oversight

HUD Inappropriately Authorized the Use of Residual Receipts in Lieu of Reserve for Replacement or Operating Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-29.

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

                                                                   Issue Date
                                                                            September 29, 2008
                                                                   Audit Report Number
                                                                                2008-KC-0007




TO:         Beverly J. Miller, Director, Office of Asset Management, HTG

            //signed//
FROM:       Ronald J. Hosking, Regional Inspector General for Audit, 7 AGA


SUBJECT: HUD Inappropriately Authorized the Use of Residual Receipts in Lieu of Reserve
           for Replacement or Operating Funds


                                    HIGHLIGHTS

 What We Reviewed and Why

             We audited the U.S. Department of Housing and Urban Development’s (HUD)
             use of residual receipts in lieu of reserve for replacement funds between January
             1, 2004, and March 31, 2008. We identified this as a potential issue in a prior
             audit, report #2007-KC-0002. The objective of this audit was to determine
             whether HUD appropriately authorized residual receipt withdrawals in lieu of
             reserve for replacement funds for new regulation multifamily projects.

 What We Found


             HUD inappropriately authorized the use of more than $3.2 million in residual receipt
             funds for new regulation multifamily projects for ineligible costs. Regional and field
             office staff nationwide were either not familiar with or overlooked the residual
             receipt use requirements for new regulation multifamily projects. As a result, HUD
             lost $3.2 million that it could have used more effectively for additional housing
             subsidies and other authorized taxpayer purposes.
What We Recommend

           We recommend that HUD, on a project-by-project basis for the 14 projects
           reviewed, ensure that the project reimburses the residual receipts account with
           reserve for replacement or operating funds, unless this action negatively affects
           the project. In addition, HUD needs to direct regional and field office staff to
           fully understand and comply with the requirements regarding the use of residual
           receipts for new regulation multifamily projects. Finally, HUD needs to follow
           up with the regional and field offices’ staff in six months to ensure that they are
           using residual receipts for allowable expenses.

           Please furnish us copies of any correspondence or directives issued because of the
           audit.


Auditee’s Response


           We provided the discussion draft of the audit report to HUD on August 27, 2008,
           and requested its comments by September 26, 2008. HUD provided its written
           response and a complete management decision on September 24, 2008, and
           agreed with the finding and each recommendation.

           The complete text of HUD’s response, along with our evaluation of that response,
           can be found in appendix B of this report.




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                           TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Review                                                                 5
      Finding: HUD Inappropriately Authorized the Use of More Than $3.2 Million
                in Residual Receipt Funds for Ineligible Costs

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendixes
   A. Schedule of Questioned Costs                                                9
   B. Auditee Comments and OIG’s Evaluation                                       10




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                  BACKGROUND AND OBJECTIVES

Congress authorized the Section 8 program in 1974, and the U.S. Department of Housing and
Urban Development (HUD) developed the program to provide rental subsidies for eligible
tenant families residing in newly constructed, rehabilitated, and existing rental and
cooperative apartment projects. HUD’s Office of Multifamily Housing has oversight
responsibility for approximately 30,000 insured or assisted properties with more than 2.5
million units. Of these units, more than 1.2 million units are Section 8-assisted units located
in more than 17,000 properties.

HUD contracts with project owners to provide rental assistance under a housing assistance
payments contract. Project income consists of tenant payments and HUD’s rental assistance.
Owners use these funds to pay the project’s mortgage payments, operating expenses, reserve
for replacement deposits if the project is insured, and any allowable distributions. When
project income for nonprofit and limited distribution projects exceeds expenses, the project
has excess earnings, or residual receipts.

Before 1979/1980, HUD’s housing assistance payments contracts did not contain provisions
regarding residual receipt use. In 1979/1980, HUD changed the Section 8 regulations for 100
percent-assisted new construction and substantial rehabilitation projects. The new regulation
housing assistance payments contracts outline the use and disposition of residual receipts. In
addition, the new regulations are outlined in HUD Handbook 4350.1, Multifamily Asset
Management and Project Servicing, as well as 24 CFR (Code of Federal Regulations) Parts
880, 881, and 883.

The above sources explain that the project will remit any remaining residual receipts to HUD
at the end of the project’s housing assistant payments contract. It also explains that projects
subject to the revised 1979/1980 Section 8 regulations that request residual receipt
withdrawals will be considered if such requests are for the purposes of reducing operating
deficits or making mortgage payments when a default is actual or imminent. Projects can
also pay housing assistance and service coordinator-related fees with residual receipts. The
new regulations state that the field office will disapprove requests for other purposes.

The objective of the review was to determine whether HUD appropriately authorized residual
receipt use in lieu of reserve for replacement funds for new regulation multifamily projects
on a nationwide basis.




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                               RESULTS OF REVIEW

Finding: HUD Inappropriately Authorized the Use of More Than $3.2
           Million in Residual Receipt Funds for Ineligible Costs
HUD inappropriately authorized the use of more than $3.2 million in residual receipt funds for
ineligible costs. Regional and field office staff nationwide were either not familiar with or
overlooked the residual receipt use requirements for new regulation multifamily projects. As a
result, HUD lost more than $3.2 million that it could have used more effectively for additional
housing subsidies and other authorized taxpayer purposes.



 HUD Inappropriately
 Authorized the Use of Residual
 Receipts


               HUD staff inappropriately authorized new regulation multifamily projects to use
               residual receipt funds for ineligible costs. For 10 of the 14 projects tested,
               multifamily staff allowed new regulation project owners to use residual receipts in
               lieu of reserve for replacement funds for capital expenditures and operating-
               related costs. These ineligible costs included painting, management fees, kitchen
               renovations, installing slate over concrete walkways, repairs to elevators, window
               replacements, and the construction of a new pier. These expenditures contradict
               24 CFR Parts 880 and 881 and the detailed procedures in HUD Handbook 4350.1,
               which state that for those projects subject to the revised 1979/1980 Section 8
               regulations, requests for withdrawals will be considered if such requests are for
               two specific purposes: reducing operating deficits or making mortgage payments
               when default is actual or imminent. Finally, the handbook states that the field
               office will disapprove requests for other purposes.

 HUD Was Not Familiar with or
 Overlooked the New
 Regulations


               Regional and field office staff nationwide were either not familiar with or
               overlooked the residual receipt use requirements for new regulation multifamily
               projects. Each of the project managers for these 14 projects stated that they used
               HUD Handbook 4350.1 as their main source to manage their projects and to
               perform their job duties. Twelve of them (86 percent) were not familiar with the
               difference between old regulation and new regulation multifamily projects
               regarding residual receipt use. Two of them were familiar with the residual
               receipt use requirements for new regulation multifamily projects, but both project
               managers overlooked the requirements, and the field office officials authorized


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            the ineligible costs. One of the project managers stated that there was no
            difference in the regulations for new rule versus old rule multifamily projects
            regarding residual receipt use. After talking with regional and field multifamily
            office staff nationwide, it was evident that most staff was not knowledgeable
            about the new regulations and residual receipt use requirements.


HUD Could Have Used the $3.2
Million for Other Eligible Costs



            Because of HUD’s action, it lost more than $3.2 million in residual receipt funds
            that it could have used for additional housing subsidies and other eligible taxpayer
            purposes. For example, HUD can use excess residual receipt funds to reduce
            housing assistance payments from appropriated funds for new regulation projects.
            HUD can then make the saved appropriated funds available to other new
            regulation projects. Finally, when a new regulation Section 8 contract terminates,
            HUD remits the residual receipts to the United States Treasury. When HUD
            improperly authorizes the use of residual receipts, it deprives the federal
            government of funds it is owed.


Recommendations



            We recommend that the Director of HUD’s Office of Asset Management


                     1A. Ensure that each of the 14 projects reviewed reimburses the
                         residual receipts account with reserve for replacement or operating
                         funds, unless this action negatively affects the project. If every
                         project is able to reimburse its residual receipts account, the total
                         transfer for the 14 projects will be $3,203,135.

                     1B. Direct regional and field office staff to fully understand and
                         comply with the requirements regarding the use of residual receipts
                         for new regulation multifamily projects.

                     1C. Follow up with the regional and field offices in six months to
                         ensure that they are not using residual receipts for ineligible costs.




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                             SCOPE AND METHODOLOGY

Our review period was from January 1, 2004, to March 31, 2008. We expanded the period as
needed to evaluate historical and current information pertinent to our review. We limited the audit
to a sample of new regulation Section 8 multifamily projects.

To achieve our objectives, we reviewed a previous HUD Office of Inspector General (OIG)
report (#2007-KC-0002), data obtained from HUD’s computer systems, and applicable federal
regulations. We also interviewed HUD officials from its Office of Multifamily Housing, hub
directors, project managers, team leaders, and supervisors.

We selected our sample from a HUD-provided list showing that as of July 2006, more than
10,000 nonprofit or limited distribution projects had residual receipt activity between the fiscal
year ends June 30, 2004 and December 31, 2005. From that list, we selected the 22 new
regulation projects with the highest residual receipt balances and added the three new regulation
projects identified in HUD OIG report #2007-KC-0002. After performing our preliminary audit
work and reviewing the first 14 project files we received from HUD, we concluded that the
conditions disclosed in this report existed across regional offices. We, therefore, reduced our
sample size to include only those first 14 projects.

We used computerized data from HUD’s Integrated Real Estate Management System solely for
background information and to identify projects for review. Therefore, we did not perform tests
to assess the reliability of the data. For the 14 new regulation Section 8 multifamily projects in
our sample, we reviewed pertinent documentation including regulatory agreements, agreements
to enter into housing assistance payments contracts, housing assistance payments contracts and
renewals, notification of selection letters, and residual receipt draw requests and authorizations
from the project files.

We performed our audit work on site in New York and in our Denver office from May to August
2008. We briefed HUD management in Washington, DC, on the results of our review on July 25
and August 1, 2008.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our finding and conclusion based on our audit objective.




                                                 7
                             INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls
              We determined the following internal controls were relevant to our audit objectives:

              •       Controls over ensuring that residual receipts for new regulation
                      multifamily projects are authorized for allowable expenses.

              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:

              •       HUD staff inappropriately authorized the use of residual receipts for new
                      regulation multifamily projects for ineligible costs.




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                          Recommendation            Ineligible 1/
                                 number
                                        1A           $3,203,135


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.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation         Auditee Comments


Comment 1




                         10
11
                         OIG Evaluation of Auditee Comments

Comment 1   HUD's Office of Asset Management (HUD) concurs with all recommendations
            and provided OIG with a written response in the form of a management decision.
            If HUD implements the corrective actions outlined in the proposed management
            decision, the finding identified in this audit report should no longer be an issue for
            HUD.




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