oversight

The Housing Authority of the City of San Buenaventura, San Buenaventura, California, Did Not Manage HUD Program Funds in Accordance with HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-05-28.

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

                                                                 Issue Date
                                                                              May 28, 2008
                                                                 Audit Report Number
                                                                          2008-LA-1010




TO:         K.J. Brockington, Director, Los Angeles Office of Public Housing, 9DPH



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

SUBJECT: The Housing Authority of the City of San Buenaventura, San Buenaventura,
           California, Did Not Manage HUD Program Funds in Accordance with HUD
           Requirements


                                   HIGHLIGHTS

 What We Audited and Why

      We audited the Housing Authority of the City of San Buenaventura (Authority) in
      response to a hotline complaint alleging mismanagement and misuse of U.S. Department
      of Housing and Urban Development (HUD) funding. Our overall audit objective was to
      determine whether the Authority’s financial activities, operations, and controls complied
      with HUD requirements.

 What We Found


      The Authority stopped paying its Low Rent Public Housing program’s Payment-in-Lieu
      of-Taxes obligations to the City of San Buenaventura (City) without City or HUD
      approval and used the associated HUD funds to acquire non-HUD-related property.
      Additionally, it used Low Rent Public Housing program funds to temporarily cover its
      Housing Choice Voucher program overspending for fiscal year 2007, placing both
      programs at risk.
What We Recommend


     We recommend that HUD require the Authority to comply with HUD’s requirements
     regarding the use of Payment-in-Lieu-of-Taxes funds, reimburse the Low Rent Public
     Housing program $496,137 from nonfederal funds, and implement written procedures for
     the accounting and use of both Housing Choice Voucher and Low Rent Public Housing
     program funds.

     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 with a discussion draft report on April 21, 2008, and held an
     exit conference with the Authority’s officials on May 5, 2008. The Authority also
     provided written comments on May 5, 2008. It generally disagreed with our report
     findings.

     The complete text of the auditee’s response without the voluminous attachments, along
     with our evaluation of that response, can be found in appendix B of this report. The
     attachments will be made available upon request.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
      Finding 1: The Authority Disregarded Its Payment-in-Lieu-of-Taxes Obligation   5
                 and Misused HUD Funds
      Finding 2: The Authority Used Low Rent Public Housing Funds to Cover           8
                 Housing Choice Voucher Program Overspending

Scope and Methodology                                                                11

Internal Controls                                                                    12

Appendixes
      A. Schedule of Questioned Costs and Funds to Be Put to Better Use              13
      B. Auditee Comments and OIG’s Evaluation                                       14
      C. Criteria                                                                    24




                                            3
                     BACKGROUND AND OBJECTIVES

The Housing Authority of the City of San Buenaventura (Authority) was created on September
12, 1949, by the City Council of San Buenaventura. It is a state chartered, federally funded,
nonprofit agency with a locally appointed board of commissioners managing and administering
housing assistance programs to provide decent, safe, and affordable housing to low- and
moderate-income families.

The Authority administers the U.S. Department of Housing and Urban Development (HUD)-
funded Low Rent Public Housing and Section 8 Housing Choice Voucher programs. It operates
716 public housing units and manages 1,189 vouchers, with an open waiting list of
approximately 2,300 applicants. It was awarded $719,409 under the Low Rent Public Housing
program, $10,709,814 under the Housing Choice Voucher program, and $1,252,154 under the
Public Housing Capital Fund program for the calendar year 2006.

We received a hotline complaint alleging that the Authority mismanaged and misused federal
funds under the Housing Choice Voucher and Low Rent Public Housing programs. Our overall
audit objective was to determine whether the Authority’s financial activities, operations, and
controls complied with HUD requirements.




                                               4
                                RESULTS OF AUDIT

Finding 1: The Authority Disregarded Its Payment-in-Lieu-of-Taxes
Obligation and Misused HUD Funds
The Authority disregarded its Payment-in-Lieu-of-Taxes obligation, contrary to its consolidated
annual contributions contract and cooperation agreement requirements, and used at least
$496,137 in Low Rent Public Housing program funds to purchase nonfederal housing. Authority
management was unaware of HUD regulations and agreements restricting the use of Payment-in-
Lieu-of-Taxes funds and the use of Low Rent Public Housing program funds. As a result, these
funds are no longer available for the operation of the Low Rent Public Housing program or to
cover the Authority’s obligations to the City of San Buenaventura (City), putting the program at
risk.




 Payment-in-Lieu-of-Taxes
 Obligation Requirements Were
 Ignored


       In May 2004 and again in October 2006, the Authority requested a waiver from the City
       for the Authority’s obligation to make annual Payment-in-Lieu-of-Taxes payments
       pursuant to the terms of its cooperation agreement. The Authority proposed that such
       funds be used for the increase in supply of low/very low-income housing for the City.

       The City did not provide the Authority with a written waiver of its Payment-in-Lieu-of-
       Taxes obligation. Rather, it notified the Authority that it would recommend that its
       council deny the Authority’s initial request for the waiver. Additionally, based on
       correspondence between the City and the Authority, the City made it clear that it did not
       intend to grant the Authority’s request. According to the City, withholding the Payment-
       in-Lieu-of-Taxes payment would be detrimental to its own fiscal operations. Not only
       would the waiver decrease the amount of funds available to the City, it would also
       increase its service costs as the Authority would increase the supply of housing, as stated
       in the Authority’s request.

       Although the Authority affirmed that it had not received a written waiver, it had withheld
       payment since fiscal year 2005.

       In addition, the Authority had requested HUD’s endorsement for the amendment of its
       cooperation agreement in January 2004, as required in its annual contributions contract.
       However, even though HUD provided sample formats to be used in obtaining a Board
       approved waiver for annual Payment-in-Lieu-of-Taxes payments from the City, there is



                                                5
         no indication that HUD formally approved the Authority's request. Furthermore, current
         Authority management officials stated that they did not believe HUD approval was
         required. HUD was therefore not informed of the City’s lack of approval or the
         Authority’s subsequent actions.

    The Payment-in-Lieu-of-Taxes
    Obligation Was Used to
    Determine Operating Subsidy

         The Authority’s Low Rent Public Housing program operating subsidy funding is
         determined by including a Payment-in-Lieu-of-Taxes expense in its calculation. The
         Authority reported expenses for Payment-in-Lieu-of-Taxes for fiscal years 2005 and
         2006 of $244,373 and $245,982, respectively, in its financial submissions to HUD. For
         its calculation of its Low Rent Public Housing program’s operating subsidy for calendar
         year 2007, the Authority requested additional funding in the amount of $243,352 for its
         Payment-in-Lieu-of-Taxes obligation and reported $233,794 in its financial submission
         for the fiscal year. HUD provided additional funding to the Low Rent Public Housing
         program’s operating subsidy in all three years for this expense. As a result, the Authority
         had been receiving funding from HUD for Payment-in-Lieu-of-Taxes obligations it had
         not met or otherwise spent on the operation of the Low Rent Public Housing program.

    Low Rent Funds Were Used for
    Nonfederal Purposes

         In December 2006, the Authority transferred the Payment-in-Lieu-of-Taxes obligated
         funds for fiscal years 2005 and 2006, totaling $496,137, 1 to a housing trust fund for the
         purchase of property that was to be used to develop nonfederal low-income housing units.
         These funds were then used for the downpayment on a non-HUD property at 1150 North
         Ventura Avenue. As of the end of our audit period, the Authority had not yet moved the
         2007 funds to its housing trust fund, although these funds were also at risk. Management
         incorrectly considered Low Rent Public Housing program funds set aside for the
         Payment-in-Lieu-of-Taxes obligation as being available for use for purposes other than
         the operation of the Low Rent Public Housing program, despite the requirement of the
         consolidated annual contributions contract and HUD Guidebook 7510.1G restricting the
         use of the funds. Even if the City had agreed to waive the obligation, Low Rent Public
         Housing funds must be used for the operation of the Low Rent Public Housing program.




1
  The total low-rent public housing program funds that were transferred exceeded the applicable payment-in-lieu-of-
taxes expenses for fiscal years 2005 and 2006 by $5,782.


                                                        6
Conclusion



     The Authority disregarded its Payment-in-Lieu-of-Taxes obligations and requirements for
     fiscal years 2005 and 2006 and calendar year 2007. Since this obligation is used to
     determine the Authority’s operating subsidy, it is not only essential but required that
     HUD be notified of any amendments made to the Authority’s cooperation agreement.
     Instead, the Authority transferred Low Rent Public Housing program funds to its housing
     trust fund and used them for the purchase of property to develop nonfederal low-income
     housing units. As a result, the Authority received HUD funding for the operation of its
     Low Rent Public Housing program that it did not expend for the continued operation of
     that program. Further, the Authority’s use of HUD obligated funds on non-HUD
     program activities put its Low Rent Public Housing program at risk that the necessary
     funds would not be available when the Payment-in-Lieu-of-Taxes had to be paid.

Recommendations



     We recommend that the Director of the Los Angeles Office of Public and Indian Housing
     require the Authority to

     1A. Comply with the annual contributions contract and the cooperation agreement with
         the City by settling its Payment-in-Lieu-of-Taxes obligations to the City.

     1B. Reimburse the Low Rent Program $496,137 from nonfederal funds for fiscal years
         2005 and 2006 funds paid to the housing trust fund.

     1C. Cease all transfers of Payment-in-Lieu-of-Taxes obligated funds to the housing trust
         fund and demonstrate that calendar year 2007 funding in the amount of $243,353
         has not been transferred to the housing trust fund or return the funds to the Low
         Rent Public Housing program from nonfederal funds.




                                            7
Finding 2: The Authority Used Low Rent Conventional Housing Funds
to Cover Housing Choice Voucher Program Overspending
The Authority overspent its Section 8 Housing Choice Voucher program funding for fiscal year
2007 and used at least $165,647 of its Low Rent Public Housing program funds to cover the
deficit in violation of HUD requirements. The Authority’s insufficient accounting controls and
lack of written policies and procedures contributed to its cash management problems. Although
the Authority restored all borrowed funds, if this practice continues, it may leave the Authority
with insufficient resources to operate its programs and place both the Housing Choice Voucher
and Low Rent Public Housing programs at risk.



 The Authority Overspent Its
 Available Housing Choice
 Voucher Program Funding


       The Authority overspent its available Housing Choice Voucher program funding and
       used Low Rent Public Housing program funds to cover operational deficits. During the
       period October 31, 2006, through May 31, 2007, the Authority experienced deficits in its
       Housing Choice Voucher program as follows:

          Date     Number of units Total housing    Total funds     Overspent      Cumulative
                      leased        assistance      available for    housing         housing
                                    payments          housing       assistance      assistance
                                                     assistance                       deficit
         Oct-06            1,140        $ 942,429      $ 924,016      $ (18,413)   $     (18,413)
         Nov-06            1,151          937,386         914,717       (22,669)         (41,082)
         Dec-06            1,164          965,952         902,375       (63,577)       (104,659)
         Jan-07            1,164          963,877         904,621       (59,256)       (163,915)
         Feb-07            1,172          981,907         903,698       (78,209)       (242,124)
         Mar-07            1,173          994,899         907,024       (87,875)       (329,999)
         Apr-07            1,170          981,688         903,667       (78,021)       (408,020)
         May-07            1,173          981,455         903,890       (77,565)       (485,585)
                  Totals               $7,749,593     $7,264,008     $ (485,585)     $ (485,585)

       As of September 30, 2006 (end of fiscal year 2006), the Authority maintained Low Rent
       Public Housing program reserves of $606,510 and Housing Choice Voucher program
       reserves of $319,938 (operating reserves of $201,316 and administrative reserves of
       $118,622). To cover the deficits, the Authority transferred all of its Housing Choice
       Voucher program reserves (operating and administrative) from its investment account to
       its general checking account. However, it only had enough reserves to cover its Housing
       Choice Voucher program deficit through February 2007. Therefore, it overdrew at least
       $165,647 to cover the Housing Choice Voucher program payments, and the Authority’s


                                                8
    records indicated that only the Low Rent Public Housing program had enough funds to
    cover these deficits. The Authority’s use of Low Rent Public Housing program funds to
    cover Section 8 expenditures is a violation of the Authority’s annual contributions
    contract and HUD Guidebook 7510.1G requirements.

    The Authority received its calendar year 2007 funding in June of 2007, nine months into
    the fiscal year. The calendar year 2007 funding increase was applied retroactively to
    January 2007 and created a positive balance in the Section 8 program through its fiscal
    year ending September 30, 2007. However, it is apparent that the Authority needs to
    manage its Section 8 program more effectively to avoid funding shortfalls in reliance on
    HUD funding. Should HUD provide less than expected funding, the Authority would
    face continuing operating deficits.


The Authority Was Making
Financial Management System
Control Changes


    The Authority’s insufficient accounting controls and lack of written policies and
    procedures contributed to its cash management problems. Its financial management
    system did not sufficiently identify the changes to its Housing Choice Voucher program
    reserves and use of Low Rent Public Housing program funds. Since all program funds
    were maintained in a single checking account, with only its reserves maintained in a
    separate investment account, the Authority could tap into Low Rent Public Housing
    funds without showing the cash as having come from that program. In addition, even
    when cash was moved from the reserve account, the Authority’s financial management
    system failed to properly record the activity. Due to the absence of documented
    procedures, staff had difficulty in explaining the procedures and controls that were in
    place between fiscal years 2005 and 2007.

    However, the Authority recently began taking corrective actions to repair some of these
    weaknesses. Specifically, the Authority opened 13 new bank accounts to supersede its
    current single checking account used to handle all program funds. The new bank
    accounts are separated by program (Section 8, Low- Rent, Public Housing Capital Fund,
    etc.) and by asset management project. Additionally, the Authority was restructuring its
    general ledger system to better track cash, expenses, and revenues. The new system
    would consist of a master general ledger and subsidiary ledgers for each specific program
    and each specific asset management project. Lastly, the Authority planned to create
    written accounting policies and procedures.




                                            9
Conclusion


     The Authority used Low Rent Public Housing program funds to cover its Housing Choice
     Voucher program overspending for fiscal year 2007. Although the Authority restored all
     borrowed funds, if this practice continues, it may leave the Authority with insufficient
     resources to operate its programs and place both the Housing Choice Voucher and Low
     Rent Public Housing programs at risk. The Authority was working to create written
     accounting policies and procedures to correct these deficiencies; however, as of the end
     of our fieldwork, the changes had not been implemented.


Recommendation



     We recommend that the Director of the Los Angeles Office of Public and Indian Housing
     require the Authority to

     2A. Implement written procedures and controls to ensure that sufficient and appropriate
         program funds are available before use and to prevent the use of Low Rent Public
         Housing and Housing Choice Voucher program funds to cover the expenditures of
         other programs.




                                            10
                        SCOPE AND METHODOLOGY

We performed our on-site audit work from September 10 through October 25, 2007, at the
Authority located in San Buenaventura, California. The audit generally covered the period
October 2004 through September 2007. We expanded our scope when necessary.

To accomplish our objectives, we

   •   Reviewed applicable HUD regulations under 24 CFR [Code of Federal Regulations]
       Parts 982 and 990, HUD Public and Indian Housing notices, HUD’s Program Accounting
       Handbook 7420.6, and HUD’s Low-Rent Technical Guide 7510.1G.

   •   Obtained an understanding of the Authority’s procedures, including its controls to ensure
       that it properly administered its Section 8 program.

   •   Reviewed HUD’s Los Angeles Office of Public and Indian Housing monitoring reports
       and files relating to the Authority’s financial submissions and interviewed appropriate
       personnel.

   •   Reviewed the Authority’s independent public accountant reports for fiscal years 2004
       through 2006.

   •   Interviewed Authority Finance Department personnel to acquire an understanding of its
       financial operations, practices, tracking, and controls.

   •   Reviewed the Authority’s annual contributions contract and cooperation agreement to
       determine Payment-in-Lieu-of-Taxes obligations and requirements.

   •   Performed general ledger review for fiscal years 2005 and 2006 to determine whether any
       Payment-in-Lieu-of-Taxes payments were made to the City and/or county.

   •   Interviewed City and county personnel to determine whether an agreement was made
       between the City and county with the Authority relating to the payment of its Payment-
       in-Lieu-of-Taxes obligation.

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




                                              11
                              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:

            •   Policies and procedures that management has implemented to ensure accurate,
                current, and complete disclosure of financial results.
            •   Policies and procedures that management has implemented to reasonably ensure
                that its Section 8 program funds are used in accordance with applicable laws
                and regulations.

       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 did not have sufficient controls in place to ensure that its HUD
                program funds were tracked and spent in accordance with applicable laws and
                regulations (see findings 1 and 2).




                                                12
                                   APPENDIXES

Appendix A

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

      Recommendation number               Ineligible 1/           Funds to be put to
                                                                    better use 2/
                  1B                        $496,137
                  1C                                                  $243,352

1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     policies or regulations. This includes the total Low Rent Public Housing program funds
     that were transferred to the housing trust fund. The amount exceeded the applicable
     fiscal years 2005 and 2006 Payment-in-Lieu-of-Taxes expenses by $5,782.

2/   Recommendations that funds be put to better use are quantifiable savings that are
     anticipated to occur 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. In this instance, if HUD implements our
     recommendation, $243,352 in calendar year 2007 Low Rent Public Housing funds,
     earmarked for the program’s Payment-in-Lieu-of-Taxes obligation to the City, will not be
     transferred to the Authority’s housing trust fund and used for nonfederal purposes.




                                            13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         14
15
Comment 1



Comment 2




Comment 1&3




Comment 4




              16
Comment 5




Comment 6


Comment 5




Comment 7




            17
Comment 7



Comment 5


Comment 4




            18
Comment 8




            19
                         OIG Evaluation of Auditee Comments

Comment 1   Our finding that the Authority disregarded its Payment-in-Lieu-of-Taxes
            obligation, contrary to all said agreements governing the use of $495,137 of
            Payment-in-Lieu-of-Taxes funds, without guidance from or in violation of HUD
            regulations is based on: (1) the Cooperation Agreement between the Authority
            and the City of Ventura that requires the Authority to make Payments-in-Lieu-of-
            Taxes at the end of each fiscal year to the City. The agreement also stipulates that
            it "shall not be abrogated, changed, or modified without the consent of the
            Government [HUD].” Additionally, (2) the Annual Contributions Contract
            between HUD and the Authority requires the Authority to "perform and comply
            with all applicable provisions of the Cooperation Agreement(s)," including
            meeting their Payments-in-Lieu-of-Taxes obligation to the City, and "shall not
            terminate or amend the Cooperation Agreement(s) without the written approval of
            HUD.” Although neither the City nor HUD approved a waiver or change to the
            agreements, the Authority did not pay its Payments-in-Lieu-of-Taxes obligation to
            the City for fiscal years 2005 and 2006.

            The Annual Contributions Contract also restricts the use of all funds controlled
            under this agreement, including Low Rent Public Housing program funds, and
            requires that the Authority may only use such funds for "(1) the payment for
            expenses related to the development and operation of projects; (2) the purchase of
            investment securities as approved by HUD; and (3) other purposes specifically
            approved by HUD.” The Authority withdrew $496,137 from its Payments-in-
            Lieu-of-Taxes accrual account and transferred the funds into a Housing Trust
            Fund and used $495,725 as a down payment for property to develop low-income
            nonfederal funded housing units. The Authority's use of these Annual
            Contributions Contract controlled funds was therefore in violation with the
            Annual Contributions Contract.

            Although the Authority sought HUD's guidance in January 2004, proposing to
            amend its Cooperation Agreement with the City of Ventura, HUD did not
            formally approve the use of Payments-in-Lieu-of-Taxes funds for any specific
            purpose. HUD simply provided sample formats in which to obtain a waiver from
            the City, which the Authority did not obtain. Furthermore, the examples provided
            were to defray the operating expenses of the subject Authority, not for use in
            developing nonfederal property.

            As a result, the Authority is still liable to the City for Payments-in-Lieu-of-Taxes
            under the Cooperation Agreement, and until it disburses the funds allocated for
            Payments-in-Lieu-of-Taxes to the City, they remain operating subsidy funds
            subject to the Annual Contributions Contract.

Comment 2   The funds in question were funded to the Authority for the purpose of paying the
            Authority's Payments-in-Lieu-of-Taxes obligation to the City. Therefore, the



                                             20
            funds are subject to the Authority's Annual Contributions Contract and
            Cooperation Agreements and are considered federal funds until they are used "(1)
            for expenses related to the development and operation of projects; (2) the
            purchase of investment securities as approved by HUD; and (3) other purposes
            specifically approved by HUD.”

            Moreover, the Authority has not provided documentation indicating that the
            Payments-in-Lieu-of-Taxes funds were being used as directed by the City. The
            Authority did provide an application for funding to the City with a letter of intent
            stating that the Authority's Board of Commissioners passed a resolution placing
            their 2004 and 2005 Payments-in-Lieu-of-Taxes funds into a Housing Trust Fund.
            The funds would be used for the downpayment, loan fees, and interest to acquire
            the property noted on the application. However, the City did not provide a written
            approval or waiver for the use of the Payments-in-Lieu-of-Taxes funds.
            Additionally, our contact with the City indicates that it has no intention of
            waiving the Authority's Payments-in-Lieu-of-Taxes obligation. Until the City
            Council officially waives the obligation in conjunction with HUD's approval
            and/or it specifically approves the current use as fulfilling the obligation, the
            Payments-in-Lieu-of-Taxes are still owed to the City.

            Also, because the Authority has already expended the funds provided by HUD for
            the Authority's Payments-in-Lieu-of-Taxes obligation, these funds are no longer
            available for use for the operation of the Low Rent Public Housing program.

Comment 3   Although we agree that in Director Ross' letter of guidance she did not indicate
            that HUD's approval was necessary, the Authority is subject to its Annual
            Contributions Contract and Cooperation Agreements. Additionally, HUD
            provided guidance on how to achieve a written waiver of Payments-in-Lieu-of-
            Taxes from the City; however, the Authority has yet to attain one. The Authority
            did not inform HUD that it withheld payment despite the lack of City approval.

Comment 4   We agree that the Payments-in-Lieu-of-Taxes fee can be used at the discretion of
            the City. We are also aware that once the Authority pays the Payments-in-Lieu-
            of-Taxes to the City the funds are no longer subject to HUD regulations and the
            City may choose how to spend these funds. Nevertheless, the Payments-in-Lieu-
            of-Taxes were not paid to the City for fiscal years 2005 and 2006, as required by
            both the Annual Contributions Contract and Cooperation agreements, and
            therefore are still subject to the Annual Contributions Contract and were not
            expended for the intended obligation.

Comment 5   We agree that the Authority did propose to the City that the deposit of the 2005
            and 2006 Payments-in-Lieu-of-Taxes funds be placed into a Housing Trust fund.
            However, even though some City officials may have been fully aware of the
            Authority's use of Payments-in-Lieu-of-Taxes funds for the SOHO project, the
            City has not officially waived nor approved the use of these funds.




                                             21
            In addition, the Authority has not provided documentation indicating that the
            Payments-in-Lieu-of-Taxes funds were being used as directed by the City. The
            Authority did provide an application for funding to the City with a letter of intent
            stating that the Authority's Board of Commissioners passed a resolution placing
            their 2004 and 2005 Payments-in-Lieu-of-Taxes funds into a Housing Trust Fund.
            Accordingly, the funds would be used for the downpayment, loan fees, and
            interest to acquire the property noted on the application. Nonetheless, the City
            did not provide an explicit written approval nor waiver for the use of the
            Payments-in-Lieu-of-Taxes funds. Additionally, we did not find any reference of
            the use of Payments-in-Lieu-of-Taxes funds as "Sources and Uses" in the project
            financing details contained in both the City Council's approved meeting minutes
            and the Administrative Report presented to the City Council in March 2008
            requesting approval on the SOHO project loan. As a result, it is not clear if the
            City Council has been made fully aware of the Authority’s actions, which took
            place over a year before this meeting, or the impact on the City’s fiscal
            operations. Furthermore, our contact with the City indicates that it has no
            intention of waiving the Authority's Payments-in-Lieu-of-Taxes obligation.
            Therefore, the Authority expended the obligated Payments-in-Lieu-of-Taxes
            funds before obtaining the required written approval from the City Council on the
            use and purpose of such funds.

Comment 6   We agree the Authority's Board of Commissioners passed a resolution waiving
            the payment of funds to the City and placing the 2004 and 2005 Payments-in-
            Lieu-of-Taxes into a Trust Fund, not including 2006 accrued Payments-in-Lieu-
            of-Tax funds; however, the Authority failed to obtain a resolution from the City's
            Board of Commissioners as recommended by HUD in its February 2004 response.
            The Cooperation Agreement is between the City and the Authority, therefore an
            agreement must be made between both parties for any proposed amendments. As
            a result, the Authority's Board of Commissioners may not solely make any
            amendments to the Cooperation Agreement.

Comment 7   To date there has been no official approval of the Authority's Payments-in-Lieu-
            of-Taxes waiver proposal from the City, which should have been obtained before
            the funds were withheld and disbursed for the SOHO project. In addition, the
            Authority has made numerous attempts to attain the City's approval; however, the
            City has not provided one. Therefore, the Authority has disregarded its
            Payments-in-Lieu-of-Taxes obligation and misused HUD funds.

Comment 8   As mentioned in the audit report, we agree with the Authority that measures are
            being taken to ensure that Low Rent Public Housing program funds are not used
            to cover Section 8 deficits. We found that the use of separate bank accounts,
            monthly programmatic monitoring reports, and written policies and procedures
            will enhance the control environment.

            The written procedures provided by the Authority are a step in the right direction.
            However, our recommendation remains unchanged so that HUD can take the



                                             22
necessary steps to review implementation of the additional controls enacted by the
Authority. In addition, we believe the procedures presented by the Authority are
not complete. The new policies and procedures should include details on new
accounting procedures enacted, ability to track program funds within the
accounting system, monitoring of program bank accounts and monthly
reconciliations of program funds. Additionally, the new policies and procedures
should include references to HUD rules and regulations and the Authority's
Administrative Plan where applicable.




                                23
Appendix C
                                         CRITERIA
The Consolidated Annual Contributions Contract, Number SF-194, March 22, 2002, states
as follows:

   •   Section 6, Cooperation Agreement(s), states that the Authority must perform and
       comply with all applicable provisions of the cooperation agreement(s) including the
       making of payments in lieu of taxes. The Authority may not terminate or amend the
       cooperation agreement(s) without the written approval of HUD.

   •   Section 9(C)(1), Depository Agreement and General Fund, states that the Authority
       may only use funds outlined under the annual contributions contract for payment of
       expenses related to the development and operation of projects controlled under the
       provisions of the annual contributions contract.

The Cooperation Agreement between the City of San Buenaventura and the Authority,
section 9, requires the Authority to pay an annual Payment-in-Lieu-of-Taxes to the City at the
end of each fiscal year in the amount of 10 percent of the shelter rent received from its tenants or
the amount permitted by applicable state law, whichever amount is lower. Additionally, it states
that the agreement cannot be modified without the consent HUD.

24 CFR [Code of Federal Regulations] 982.152(a)(3) states, “HA [housing authority]
administrative fees may only be used to cover costs incurred to perform HA administrative
responsibilities for the program in accordance with HUD regulations and requirements.”

24 CFR 982.153, PHA [Public Housing Authority] Responsibilities, requires public housing
authorities to “comply with the consolidated ACC [annual contributions contract], the
application, HUD regulations and other requirements, and the PHA administrative plan.”

24 CFR 982.155(a), Administrative Fee Reserve, states, “the PHA [public housing authority]
must credit to the administrative fee reserve the total of (1) the amount by which program
administrative fees paid by HUD for a PHA fiscal year exceeded the PHA program
administrative expenses for the fiscal year; plus (2) Interest earned in the administrative fee
reserve.”

24 CFR 982.156, Depositary [sic] for Program Funds, states that a “PHA [public housing
authority] may only withdraw deposited program receipts for use in connection with the program
in accordance with HUD requirements.”

24 CFR 982.158(a), Program Accounts and Records, requires public housing authorities to
maintain complete and accurate accounts and other records for the program in accordance with
HUD requirements. Additionally, they must provide HUD with accounts and other records,
reports, documents, and information as requested.




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24 CFR 990.190(c), Other Formula Expenses (add-ons), states that in addition to calculating a
public housing authority’s operating subsidy based on the project and utilities expense level, an
authority’s eligible formula expenses, used to calculate its operating subsidy, may be increased
by allowed add-on expenses. An amount for payment in lieu of taxes in accordance with section
6(d) of the United States Housing Act of 1937 may be added as an eligible expense in
determining the authority’s annual operating subsidy.

PIH [Public and Indian Housing] Low-Rent Technical Accounting Guide 7510.1G, chapter
2-13, requires housing authorities to establish sufficient controls to ensure proper accounting for
cash and fill identification of audit trails. “Accounting controls ensure that the accounting
system used by the HA [housing authority] accurately identifies the source, use, and remaining
balance of individual program cash resources.” Additionally, all funds received from HUD
program funding are “restricted to the specific purposes authorized in the program budgets.”
Chapter 2-15, stipulates that even though funds may be pooled together for any expenditures
chargeable to the housing authority’s programs, program funds are not fungible and “funds shall
not be withdrawn for a program in excess of the amount of funds on deposit for that particular
program.” All funds pooled together that result in “due to/due from” transactions must be
“reconciled at the end of each reporting period to ensure that they are in balance.” Further,
chapter 11-16 specifies that all funds provided by HUD are to be used by the housing authority
only for the purposes for which the funds are authorized.

PIH Notice 2005-09, Public Housing Agency (PHA) Flexibility to Manage the Housing
Choice Voucher Program in 2005, states that “starting in calendar year 2005, the Department
will no longer exercise its option to establish and maintain an Annual Contributions Contract
(ACC) reserve account for the voucher program.”

PIH Notice 2006-03, Reduction of Annual Contributions Contract (ACC) Reserves,
Recession of Requirements under Form HUD-52681 for Most Housing Choice Voucher
Program Units, and Sanctions for Failure to Submit Required Financial Reports Pursuant
to 24 CFR 5.801, reduces any unused annual contributions contract reserves remaining after
December 31, 2005, to zero. It also outlines the accounting requirements for any budget
authority and administrative fees provided to housing authorities for calendar year 2005.
Specifically, beginning January 1, 2005, excess budget authority funds received by public
housing authorities that are not used to pay housing assistance payments will become part of the
undesignated fund balance account. Such funds may only be used to assist additional families up
to the number of units under contract. Administrative fees received in excess of administrative
expenses will also become part of the undesignated fund balance account. These funds will
remain as administrative fee reserves and are subject to all requirements applicable including 24
CFR 982.155. Moreover, “a PHA [public housing authority] must be able to differentiate HAP
[housing assistance payment] equity (budget authority in excess of HAP expenses) from
Administrative Fee equity (Administrative Fees earned in excess of administrative costs.”

PIH Notice 2005-01, Implementation of the Consolidated Appropriations Act (HR 4818-H
Rept 108-792), 2005 Funding Provisions for the Housing Choice Voucher Program,
stipulates that administrative fees provided from this appropriation shall only be used for
activities related to the provisions of Section 8 tenant-based rental assistance, including related



                                                 25
development activities. Also, it prohibits the use of renewal funds for overleasing. “PHAs
[public housing authority] must manage their programs in a prudent manner, to enable them to
serve families within their calendar year 2005 budget and voucher baseline. PHAs should
review their policies and operations, to ensure they are not incurring HAP [housing assistance
payment] costs beyond what is needed to support decent housing of a modest nature within
market rents for participants.” Administrative fees received from fiscal year 2006 funding that
are later moved into an undesignated fund account are subject to 24 CFR 982.155.

PIH Notice 2006-05, Implementation of the 2006 HUD Appropriations Act (Public Law
109-115), Funding Provisions for the Housing Choice Voucher Program, continues to
prohibit the use of renewal funds for overleasing. “Additionally, this Notice provides that any
budget authority provided to PHAs [public housing authority] in CY [calendar year] 2006 that
exceeds actual program expenses for the same period must be maintained in the PHA’s
undesignated fund balance account in accordance with Generally Accepted Accounting
Principles (GAAP).” Moreover, administrative fees received from federal fiscal fear 2006
funding that are later moved into an undesignated fund account are subject to 24 CFR 982.155.

PIH Notice PIH 2007-14, Implementation of Federal Fiscal Year 2007 Funding Provisions
for the Housing Choice Voucher Program, Restrictions on Housing Assistance Payment
Equity (HAP) Accounts, states, “Public housing authorities are reminded that funds in the Net
Cumulative HAP Equity account (formerly known as Undesignated Fund Balance – HAP)
generated from calendar year 2005 and later appropriations may only be used for HAP needs in
that year and future calendar year HAP needs of the Housing Choice Voucher program, keeping
in mind current and any future restrictions on over-leasing. Calendar year funds may not be used
to cover any prior year deficits. However, public housing authorities may use funds in the
Administrative Fee Equity account for such purposes.”




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