responsible entity a written declaration, signed
under penalty of perjury, by which the family member declares whether he or she is a U.S.
citizen or a noncitizen with eligible immigration status. For each adult, the declaration must be
signed by the adult. For each child, the declaration must be signed by an adult residing in the
assisted dwelling unit who is responsible for the child.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 5.901(a) include requirements that
apply to criminal conviction background checks by public housing authorities that administer
Section 8 and public housing programs when they obtain criminal conviction records, under the
authority of Section 6(q) of the 1937 Act (United States Code 42.1437d(q)), from a law
enforcement agency to prevent admission of criminals to public housing and Section 8 housing
and to assist in lease enforcement and eviction.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.153 state that the public
housing authority must comply with the consolidated annual contributions contract, the
application, HUD regulations and other requirements, and its program administrative plan.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.158(a) state that the public
housing authority must maintain complete and accurate accounts and other records for the
program in accordance with HUD requirements in a manner that permits a speedy and effective
audit. The authority must prepare a unit inspection report. During the term of each assisted
lease and for at least three years thereafter, the authority must keep a copy of the executed lease,
the housing assistance payment contract, and the application from the family. The authority
must keep the following records for at least three years: records that provide income, racial,
ethnic, gender, and disability status data on program applicants and participants; unit inspection


                                                 34
reports; lead-based paint records as required by part 35, subpart B, of this title; records to
document the basis for authority determination that rent to owner is a reasonable rent (initially
and during the term of a contract); and other records specified by HUD.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.162(a)(3) state that the
authority must use program contracts and other forms required by HUD headquarters including
the tenancy addendum required by HUD.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.305(d) state that after receiving
the family’s request for approval of the assisted tenancy, the housing authority must promptly
notify the family and owner of whether the assisted tenancy is approved.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.311(d) state that if the family
moves out of the unit, the authority may not make any housing assistance payment to the owner
for any month after the month when the family moves out. The owner may keep the housing
assistance payment for the month when the family moves out of the unit.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.4 state that the voucher is the
document issued by the authority to a family selected for admission to the voucher program.
This document describes the program and procedures for the authority’s approval of a unit
selected by the family. The voucher also states obligations of the family under the program.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.505(B)(4) state that if the
payment standard amount is increased during the term of the contract, the increased payment
standard amount shall be used to calculate the monthly housing assistance payment for the
family beginning at the effective date of the family’s first regular reexamination on or after the
effective date of the increase in the payment standard amount.

HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.516(a)(1) require the authority
to conduct a reexamination of family income and composition at least annually. The authority
must obtain and document in the client file third-party verification of the following factors or
must document in the client file why third-party verification was not available: (1) reported
family annual income, (2) the value of assets, (3) expenses related to deductions from annual
income, and (4) other factors that affect the determination of adjusted income. At any time, the
authority may conduct an interim reexamination of family income and composition. Interim
examinations must be conducted in accordance with policies in the authority’s administrative
plan. As a condition of admission to or continued assistance under the program, the authority
shall require the family head and such other family members as the authority designates to
execute a HUD-approved release and consent form (including any release and consent as
required under 5.230 of this title) authorizing any depository or private source of income or any
federal, state, or local agency to furnish or release to the authority or HUD such information as
the public housing authority or HUD determines to be necessary. The authority and HUD must
limit the use or disclosure of information obtained from a family or from another source pursuant
to this release and consent to purposes directly in connection with administration of the program.
HUD’s regulations at 24 CFR [Code of Federal Regulations] 982.517(a) state that the authority
must maintain a utility allowance schedule for all client-paid utilities, for cost of client-supplied
refrigerators and ranges, and for other client-paid housing services.



                                                 35
HUD’s Housing Choice Voucher Program Guidebook 7420.10, chapter 9, section 9.2, states, “In
each case where the public housing agency is required to document rent reasonableness, it must
document its decision and the basis for it (i.e., information on the unassisted units compared) in
the household’s file. This documentation should identify who conducted the rent reasonableness
determination and when.” Section 9.4 states, “In order to compare program units to market
units, it is necessary to collect comparable information on the program units.”

The Agency’s Housing Choice Voucher Administrative Plan, as revised June 2006, provides the
Agency’s policies for operating the Housing Choice Voucher program. The section on
occupancy states that the Agency will conduct a criminal background check to determine
eligibility (1) for all applicants (including ports and special admissions), (2) at the request to add
an adult (18 years of age or older) to the household, (3) upon accusation of criminal involvement,
and (4) as part of quality control reviews of files. The Agency’s policy is to deny participation
or terminate participation in the program when it can be reasonably determined that a household
member is illegally using a drug or abusing alcohol in a way that may interfere with the health,
safety or right of peaceful enjoyment by other residents or engaging in a violent criminal activity.
The Agency will also terminate assistance when it can be determined that there is a pattern of
illegal drug use or a pattern of alcohol abuse. A pattern is one or more incidents during the last
five years. An arrest or conviction is not required to determine whether an applicant or
participant or household member has engaged in violent criminal activity.

Assistance will be denied or terminated if the head of household or any member of the household
(1) is subject to a lifetime registration requirement under a state sex offender registration
program; (2) has engaged in any criminal activity that resulted in negligent death of any person,
(3) has engaged in any criminal activity of sexual assault or abuse; (4) has been evicted from
public or assisted housing for any lease or family obligation violation; or (5) has engaged in the
manufacturing, distribution, or use of methamphetamine.

The Agency’s administrative plan section on subsidy standards relate to the number of bedrooms
on the voucher, not on the family’s actual living arrangements. Subsidy standards must provide
for the smallest number of bedrooms needed to house a family without overcrowding, and be
applied consistently and in accordance with HUD’s housing quality standards for space. The
Agency will generally assign one bedroom on the voucher for every two family members except
the head of household subject to various exceptions. The sections on payment standards and rent
provide for using HUD-published fair market rents for payment standards but a minimum rent of
$50 was established for all vouchers. The agency will use the same payment standard schedule
for the homeownership program as is used for the Housing Choice Voucher program.

The administrative plan section on rent reasonableness states that the Agency will compare
characteristics of the contract unit with characteristics of comparable unassisted units
considering factors such as location, characteristics, amenities, services, maintenance, and
utilities provided. The Agency is to assess rent reasonableness by conducting phone calls, site
visits, or market surveys of available rental units. The Agency is to consider market rent
information obtained from the City, real estate agents, banks, classified newspaper ads, or HUD
field office data appraisers. The Agency will not accept documentation provided by a landlord
unless it can be verified to the Agency’s satisfaction.




                                                 36
The administrative plan section on interim reexaminations requires families to report all changes
in family composition to the Agency in writing within 10 business days of the change, and an
interim examination may be conducted at the Agency’s option. Families may request an interim
reexamination if there is a reduction in income. Families must report in writing all increases in
household income of $50 or more per week, $100 or more biweekly, $200 per month or more, or
$2,400 per year or more within 10 business days of the change. The Agency will process all
interim changes resulting from such increases.

Finding 3

HUD’s Public and Indian Housing Notice 2004-1, issued March 9, 2004, provides instructions
on the HUD established verification policies as provided in its accompanying Verification
Guidance.

Chapter VII of HUD’s March 2004 Verification Guidance states that public housing agencies
must put forth a conscientious effort to ensure that they use all available resources, including
upfront income verification techniques, to obtain verification of tenant reported (unreported or
underreported) income.

The Agency’s Housing Choice Voucher Administrative Plan revision, effective March 19, 2007,
states that families reporting zero income must recertify every 60 days and submit a completed
continued occupancy application reflecting current income status along with an Indianapolis
network and employment and training work history printout. If the client continues to report
zero income, the client must complete the zero income guide and checklist and a nonincome
affidavit.

The new policy also requires that an Enterprise Income Verification report be run quarterly on
zero-income clients. The threshold to report increases in income is $2,400 in reviewing the
Enterprise Income Verification discrepancy report.




                                                37