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.
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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
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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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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)