oversight

Salish and Kootenai Housing Authority, Pablo, Montana, Did Not Properly Recognize and Account for Program Income from 1937 Act Housing Projects

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-04-28.

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

                                                                 Issue Date
                                                                          April 28, 2008
                                                                 Audit Report Number
                                                                          2008-SE-1003




TO:        Randall R. Akers, ONAP Administrator, Northern Plains Office of Native
             American Programs, 8API



FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: Salish and Kootenai Housing Authority, Pablo, Montana, Did Not Properly
            Recognize and Account for Program Income from 1937 Act Housing Projects


                                   HIGHLIGHTS

 What We Audited and Why

      We audited Salish and Kootenai Housing Authority (Authority) as part of our review of
      the Office of Native American Programs’ guidance on calculating program income for
      United States Housing Act of 1937 (1937 Act) housing projects assisted by the Native
      American Housing Assistance and Self Determination Act of 1996 (NAHASDA). The
      objective of the audit was to determine whether the Authority calculated program income
      for NAHASDA-assisted 1937 Act properties in accordance with applicable U.S.
      Department of Housing and Urban Development (HUD) guidance, regulations, and
      requirements and to observe uses of revenue from NAHASDA-assisted 1937 Act
      properties.

 What We Found


      The Authority did not have adequate accounting policies and procedures for allocating
      income from 1937 Act properties receiving Indian Housing Block Grant (Block Grant)
      program assistance between its general fund and Block Grant programs. It failed to track
      Block Grant rehabilitation or capital expenses for each property and recognize
      NAHASDA revenue from substantially rehabilitated properties. It also miscalculated the
      amount of program income because it included units converted to non-NAHASDA tax
     credit units in its average expense level calculation. As a result, more than $184,000 in
     low-rent housing receipts were inappropriately excluded from Block Grant affordable
     housing funds during the period October 1, 2002, through December 31, 2006, and
     should be reclassified. These conditions occurred because management created policies
     and procedures for determining and administering program income that did not comply
     with applicable guidance and regulations.

What We Recommend


     We recommend that HUD require the Authority to (1) implement policies and procedures
     to determine program income in accordance with HUD requirements; (2) update its
     computation of program income, properly segregating the revenue and allowable expense
     level calculation for low-income housing tax credit properties from other 1937 Act low-
     rent units and reclassifying $174,054, previously withdrawn from the 1937 Act low-rent
     program as nonprogram income, as Block Grant funds; (3) reduce the number of 1937
     Act units capable of producing nonprogram income by the nine units that received
     substantial rehabilitation or capital expenses between 2002 and 2006 using Block Grant
     funds, which exceeded 40 percent of the dwelling, construction, and equipment costs, and
     reclassify $10,172 as NAHASDA revenue; and (4) adjust the annual 2007 and forward
     1937 Act program income calculations to include all revenue from substantially
     rehabilitated units as NAHASDA revenue.

     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 our discussion draft to the Authority and HUD’s Northern Plains Office of
     Native American Programs on March 11, 2008, and held an exit conference on March 18,
     2008. The Authority disagreed with our finding and recommendation to track capital
     expenditures as instructed in HUD program income guidance and as defined in OMB
     Circular A-87. Instead, the Authority developed their own definition of long-term
     maintenance and rehabilitation which avoids attributing income to NAHASDA’s
     assistance of 1937 Act units.

     Also, the Authority agreed with the finding that they needed to correct the unit count used
     to calculate program income, but disagreed on the recommended correction. 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 Could Not Properly Account for Block Grant Program   5
              Income

Scope and Methodology                                                            11

Internal Controls                                                                12

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




                                            3
                      BACKGROUND AND OBJECTIVES

The Salish and Kootenai Housing Authority (Authority) is the tribally designated housing entity for
the Confederated Salish and Kootenai Tribes. It is located on the Flathead Indian Reservation in
Western Montana. The Authority was organized to provide housing for qualified individuals. It is
governed by a board of up to seven commissioners who are appointed by the tribal council.
Consequently, the Authority is considered a component unit of the tribe.

The Authority is a reservation-wide agency responsible for planning, coordinating, and delivering
services, which support the purpose of the agency. It was organized and is operated to act as a
recipient of Native American Housing Assistance and Self Determination Act of 1996
(NAHASDA) Indian Housing Block Grant (Block Grant) funds, administer such funds in
accordance with NAHASDA; remedy unsafe and unsanitary housing conditions; provide
employment opportunities; improve the quality of life in all reservation communities; engage in
housing-related activities and services; and participate in other entities formed to accomplish any of
these purposes including acting as a general partner in limited partnerships.

The Authority developed, maintained, and operated low-rent and mutual help units assisted
under the United States Housing Act of 1937 (1937 Act), as amended. On October 1, 1997,
NAHASDA reorganized the system of housing assistance provided to Native Americans by the
U.S. Department of Housing and Urban Development (HUD), eliminating several separate
programs of assistance, and replaced them with a NAHASDA Block Grant program. For those
units previously assisted under the 1937 Act, the Block Grant program provided for continued
operating and maintenance assistance.

The Authority used Block Grant program funds to operate and maintain low-rent units and
rehabilitate mutual help units that were previously assisted under the 1937 Act. In fiscal year
2007, the Authority had 414 low-rent and 82 mutual help units. The regulations at 24 CFR
[Code of Federal Regulations] 1000.62(a) govern how rents collected from low-rent units and
proceeds of sale from mutual help units are allocated between the Block Grant program income
and the Authority as nonprogram income. The regulation states that Block Grant program
income does not include any amounts generated from the operation of 1937 Act units unless the
units are assisted with grant amounts and the income is attributable to such assistance. Public
and Indian Housing (PIH) Notice 2000-18 provides guidance on accounting for program income
generated by the use or disbursement of Block Grant funds.

Our objective was to determine whether the Authority calculated program income for Block
Grant-assisted 1937 Act properties in accordance with applicable HUD guidance, regulations,
and requirements and to observe uses of revenue from Block Grant-assisted 1937 Act properties.




                                                  4
                                RESULTS OF AUDIT

Finding 1: The Authority Could Not Properly Account for Block Grant
Program Income
The Authority did not allocate income from NAHASDA-assisted 1937 Act properties between its
general fund and NAHASDA Block Grant programs in accordance with HUD requirements.
Although the Authority’s records were sufficient to support a proper allocation, its accounting
systems failed to track NAHASDA’s cumulative investment in individual 1937 Act single-family
housing units. Additionally, the Authority overcalculated its nonprogram income by including an
allowable expense level (AEL) amount for 33 1937 Act units that were transferred to a non-
NAHASDA tax credit partnership. This condition occurred because (1) the Authority’s policies did
not follow Office of Management and Budget (OMB) Circular A-87 cost principles and classified
Block Grant expenditures for rehabilitation and capitol improvements as maintenance expenses, and
(2) the Authority’s accounting controls did not ensure that the correct number of NAHASDA-
assisted units was used in its program income calculation. As a result, the Authority understated
NAHASDA revenue by more than $184,000 from 1937 Act low-rent housing receipts.




 HUD Requirements


       The regulations at 24 CFR 1000.62(a) state that program income does not include any
       amounts generated from the operation of 1937 Act units unless the units are assisted with
       grant amounts and the income is attributable to such assistance. For low-rent units
       receiving Block Grant program assistance, PIH Notice 2000-18 provides that the tribally
       designated housing entity may retain as nonprogram income the lesser of total income or
       46 percent of the AEL for the recipient times the number of units. For mutual help units
       receiving Block Grant program assistance, the notice provides that the tribally designated
       housing entity may retain the proceeds of the sale of units as nonprogram income.
       However, HUD restricts the use of nonprogram income from mutual help unit sales to
       housing activities, community facilities, or economic development activities that benefit
       the community.

       Section 3.4 of the notice also states that all income from a 1937 Act low-rent or mutual
       help unit is NAHASDA program income once cumulative NAHASDA funding for
       rehabilitation and capital expenditure meets or exceeds 40 percent of the maximum
       allowable dwelling construction and equipment cost (DC&E), effective with the October
       1, 1997, enactment of NAHASDA. According to the notice, the 40 percent threshold is
       only a concept for accounting for program income and has no effect in determining what
       is considered eligible formula current assisted stock under the Block Grant formula.




                                                5
     On July 9, 2002, HUD issued guidance to remind grant recipients of the program income
     requirements pertaining to 1937 Act units supported with Block Grant funds. The guidance
     noted that in the absence of an accounting system meeting the requirements of PIH Notice
     2000-18 to allocate income attributable to the 1937 Act and Block Grant programs, all
     income would be program income and would be required to be used for Block Grant
     program purposes. PIH Notice 2000-18 also requires that the accounting system track the
     total income by project and the total Block Grant-funded rehabilitation by unit.


NAHASDA-Funded
Rehabilitation Expenses Not
Properly Tracked


     The Authority did not track NAHASDA’s cumulative investment in individual 1937 Act
     single-family housing units as required by PIH Notice 2000-18, section 3.4. The
     Authority’s accounting processes failed to reclassify 1937 Act units as NAHASDA units
     when these units received NAHASDA-funded rehabilitation or capital improvements.
     When this cumulative investment reaches the 40 percent of DC&E figure discussed
     above, the unit is considered substantially rehabilitated by NAHASDA and becomes a
     NAHASDA unit for program income purposes.

     The Authority’s policy required the capitalization of repairs in excess of $5,000. In
     addition, the Authority chose to incur rehabilitation costs using NAHASDA funds. If
     rehabilitation was required, the Authority’s plan was to use other funds such as low-
     income housing tax credits to fund the rehabilitation. In implementing its maintenance
     policy, the Authority recorded no rehabilitation or modernization on its units and,
     therefore, did not track the assistance provided for each unit. Modernization or
     rehabilitation was only separated from other maintenance when “many rental units have
     inadequate or out of date equipment or require common repair, rehabilitation, or
     refurbishment and when operating funds are insufficient to meet anticipated costs.”

     However, the Authority’s definition of rehabilitation includes many activities that
     constitute capital expenditures and is not consistent with the definition of maintenance in
     OMB Circular A-87 cost principles (2 CFR 225), appendix B, paragraph 25, which states:

            Maintenance, operations, and repairs. Unless prohibited by law, the cost
            of utilities, insurance, security, janitorial services, elevator service, upkeep
            of grounds, necessary maintenance, normal repairs and alterations, and the
            like are allowable to the extent that they: keep property (including Federal
            property, unless otherwise provided for) in an efficient operating
            condition, do not add to the permanent value of property or appreciably
            prolong its intended life, and are not otherwise included in rental or other
            charges for space. Costs which add to the permanent value of property or
            appreciably prolong its intended life shall be treated as capital
            expenditures.



                                               6
Significant Block Grant-Funded
Capital Expenditures Observed


     We reviewed the Authority’s NAHASDA-funded maintenance expenditures for 1937 Act
     units and observed numerous examples of expenditures between 2002 and 2007 that
     should have been classified as capital expenditures in conformance with OMB Circular
     A-87 requirements. We also noted expenditures exceeding the Authority’s $5,000
     capitalization threshold, which were not capitalized in the Authority’s accounting
     records. We observed 26 units with capital expenditures exceeding $20,000 from 2002 to
     2007.

     Nine of the 26 units exceeded the 40 percent of DC&E threshold based on our review and
     reclassification of capital expenditures as follows.

                         Units substantially rehabilitated with NAHASDA funds

          Date of          Unit       Months since      NAHASDA         Beds   40 % of   Exceeds
        transition                    transition, as     funds net              DC&E     DC&E by:
                                       of Dec. 2006     of credits *
      Aug. 31, 2004         1502          28               45,020         3    24,845      20,175
      Dec. 31, 2005         2612          12               45,650         3    24,845      20,805
      Jan. 3, 2006          1833          12               41,990         4    29,753      12,237
      Mar. 22, 2006         2808          10               29,790         3    24,845       4,945
      June 27, 2003         3104          43               26,715         2    22,690       4,025
      Aug. 22, 2007         3028          0                23,290         2    22,690         600
      May 31, 2007          3126          0                29,995         3    24,845       5,150
      Apr. 10, 2007         349           0                31,538         2    22,690       8,848
      May 18, 2007          702           0                32,894         3    24,845       8,049
                     Total months:       105
      * Credits include reimbursements from residents and homeowner equity.


     Mutual Help
     Two mutual help units converted to low rent after substantial rehabilitation occurred and
     will now produce NAHASDA revenue. Unit 1502, converted to unit 348 on August 31,
     2004, and unit 2612 converted to unit 2824 on December 31, 2005. Neither unit
     produced proceeds of sale.

     Low Rent
     Each month that a low-rent unit was not transitioned to NAHASDA, the Authority was
     eligible to convert $97 to nonprogram income. The seven low-rent units, along with the
     two converted mutual help units, will now produce $873 in NAHASDA revenue per
     month or $10,476 per year, based on PIH Notice 2000-18, section 3.4, which limits


                                                       7
     nonprogram income per unit to 46 percent of the AEL. The AEL figure is $211 per
     month for the Authority, as listed in the appendix to PIH Notice 2000-18.

     We also noted that four additional units were within $1,200 of exceeding the threshold.
     Since the nine units above exceeded the 40 percent threshold, they should have been
     transitioned as NAHASDA units, with all income from these units recognized as
     NAHASDA revenue. The Authority’s failure to track the capital expenditures for the
     nine units shown above allowed it to classify $10,172 (105 months times $97) in income
     from these units as nonprogram income from the time that the 40 percent threshold was
     met through December 2006. This amount should be reclassified as NAHASDA
     revenue, and a similar adjustment will be required for future program income
     computations.


Calculation of Nonprogram
Income

     From October 2002 through December 2006, the Authority collected more than $2.1
     million in gross income from its 381 NAHASDA-subsidized 1937 Act low-rent units.
     However, the AEL calculation for allocating program and nonprogram income was based
     on 414 low-rent units because the Authority did not remove 33 units that were transferred
     into a low-income tax credit project in June 2002. These 33 units were not subsidized
     with NAHASDA funds during this period.

     Using the inflated AEL, the Authority recognized only $69,078 in program income over
     the period for these units. Had the Authority used the proper unit count for the AEL, the
     annual AEL amount would have decreased from $482,194 to $443,758, and the Authority
     would have reported an additional $174,054 in NAHASDA program income earned by
     the low-rent program.

                                  Program income calculations
     Program year end              Sept. 30,     Dec. 31,      Dec. 31,       Dec. 31,     Totals
                                      2003         2004          2005           2006
     Total rent revenue            $488,009     $636,214      $517,801       $487,081     $2,129,105
        (from 381 units)
     Less: 46% of total AEL
        414 units                  (482,194)     (602,743)     (482,194)     (482,194)
        381 units                  (443,758)     (554,698)     (443,758)     (443,758)
     Net program income
        414 units                      5,815        33,471        35,607         4,887
        381 units                     44,251        81,516        74,043        43,323
     Program income
        414 units                       None       $33,471       $35,607         None        69,078
        381 units                    $44,251       $81,516       $74,043       $43,323     243,132
     Underreported NAHASDA revenue                                                         $174,054
         Note: If program income is less than $25,000, no program income is recognized.




                                               8
Use of Nonprogram Income

     We observed that the primary use of nonprogram income from NAHASDA-assisted 1937
     Act units was to fund low-income housing tax credit properties. This nonprogram
     income was commingled in a general fund with revenue from other Authority operations.
     The Authority did not track how it spent the nonprogram income from its 1937 Act rental
     units. However, during the period 2004 through 2006, it spent more on housing-related
     activities than the amount of nonprogram income obtained from the NAHASDA-assisted
     1937 Act rental units. Therefore, we determined that there was little risk of abuse of
     nonprogram income.

Conclusion


     Since the Authority did not have a compliant definition of maintenance in place and
     disregarded capital expenditures, it did not track actual dwelling construction and
     equipment costs for its 1937 Act units at the unit level. As a result, it did not ensure the
     accuracy of its program income calculation for its 1937 Act units assisted with Block
     Grant funds by recognizing NAHASDA revenue from assets substantially rehabilitated
     using NAHASDA funds. In addition, the calculation contained an inflated AEL that
     reduced the amount of program income attributed to NAHASDA.

Recommendations

     We recommend that HUD require the Authority to

     1A. Implement policies and procedures to determine program income in accordance
         with HUD requirements, to include a corrected definition of maintenance and the
         Authority’s ability to track Block Grant-funded rehabilitation and/or capital
         expenses by 1937 Act unit from both contracts and internal work orders.

     1B. Update its computation of program income, properly segregating the revenue and
         AEL calculation for low-income housing tax credit properties from other 1937 Act
         low-rent units and reclassifying $174,054, which was previously withdrawn from
         the 1937 Act low-rent program as nonprogram income, as Block Grant funds.

     1C. Reduce the number of 1937 Act units capable of producing nonprogram income by
         the nine units that received substantial rehabilitation or capital expenses between
         2002 and 2006 using Block Grant funds, which exceeded 40 percent of the
         dwelling, construction, and equipment costs, and reclassify $10,172 as NAHASDA
         revenue.




                                               9
1D. Adjust the annual 2007 and forward program income calculations to include
     revenue from all substantially rehabilitated units as NAHASDA revenue.




                                 10
                               SCOPE AND METHODOLOGY

Our objective was to determine whether the tribe complied with criteria for program income
from Block Grant-assisted 1937 Act housing projects and to observe uses of revenue from Block
Grant-assisted 1937 Act properties. The criteria are contained in NAHASDA implementing
regulations found in 24 CFR 1000.62, HUD’s Office of Native American Programs’ guidance,
and external requirements such as those from the General Accounting Office and the Office of
Management and Budget. The audit steps were designed to gain an understanding of the 1937
Act income and related use restrictions, the accounting for associated program income, and
support used to calculate program and nonprogram income.

To accomplish our objectives, we reviewed the Authority’s calculation of program income from
Block Grant-assisted 1937 Act housing projects and related supporting data at its offices in
Pablo, Montana. We reviewed sufficient cost accounting system information to confirm whether
the accounting system was capable of tracking rehabilitation and/or capital expenditures at the
housing unit level, as required to remove nonprogram income. We also reviewed the system for
tracking the transition of unit income from a 1937 Act identity to a Block Grant identity.
Finally, we observed the use of nonprogram income generated from Block Grant-assisted 1937
Act units. Our observations included review of the Authority’s fiscal years 1999 through 2004
financial audits.

We reviewed the Authority’s accounting system for reports that might identify any units that
exceeded the 40 percent dwelling construction and equipment cost limit for the program income
calculation. Its new electronic system could only report back to its implementation in 2006 and
could not provide sufficient data to satisfy this tracking requirement. To further support these
conclusions, we reviewed records of maintenance and rehabilitation work performed at tenant
move-out and at the time of casualty damages.

We randomly selected a sample of 12 of the Authority’s 496 1937 Act units between Polson and
Dixon, Montana. These units included six low-rent units, three nonconveyed mutual help units,
and three low-rent units that had rehabilitation work funded with low-income housing tax credits.
We then performed site visits to the sample units to verify that rehabilitation work shown in the
Authority’s files had been performed. We also toured the projects to determine whether there
had been any significant rehabilitation work performed on other units.

The audit was conducted between August 6, 2007, and January 18, 2008. Our review covered
the period October 1, 2002, to December 31, 2006, which corresponds to the financial reporting
periods needing restatement of nonprogram income from the Block Grant program.

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:

               •   The system for calculating and tracking the use of program income and
                   nonprogram income.

               •   The cost accounting system dedicated to identifying and collecting the cost of
                   individual tasks and assigning those costs to an end unit of production.

       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 created policies and procedures for determining program income that
               did not comply with applicable guidance and regulations. Its definitions of long-
               term maintenance and rehabilitation were not consistent with OMB Circular A-87
               and industry practices. The Authority did not track cumulative NAHASDA
               rehabilitation or capital expenses for each property, as required, to properly allocate
               the property’s share of income attributable to the Block Grant program.




                                                 12
                                  APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                      Recommendation            Funds to be put to better
                          number                         use 1/
                            1B                         $174,054
                            1C                          $10,172
                           Total                       $184,226


1/   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. Finding 1B questions $174,054 of the Authority’s
     calculation of nonprogram income for the period July 1, 2002, through December 31,
     2006. The questioned amount represents an error in the formula used by the Authority
     caused by the removal of revenue from 33 units transferred to a low-income housing tax
     credit program. Finding 1C questions $10,172 in NAHASDA revenue for nine low-rent
     homes excluded from the Authority’s calculation of program income for the period
     October 1, 2002, through December 31, 2006. The questioned amount represents units
     removed from the 46 percent of AEL formula because the Authority failed to transition
     these units to NAHASDA after they were substantially rehabilitated using Block Grant
     funds.




                                           13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         14
Comment 1




Comment 2




            15
Comment 3


Comment 4



Comment 5




Comment 3
Comment 6

Comment 7




            Names of the staff redacted for privacy.




                                           16
Comment 3
Comment 8




Comment 9




Comment 10




             17
Comment 10




Comment 11




             18
                          OIG Evaluation of Auditee Comments

Comment 1   We discussed the Authority’s practices in the section labeled “Results of Audit.”

Comment 2   Negotiated rulemaking for the NAHASDA program took place within the
            constraints of the federal laws and regulations controlling the government grants
            management process. These standardized rules, applicable to grants from
            essentially all federal agencies are outside the influence of negotiated rulemaking
            without prior approval from the Office of Management and Budget (OMB).

            Negotiated rulemaking resulted in the NAHASDA regulations at 24 CFR 1000.
            The supplementary information to this regulation called for a committee to
            address the need for accounting guidance for program income generated by the
            combined use of NAHASDA grant amounts and other funds. The product of that
            committee was PIH Notice 2000-18, which is guidance, not regulation.

Comment 3   The program income subcommittee did not define rehabilitation in any technical
            terms other than that of capital expenditures, which are defined by OMB Circular
            A-87 cost principles (2 CFR 225), appendix B, paragraph 25. Also, the
            Authority’s definition of maintenance does not comply with OMB Circular A-87.

            Since there is no definition of rehabilitation in the criteria, our position did not
            attempt to question rehabilitation amounts lower than the Authority’s own
            definition of capital expenditures, or $5,000. The definition of capital
            expenditures and maintenance are defined by OMB Circular A-87, which is
            specified by the NAHASDA regulation. The Authority’s understanding of this
            circular is required to maintain the basic administrative capacity to manage a
            federal grant program.

            Authority records clearly demonstrate significant capital expenditures of
            NAHASDA funds, much higher than this amount, which were not tracked by their
            system. We observed numerous examples of NAHASDA funded capital
            improvements to homes, such as replacing windows, siding, roofing, cabinetry,
            and appliances. Many of these improvements will extend the useful lives and the
            value of these homes, even at amounts under the Authority’s $5,000 capital
            threshold. Yet, the Authority treated 26 rehabilitations exceeding $20,000 and
            three rehabilitations exceeding $40,000 as maintenance.

Comment 4   Our results of audit questions the unit counts used in the Authority’s calculation
            of program income, which is the basis for our questioned costs.

Comment 5   Note that the Authority’s citation includes the requirement for capital
            expenditures to be considered in the calculation of substantial rehabilitation.




                                              19
Comment 6     While there is no clear definition of rehabilitation in the NAHASDA regulations
              or guidance, the guidance did relate it to other defined terms, such as capital
              expenditures.

Comment 7     These 33 units were transferred to a Low Income Housing Tax Credit (LIHTC)
              partnership to obtain significant rehabilitation and modernization. While we
              acknowledge the Authority’s creative efforts to take advantage of other funding
              opportunities, our review of maintenance contracts revealed that these
              partnerships were not the only significant capital improvements occurring at the
              Authority, as identified in our Results of Audit.

Comment 8     We believe it is irrefutable that a $40,000 investment in a property would impact
              both the useful life and the value of the property and would constitute substantial
              rehabilitation for any unit maintained by this Authority.

Comment 9     The date used in our calculation was the date the 33 units were transferred to the
              control of the limited partnership. The Authority proposed using the date the
              property began earning revenue which is inconsistent with their ownership status
              and their established practice of segregating revenue by separate balance sheets
              for the Authority and the tax credit partnerships. If the Authority wants to operate
              these partnerships within NAHASDA, they would first need to be reviewed and
              approved by HUD for compliance with established criteria.

Comment 10 The expenses for homes included in this calculation were paid using NAHASDA
           IHBG grant funds and the nonprogram income was transferred to fund the LIHTC
           partnership. It is not clear what revenues or expenses are left to offset.

Comment 11 We hope that the Authority continues to pursue creative solutions to affordable
           housing, both inside and outside of the NAHASDA program. However, as
           changes in tribal leadership and policy may occur, the purpose of these program
           income rules is to ensure NAHASDA grant funds continue to reach the intended
           beneficiaries.




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