oversight

The Douglas County Housing Authority of Omaha, Nebraska, Improperly Encumbered and Spent Its Public Housing Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-02-11.

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

                                                                 Issue Date
                                                                          February 11, 2008
                                                                 Audit Report Number
                                                                              2008-KC-1001




TO:        Debra L. Lingwall, Coordinator, Omaha Public Housing Program
             Center, 7DPHO

           Henry S. Czauski, Acting Director, Departmental Enforcement Center, CV

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

SUBJECT: The Douglas County Housing Authority of Omaha, Nebraska, Improperly
           Encumbered and Spent Its Public Housing Funds


                                   HIGHLIGHTS

 What We Audited and Why

             We reviewed the development activities of the Douglas County Housing
             Authority (Authority), Omaha, Nebraska, to determine whether the Authority
             encumbered or spent U.S. Department of Housing and Urban Development
             (HUD) assets for nonfederal development activities without HUD approval. We
             conducted the audit because HUD had concerns that the Authority had improperly
             used public housing funds to assist three nonfederal developments.

 What We Found
             The Authority inappropriately encumbered nearly $1.67 million in federal assets
             when it entered into loan documents containing setoff provisions against the
             Authority’s HUD-related bank accounts. The Authority also inappropriately
             entered into partnership agreements that made it responsible for all operating
             deficits of two nonfederal developments. Further, the Authority inappropriately
             spent nearly $860,000 in public housing funds on three nonfederal developments.
             Finally, the Authority arbitrarily allocated nearly $730,000 of its administrative
           and maintenance supervisor salaries to its federal programs without adequate
           support.

What We Recommend

           We recommend that HUD require the Authority to implement adequate
           procedures to ensure that it does not encumber or spend HUD assets on
           nonfederal programs and activities without HUD approval. We recommend that
           HUD ensure that the release obtained by the Authority formally excludes the
           Authority’s HUD-related bank accounts from the setoff provisions in
           development loan documents. Additionally, HUD should ensure that the
           Authority obtains formal releases from the guarantees in partnership agreements.
           Further, we recommend that HUD require the Authority to repay its public
           housing program from nonfederal sources for any federal funds used
           inappropriately.

           We also recommend that HUD require the Authority to support salary costs
           allocated to HUD programs or reimburse its HUD programs from nonfederal
           sources for unsupported allocations. HUD should also require the Authority to
           implement an acceptable method for allocating future salary and benefits costs.
           Finally, we recommend that HUD take appropriate administrative actions against
           the Authority, its chief executive officer, and members of its board of
           commissioners for violating HUD rules.

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

Auditee’s Response


           We provided the draft report to the Authority on December 27, 2007, and
           requested a response by January 21, 2008. It provided written comments on
           January 16, 2008. The Authority generally agreed that it encumbered and spent
           public housing assets for nonfederal developments, but disagreed that its salary
           and benefit cost allocation plan was unsupported.

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




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
      Finding 1: The Authority Inappropriately Encumbered Its Federal Funds for      6
                  Development Activities
      Finding 2: The Authority Inappropriately Spent Its Public Housing Funds for    9
                  Development Activities
      Finding 3: The Authority Arbitrarily Allocated Its Administrative and         12
                  Maintenance Supervisor Salaries and Benefits

Scope and Methodology                                                               14

Internal Controls                                                                   15

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                16
   B. Auditee Comments and OIG’s Evaluation                                         17
   C. Criteria                                                                      27




                                             3
                      BACKGROUND AND OBJECTIVES

The Douglas County Housing Authority (Authority) of Omaha, Nebraska, was established in
December 1975. The mission of the Authority is to promote personal growth and community
responsibility by cultivating self-reliance, and by providing quality, affordable, and safe housing
for low-to-moderate income families, the elderly, and the disabled. The Authority is governed
by a seven-member board of commissioners, including a resident commissioner, who are
appointed by the Douglas County Board of Commissioners.

The Authority owns and operates 78 public housing units that provide housing for the disabled,
the elderly, and families whose income meets U.S. Department of Housing and Urban
Development (HUD) guidelines. The Authority also administers a Section 8 Housing Choice
Voucher program that enables 968 low-income families to rent from a private landlord with
rental assistance administered by the Authority. The Authority received $82,125 for its public
housing program and $5.2 million for its Section 8 program in 2007.

To participate in HUD’s public housing programs, the Authority executed an annual
contributions contract with HUD on January 31, 1996. The annual contributions contract defines
the terms and conditions under which the Authority agreed to develop and operate all projects
under the agreement. The contract defines a project as any public housing developed, acquired,
or assisted by HUD under the United States Housing Act of 1937, as amended. The contract
states that the Authority may withdraw public housing funds only for the payment of the costs of
development and operation of the projects under the contract or other purposes approved by
HUD. It also provides that the Authority cannot in any way encumber any project or portion
thereof without the prior approval of HUD.

Due to concerns about housing authority development activities nationwide, on June 20, 2007,
HUD’s Office of Public and Indian Housing issued Notice: PIH-2007-15(HA), “Applicability of
Public Housing Development Requirements to Transactions between Public Housing Agencies
and their Related Affiliates and Instrumentalities.” This notice reaffirmed the requirements of
public and Indian housing programs, including the annual contributions contract, that apply to
public housing development activities.

In accordance with its agency plan, a public housing agency may form and operate wholly
owned or controlled subsidiaries or other affiliates. Such wholly owned or controlled
subsidiaries or other affiliates may be directed, managed, or controlled by the same persons who
constitute the board of directors or similar governing body of the public housing agency or who
serve as employees or staff of the public housing agency but remain subject to other provision of
law and conflict-of-interest requirements. Further, a public housing agency, in accordance with
its agency plan, may enter into joint ventures, partnerships, or other business arrangements with
or contract with any person, organization, entity, or governmental unit with respect to the
administration of the programs of the public housing agency such as developing housing or
providing supportive/social services subject to either Title I of the United States Housing Act of
1937, as amended, or state law.



                                                 4
The Authority’s nonprofit affiliate, Community Housing and Service Corporation, became part
owner and general partner of the Platte Valley Apartments development in 1997. This is a 48-
unit nonfederal property in Valley, Nebraska, which was ready for occupancy when purchased.
Since 2001, the Authority has contracted with a private management firm to manage the
property.

Between April 2001 and May 2002, the Authority developed and constructed Woodgate
Townhomes, a 20-unit nonfederal townhome subdivision for low-income families in Omaha,
Nebraska. The Authority is the general partner and manages the daily operations.

Between October 2003 and October 2004, the Authority developed and constructed Orchard
Gardens, a 56-unit nonfederal assisted living property in Valley, Nebraska. The Authority
retained direct ownership of Orchard Gardens. The facility’s director of senior housing manages
the daily operations. The Authority’s chief executive officer oversees the facility’s director.

In June 2006, HUD conducted a limited financial review of the Authority, based on declining
financial scores under HUD’s Public Housing Assessment System. HUD became concerned that
the Authority was using public housing funds for purposes other than routine operations of the
public housing program. HUD notified the Authority of its concerns and asked us to conduct a
more in-depth review of the Authority’s development activities and use of public housing funds.

Our audit objective was to determine whether the Authority improperly encumbered or spent
HUD assets for nonfederal development activities without HUD approval.




                                               5
                                RESULTS OF AUDIT

Finding 1: The Authority Inappropriately Encumbered Its Federal Funds
            for Development Activities
The Authority inappropriately encumbered its HUD-related assets when it developed and
operated two nonfederal entities. This condition occurred because the Authority’s board of
commissioners did not have adequate controls in place to keep it from encumbering the
Authority’s federal assets when pursuing nonfederal housing ventures. As a result, it
inappropriately encumbered nearly $1.67 million in federal funds held in Authority bank
accounts and placed these funds at risk of being seized.



 Authority Encumbered Its
 Public Housing Funds

              The Authority inappropriately encumbered its HUD-related assets when it
              developed and operated two nonfederal entities. The Authority entered into

                  •   Loan agreements containing setoff provisions allowing the bank to seize
                      the Authority’s assets in the event of default on the loans and
                  •   Partnership agreements that guaranteed recourse against the Authority’s
                      assets to ensure payment of all operating deficits of the developments.

              The public housing annual contributions contract between HUD and the Authority
              states that the Authority shall not in any way encumber any public housing project
              without prior approval from HUD. The Section 8 annual contributions contract
              between HUD and the Authority states that the Authority must use program
              receipts only to pay program expenditures.

              The Authority obtained bank loans, totaling more than $1.75 million, for the
              Platte Valley Apartments and Woodgate Townhomes developments at the same
              bank in which it had federal money on deposit. The bank loan documents for
              each development contained a setoff provision that allowed the bank to seize all
              funds in the Authority’s bank accounts in the event of default on either of the
              loans. As of October 15, 2007, the Authority’s HUD-funded bank accounts held
              nearly $1.67 million.

              Three members of the board of commissioners and the chief executive officer told
              us that they were not aware that the loan documents contained setoff provisions.

              In addition, the Authority entered into partnership agreements for the Platte
              Valley Apartments and Woodgate Townhomes developments, which guaranteed


                                               6
            that the Authority would be responsible for all operating deficits of the
            developments. The agreements also stated that recourse might be had against the
            Authority’s properties and assets if the Authority did not pay the obligations. The
            agreements further stipulated that the Authority’s properties and assets were
            subject to fulfilling any judgments rendered by the courts that related to the
            developments. Finally, the Authority waived protections afforded to housing
            authorities by Nebraska state law.

            The chief executive officer told us that she relied on her legal advisors who said
            that it was acceptable to sign the partnership agreements.

Authority Lacked Controls to
Avoid Encumbrances

            The Authority’s board of commissioners did not have adequate controls in place
            to keep it from encumbering the Authority’s federal assets when pursuing
            nonfederal housing ventures. In addition, the Authority’s chief executive officer
            did not perform the necessary due diligence when signing loan documents and
            partnership agreements.

Authority Placed Federal Assets
at Risk

            The Authority placed $1.67 million in federal assets at risk of being seized if it
            defaulted on either of two nonfederal development loans and the bank exercised
            the setoff provision.

            The Authority also risked its future assets by entering into partnership agreements
            that made it responsible for all operating deficits and potential judgments of the
            nonfederal developments. Without removal of the guarantees, the Authority’s
            future assets remain at risk. We valued this risk at nearly $230,000, which is the
            estimate of funding that HUD will provide to the Authority in fiscal year 2008.

Recommendations



            We recommend that the Coordinator of the Omaha Public Housing Program
            Center

            1A.    Require the Authority to implement adequate procedures to ensure that it
                   does not encumber HUD assets without HUD approval. These procedures
                   should include following PIH Notice 2007-15, which addresses
                   encumbering HUD-related assets.



                                             7
1B.   Ensure that the lender has formally released the Authority’s HUD-related
      bank accounts from the right of setoff provisions in the loan documents for
      Platte Valley Apartments and Woodgate Townhomes. As of October 15,
      2007, the Authority’s HUD-related bank accounts placed at risk totaled
      $1,666,592.

1C.   Require the Authority to pursue removing the guaranty from the
      partnership agreement for Platte Valley Apartments, which will ensure
      that the $228,339 it receives from HUD next year will be put to better use.

1D.   Ensure that the Authority’s partner for Woodgate Townhomes has
      formally released its recourse against the Authority’s assets related to the
      partnership agreement guaranty. As stated in recommendation 1C, this
      will ensure that the Authority’s HUD funding in the next year will be put
      to better use.

1E.   Take appropriate administrative actions against the Authority for violating
      the annual contributions contract with HUD and refer to findings 2 and 3
      for additional support for administrative actions.


We recommend that the Director of the Departmental Enforcement Center

1F.   Impose appropriate administrative sanctions against the Authority’s chief
      executive officer and members of its board of commissioners who violated
      HUD rules and refer to findings 2 and 3 for additional support for
      administrative sanctions.




                                8
Finding 2: The Authority Inappropriately Spent Its Public Housing
            Funds for Development Activities
The Authority inappropriately used public housing assets for nonfederal development activities.
This condition occurred because the Authority’s board of commissioners did not have adequate
controls in place to ensure that financial transactions were in accordance with its annual
contributions contract with HUD. As a result, nearly $860,000 of the Authority’s public housing
funds was not available for its intended purpose, which was to provide decent and safe housing
for low-income families, the elderly, and persons with disabilities.


 Authority Used Public Housing
 Funds to Pay Nonfederal
 Development Expenses


              The Authority inappropriately spent nearly $860,000 in public housing assets for
              nonfederal development activities. According to the Authority’s contract with
              HUD, the Authority may withdraw money from the public housing fund only for
              the payment of the costs and operation of the projects covered under the annual
              contributions contract. The nonfederal developments were not approved projects
              under the annual contributions contract.

              The Authority spent nearly $1.8 million from its public housing account on three
              nonfederal developments, as detailed in the chart below.

                     Development                           Examples of expenditures
                                                        Architect fees, infrastructure,
                                                        surveys, environmental studies,
                    Orchard Gardens          $1,605,111 and insurance
                                                        Roof repair, insurance, and cash
                 Platte Valley Apartments       $83,069 for operations
                                                        Land purchase, architect fees,
                                                        legal fees, and neighborhood
                 Woodgate Townhomes             $92,871 association dues

              Not all of the funds used to support the developments were from HUD’s public
              housing subsidies (operating and capital funds). The Authority had commingled
              about $922,000 in sales proceeds from the HUD-related 5(h) homeownership
              program home sales with the public housing subsidies. HUD allowed the
              Authority to use its 5(h) sales proceeds for the nonfederal developments but did
              not allow it to use public housing subsidies for the developments. Therefore, the
              Authority inappropriately spent public housing funds on the remaining
              development costs.



                                               9
           Of the nearly $860,000 in federal funds inappropriately spent, the public housing
           program has recouped about $663,000. One nonfederal development owed the
           public housing program about $200,000 as of October 15, 2007.

                                    Orchard Gardens
            Nonfederal expenses paid from public housing account       $1,605,111
            Repayment from Orchard Gardens                             ($487,016)
            Sale proceeds from HUD’s 5(h) program                      ($921,936)
            To be repaid                                                 $196,159

                                Platte Valley Apartments
            Nonfederal expenses paid from public housing account           $83,069
            Repayment from Platte Valley Apartments                      ($83,069)
            To be repaid                                                        $0

                                 Woodgate Townhomes
            Nonfederal expenses paid from public housing account           $92,871
            Repayment from state grant                                   ($92,871)
            To be repaid                                                        $0


Authority Management Did Not
Have Controls in Place

           Housing authorities’ boards of commissioners are responsible for their operations.
           However, the Authority’s board of commissioners did not have adequate controls
           in place to ensure that financial transactions were in accordance with its annual
           contributions contract with HUD. The Authority did not have written policies and
           procedures to address developing, constructing, financing, and operating
           nonfederal properties. Further, the Authority’s board of commissioners did not
           employ a monitoring process to ensure that the Authority did not use federal
           funds in its nonfederal development efforts.

           The Authority’s chief executive officer told us she needed startup funds for the
           developments while awaiting private financing. She also told us she knew that
           HUD did not allow housing authorities to use HUD funds for these purposes but
           she believed that the Authority had sufficient 5(h) funds to use on the nonfederal
           developments. However, because the Authority did not separately account for the
           5(h) funds from the public housing funds, either in its financial records or bank
           accounts, the chief executive officer was not aware when the Authority had fully
           depleted the 5(h) funds and began using public housing funds for the nonfederal
           developments.




                                           10
Public Housing Funds Were
Not Available for Intended
Purposes


           Nearly $860,000 of the Authority’s public housing funds was not available for its
           intended purpose, which was to provide decent and safe housing for low-income
           families, the elderly, and persons with disabilities. The $860,000 is equivalent to
           four years of public housing funding for the Authority, which receives an average
           of about $200,000 per year.

Recommendations

           We recommend that the Coordinator of the Omaha Public Housing Program
           Center

           2A.    Require the Authority to repay its public housing program from nonfederal
                  sources for any federal funds inappropriately used, including $196,159
                  owed by Orchard Gardens as of October 15, 2007.

           2B.    Require the Authority to implement adequate procedures to ensure that it
                  does not spend HUD funds on nonfederal programs and activities without
                  HUD approval. These procedures should include following PIH Notice
                  2007-15, which addresses spending HUD-related assets in relation to
                  development activities.




                                            11
Finding 3: The Authority Arbitrarily Allocated Its Administrative and
            Maintenance Supervisor Salaries and Benefits
The Authority arbitrarily allocated its administrative and maintenance supervisor salaries and
benefits to federal and nonfederal programs. This condition occurred because the Authority’s
chief executive officer believed that the Authority’s budget estimates for time spent on federal
and nonfederal activities was sufficient support for salary and benefits allocations. As a result,
HUD has no assurance that the Authority used nearly $730,000 in salary costs or additional costs
for related benefits charged to its federal programs for HUD-funded activities.



 Authority Did Not Support Its
 Personnel Cost Allocations


               The Authority arbitrarily allocated its administrative and maintenance supervisor
               salaries and benefits to federal and nonfederal programs. In contrast to HUD
               requirements, Authority management used yearly budget estimates as a basis for
               allocating these personnel costs.

               The annual contributions contract between the Authority and HUD states that the
               Authority must maintain records that identify the source of funds and application
               of funds in a way that allows HUD to determine that all funds are and have been
               spent in accordance with each specific program requirement. Further, Office of
               Management and Budget Circular A-87 states that when employees work on
               multiple activities, the employer must support salary distributions with personnel
               activity reports or equivalent documentation. It also states that budget estimates
               or other distribution percentages determined before the services are performed do
               not qualify as support for charges to federally funded programs.

               As part of its yearly budgeting process, the chief operating officer estimated
               percentages for administrative and maintenance personnel time spent on federal
               and nonfederal activities. From April 2004 through September 2007, the
               Authority paid more than $1.2 million in salaries, excluding benefits, for
               employees who divided their time between federal and nonfederal activities. The
               $1.2 million did not include costs for personnel that did not work on HUD
               programs or were paid from non-HUD sources. The Authority allocated nearly
               $730,000 of the $1.2 million to its public housing and Section 8 programs.
               However, it did not have support for the cost allocations applied to its HUD-
               related programs.




                                               12
Authority Management
Believed Budget Estimates
Were Sufficient Support


           The Authority’s chief executive officer believed that the Authority’s budget
           estimates for time spent on federal and nonfederal activities provided sufficient
           support for salary and benefits allocations and that it was not necessary to
           maintain additional support for cost allocations.

Authority May Have Allocated
Improper Share of Personnel
Costs to HUD Programs


           HUD has no assurance that the Authority used nearly $730,000 in salary costs or
           additional costs for related benefits charged to its federal programs for HUD-
           related activities. Further, without an acceptable method of allocating salaries and
           benefits, the Authority will charge HUD-related programs at least $221,000 for
           unsupported salary costs, excluding benefits, within the next year.

Recommendations

           We recommend that the Coordinator of the Omaha Public Housing Program
           Center require the Authority to

           3A.    Provide documentation to support salary and benefits costs allocated to
                  HUD programs or reimburse its HUD programs from nonfederal sources
                  for costs that it cannot adequately support. These costs should include
                  $729,361 allocated from April 1, 2004, to September 30, 2007.

           3B.    Implement an acceptable method for allocating future salary and benefits
                  costs, such as daily activity reports or equivalent documentation, for
                  services performed. This will ensure that an estimated $221,228 in salary
                  costs, excluding benefits, that will be allocated in the next year will be put
                  to better use.




                                            13
                         SCOPE AND METHODOLOGY

Our review generally covered the period from June 2000 through April 2007 and was expanded
as necessary. To achieve our audit objective, we conducted interviews with the Authority’s staff
and with HUD staff at the Omaha, Nebraska, and Kansas City, Kansas, Offices of Public
Housing.

We reviewed the Authority’s policies and procedures; development files for Platte Valley
Apartments, Woodgate Townhomes, and Orchard Gardens; general ledgers; trial balances;
payable files; payroll files; and audited financial statements. We also reviewed the Authority’s
annual plan, board of commissioners meeting minutes, correspondence with HUD, annual
contributions contracts, bank statements, and bank loan documents. In addition, we reviewed
federal regulations and HUD monitoring reports.

We relied in part on computer-processed data from the Authority’s computerized accounting
system for evidence of spending public housing assets without prior HUD approval. We
assessed the data’s reliability and found it adequate to identify expenses paid with public housing
funds on behalf of the nonfederal developments. In reaching our audit conclusions, we used the
Authority’s original source documents as corroborating evidence for the information obtained
from the Authority’s computer-processed data.

We assigned a value to the potential savings to the Authority if HUD implements our
recommendations. If HUD implements recommendation 1B to eliminate setoff provisions in
certain loan documents, as of October 15, 2007, $1,666,592 in HUD-related bank funds will no
longer be at risk. If HUD implements recommendation 1C to eliminate the guarantees placing
HUD funds at risk, it will protect an estimated $228,339 that it will provide to the Authority in
fiscal year 2008. The estimate is based on the average HUD operating and capital funding
provided to the Authority in fiscal years 2000 through 2007. The estimate will be a recurring
benefit; however, our estimates reflect only the initial year of this benefit. Similarly, if HUD
implements recommendation 3B requiring the Authority to implement an acceptable cost
allocation plan, it will protect an estimated $221,228 in salary allocations that the Authority has
budgeted for its fiscal year 2008. The estimate will be a recurring benefit; however, our
estimates reflect only the initial year of this benefit.

We performed on-site work from May through August 2007 at the Authority’s office located at
5404 North 107th Plaza, Omaha, Nebraska. We performed our review in accordance with
generally accepted government auditing standards.




                                                 14
                              INTERNAL CONTROLS

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

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

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



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

              •       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 of 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 Weaknesses

              Based on our review, we believe the following items are significant weaknesses:

              •       The Authority did not have adequate controls to ensure that it did not put
                      HUD funds at risk or inappropriately spend the funds (findings 1 and 2).
              •       The Authority did not have an acceptable cost allocation plan in place to
                      ensure that it adequately supported salary and benefits costs charged to its
                      HUD-related programs (finding 3).



                                                15
                                    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/

                1B                                                          $1,666,592
                1C                                                            $228,339
                2A                     $196,159
                3A                                        $729,361
                3B                                                            $221,228

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
     polices 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.

     If HUD requires the Authority to implement the OIG recommendations, it will remove
     encumbrances on the Authority’s HUD-related assets. Additionally, once the Authority
     successfully improves its controls over encumbering and spending annual contributions
     contract assets and implements an adequate salary and benefits allocation plan, there will
     be a recurring monetary benefit. Our estimates reflect only the initial year of this benefit.




                                              16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                          Auditee Comments




Comment 1




Comment 2




Comment 3




            ** We provided HUD officials with the attachments that the Authority included with its written
               response. Due to the sensitive nature and volume of the attachments, we have not included
               them in the report but can provide them upon request.




                                                  17
Comment 4




Comment 5




Comment 6




            18
Comment 7


Comment 2




Comment 8




Comment 5




            19
Comment 4




Comment 2




Comment 6




Comment 9



Comment 10



Comment 11




Comments
5&8




             20
Comment 5




Comment 8


Comment 5


Comment 5

Comment 12



Comment 12




Comment 4




             21
Comment 13




Comment 14




Comment 4




Comment 2




             22
Comment 2




            23
                         OIG Evaluation of Auditee Comments

Comment 1   Three of the current board of commissioners members were on the board when
            the Authority entered into Platte Valley and Woodgate loan agreements in 2002.
            One of the three board members was also on the board in 2000 when the
            Authority entered into the Woodgate partnership agreement. Therefore, we
            maintain that some of the current board members were responsible for the
            Authority’s actions when it inappropriately encumbered HUD assets.

Comment 2   The Authority used estimates to allocate salaries and benefits to federal and
            nonfederal activities. The Authority did not base the estimates on a time study or
            other supportable method. The Authority asserted that it had based its estimates
            on the number of units serviced. However, the yearly budgets and general ledger
            payroll entries showed that the Authority did not consistently base its allocations
            on the number of units serviced. In addition, it did not provide any other
            documentation demonstrating that using the number of units serviced was a
            reasonable and supportable method for allocating payroll expenses.

            Further, the Authority was notified of its unsupported payroll expense allocations
            in the independent auditor’s report on the Authority’s 1999 financial statements.
            The audit report stated that for those employees working on multiple programs,
            the Authority allocated their payroll expenses based on management’s estimates.
            The audit report explained that federal regulations required that allocations of
            payroll expenses be based on a reasonable methodology, and the methodology
            should be documented and used consistently. The audit report also noted that
            payroll allocations must be based on after-the-fact documentation, such as
            timesheets. The independent auditor recommended that management formally
            document its payroll allocation methodology and work with the applicable federal
            agencies to determine the necessary support that the Authority must maintain.
            However, the Authority could not demonstrate that it had heeded the auditor’s
            recommendation that was intended to bring the Authority into compliance with
            federal regulations. We have recommended that HUD ensure that the Authority
            implements an acceptable method for allocating future salary and benefits costs
            and therefore, HUD can determine what constitutes an acceptable and supportable
            method of allocating salaries and benefits.

Comment 3   As stated in the report, HUD had allowed the Authority to use 5(h) proceeds and
            Section 8 administrative fees earned before December 2004 for the nonfederal
            developments. The Authority also used earned nonfederal development fees and
            management fees for the nonfederal developments. However, the Authority
            violated its annual contributions contract when it spent public housing funds for
            nonfederal development.

            The correspondence between HUD and the Authority’s chief executive officer
            showed that in April 2001 HUD began questioning the Authority’s use of nearly
            $200,000 in public housing funds for nonfederal development startup costs. The



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            Authority’s audited financial statements for the period ended March 31, 2000, had
            disclosed the Authority’s use of the public housing funds for this purpose. The
            chief executive officer replied to HUD that the source of the funds was from
            proceeds of home sales from the 5(h) homeownership program. The chief
            executive officer also told HUD that the Authority was obtaining other sources of
            funding and expected to repay the public housing funds used within the next year.

Comment 4   As shown in the report, as of October 15, 2007, one nonfederal development
            owed the public housing program $196,159. During the audit, the Authority had
            identified funding sources that it intended to use to repay the public housing
            program. One funding source was the Authority’s reserve funds, which when
            applied would leave a balance of about $80,000 owed to the public housing
            program. The Authority had not used the reserve funds to repay the public
            housing program as of the date of this report. We explained to the chief executive
            officer that HUD is responsible for ensuring that the Authority repays the funds
            and that the repayments are from acceptable sources.

Comment 5   We provided HUD officials with the March 2007 Woodgate Townhomes
            amended and restated guaranty and the January 2008 Platte Valley Apartments
            letter agreement releasing the guaranty. HUD will determine whether the
            documents release the Authority from improper encumbrances.

Comment 6   The Authority’s board of commissioners and its chief executive officer are
            responsible for the Authority’s operations. These responsibilities include
            ensuring that the Authority does not violate federal regulations or enter into
            financial agreements that place the Authority at risk. As explained in the report,
            the board of commissioners and the chief executive officer violated federal
            regulations and failed to perform proper due diligence when they improperly
            spent public housing funds, encumbered the Authority’s assets, and allocated
            salaries and benefits to federal programs without adequate support. Therefore, we
            maintain that administrative actions and sanctions are warranted.

Comment 7   As stated in the report, the Authority spent nearly $1.8 million from its public
            housing account on the nonfederal developments. However, only about $922,000
            of the $1.8 million was from 5(h) funds, which were commingled with the public
            housing funds. The remaining $858,000 spent for nonfederal development was
            from the public housing funds.

Comment 8   We provided HUD officials with the August 2007 letter from the lender that states
            that the lender will not invoke the setoff provisions in the nonfederal development
            loan documents against the Authority’s public housing accounts. HUD will
            determine whether the document formally releases the Authority from the
            improper setoff provisions.

Comment 9   We revised the report and corrected the Authority’s mission statement.




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Comment 10 We revised the report to correctly state the ownership of Platte Valley
           Apartments.

Comment 11 We revised the report to correctly describe the management structure of Orchard
           Gardens.

Comment 12 As explained in comments 3 and 6, HUD began questioning the Authority’s use
           of public housing funds for nonfederal development startup costs in 2001. The
           chief executive officer told HUD that the funds used were from the Authority’s
           5(h) program. She also told HUD that the Authority expected to repay the funds
           within the next year. However, the Authority continued paying for nonfederal
           development costs from the public housing account. Further, the Authority did
           not separately account for the 5(h) funds from the public housing funds and
           subsequently exceeded the available 5(h) funds and inappropriately spent public
           housing funds on the nonfederal developments. The Authority’s board of
           commissioners and chief executive officer had a responsibility to ensure that the
           Authority’s nonfederal activities did not negatively affect the Authority’s public
           housing program. However, under their oversight, the Authority inappropriately
           spent nearly $860,000 in public housing funds. Therefore, we believe that
           administrative actions and sanctions are warranted.

Comment 13 We revised the report to clarify what the chief executive officer told us.

Comment 14 We agree that the Authority placed the 5(h) funds in the public housing account,
           which the Authority used as its general fund. However, as explained in the report
           and comment 7, the Authority spent $1.78 million of its public housing funds on
           the nonfederal developments and only about $922,000 of the $1.78 million was
           from 5(h) funds. The remaining $858,000, nearly half of the public housing
           account funds spent on the nonfederal developments, was public housing funds.
           Therefore, the Authority was without use of the $858,000 to support its public
           housing programs for various periods of time until the developments repaid the
           public housing program and the Authority applied state grant funds to the public
           housing program. The Authority is currently without use of the remaining
           $196,159 for its intended purposes until the Authority repays these funds.




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Appendix C

                                         CRITERIA



Consolidated annual contributions contract, part A (Public Housing – form HUD-53012A),
section 7, states that the Authority shall not in any way encumber any project or portion thereof
without prior HUD approval.

Section 9(C) states in part that the Authority shall maintain records that identify the source and
application of funds in such a manner as to allow HUD to determine that all funds are and have
been expended in accordance with each specific program regulation and requirement. Funds
may only be withdrawn from the general fund for (1) the payment of the costs of development
and operation of the projects under contract with HUD, (2) the purchase of investment securities
as approved by HUD, and (3) such other purposes as may be specifically approved by HUD.

Consolidated annual contributions contract (Section 8 – form HUD-52520), section 11(a),
states that the Authority must use program receipts to provide decent, safe, and sanitary housing
for eligible families in compliance with the United States Housing Act of 1937 and all HUD
requirements. Program receipts may only be used to pay program expenditures.

Office of Management Budget Circular A-87, attachment B, paragraph 11h(4), states in part
that when employees work on multiple activities or costs objectives, a distribution of their
salaries or wages will be supported by personnel activity reports or equivalent documentation.
Paragraph 11h(5)(e) states that budget estimates or other distribution percentages determined
before the services are performed do not qualify as support for charges to federal awards.

Nebraska Housing Agency Act, section 71-1595, states that the powers of each local housing
agency shall be vested in its commissioners in office.




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