Issue Date
February 20, 2008
Audit Report Number
2008-KC-1002
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, Kansas City
Region, 7AGA
SUBJECT: The Schuyler Housing Authority, Schuyler, Nebraska, Improperly Used
Public Housing Funds to Support a Non-HUD Assisted Living Program
HIGHLIGHTS
What We Audited and Why
We audited the Schuyler Housing Authority (Authority) because the U.S.
Department of Housing and Urban Development (HUD) believed that the
Authority was operating a nonfederal assisted living program to the
detriment of its public housing program.
Our objective was to determine whether the Authority improperly spent
public housing assets when developing and operating an assisted living
program.
What We Found
The Authority inappropriately used more than $78,000 in public housing
funds to pay expenses of a non-HUD assisted living program. In addition,
the Authority improperly allowed the assisted living entity to collect more
than $60,000 in public housing rent. Further, the Authority did not
maintain tenant records or accurately report tenant data to HUD for
assisted living participants.
What We Recommend
We recommend that HUD require the Authority to obtain from the non-
HUD assisted living entity repayment of approximately $54,000 for
expenses paid on its behalf as of July 2007. We also recommend that
HUD require the Authority to collect about $25,000 in public housing
tenant rents that the non-HUD entity had not transferred to the Authority
as of October 2007. We further recommend that HUD require the
Authority to implement controls to separate public housing revenues and
expenses from those of the assisted living program. Finally, we
recommend that HUD monitor the Authority to ensure that it does not
continue to inappropriately support the assisted living program.
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 January 31, 2008, and
requested a response by February 15, 2008. It provided written comments
on February 14, 2008. The Authority generally agreed with our findings
and recommendations.
The complete text of the auditee’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 Audit
Finding 1: The Authority Inappropriately Used Public Housing Funds to Pay 6
Expenses of a Non-HUD Assisted Living Program
Finding 2: The Authority Inappropriately Allowed a Non-HUD Assisted Living 11
Entity to Collect Public Housing Rents
Finding 3: The Authority Did Not Maintain Tenant Records or Report Tenant 13
Data to HUD for All Assisted Living Participants
Scope and Methodology 15
Internal Controls 16
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 17
B. Auditee Comments and OIG’s Evaluation 18
3
BACKGROUND AND OBJECTIVES
The Schuyler Housing Authority (Authority) is a small public housing authority in
Schuyler, Nebraska. It owns and operates a 49-unit high rise public housing building
(known as Schuyler Manor) and 10 scattered site units. The Authority is funded almost
exclusively by the U.S. Department of Housing and Urban Development (HUD). HUD
provided operating and capital funds to the Authority totaling $385,000 for fiscal years
2004 through 2007.
To participate in HUD’s public housing programs,
the Authority entered into an annual contributions
contract with HUD on November 6, 1995. The
contract defines the terms and conditions under
which the Authority agreed to develop and operate
all projects under the agreement. A project is any
public housing developed, acquired, or assisted by
HUD under the United States Housing Act of
1937, as amended. Further, the contract describes
the appropriate uses of HUD-provided operating
and capital funds.
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 development housing or providing supportive/social services
subject to either Title I of the United States Housing Act of 1937, as amended, or state
law.
In 2004, HUD allowed the Authority to obtain a bank loan to modernize Schuyler Manor
and set up a nonfederal assisted living program for qualified public housing tenants. The
efforts included adding a kitchen and dining facility for the assisted living program and
converting an apartment to office space for the program. The Authority completed the
modernization efforts in late 2005 at a cost of more than $950,000. In addition to the
loan proceeds of $429,000, the Authority used $401,000 in capital funds and $121,000 in
operating reserves to complete the renovations.
The Authority’s assisted living program, operated by Whispering Pines Inc. (Whispering
Pines), opened in November 2005. Whispering Pines provides a variety of services to the
public housing residents who require assisted living services. Some public housing
4
residents may also qualify for benefits under Nebraska’s Medicaid Waiver program. The
assisted living services include
• Three meals per day,
• Adult day care/socialization activities,
• Escort assistance,
• Health maintenance activities,
• Assistance with housekeeping activities and laundry,
• Medication assistance,
• Making arrangements for transportation, and
• Various personal care activities.
The Authority is governed by a five-member board of commissioners, all of whom are
also board members for Whispering Pines. The Authority’s executive director manages
the day-to-day operations of the Authority and is also the assisted living administrator for
Whispering Pines.
Our audit objective was to determine whether the Authority improperly spent public
housing assets when developing and operating an assisted living program.
5
RESULTS OF AUDIT
Finding 1: The Authority Inappropriately Used Public Housing
Funds to Pay Expenses of a Non-HUD Assisted
Living Program
The Authority inappropriately used more than $78,000 in public housing funds to pay
expenses of a non-HUD assisted living program operated by Whispering Pines. This
condition occurred because the Authority lacked policies and procedures to define the
treatment of expenses common to the Authority and Whispering Pines. In addition, the
Authority’s board of commissioners believed that public housing funds could be used for
the assisted living program until it was financially self-sustaining. As a result, the
Authority did not have sufficient public housing funds to pay its routine operating
expenses.
Improper Use of Authority
Funds for Assisted Living
Program
The Authority inappropriately used nearly $60,000 in public housing
funds for direct costs of the assisted living program. Section 9 of the
annual contributions contract between the Authority and HUD states that
the Authority may use public housing funds only for the payment of the
costs and operation of the projects covered by the annual contributions
contract. The Authority’s annual contributions contract with HUD did not
cover the assisted living program; therefore, the Authority was not
permitted to use public housing funds to pay expenses of that program.
Further, HUD’s approval letter for the assisted living program stated that
the Authority could not use public housing funds to support the provision
of assisted living services.
The following table describes the direct costs that the Authority paid on
Whispering Pines’ behalf from June 2005 through July 2007.
Direct costs
Liability insurance $ 13,810
Workers compensation insurance $ 7,417
Employee health insurance $ 16,161
Employee salaries $ 14,650
Miscellaneous costs $ 7,767
Total direct costs $ 59,805
6
The Authority added Whispering Pines to its policies for liability, workers
compensation, and employee health insurance. Consequently, the
Authority was billed and paid for Whispering Pines’ portion of the
premiums. In addition, the Authority paid for employee salaries and other
miscellaneous costs at the time that the assisted living program began in
November 2005 because Whispering Pines did not have the resources to
fund startup costs.
The Authority’s executive director notified HUD in November 2006 that
the Authority did not have sufficient public housing funds to pay for its
operations. Upon further review, HUD became aware that the Authority
had inappropriately used public housing funds to pay for Whispering
Pines’ expenses. HUD immediately notified the Authority that it must
cease using public housing funds to pay for the assisted living program
and that Whispering Pines must repay the Authority for any public
housing funds used to support its program.
The Authority did not have detailed records showing what public housing
funds that it had used to support the assisted living program. Although
Whispering Pines subsequently began repaying the Authority in limited
amounts, the Authority continued to use public housing funds to support
the assisted living program. As of July 2007, Whispering Pines had repaid
the Authority about $17,500 for the insurance premiums but still owed
nearly $20,000. Whispering Pines had also reimbursed the Authority
about $6,500 for employee salaries and other miscellaneous expenses, but
still owed more than $15,500 as of July 2007.
Overhead Costs of Assisted
Living Program Incurred by
Authority
The Authority inappropriately incurred overhead costs of the assisted
living program when it allowed Whispering Pines to use the Authority’s
space, equipment, and utilities free of charge. Although Whispering
Pines’ articles of incorporation stated that it would lease the Authority’s
property to implement the assisted living program, the Authority did not
execute a lease agreement with Whispering Pines.
Beginning in November 2005, the Authority provided Whispering Pines a
fully furnished office, kitchen, and dining facility but did not require
Whispering Pines to pay for using the space or equipment. In addition, the
Authority incurred at least $18,000 in increased utility expenses
attributable to Whispering Pines’ operations from November 2005 through
July 2007.
7
The graph below shows the Authority’s utility expenses for fiscal years
2002 through 2007, including the periods in which the Authority
renovated the public housing building and Whispering Pines implemented
the assisted living program. The Authority incurred a significant rise in
utility costs while renovating the public housing building. After
renovations were complete, the utility expenses remained significantly
higher than in past years, mainly due to the assisted living program
beginning in November 2005.
In November 2006, HUD notified the Authority that it needed to establish
and collect a reasonable monthly rent from Whispering Pines. However,
as of September 2007, Whispering Pines had not paid rent or otherwise
reimbursed the Authority for its use of public housing space, equipment,
or utilities.
Authority’s Inadequate
Controls
The Authority had not developed written policies and procedures that
defined the treatment of expenses that were common to the Authority and
Whispering Pines. Further, the Authority’s board of commissioners
believed that HUD’s restriction against using public housing funds to
support the assisted living program did not apply until the program was
financially self-sustaining.
Authority’s Financial
Problems
Because the Authority paid more than $78,000 of Whispering Pines’
expenses, it did not have sufficient funds to pay its own routine operating
expenses. The Authority’s operating account had a negative cash balance
from January to July 2007. As a result of cash shortages, the Authority
8
incurred nearly $5,000 in penalties and finance charges. These charges
included insufficient funds charges, overdraft penalties, and late fees and
finance charges from vendors. Further, the $78,000 is equivalent to more
than six months of public housing funding for the Authority .
In July 2007, the Authority had to use $10,000 of its capital funds to
sustain operations and recover from a negative cash position. Capital
funds are generally intended to be used for development, financing, and
modernization of public housing. Therefore, these funds were not
available to the Authority for these purposes .
If the Authority continues to pay Whispering Pines’ expenses, it will risk
not being able to sustain its own operations and mission to provide decent
and safe housing for low-income families, the elderly, and persons with
disabilities.
Recommendations
We recommend that the Coordinator of the Omaha Public Housing Program
Center
1A. Ensure that the Authority implements adequate policies and procedures
to segregate its direct and overhead expenses from those of Whispering
Pines. This will ensure that an estimated $102,000 that HUD will
provide to the Authority for its operations in the next year will be put
to better use.
1B. Require the Authority to obtain repayment from Whispering Pines for
the expenses paid on Whispering Pines’ behalf, including the $35,521
for direct costs of the assisted living program and approximately
$18,711 for its share of utility expenses that had not been repaid to the
Authority as of July 2007. Repayments should be deposited into the
Authority’s public housing program account.
1C. Require the Authority to obtain repayment from Whispering Pines or
other nonfederal sources for penalties and finance charges, including
$4,901 identified as of July 2007. Repayments should be deposited
into the Authority’s public housing program account.
1D. Ensure that the Authority executes an acceptable lease agreement with
Whispering Pines for its use of the public housing space, equipment,
and utilities.
1E. Ensure that the Authority collects rent retroactively from Whispering
Pines for the period from November 2005 to the present and in doing
9
so, consider the amount collected for utilities during this same period
as recommended in recommendation 1B.
1F. Monitor the Authority and its use of public housing funds to ensure
that it provides no additional HUD funds for Whispering Pines’
operations. If HUD identifies additional use of HUD funds, it should
take appropriate actions, which may include requiring the Authority to
cease the assisted living program if it cannot sustain its operations
without HUD financial assistance.
1G. Take appropriate administrative actions against the Authority for
violating the annual contributions contract with HUD and refer to
finding 2 for additional support for administrative actions.
We recommend that the Director of the Departmental Enforcement Center
1H. Impose appropriate administrative sanctions against the Authority’s
executive director and members of its board of commissioners for
violating HUD rules. Also refer to finding 2 for additional support for
administrative sanctions.
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Finding 2: The Authority Inappropriately Allowed a Non-HUD
Assisted Living Entity to Collect Public Housing
Rents
The Authority inappropriately allowed Whispering Pines to collect more than $60,000 of
public housing rent from assisted living participants. This condition occurred because the
Authority’s board of commissioners allowed its executive director to also serve as
Whispering Pines’ administrator without providing adequate oversight of her actions. As
a result, the Authority’s public housing program did not have use of all of its rent revenue
for more than 19 months and Whispering Pines owed more than $25,000 in public
housing rent to the Authority as of October 2007.
Non-HUD Entity Collected
Public Housing Rents
The Authority inappropriately allowed Whispering Pines to collect more
than $60,000 in public housing rent from November 2005 through October
2007. The Authority’s annual contributions contract provides that the
Authority is to deposit all public housing operating receipts, including
tenant rents, for the Authority to use in conducting its public housing
program.
The Authority’s executive director, who also served as the assisted living
administrator for Whispering Pines, told us that it was too complicated for
tenants to write separate checks for public housing rent and assisted living
services. Therefore, she allowed tenants to write one check to Whispering
Pines that included both costs. Consequently, Whispering Pines collected
public housing rents and deposited them into its account. However, the
Authority did not ensure that Whispering Pines transferred the rents to the
public housing program.
No Separation of Duties
Each housing authority’s board of commissioners is responsible for the
operations of the authority. In this capacity, the Authority’s board of
commissioners allowed its executive director to also serve as Whispering
Pines’ administrator without providing adequate oversight of her actions.
Therefore, the executive director solely controlled the financial activities
of both organizations for nearly the entire period of Whispering Pines’
operations.
11
Lost Use of Tenant Rent
Revenue
The Authority’s public housing program did not have use of all of its rent
revenue for more than 19 months. Further, Whispering Pines owed more
than $25,000 in public housing rent to the Authority’s public housing
program as of October 2007.
As reported in finding 1, the Authority experienced financial difficulties
due to cash shortages, which could have been alleviated if it had collected
the public housing rents from Whispering Pines. If the Authority
continues to allow Whispering Pines to collect public housing rents, the
Authority will continue to risk its public housing revenues and ability to
meet its own financial responsibilities.
Recommendations
We recommend that the Coordinator of the Omaha Public Housing Program
Center
2A. Require the Authority to immediately discontinue the practice of
allowing Whispering Pines to collect public housing rents.
2B. Ensure that the Authority implements policies and procedures to
segregate its public housing revenues from the assisted living program.
The policies and procedures should require tenants to pay public
housing rents separately from assisted living services, or for the
Authority to collect the rents and assisted living service fees and then
transfer the service fees to Whispering Pines.
2C. Require the Authority to collect the correct amount of public housing
rents owed by Whispering Pines (including approximately $25,000
owed as of October 2007). Repayments should be deposited into the
Authority’s public housing program account.
2D. Monitor the Authority to ensure that the board of commissioners
provides adequate oversight of the executive director’s actions or
provide for separate management of the two organizations.
2E. Monitor the Authority’s collection of rent from the assisted living
participants to ensure that these funds are deposited into the public
housing program account.
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Finding 3: The Authority Did Not Maintain Tenant Records or
Report Tenant Data to HUD for All Assisted Living
Participants
The Authority did not maintain tenant records or accurately report tenant data to HUD for
6 of 15 assisted living participants. This condition occurred because the Authority’s
board of commissioners allowed its executive director to also serve as Whispering Pines’
administrator without providing adequate oversight of her actions. As a result, HUD’s
ability to make appropriate funding decisions or to detect fraud, waste, and abuse in the
public housing program may have been negatively affected.
No Public Housing Records for
Assisted Living Participants
The Authority did not maintain tenant records for 6 of 15 assisted living
participants. Federal regulations require public housing agencies to
maintain complete and accurate records for at least three years. All
assisted living participants were also public housing tenants. Therefore,
the Authority should have maintained tenant records, including eligibility
determinations and tenant leases, for all assisted living participants.
In addition, the Authority did not report required tenant data to HUD for
the same six assisted living participants residing in the public housing
building. Therefore, HUD was not aware that the six tenants and their
families were occupying public housing units. Federal regulations require
public housing agencies to report 100 percent of their tenant data to HUD.
The Authority’s executive director said that she did not know why she did
not have certain tenant records for the six assisted living participants, or
why she did not report the required tenant information to HUD.
Inadequate Oversight by
Board of Commissioners
As previously explained, housing authorities’ boards of commissioners are
responsible for their operations. In this capacity, the Authority’s board of
commissioners allowed its executive director to also serve as Whispering
Pines’ administrator without providing adequate oversight of her actions.
The executive director was responsible for maintaining records for both
organizations for nearly the entire period of Whispering Pine’s operations.
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HUD Oversight of Authority
Hindered
Inaccurate or incomplete information submitted to HUD affected its
ability to make appropriate funding decisions or to detect fraud, waste, and
abuse in the public housing program.
Recommendations
We recommend that the Coordinator of the Omaha Public Housing Program
Center
3A. Require the Authority to document that all assisted living participants
are eligible public housing tenants and have entered into public
housing lease agreements for the appropriate rent amount.
3B. Ensure that the Authority reports required tenant information to HUD
for all assisted living tenants.
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SCOPE AND METHODOLOGY
Our review generally covered the period from January 2004 through October 2007. To
achieve our audit objective, we conducted interviews with the Authority’s current and
former executive directors and its development consultant and former fee accountant. We
also interviewed HUD staff in the Omaha, Nebraska, and Kansas City, Kansas, Offices of
Public Housing. In addition, we interviewed assisted living participants and/or their
responsible parties.
We reviewed the Authority’s policies and procedures, general ledgers, audited financial
statements, construction budgets, invoices, check registers, rent registers, and construction
progress reports. We also reviewed the Authority’s five-year administrative plan, board of
commissioners meeting minutes, correspondence with HUD, annual contributions contracts,
and bank loan documents. Further, we reviewed Whispering Pines’ articles of
incorporation, bylaws, board of directors meeting minutes, line of credit documents, general
ledgers, and bank statements. In addition, we reviewed federal and state regulations.
We analyzed the Authority’s historical utility costs for its fiscal years 2002 through 2005.
Using its historical average annual increase of 6.3 percent, we estimated the Authority’s
utility costs for fiscal years 2006 and 2007 if it had not added significant building space and
a commercial kitchen to the public housing property for the purposes of the assisted living
program. We estimated that the Authority incurred about $18,000 in increased utility
expenses due to adding the assisted living program to the Authority’s public housing
building.
We reviewed reports generated by the Authority’s computerized accounting system for
evidence of expending public housing assets without prior HUD approval. We used the
computerized data for background information purposes only. We did not conduct tests
of the data or controls governing the data. We did not use the data to support audit
conclusions but used only original source documents to reach our conclusions.
We assigned a value to the potential savings to the Authority if HUD implements
recommendation 1A. If HUD implements this recommendation requiring HUD to ensure
that the Authority implements adequate policies and procedures to segregate its expenses
from those of the non-HUD assisted living program, it will protect an estimated $102,000
that HUD will provide to the Authority for its operations in the next year. The estimate will
be a recurring benefit; however, our estimate reflects only the initial year of this benefit.
We performed on-site work from April through November 2007 at the Authority’s office
located at 712 F Street in Schuyler, Nebraska.
We performed our review in accordance with generally accepted government auditing
standards.
15
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 item is a significant
weakness:
• The Authority lacked adequate controls to ensure compliance with
federal regulations and its annual contributions contract with HUD
(see findings 1, 2, and 3).
16
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Unreasonable or Funds to be put
number unnecessary 2/ to better use 3/
1A $102,000
1B $54,232
1C $4,901
2C $25,000
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/ Unreasonable/unnecessary costs are those costs not generally recognized as
ordinary, prudent, relevant, and/or necessary within established practices.
Unreasonable costs exceed the costs that would be incurred by a prudent person in
conducting a competitive business.
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.
The $102,000 represents the estimated amount of operating and capital funds that
will be available to the Authority within the next year. If HUD ensures that the
Authority implements appropriate policies and procedures to segregate public
housing expenses from those of the assisted living program, HUD funds will be
used for their intended purposes.
17
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
18
Comment 1
19
OIG Evaluation of Auditee Comments
Comment 1 The Authority’s board of commissioners and its executive director are
responsible for the Authority’s operations, including ensuring that the
Authority does not violate federal requirements. As explained in the
report, the Authority violated federal requirements when it improperly
spent public housing funds on the assisted living program and caused the
Authority to encounter significant financial difficulties. Further, it
continued to use federal funds to support the assisted living program after
HUD instructed it to cease using federal funds for the nonfederal program.
In addition, the board of commissioners and executive director
inappropriately allowed the assisted living entity to collect and maintain
control of the public housing rents. This violated federal requirements and
contributed to the Authority’s financial problems because the Authority
did not have use of the rent funds to meet its own obligations. Therefore,
we believe that administrative actions and sanctions are warranted.
20
The Schuyler Housing Authority, Schuyler, Nebraska, Improperly Used Public Housing Funds to Support a Non-HUD Assisted Living Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-02-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)