oversight

The Housing Authority of the County of San Joaquin, Stockton, California, Did Not Administer Capital Funds in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-03-06.

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

                                                                  Issue Date
                                                                           March 6, 2008
                                                                  Audit Report Number
                                                                           2008-LA-1008




TO:         Stephen Schneller, Director, San Francisco Office of Public Housing, 9APH



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: The Housing Authority of the County of San Joaquin, Stockton, California, Did
           Not Administer Capital Funds in Accordance with HUD Requirements


                                   HIGHLIGHTS

 What We Audited and Why

      We reviewed the Housing Authority of the County of San Joaquin’s (the Authority)
      capital fund program to determine whether it used capital funds in accordance with U.S.
      Department of Housing and Urban Development (HUD) rules and regulations. The HUD
      San Francisco Office of Public Housing requested the review due to concerns about the
      use of capital funds.

 What We Found


      The Authority did not use capital funds in accordance with requirements. Specifically,
      the Authority

             ƒ   Used $175,775 to absorb shared administrative costs of other housing
                 programs,

             ƒ   Improperly charged $114,771 in ineligible indirect administrative fees,

             ƒ   Recorded an additional $77,188 in questioned costs to its capital fund grant
                 and,
            ƒ   Did not have policies and procedures in place to ensure accurate and complete
                financial information.

What We Recommend

     We recommend that the Director of HUD’s San Francisco Office of Public Housing
     require the Authority to repay HUD and reimburse the capital fund $175,775 for shared
     administrative costs of other housing programs and that it repay HUD and reimburse the
     capital fund for $114,771 in ineligible administrative fees. We also recommend that the
     Authority remove liabilities in the amount of $77,188 from its accounting records and
     that the Authority establish policies and procedures to ensure it spends and supports its
     use of capital funds in accordance with HUD requirements in the future.

     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 Authority a draft report on February 12, 2008, and held an exit
     conference with officials on February 19, 2008. The Authority provided written
     comments on February 26, 2008. The Authority generally agreed with our audit report
     but requested alternative remedies for some of the 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.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
   Finding 1: The Authority Did Not Administer Capital Funds in Accordance with   5
              HUD Requirements

Scope and Methodology                                                             10

Internal Controls                                                                 11



Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use              12
   B. Auditee Comments and OIG’s Evaluation                                       13
   C. Criteria                                                                    23




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                      BACKGROUND AND OBJECTIVES

The Housing Authority of the County of San Joaquin (Authority) is responsible for providing
decent, safe, and affordable housing for low-income families, the elderly, and the disabled. The
Authority, established by state legislation and federally funded, has been continually serving the
low-income population of San Joaquin County since 1942.

The Authority distributes 4,857 housing choice vouchers and operates 1,075 public housing
development units. It also operates State of California migrant housing units, United States
Department of Agriculture farm labor housing units, and market-rate housing units.

The mission of the Authority is to provide and advocate for affordable, attractive, and safe living
environments and to provide opportunities to become self-sufficient for persons of very low to
moderate income. A seven-member board of locally appointed commissioners and
approximately 100 staff members implement and manage the County of San Joaquin’s mandates.

Our objective was to determine whether the Authority used capital funds in accordance with
HUD requirements.




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                                RESULTS OF AUDIT

Finding 1: The Authority Did Not Administer Capital Funds in
Accordance with HUD Requirements

The Authority did not properly administer $369,415 of the $4.6 million in fiscal years 2003 and
2004 capital funds it received in accordance with HUD requirements. This condition occurred
because the Authority did not have the necessary policies and procedures in place regarding the
use and recording of capital funds. Specifically, the Authority used capital funds to incur
ineligible administrative expenses, absorb shared administrative costs of other housing programs,
incur unsupported expenditures, and pay for non-HUD program expenses. In addition, it did not
ensure that financial information was accurate and complete. As a result, the program paid for
$369,415 in questioned costs, and the public housing program was deprived of scarce HUD
funds.



 Administration of Capital
 Funds


       We reviewed the Authority to determine whether it administered capital funds in
       accordance with HUD requirements. HUD established the program to assist the
       Authority in carrying out capital and management activities at existing public housing
       developments to ensure that such developments continue to be available to serve low-
       income families.

 The Authority Improperly Used
 $175,775 in Capital Funds to
 Absorb Shared Administrative
 Costs of Other Housing
 Programs


       The Authority used $243,776 in capital funds for shared administrative and management
       improvement costs. Of this amount, the Authority used its 2003 and 2004 capital fund
       grants to improperly absorb $175,775 in costs that should have been paid for by the
       Authority’s other programs. This includes $131,197 spent using funds from the closed
       2003 grant. The Authority was required to expend all 2003 funds before August 14,
       2007. The remaining $44,578 was spent using funds from the closed 2004 grant. This
       grant remains open through September 13, 2008. It used these funds for centralized
       administrative costs including renovations to its administration building and purchases of
       centralized network hardware and software. The Authority operates several different
       housing programs out of its central administration building including its low-rent

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     housing, Section 8 (Housing Choice Voucher and Project-Based Voucher), State of
     California Migrant, U. S. Department of Agriculture Rural Housing, and market-rate
     housing programs. The Authority conducts its centralized management, accounting,
     information technology, and other administrative functions for all of its programs in this
     building. Therefore, all of its programs benefitted from the improvements. Although
     HUD permits the Authority to use capital funds to pay for a portion of these
     improvements, it must only allocate the portion of costs that directly benefit the public
     housing program. The remaining costs must be allocated to its other programs that
     benefitted from the improvements. However, the Authority did not have policies and
     procedures in place for its capital fund program to allocate these costs to its other
     programs. Based on its allocation plan, $175,775 of $243,776 in centralized
     administrative costs should have been allocated to its other programs. As a result, the
     capital fund program paid for $175,775 in ineligible costs, which deprived the public
     housing program of scarce HUD funds.

The Authority Improperly
Charged $114,771 in Ineligible
Indirect Administrative Fees

     The Authority improperly charged $114,771 in ineligible indirect administrative fees to
     its fiscal years 2003 and 2004 capital fund grants. Of this amount, $80,366 was spent
     using funds from the closed 2003 grant. The Authority was required to expend all 2003
     funds before August 14, 2007. The remaining $34,405 was spent using funds from the
     closed 2004 grant. This grant remains open through September 13, 2008.

     HUD requirements applicable to the fiscal years 2003 and 2004 grants state that indirect
     administrative fees are ineligible. The Authority misinterpreted HUD requirements and
     improperly applied HUD’s new asset management regulations to its 2003 and 2004
     grants. It intended to implement the fees earlier than required to determine how the
     financial changes of asset management would affect its operations. HUD’s new asset
     management regulations permit the Authority to charge an administrative or management
     fee for managing its capital fund grants issued after October 1, 2007, not retroactively.
     As a result, the Authority charged $114,771 in indirect administrative fees to its 2003 and
     2004 grants in violation of HUD requirements.

The Authority Incurred $1,681
in Unsupported and Ineligible
Expenses

     The Authority incurred $1,681 in unsupported and ineligible expenses for its 2003 grant.
     Of this amount, it could not provide supporting documentation for $1,346 in capital fund
     expenditures and used $335 for non-HUD program expenses. This occurred because it
     did not have policies and procedures in place to ensure that it spends capital funds in
     accordance with HUD requirements.

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     According to HUD requirements, the Authority must maintain source documentation for
     all expenditures, including the capital fund program. During our review, it was unable to
     provide supporting documentation for $1,346 in capital fund expenditures. As a result,
     there was no assurance that it used $1,346 for eligible purposes. In addition, it used $335
     for expenses tied to one of its non-HUD properties. The Authority may not use capital
     funds for non-HUD properties. As a result, the capital fund program paid for $335 in
     ineligible costs.

The Authority Charged an
Additional $77,188 in
Questioned Costs to Its Capital
Fund Grant



     The Authority recorded $77,188 in questioned costs to its fiscal year 2004 grant. Of this
     amount, $38,414 was for ineligible indirect administrative fees and $38,774 for shared
     administrative costs of other housing programs. This occurred because it did not have
     policies and procedures in place to ensure that it spends capital funds in accordance with
     HUD requirements. The Authority operates its capital fund on a reimbursement system,
     and HUD had not reimbursed the Authority for these costs. When the Authority incurs a
     capital fund expense, it pays the expense through its centralized check writing account. It
     then codes the invoice and payment in its accounting system as a capital fund expense. It
     tracks the amount of funds the capital fund owes the centralized account. Once the fund
     has accumulated a large amount of expenses, the Authority submits an expense voucher
     to HUD for drawdown in the Line Of Credit Control System. Upon HUD approval,
     HUD disburses the funds into the Authority’s centralized account. The original capital
     fund expense is then reconciled in its accounting system. HUD had not yet reimbursed
     these costs, but the Authority coded the costs to the capital fund in its accounting system.
     As a result, we are reporting these costs separately from other questioned costs identified
     in the report.

The Authority Did Not Have
Policies and Procedures in Place
to Ensure Accurate and
Complete Financial
Information

     The Authority did not properly account for $351,773 of more than $2.1 million in fiscal
     year 2003 capital fund grants. This condition occurred because it did not have policies
     and procedures in place to ensure accurate and complete financial information for its
     capital fund program. As a result, it reported inaccurate financial data related to its fiscal
     year 2003 grant.



                                               7
     The Authority incorrectly coded $351,773 in capital fund expenditures to incorrect public
     housing developments. For example, it spent $37,008 in capital funds on roofing at its
     Conway Homes public housing development in Stockton, California. However, it
     entered the expense to its Diablo Homes development located in Tracy, California.
     Discussions with the Authority indicated the incorrect coding of invoices was due to
     human error by an employee who no longer worked there. In response to the problem,
     the Authority implemented improved internal controls in which one employee would
     code the invoice and another would approve the invoice coding before submission of the
     invoice to the finance department. The Authority believed the new procedures would
     minimize any future coding problems.

     Although the Authority inaccurately reported the use of its capital funds, it did use the
     funds for its public housing developments. HUD requirements permit fungibility,
     transferring and allocating of program funds among developments. However, the
     Authority must ensure that the changes in funding allocation are reported to HUD. In this
     case, it used the misreported funds in accordance with HUD requirements but did not
     properly code the expenses to ensure that HUD had an accurate and complete report of
     capital fund use. The Authority was implementing corrective actions to address any
     future instances and to ensure that its annual plans, invoices, and accounting records are
     accurate and complete. As a result, we did not question the $351,773 in expenditures
     charged to the 2003 grant.

Conclusion



     The Authority did not administer $369,415 of $4.6 million in capital funds in accordance
     with HUD requirements. This condition occurred because it did not have the necessary
     policies and procedures in place regarding the used and recording of capital funds. As a
     result, the program paid for $369,415 in questioned costs, and the public housing
     program was deprived of scarce HUD funds needed to ensure safe, decent, and quality
     housing for low-income families.

Recommendations

     We recommend that the Director of the Office of Public Housing require the Authority to

        1A. Repay HUD $131,197 from its other programs which benefitted from
            improvements and did not pay the appropriate allocation of administrative costs
            since it did not properly expend these funds before the grant deadline.

        1B. Reimburse the 2004 capital fund grant $44,578 from its other programs which
            benefitted from improvements and did not pay the appropriate allocation of
            administrative costs.



                                             8
1C. Repay HUD $80,366 from nonfederal funds for ineligible administrative fees
    charged to its 2003 capital fund grant since funds were not properly expended
    before the grant deadline.

1D. Repay $34,405 to the Authority’s capital fund program for ineligible
    administrative fees charged to its 2004 capital fund grant.

1E. Remove $77,188 ($38,414 in administrative fees and $38,774 for shared
    administrative costs of other housing programs) in 2004 capital fund grant
    expenses from its accounting records and ensure that it does not charge these
    costs to the capital fund program in HUD’s Line of Credit Control System.

1F. Provide supporting documentation for $1,346 in unsupported 2003 capital fund
    program expenses or repay HUD for those expenses from nonfederal funds.

1G. Reimburse HUD $335 from nonfederal funds for non-HUD program expenses.

1H. Establish policies and procedures for the capital fund program to ensure that it
    properly allocates shared costs to all of its housing programs.

1I.   Establish and implement adequate controls and procedures to ensure it spends
      funds in accordance with HUD requirements and that financial documents such
      as invoices, annual plans, and financial reports are accurate and complete when
      issued to HUD for review.




                                     9
                        SCOPE AND METHODOLOGY

We performed on-site work at the Authority, located in Stockton, California, from August
through December 2007. Our review generally covered the Authority’s fiscal years 2003 and
2004 capital fund grants and the period October 1, 2005, through July 31, 2007. This period was
adjusted as necessary. Our objective was to determine whether the Authority used capital funds
in accordance with HUD requirements.

To accomplish our objective, we

   ƒ   Interviewed HUD and Authority personnel to obtain information about the Authority and
       its capital fund program.

   ƒ   Reviewed Authority accounting records including audited financial statements, general
       ledgers, invoices, contracts, and other supporting documentation necessary for a complete
       review of grant transactions.

   ƒ   Reviewed HUD requirements and regulations regarding the use of capital funds.

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




                                              10
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls

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

               ƒ   Administration of the capital fund program in compliance with HUD
                   regulations,
               ƒ   Maintaining complete and accurate records, and
               ƒ   Safeguarding HUD program resources

       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:

           ƒ   The Authority did not have controls in place to ensure it only charges costs
               attributable to the capital fund program.

           ƒ   The Authority did not have controls in place to ensure it spends funds in
               accordance with HUD requirements and ensue that financial documents such as
               invoices, annual plans, and financial reports are accurate and complete when
               issued to HUD for review.


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                                   APPENDIXES

Appendix A

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

      Recommendation             Ineligible 1/    Unsupported 2/      Funds to be put
          number                                                       to better use 3/
              1A                    $131,197
              1B                     $44,578
              1C                     $80,366
              1D                     $34,405
              1E                                                        $77,188
              1F                                     $1,346
              1G                        $335

            Totals                  $290,881         $1,346             $77,188


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 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.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         13
14
Comment 1




Comment 2




            15
Comment 3




Comment 4




            16
Comment 5




Comment 6




            17
Comment 7




            18
Comment 8




Comment 9




            19
20
                         OIG Evaluation of Auditee Comments

Comment 1   OIG disagrees with the Authority's proposed recommendation. The Authority
            cannot substitute eligible expenses in place of the ineligible expenses since it has
            missed the August 14, 2007 expenditure deadline. The expenditure requirement
            is specifically cited in 24 CFR 905.120(d) (see appendix C). HUD's right to
            recapture the funds is cited in 24 CFR 905.120(e) which states "Right of
            Recapture. Any obligation entered into by a PHA is subject to HUD's right to
            recapture the obligated amounts for violation by the PHA of the requirements of
            this section." Since the grant is closed, the Authority must repay these ineligible
            costs to HUD.

Comment 2   OIG agrees that the 2004 capital fund grant is still open for expenditures but
            disagrees with the proposed recommendation. The Authority needs to reimburse
            its 2004 capital fund grant from its other programs which benefitted from the
            improvements and did not pay the appropriate allocation of administrative costs.
            After repayment to the 2004 capital fund grant by these other programs, the
            Authority may then use these funds for eligible expenses in accordance with HUD
            requirements.

Comment 3   OIG disagrees with the Authority's proposed recommendation. Since the grant is
            closed, the Authority must repay these ineligible costs to HUD. See Comment 1.

Comment 4   OIG agrees that the 2004 capital fund grant is still open for expenditures but
            disagrees with the proposed recommendation. The Authority needs to reimburse
            its 2004 capital fund grant for the ineligible administrative fees charged to its
            2004 grant. After repayment to the 2004 capital fund grant, the Authority may
            then use these funds for eligible expenses in accordance with HUD requirements.

Comment 5   We reviewed the documentation provided by the Authority and have decreased
            the unsupported costs in the report by $1,174. The Authority needs to provide
            supporting documentation for the remaining $1,346 or repay HUD for those
            expenses from nonfederal funds. The Authority cannot substitute eligible
            expenses in place of the unsupported expenses (see Comment 1). Since the grant
            is closed, the Authority must support these costs or repay the unsupported amount
            to HUD.

Comment 6   OIG disagrees with the Authority's proposed recommendation. Since the grant is
            closed, it must repay these ineligible costs to HUD. See Comment 1.

Comment 7   During the audit resolution phase, the Authority will need to provide HUD
            documentation, such as copies of the general ledger, that show that the questioned
            administrative fees and shared administrative costs are not posted to the 2004
            capital fund grant in its general ledger.




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Comment 8   OIG agrees with the Authority's response. However, the Authority must monitor
            the effectiveness of its controls and procedures to ensure compliance with HUD
            requirements.

Comment 9   OIG agrees with the Authority's response. However, the Authority must monitor
            the effectiveness of its controls and procedures to ensure compliance with HUD
            requirements.




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Appendix C

                                         CRITERIA
24 CFR (Code of Federal Regulations) 968.112(n)(3): “Program benefit. Where the physical
or management improvement, including administrative cost, will benefit programs other than
Public Housing, such as Section 8 or local revitalization programs, eligible costs are limited to
the amount directly attributable to the public housing program.”

HUD Handbook 7485.3G, chapter 2-19F: “Program Benefit. Where the physical or
management improvement, including administrative cost, will benefit programs other than Public
and Indian Housing, such as Section 8 or local revitalization, eligible costs are limited to the
amount directly attributable to the Public and Indian Housing Program. For example, the HA
[housing authority] is operating 800 public housing units and 200 Section 8 units and wishes to
construct a single building for administrative employees of both programs; in such case, CGP
[capital grant program] funds may be used to pay up to 80% of the total cost since the public
housing units represent 80% of the total units operated by the HA. Another reasonable basis for
allocating costs would be the number of staff employed by the Public and Indian Housing
Program versus other programs.”

24 CFR 968.112(o)(2): “Ineligible costs. Ineligible costs include...(2) Indirect administrative
costs (overhead), as defined in OMB [Office of Management and Budget] Circular A-87.”

HUD Handbook 7485.3G, chapter 2-20D: “Ineligible Administrative and Other Related Costs.
Ineligible costs include:......8. Indirect costs (overhead).”

Attachment to PIH (Public and Indian Housing) Notice 07-9, revision to HUD Handbook
7475.1, chapter 5.2, Capital Fund Program Management Fee: “For the Capital Fund and
RHF [Replacement Housing Factor]Programs (see section 7.9 for fees for RHF grants),
management fees will become effective beginning with FFY [federal fiscal year] 2007 grants.
For FFY 2006 and prior year grants, a PHA [public housing authority] should continue to charge
actual expenses. For FFY 2007 and subsequent year grants, the PHA shall charge management
fees commencing the start of its first year under project-based budgeting and accounting.”

24 CFR 905.120: “(d) Expenditure of amounts--(1) In general. A PHA must spend any
assistance received under this part not later than four years (plus the period of any extension
approved by HUD under paragraph (b) of this section) after the date on which funds become
available to the PHA for obligation. (2) Enforcement. HUD will enforce the requirement of
paragraph (d)(1) of this section through default remedies up to and including withdrawal of the
CFP [capital fund program] funding. (e) Right of recapture. Any obligation entered into by a
PHA is subject to the HUD’s right to recapture the obligated amounts for violation by the PHA
of the requirements of this section.”

HUD Guidebook 7510.1G, PIH Low-Rent Technical Guide, II. Financial Operations and
Accounting, 6. Source Documentation: “The HA must maintain source documents and files
that support the financial transactions recorded in the books of account, and that provide an

                                                23
adequate audit trail. This includes such items as documents identifying the source of cash
receipts, cancelled checks, paid bills, payrolls, time and attendance records, tenant rent rolls,
Housing Assistance Payment (HAP) registers, investment registers, insurance policies, inventory
records, contracts, grant award documents, and the approved program budgets and revisions.”

PIH Notices 03-19, 04-15, and 05-22: “PHAs may exercise fungibility between work items but
will be required to reflect these work items in their FY...Annual Plan submissions.”

HUD’s PIH Low-Rent Technical Accounting Guide 7510.1G, chapter 2: Financial
Operations and Accounting 5. Allowable Cost: “Funds are provided by HUD to the HA for a
particular program or purpose. In each instance, the use of those funds is governed by the
program regulations, the program budget which constitutes the approved plan for expenditures of
those funds, and the applicable cost principles of OMB Circular A-87.

HUD’s PIH Low-Rent Technical Accounting Guide 7510.1G, chapter 2, section 7. Cash
Management: “Funds provided by HUD are to be used by the housing authority only for the
purposes for which the funds are authorized.”

PIH Notices 03-19, 04-15, and 05-22 state the following: “Regulatory Requirements. HUD
plans to issue a Capital Fund program regulation in the near future. Until a final rule is
published, PHAs should proceed in accordance with 24 CFR Part 968 for modernization
activities, except where statutory requirements prevail. For example, PHAs must comply with
24-month obligation and 48-month expenditure requirements of section 9(j) of the U.S. Housing
Act of 1937, as amended.”




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