oversight

The Housing Authority of the City of Newnan, Georgia, Inappropriately Encumbered Assets and Advanced Funds to Support Its Nonprofit Organization

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-20.

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

                                                                  Issue Date
                                                                        July 20, 2009
                                                                  Audit Report Number
                                                                        2009-AT-1009




TO:        Ada Holloway, Director, Office of Public Housing, 4APH


           //signed//
FROM:      James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: The Housing Authority of the City of Newnan, Georgia, Inappropriately
          Encumbered Assets and Advanced Funds to Support Its Nonprofit Organization

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the City of Newnan’s (Authority) activities
             with its related nonprofit organization, the Newnan Housing Development
             Corporation. The review was performed based on concerns that the Authority
             encumbered its assets, used its federal funds to support nonprofit development
             activities, and had a conflict-of-interest transaction. Our objective was to
             determine whether the Authority inappropriately used funds and assets restricted
             by its annual contributions contract with the U. S. Department of Housing and
             Urban Development (HUD) to support the operations of its nonprofit organization
             and incurred costs for insurance that involved a conflict of interest.

 What We Found


             The Authority inappropriately encumbered $649,976 in HUD-restricted funds in
             violation of its contract with HUD and also violated an agreement it made with
             HUD concerning the sale and disposition of Authority property. The Authority
             used the $649,976 to open a certificate of deposit account as collateral to secure a
             bond issuance on behalf of its nonprofit organization. As of December 31, 2008,
             the certificate of deposit account balance was $673,859. In addition, the
         Authority encumbered its assets as collateral for a $150,000 loan on behalf of the
         nonprofit organization. These encumbrances occurred because the Authority
         lacked the controls necessary to avoid encumbrances. As a result, the
         encumbrances put the Authority’s funds at risk.

         The Authority inappropriately used $221,531 of its public housing program funds
         for nonfederal development activities in violation of its annual contributions
         contract with HUD. In addition, it inappropriately used HUD funds to make 31
         monthly payments on a $150,000 loan on behalf of its nonprofit organization.
         This condition occurred because the Authority’s board of commissioners did not
         establish sufficient controls to ensure that the executive director followed terms
         and conditions established in the contract. Also, the nonprofit organization was
         not financially sound, and the Authority did not have an updated comprehensive
         marketing strategy to ensure its financial viability. Consequently, $221,531 of the
         Authority’s public housing funds was not available for its intended purpose.

         HUD granted a waiver for conflict-of-interest provisions and permitted the
         Authority to purchase insurance from a company that employed a board member.
         In its waiver, HUD cited good cause reasons and further noted that the insurance
         bid was the best and most reliable bid submitted. Therefore, we did not have an
         issue with the conflict of interest.

What We Recommend


         We recommend that the Director of HUD’s Office of Public Housing require the
         Authority to develop a plan to bring it into compliance with HUD’s requirements
         and if necessary, ensure that the lender formally releases the HUD-related funds
         as collateral. As of December 31, 2008, the HUD-related certificate of deposit
         account put at risk totaled $673,859. Also, we recommend that HUD require the
         Authority to propose a legal solution regarding the ownership structure of the
         nonprofit organization. If a legal solution is not possible, we recommend that
         HUD require the Authority to repay its public housing program $221,531 in
         nonfederal funds or the current amount owed that the Authority advanced to its
         nonprofit organization.

         In addition, HUD should require the Authority to (1) implement adequate controls
         and procedures to ensure that it does not encumber or spend HUD assets on
         nonfederal activities without HUD approval and (2) develop and implement a
         strategic, comprehensive marketing plan for the nonprofit organization to ensure
         that it becomes financially sound.




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           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 discussed our review results with the Authority during the audit and with
           HUD officials during the exit conference. We provided a copy of the draft report
           to Authority officials on June 11, 2009, for their comments and discussed the
           report with the officials at the exit conference on June 25, 2009. The Authority
           provided written comments on July 2, 2009. The Authority disagreed with the
           findings but understands what must be done to fulfill HUD’s mission. It agreed to
           seek to replace the letter of credit that encumbered the $650,000, and implement
           controls and procedures designed to ensure it does not encumber or spend HUD
           assets on nonfederal activities without HUD approval.

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




                                            3
                            TABLE OF CONTENTS

Background and Objective                                                  5

Results of Audit
      Finding 1: The Authority Inappropriately Encumbered Its Funds to    6
                 Support Its Nonprofit Entity
      Finding 2: The Authority Inappropriately Advanced Funds to          8
                 Support Its Nonprofit Entity

Scope and Methodology                                                    11

Internal Controls                                                        12

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use     14
   B. Auditee Comments and OIG’s Evaluation                              15




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                      BACKGROUND AND OBJECTIVE

The Housing Authority of the City of Newnan (Authority), Georgia, was established in 1950 by
the mayor and city council of Newnan. The mission of the Authority is to develop and operate
each project solely for the purpose of providing decent, safe, and sanitary housing for eligible
families in a manner that promotes serviceability, economy, and stability of the projects and the
economic and social well-being of the tenants. The Authority’s five-member board of
commissioners oversees the direction of the Authority. The Authority administers 397 units of
public housing and a Section 8 Housing Choice Voucher program that enables 68 families to rent
from a private landlord with rental assistance that it administers.

The Authority created a domestic nonprofit organization, the Newnan Housing Development
Corporation, on May 11, 2000, by resolution adopted by the governing body of the City of
Newnan, Georgia, under the provisions of the Georgia Housing Authorities law for the purpose
of carrying out the powers and any purposes of the Authority. The nonprofit entity is a
controlled instrumentality of the Authority that developed 136 low-income apartment units
located in Newnan, Georgia. The board members of the nonprofit organization are the members
of the Authority’s board.

The Authority received approximately $18.3 million from the U.S. Department of Housing and
Urban Development (HUD) to operate its various programs from January 1, 2000, through
December 31, 2008. HUD’s Georgia State Office of Public Housing in Atlanta, Georgia, is
responsible for overseeing the Authority.

Our objective was to determine whether the Authority inappropriately used funds and assets
restricted by its annual contributions contract with HUD to support the operations of its nonprofit
organization and incurred costs for insurance that involved conflicts of interest.




                                                5
                                 RESULTS OF AUDIT


Finding 1: The Authority Inappropriately Encumbered Its Funds to
           Support Its Nonprofit Entity
The Authority inappropriately encumbered $649,976 in HUD-restricted funds in violation of its
annual contributions contract with HUD and also violated an agreement it made with HUD
concerning the sale and disposition of Authority property. The Authority used the $649,976 to
open a certificate of deposit account as collateral to secure a bond issuance on behalf of its
nonprofit organization. In addition, it encumbered its assets as collateral for a $150,000 loan on
behalf of the nonprofit organization. These encumbrances occurred because the Authority
lacked the controls necessary to avoid encumbrances. As a result, the encumbrances put the
Authority’s funds at risk.


 Criteria


               Part A of the annual contributions contract, section 7, Covenant against
               Disposition and Encumbrances, states that the Authority shall not in any way
               encumber any such project, or portion thereof, without the prior approval of
               HUD. In addition, the Authority shall not pledge as collateral for a loan the assets
               of any project covered under the contract.

 Public Housing Funds
 Encumbered

               The Authority inappropriately encumbered $649,976 in HUD-restricted funds in
               violation of its annual contributions contract with HUD and also violated an
               agreement it made with HUD concerning the sale and disposition of Authority
               property. Under its contract agreement with HUD, the Authority received the
               $649,976 from the sale of real estate to the City of Newnan. HUD approved the
               disposition with the stipulation that the proceeds could only be used for housing
               which was owned and managed by the Authority.

               The Authority allowed the nonprofit organization to use the $649,976 to open a
               certificate of deposit account to secure an $8.5 million bond issuance. The bond
               proceeds were used by the nonprofit entity to develop 136 low-income apartment
               units in Newnan, Georgia. The Authority manages the housing complex, but it
               does not own the housing, which was required by the HUD approval. As of
               December 31, 2008, the certificate of deposit account balance was $673,859,
               which included interest earned.

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          The Authority’s executive director initiated efforts during our audit to obtain a
          modification to HUD’s disposition agreement that would permit the Authority to
          use the $649,976 in sale proceeds on behalf of the nonprofit organization. On
          May 20, 2009, HUD’s Special Applications Center provided a response to the
          Authority. However, HUD's Georgia State Office of Public Housing reviewed the
          response and determined that the modification to HUD's disposition agreement
          did not allow the Authority to use the sale proceeds for anything other than low
          income public housing as defined by the U.S. Housing Act of 1937 and therefore
          the sale proceeds could not be used for the nonprofit organization.

          In addition, the Authority violated its annual contributions contract provision
          against encumbrances when it obtained a loan for $150,000 to pay preliminary
          expenses associated with proposed acquisition, design, development, and
          financing for the nonprofit organization. The Authority encumbered its assets
          when it pledged them as collateral for the $150,000 loan if the nonprofit entity
          could not make the loan payments. Although the loan was repaid, the nonprofit
          organization was not financially sound, and the encumbrance placed the
          Authority’s funds at risk.

          The Authority lacked the controls necessary to avoid encumbrances. Its board of
          commissioners did not have adequate controls in place to keep it from
          encumbering the Authority’s federal assets when pursuing nonfederal housing
          ventures. Although the executive director was aware of HUD’s provision against
          encumbering assets, when she signed the loan documents and agreements, she
          was unaware that the loan agreements included clauses that pledged the
          Authority’s assets if the nonprofit organization did not pay off the loan.

Recommendations



          We recommend that the Director of HUD’s Office of Public Housing

          1A.     Require the Authority to develop a plan to bring the Authority into
                  compliance with HUD’s requirements and if necessary, ensure that the
                  lender formally releases the HUD-related funds as collateral. As of
                  December 31, 2008, the HUD-related certificate of deposit account put at
                  risk totaled $673,859.

          1B.     Require the Authority to implement adequate controls and procedures to
                  ensure that it does not encumber HUD assets for nonfederal activities
                  without HUD approval.




                                           7
Finding 2: The Authority Inappropriately Advanced Funds to Support
           Its Nonprofit Entity
The Authority inappropriately used $221,531 of its public housing program funds for nonfederal
development activities in violation of its annual contributions contract with HUD. In addition, it
inappropriately used HUD funds to make 31 monthly payments on a $150,000 loan on behalf of
its nonprofit organization. This condition occurred because the Authority’s board of
commissioners did not establish sufficient controls to ensure that the executive director followed
terms and conditions established in the contract. Also, the nonprofit organization was not
financially sound, and the Authority did not have an updated comprehensive marketing strategy
to ensure its financial viability. Consequently, $221,531 of the Authority’s public housing funds
was not available for its intended purpose.



 Criteria


               Part A of the annual contributions contract, section 9, Depository Agreement and
               General Fund, (C), states that the Authority may withdraw funds from the general
               fund only for the payment of the costs of development and operation of the
               projects under the annual contributions contract with HUD.


 $221,531 Advanced to
 Nonprofit Organization



               The Authority inappropriately advanced $221,531 to its nonprofit organization to
               pay expenses that it had incurred. The nonprofit organization’s revenue was
               insufficient to pay its financial obligations, and the Authority paid the operational
               costs that the nonprofit entity could not pay. Consequently, the balance due to the
               Authority grew steadily from $11,161 in July 2006 to $221,531 in February 2009.
               The nonprofit organization did not have the funds needed to repay the accounts
               receivable balance it owed the Authority. Therefore, the Authority was at risk of
               losing $221,531 in public housing funds intended to benefit its residents and
               programs supported by HUD.

               In addition, the Authority inappropriately paid 31 monthly loan payments of
               approximately $2,900 on behalf of the nonprofit organization. The Authority
               obtained a loan for $150,000 to pay preliminary expenses associated with
               proposed acquisition, design, development, and financing for the nonprofit entity.
               The nonprofit organization then repaid the Authority the 31 payments and made

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           the remaining monthly loan payments until the loan was repaid. Although the
           nonprofit entity repaid the Authority the 31 payments, the Authority violated
           section 9 of its annual contributions contract with HUD when it used HUD funds
           to support the operations of its nonprofit organization.

           Authority management did not have adequate controls in place to ensure that its
           restricted federal funds were only used for the payment of the costs of
           development and operation of the projects under the contract with HUD. The
           Authority’s board of commissioners did not have a monitoring process to ensure
           that the Authority did not use its federal funds for nonfederal development efforts.

Updated Comprehensive
Marketing Strategy Needed to
Ensure Financial Viability


           The Authority’s nonprofit entity did not have a current written marketing plan. In
           October 2004, a written marketing plan was developed. The Authority and its
           related nonprofit organization had taken a variety of actions to market the
           property, and they had taken steps to monitor its progress. For example, the
           nonprofit entity’s property manager maintained a weekly management report on
           the marketing status of the apartments. Other efforts to market the nonprofit
           organization included newspaper advertisements, offering a $99 move-in special,
           payment arrangements for the security deposit, and a $1,000 referral fee for
           tenants. The nonprofit organization’s property manager attended a Section 8
           voucher seminar to inform tenants that they could use their housing choice
           vouchers in Newnan, Georgia. Although various marketing efforts were tried, the
           nonprofit remained financially unsound.

           The nonprofit organization would likely benefit from a current marketing plan
           that strategically and comprehensively addresses various marketing components
           that would include but not necessarily be limited to assessments of locality-based
           rents, census and demographic studies, locality-based vacancy rates, effective
           advertising, and incentives.




                                            9
Recommendations



          We recommend that the Director of HUD’s Office of Public Housing

          2A.     Require the Authority to propose a legal solution regarding the ownership
                  structure of the nonprofit organization. If a legal solution is not possible,
                  the Director should require the Authority to repay its public housing
                  program $221,531 in nonfederal funds or the current amount owed that the
                  Authority advanced to its nonprofit organization.

          2B.     Require the Authority to implement adequate controls and procedures to
                  ensure that it does not spend HUD assets on nonfederal activities without
                  HUD approval.

          2C.     Require the Authority to develop and implement a strategic,
                  comprehensive marketing plan for the nonprofit organization to ensure
                  that it becomes financially sound.




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                           SCOPE AND METHODOLOGY

To accomplish our objective, we

       Considered Office of Inspector General (OIG) concerns that the Authority may have
       encumbered assets, used its restricted funds for nonprofit activities, and violated conflict-
       of-interest provisions;

       Researched HUD handbooks, the Code of Federal Regulations, the annual contributions
       contract, and other requirements and notices that govern the Authority’s public housing
       programs;

       Reviewed the Authority’s board minutes, financial statements, audit reports, records,
       bank statements, and security instruments pertaining to the development and operations
       of the nonprofit organization;

       Reviewed the Authority’s marketing plans for the nonprofit organization and the
       Authority’s cost allocation policy and procedures;

       Reviewed the nonprofit organization’s incorporation documents and related
       correspondence;

       Interviewed officials of the HUD Georgia State Office of Public Housing and Regional
       Counsel attorney advisors, Authority management and staff, and nonprofit organization
       staff.

Our audit generally covered the period January 1, 2000, through December 31, 2008. We
expanded our scope as necessary to complete our objective. We performed our audit from
February through May 2009 at the Authority’s office located in Newnan, Georgia, and at HUD’s
Georgia State Office of Public Housing located in Atlanta, Georgia.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




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                              INTERNAL CONTROLS

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

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations, and
       Safeguarding of assets and resources.

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



 Relevant Internal Controls


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

                  Compliance with laws and regulations - Policies and procedures that
                  management has implemented to reasonably ensure that its resources are used
                  in accordance with laws and regulations.

                  Safeguarding of resources - Policies and procedures that management has
                  implemented to reasonably ensure that resources are safeguarded against
                  waste, loss, and misuse.

              We assessed the relevant controls identified above.

              A significant weakness exists if internal controls do not provide reasonable
              assurance that the processes for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




                                               12
Significant Weaknesses


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

               The Authority did not adequately monitor the use of its funds to ensure that its
               assets were not encumbered for activities not related to the development and
               operation of public housing under its annual contributions contract agreement
               with HUD (see finding 1).

               The Authority did not adequately monitor its disbursement of federal funds to
               ensure that payments were for supported and eligible housing activities (see
               finding 2).




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                                    APPENDIXES

Appendix A

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


               Recommendation                              Funds to be put to
                      number              Ineligible 1/         better use 2/

                       1A                                           $673,859
                       2A                    $221,531

                     Total                   $221,531               $673,859

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.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified. For
     recommendation 1A, the $673,859 represents encumbered funds that could be used by
     the Authority for activities supported by its annual contributions contract with HUD as
     intended.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         15
16
Comment 1




            17
Comment 1




Comment 2


Comment 3



Comment 3




            18
Comment 4




Comment 5




            19
Comment 6


Comment 6




Comment 7




Comment 8




            20
                           OIG Evaluation of Auditee Comments

Comment 1     The Authority disagreed with the finding. The Authority's comments cited
              numerous communications with HUD when requesting approval to dispose of the
              property. The Authority stated it had written approval from HUD's Special
              Applications Center to dispose of the land, as well as approval to construct 139
              low and mixed-income units.

              The memorandum of approval from the Special Applications Center restricted the
              use of the sales proceeds for housing that was owned and managed by the
              Authority. The Authority managed the nonprofit and the same members served
              on both the Authority board and the nonprofit board. However, the Authority did
              not own the nonprofit apartments. The nonprofit apartment units were not under
              HUD's control within the annual contributions contract agreement and the
              recorded deed showed that the nonprofit entity owned the property. HUD's
              Georgia State Office of Public Housing reviewed the May 20, 2009, Special
              Applications Center amendment and determined that the modification to HUD's
              disposition agreement did not allow the Authority to use the sale proceeds for
              anything other than low income public housing as defined by the U.S. Housing
              Act of 1937, and therefore the sale proceeds could not be used for the nonprofit
              organization and the encumbrance was inappropriate.

Comment 2 The Authority requested that the ownership structure of the nonprofit remain as is.
          However, HUD and the Authority need to develop a mutually agreeable solution
          that will bring the Authority into compliance with HUD’s requirements and if
          necessary ensure that the lender formally releases the HUD-related funds as
          collateral.

Comment 3     The Authority’s agreement with the recommendations to seek to replace the letter
              of credit that encumbered the $650,000, and implement controls and procedures
              indicates its willingness to make the necessary corrections.

Comment 4     We acknowledge that the Authority has tried a variety of marketing strategies and
              had a marketing plan in 2004; however, the nonprofit has remained financially
              unsound despite those efforts.

Comment 5     The Authority stated that $140,000 of the $329,531 represents management fees
              that are due its central office; therefore, it requested that the $140,000 be deducted
              from the $329,531.

              The Authority converted to asset management accounting on July 1, 2007. The
              management fees earned from July 2006 through February 2009 were $128,000,
              which included $20,000 earned before the conversion, and are funds due under
              the annual contribution contract agreement. Therefore, $108, 000 should be

                                               21
            deducted from the $329,531. We revised our recommendation to show that the
            Authority should repay HUD $221,531 versus $329,531. The additional $12,000
            ($140,000 - $128,000) was earned after we completed our review and are not
            included in the $329,531.

Comment 6   The Authority requested that the ownership structure of the nonprofit remain as is.
            However, HUD and the Authority need to develop a mutually agreeable solution
            that will repay the public housing program $221,531 in nonfederal funds or the
            current amount owed that the Authority advanced to its nonprofit organization.

Comment 7   The Authority’s agreement with the recommendation to implement controls and
            procedures indicates its willingness to make the necessary corrections.

Comment 8   The Authority’s agreement with the recommendation to develop and implement
            an updated marketing strategy indicates its willingness to make the necessary
            corrections.




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