oversight

The Puerto Rico Public Housing Administration, Mismanaged Its Capital Fund Financing Program and Inappropriately Obligated $32 Million in Recovery Act Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-30.

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

                                                              Issue Date
                                                                  September 30, 2009
                                                              Audit Report Number
                                                                  2009-AT-1015




TO:         Olga I. Sáez, Director, Public and Indian Housing, San Juan Field Office, 4NPH


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

SUBJECT: The Puerto Rico Public Housing Administration, San Juan, Puerto Rico,
          Mismanaged Its Capital Fund Financing Program and Inappropriately
          Obligated $32 Million in Recovery Act Funds


                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Puerto Rico Public Housing Administration’s (authority) Capital
             Fund Financing Program (Financing Program) as part of the Office of Inspector
             General’s (OIG) strategic plan goals to improve the U.S. Department of Housing
             and Urban Development’s (HUD) fiscal accountability. We selected the authority
             based on the size of its Financing Program. Our audit objectives were to
             determine whether the authority obligated and expended the 2003 Financing
             Program funds in accordance with HUD requirements, the authority’s financial
             management system complied with program requirements, the authority
             completed the proposed modernization activities under its 2003 Financing
             Program, and the authority had the capacity to administer additional funds under
             the American Recovery and Reinvestment Act (Recovery Act) of 2009.

 What We Found


             The authority did not manage the 2003 Financing Program in an economical,
             efficient, and effective manner. It did not complete all of the proposed
             rehabilitation activities and did not expend all of the borrowed private capital. As
         a result, it did not meet its rehabilitation goals. In addition, the authority
         disbursed more than $57.4 million in capital funds to pay for interest charges on
         unused borrowed capital that did not provide the intended benefits to the public
         housing program or its residents.

         The authority also could not account for more than $18.7 million in program income
         and did not use $50.3 million in program income to defray program costs. In
         addition, it did not maintain accurate and current accounting records and provided
         HUD inaccurate information on its Financing Program activities. As a result, its
         internal controls were not sufficient to safeguard assets or ensure that funds were
         used in accordance with applicable requirements, and HUD lacked assurance
         regarding program accomplishments.

         The authority inappropriately obligated $32.12 million in Recovery Act funds to
         supplant expenditures from other nonfederal funds in violation of its annual
         contributions contract with HUD. This deficiency occurred because the authority
         substituted the obligations related to nonfederal funds with Recovery Act funds.
         As a result, the authority will use Recovery Act funds to pay for expenditures that
         were the responsibility of nonfederal sources.

What We Recommend


         We recommend that the Director of the San Juan Office of Public Housing require
         the authority to reimburse more than $57.4 million in unallocable and ineligible
         Financing Program expenses, account for more than $18.7 million in unrecorded
         program income, and develop and implement an action plan to use $50.3 million
         in program income to defray program costs. We also recommend that the authority
         establish better controls to ensure that the Financing Program has (1) a financial
         management system that complies with HUD requirements and (2) procedures to
         ensure that program goals are achieved in a timely and efficient manner and avoid
         unreasonable/unnecessary expenses. In addition, we recommend that the Director
         require the authority to properly account for its 2003 Financing Program receipts
         and disbursements.

         The Director should also require the authority to deobligate more than $31 million in
         Recovery Act funds that were contracted before the authorized obligation start date
         and implement adequate procedures and controls to ensure that Recovery Act
         funds are used effectively, efficiently, and in accordance with applicable
         requirements.

         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.



                                           2
Auditee’s Response


           We discussed the findings with authority and HUD officials during the audit. We
           provided a copy of the draft report to the authority on August 21, 2009, for its
           comments and discussed the report with authority officials at the exit conference
           on September 10, 2009. The authority provided written comments on September
           15, 2009, and generally disagreed with our findings.

           The authority’s response, along with our evaluation of that response, can be found
           in appendix B of this report. Attachments to the authority’s comments were not
           included in the report but are available for review upon request.




                                            3
                            TABLE OF CONTENTS

Background and Objectives                                                           5

Results of Audit
      Finding 1: The Authority Mismanaged Its Financing Program                      7
      Finding 2: The Authority’s Financial Management System Did Not Fully          12
                 Comply with HUD Requirements
      Finding 3: The Authority’s Recovery Act Funds Will Inappropriately Supplant   17
                 Expenditures from Other Sources

Scope and Methodology                                                               21

Internal Controls                                                                   23

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                25
   B. Auditee Comments and OIG’s Evaluation                                         26
   C. Schedule of Rehabilitated Units                                               45




                                            4
                         BACKGROUND AND OBJECTIVES

The Puerto Rico Public Housing Administration (authority) is a governmental entity created by
Commonwealth Law No. 66, dated August 17, 1989. The authority provides a full range of services
related to the rehabilitation, operation, and maintenance of its public housing projects. It is the
second largest public housing agency in the nation, with more than 56,000 dwelling units
scattered throughout Puerto Rico. The authority’s records are maintained at 606 Barbosa
Avenue, San Juan, Puerto Rico.

The Capital Fund Financing Program (Financing Program) allows a housing agency to borrow
private capital (through bonds or conventional bank loans) to make improvements to its housing
developments. The U.S. Department of Housing and Urban Development (HUD) allows a
housing agency to pledge a portion of its future annual capital funds to make debt service
payments for the amount borrowed under the Financing Program. Housing agencies pursuing
any type of Financing Program activities must follow all statutory and regulatory requirements
related to the Public Housing Capital Fund program in regard to the development and
implementation of their Financing Program proposal.

In December 2003, HUD approved the authority’s Financing Program proposal to issue 2003
bonds with total proceeds of $693 million for the rehabilitation of more than 8,000 units in 44
public housing projects. The authority’s deadline for obligating the 2003 bonds was December
2005, and the deadline for expending 100 percent of the bonds was December 2007.1

In October 2007, the authority informed HUD that it did not anticipate being able to fully expend
the 2003 bond proceeds within the prescribed timeframe and requested an extension to the
obligation deadline. The authority attributed the delay to the complexity and the multiple facets
of the 2003 bond transaction. HUD approved a one-year extension on December 7, 2007, that
extended the obligation deadline to December 2006 and the expenditure deadline to December
2008.

In June 2008, the authority submitted a proposal to HUD to use unexpended 2003 bond proceeds
to pay off part of the existing debt, issue new bonds of approximately $380 million, and provide
for a $235 million tax credit investment. HUD approved the proposal in June 2008. In August
2008, the unexpended 2003 bond proceeds were placed in escrow to redeem the bonds as they
reached maturity.

On February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (Recovery Act). The Recovery Act provided additional Public
Housing Capital Fund program funds to public housing agencies across the country to create and
preserve jobs and to help stabilize the economies of state and local governments. The Recovery
Act imposes strict obligation and expenditure deadlines that housing agencies must meet to avoid
strict recapture provisions. On March 18, 2009, HUD granted more than $174.5 million in
1
 Regulations at 24 CFR (Code of Federal Regulations) 905.120 provide that at least 90 percent of the funds must be
obligated before the end of the second year and fully expended before the end of the fourth year after the funds
become available.

                                                        5
capital funds authorized under the Recovery Act. As of July 2009, the authority was responsible
for managing more than $1.3 billion in funding for modernization of its public housing projects.

Our audit objectives were to determine whether the authority obligated and expended the 2003
Financing Program funds in a timely manner as prescribed by regulations, the authority’s financial
management system complied with HUD requirements, the authority completed all of the
proposed rehabilitation efforts, and the authority had the capacity to administer funds received
under the Recovery Act.




                                                6
                                 RESULTS OF AUDIT

Finding 1: The Authority Mismanaged Its Financing Program
The authority did not manage the 2003 Financing Program in an economical, efficient, and
effective manner. It did not complete all of the proposed rehabilitation activities and did not
expend all of the borrowed private capital. These deficiencies occurred because the authority’s
management did not implement adequate controls to effectively plan and coordinate the
execution of its Financing Program activities. As a result, the authority did not meet its
rehabilitation goals. In addition, it disbursed more than $57.4 million in capital funds to pay for
interest charges on unused borrowed capital that did not provide the intended benefits to the
public housing program or its residents.



 Incomplete Modernization
 Efforts

               In December 2003, HUD approved the authority’s Financing Program proposal to
               issue more than $693 million in bonds for the rehabilitation of more than 8,000
               units at 44 public housing projects. The authority’s deadline for obligating the
               2003 bonds was December 2005, and the deadline for completing the
               rehabilitation work and expending 100 percent of the bond proceeds was
               December 2007. In October 2007, the authority informed HUD that it did not
               anticipate being able to fully expend the 2003 bond proceeds as required by
               section 9(j)(5) of the United States Housing Act of 1937 and requested a one-year
               extension of the obligation deadline for reasons allowed under section 9(j)(2).
               The authority’s reasons included multiple demanding issues in managing its large
               portfolio, complex and multiple facets involving a number of parties, and
               relocation of more than 350 families. On December 7, 2007, HUD granted a one-
               year extension to the obligation/expenditure date based upon the authority’s
               request and a review of relevant information. Thus, the obligation deadline was
               extended to December 2006, and the expenditure deadline was extended to
               December 2008.

               The authority had previously informed HUD that it obligated 100 percent of the
               funds in November 2005 and thus had met the obligation deadline. Therefore, the
               October 2007 extension request was not justified. Further, we asked the authority
               to identify the number of units that were completely rehabilitated between the
               date of the HUD approval letter and the revised expenditure deadline of
               December 2008. The authority stated that the information was not readily
               available, and it would need to review project files month by month to extract the
               information. Thus, the authority lacked information to demonstrate whether the
               extension resulted in a significant increase in rehabilitated units.


                                                 7
           On March 12, 2009, the authority provided us with a summary schedule showing
           the status of the rehabilitation work associated with the 2003 bonds. The schedule
           showed that of the 44 proposed projects, 16 had been completed, 18 were in
           process, and 10 had not been funded. Of the 8,256 units that the authority had
           planned to rehabilitate with the 2003 bonds, only 3,606 had been completed.
           Thus, the authority did not complete the rehabilitation work in about 56 percent of
           the proposed dwelling units (see appendix C). Therefore, it did not fulfill its
           rehabilitation objectives, and tenants were deprived of the intended benefits of the
           Financing Program.

Inadequate Planning and
Coordination

           Regulations at 24 CFR (Code of Federal Regulations) 968.125 provide that
           housing agencies shall undertake the modernization activities in a timely,
           efficient, and economical manner.

           Authority management did not implement adequate controls and failed to provide
           timely and efficient administration of its 2003 Financing Program activities,
           resulting in delays in the rehabilitation of the public housing units. For example,
           at the Jardines de San Fernando housing project, the authority notified the
           contractor to commence the rehabilitation work, although the construction permits
           had expired and required environmental studies had not been performed. Because
           the authority had to correct these violations, the rehabilitation work at the housing
           project was postponed.




                     Rehabilitation efforts at Jardines de San Fernando were not completed.

           The rehabilitation contract for Jardines de San Fernando was awarded on May 3,
           2005, with a completion date of July 10, 2008, which was beyond the December

                                                8
2007 expenditure deadline date. According to the authority, about 41 percent of
the rehabilitation work had been completed as of March 2009. Our site visit on
April 23, 2009, confirmed that the rehabilitation efforts were still in progress.
The new target completion date for the rehabilitation work is September 2010.

The Jardines de Montellanos housing project also had delays in its rehabilitation
efforts. Although the contract was awarded on November 28, 2006, the authority
did not notify the contractor to commence the rehabilitation work until October
22, 2008. The authority informed us that the notice to proceed was not provided
in a timely manner, because the authority’s project design contract had expired,
and the authority had to rebid the services before the rehabilitation work started.




         The contractor’s offices at Jardines de Montellanos were closed.

On April 23, 2009, we visited Jardines de Montellanos and found that the
rehabilitation had not commenced. According to the authority, the contractor’s
offices at the site had been closed for more than a year, and the contractor refused
to commence the rehabilitation, alleging an increase in construction costs. The
contractor claimed that it could not complete the work at the quoted price and
attributed the cost increase to the authority’s untimely notification to proceed with
the work. The authority was negotiating with the contractor for a new timetable
to begin the rehabilitation efforts.

Other housing projects were experiencing delays in their rehabilitation efforts.
According to the summary schedule prepared by the authority, the rehabilitation
work at four construction sites was between 314 and 622 days behind schedule.




                                      9
                                           Construction    Days behind
                      Housing project       start date      schedule                 Authority’s comments
                                                                          Project lacks required endorsements from
                      Catañito Gardens     Feb. 8, 2006         314
                                                                          state agencies.
                                                                          Poor management by general contractor
                      Arístides Chavier    Aug. 1, 2005         379
                                                                          and subcontractor.
                                                                          Contractor lacks adequate administrative
                      Los Mirtos          Dec. 15, 2004         619
                                                                          and planning strategies.
                                                                          Buildings have structural deficiencies.
                      El Coral             Jan. 9, 2006         622


                    The authority did not take into consideration the Financing Program expenditure
                    requirements when it executed rehabilitation contracts for 12 housing projects.
                    When HUD approved the authority’s 2003 bonds, the deadline for expending 100
                    percent of the funds was December 2007.2 However, the authority awarded
                    contracts that were beyond the expenditure deadline. The contracts had end dates
                    that were between 205 and 921days after the expenditure deadline.

                                                     Contract            Contract        Number of days beyond
                           Housing project              date             end date         expenditure deadline
                      Jardines de San Fernando      May 3, 2005       July 10, 2008               205
                      La Lorenzana                 July 14, 2005      July 12, 2008               207
                      San Fernando                 Aug. 2, 2004       Nov. 4, 2008                322
                      Jardines de Campo Rico       Oct. 27, 2005      Nov. 15, 2008               333
                      Las Violetas                 Dec. 13, 2005      Dec. 12, 2008               360
                      Villa Del Rio                Dec. 13, 2005      Dec. 12, 2008               360
                      Jardines de Cupey            Dec. 15, 2005      Dec. 14, 2009               727
                      Trina Padilla de Sanz        Aug. 12, 2005       Feb. 5, 2010               780
                      Jardines de Montellanos      Nov. 28, 2006      Mar. 12, 2010               815
                      Catañito Gardens             Dec. 13, 2005      Mar. 17, 2010               820
                      Turabo Heights                Oct. 6, 2005      Apr. 28, 2010               862
                      Arístides Chavier            June 23, 2005      June 26, 2010               921

                    The above examples are not all-inclusive but show the authority’s ineffective
                    planning and poor coordination efforts regarding its Financing Program activities.
                    The authority’s management failed to ensure that Financing Program goals were
                    properly achieved in a timely and efficient manner.

    Interest Paid for Unused Funds



                    The authority decided to pursue a mixed-financing modernization plan for its
                    public housing developments and submitted a proposal to HUD in June 2008. In
                    conjunction with the mixed-financing plan, the authority submitted a proposal to
                    use the unexpended 2003 bond proceeds to pay off part of the existing debt. HUD
                    approved the proposal in June 2008.

2
    Regulations at 24 CFR 905.120 provide that at least 90 percent of the funds must be obligated before the end of the
    second year and fully expended before the end of the fourth year after the funds become available.

                                                           10
                    In August 2008, more than $407 million in unexpended 2003 bond proceeds was
                    placed in escrow with the authority’s bond trustee to redeem the bonds as they
                    reached maturity. We estimate that of the $102 million in capital funds used to
                    pay for interest charges,3 more than $57.4 million was associated with the
                    unexpended 2003 bond proceeds. The authority used capital funds to make debt
                    service payments for borrowed funds that were not used. Regulations at 2 CFR
                    Part 225 provide that a cost is allocable to a particular cost objective if the goods
                    or services involved are chargeable or assignable to such cost objective in
                    accordance with relative benefits received. Therefore, the $57.4 million in
                    interest charges was not an allocable expense since the unexpended funds did not
                    benefit the authority’s public housing program or its residents.


    Conclusion


                    Because the authority did not implement adequate controls, it failed to manage the
                    2003 Financing Program activities in an economical, efficient, and effective
                    manner. The authority did not complete all of the proposed rehabilitation
                    activities and was unable to expend all of the borrowed private capital in a timely
                    manner. It did not complete the rehabilitation efforts contained in the 2003
                    Financing Program proposal and used more than $57.4 million in capital funds to
                    pay for interest expenses on unused borrowed capital that did not benefit the
                    public housing developments or its residents. Management must address the
                    weaknesses identified in this report to assure HUD that it can administer the
                    Financing Program in an economical, efficient, and effective manner and achieve
                    program goals.

    Recommendations

                    We recommend that the Director of the Office of Public Housing

                    1A.      Require the authority to reimburse the Public Housing Capital Fund
                             program from nonfederal funds $57.4 million paid for the unallocable
                             interest expenses.

                    1B.      Require the authority to implement an adequate action plan to ensure that
                             rehabilitation efforts and program goals are achieved in a timely,
                             economical, efficient, and effective manner.




3
    The authority pledged a portion of its future annual capital funds to make debt service payments for the amount
    borrowed under the Financing Program.

                                                           11
Finding 2: The Authority’s Financial Management System Did Not
           Fully Comply with HUD Requirements
The authority’s financial management system did not account for more than $18.7 million in
program income, and it did not contain accurate and current accounting records. In addition, the
authority did not use $50.3 million in program income to defray program costs and provided HUD
with inaccurate information on its Financing Program activities. These deficiencies occurred
because the authority’s management did not implement effective controls to ensure that the financial
information on its Financing Program activities was complete and accurate. As a result, the
authority’s internal controls were not sufficient to safeguard assets and ensure their use in
accordance with applicable requirements, and HUD lacked assurance regarding program
accomplishments.


    Unsupported Program Income


                 According to HUD officials, investment earnings on Financing Program funds are
                 considered program income, and the receipts and expenditures of such income
                 must be recorded as part of the financial transactions and subject to applicable
                 requirements governing the use of Financing Program funds. The authority’s
                 accounting records did not show the disposition of more than $18.7 million in
                 program income generated by the Financing Program.

                 The authority’s records reflected that between December 2003 and September
                 2008, the Financing Program should have received more than $69.3 million in
                 program income associated with interest earnings.4 The general ledger showed
                 that as of September 2008, the authority had disbursed $257,244 of the program
                 income. Therefore, $69 million of the program income remained unexpended.5

                 We examined the Financing Program bank statements to verify that the
                 unexpended funds remained deposited at the authority’s financial institutions. Of
                 the $69 million in unexpended program income, the bank statements reflected a
                 balance of only $50.3 million as of September 2008. The authority’s accounting
                 records did not reflect the disposition of the remaining $18.7 million. An
                 accounting official informed us that bank reconciliations were not performed on
                 the investment accounts of the Financing Program.

                 The authority’s fiscal controls were not sufficient to permit the proper tracing of
                 program income at a level that would ensure that funds had not been used in
                 violation of the applicable statutes. Although the authority informed HUD that
                 more than $66 million in program income was available for future public housing

4
 The amount was determined from a summary schedule prepared by the authority’s consultant and bank statements.
5
 In December 2008, the authority informed HUD that more than $66 million in unexpended program income was
available for future public housing development activities and that the funds remained with the 2003 bond trustee.

                                                       12
           development activities, bank statements reflected a significantly smaller amount
           of available funds, $50.3 million. At the time of our review, the authority was not
           aware of the unrecorded program income and did not provide support showing the
           location of the funds. It could not ensure that program income was adequately
           accounted for, safeguarded, and used for authorized and eligible purposes. The
           $18.7 million in unrecorded program income is unsupported pending an
           explanation and appropriate supporting documents showing the disposition and
           eligibility of the funds.

Inaccurate Accounting Records



           The authority’s annual contributions contract and 24 CFR Part 85 provide that
           housing agencies must maintain financial records that are accurate and current and
           that adequately identify the source and application of funds provided for assisted
           activities.

           The authority’s accounting records did not reflect current complete and accurate
           financial information on Financing Program activities. For example, transactions
           affecting the investment and revenue accounts had not been recorded since June 30,
           2008. In addition, the accounting records did not include the transactions associated
           with the repayment of the 2003 bonds that took place in August 2008. The
           authority’s accounting official attributed the delay in recording financial transactions
           to a lack of personnel and inadequate information from other authority officials. The
           accounting records also contained several instances of incorrect ending balances as a
           result of posting errors. For example, the interest income accounts contained more
           than $10 million in erroneous transactions.

           In addition, the authority’s accounting system did not reflect accurate information
           when obligations occurred. The dates recorded in the system represented the date
           the obligation was entered into the authority’s accounting system and not the date
           when the contractual obligation occurred. The following table illustrates
           examples of the discrepancies in the obligation dates.

                                               Obligation date
                         Contract number       according to the        Contract date
                                              accounting system
                           2005-1070              Aug. 16, 2005       June 23, 2005
                           2005-0334              Sept. 2, 2004       Aug. 2, 2004
                           2006-0371              Nov. 29, 2005        Oct. 6, 2005
                           2006-0119              Sept. 20, 2005      Aug. 12, 2005
                           2006-0362              Dec. 13, 2005       Oct. 27, 2005

           The authority’s system did not permit the tracking of obligations by contract
           dates. Therefore, it was not adequate to monitor compliance with HUD’s
           obligation requirements.

                                             13
    Unused Program Income


                   HUD’s regulations at 24 CFR 85.25 state that grantees are encouraged to earn
                   income to defray program costs.

                   The authority did not have a plan for the use of its program income, allowing the
                   accumulation of a significant amount of cash in its investment accounts. As a
                   result, it did not use the funds to defray program costs or benefit low-income
                   housing projects and residents. Between December 2003 and September 2008,
                   the 2003 bonds proceeds generated more than $69.3 million in program income.
                   However, the authority’s general ledger only reflected expenditures of $257,244,
                   and the balance of its investment accounts remained consistently high during the
                   same period. The 2003 bonds earned on average $11.5 million in program
                   income per year.

                                          Investment earnings and disbursements




                   The authority informed us that it did not have in place an action plan for the use
                   of the investment earnings generated from the 2003 bonds. As a result, the
                   balance of the program income continued to increase without benefiting the
                   public housing program. Authority management must improve its controls over
                   program income to ensure that the $50.3 million in unexpended funds is put to better
                   use in accordance with HUD requirements.6


6
    The amount was determined from bank statements reflecting the accounts’ cash balance as of September 2008.

                                                         14
Inaccurate Progress Reports


           HUD’s Financing Program guidelines provide that housing agencies must submit
           performance and evaluation reports reflecting the use of Financing Program
           proceeds. These reports are used to monitor program activities and ensure that the
           obligation and expenditure of the funds comply with HUD requirements. The
           authority’s performance and evaluation reports were not accurate.

           The performance and evaluation reports submitted to HUD reflected inaccurate
           information on the amount obligated. For example, the November 2005 report
           reflected that 100 percent of the 2003 Financing Program proceeds were
           obligated. However, the authority overstated the actual obligations by at least
           $14.9 million. From the $14.9 million in overstated obligations, $13.3 million
           was associated with unsupported budget estimates of expected expenditures
           associated with future relocation activities to be undertaken by the authority’s
           managing agents. These budget estimates were not consistent with the definition
           of obligations as contained in 24 CFR 85.3. Accordingly, the authority did not
           follow HUD requirements and should not have reported the relocation activities
           as obligated funds. The remaining $1.6 million in overstated obligations was
           related to duplicate transactions, obligations not associated with the 2003
           Financing Program, or obligations reported in excess of the contracted amount.

           The authority also provided HUD with inaccurate information on the expenditures
           of its 2003 bond proceeds. The September 2008 performance and evaluation
           report reflected expenditures of more than $330 million. However, the authority’s
           accounting records showed that a much higher amount was expended, more than
           $395 million. The performance and evaluation report for the period ending
           September 30, 2008, did not agree with amounts reflected in the authority’s
           general ledger.

                                           General      Performance
                  Account description       ledger         report      Difference
                Fees and costs            $25,636,102    $22,483,369    $3,152,733
                Site improvement           84,045,750     67,793,765    16,251,985
                Dwelling structure        257,732,677    217,591,633    40,141,044
                Nondwelling structure      14,490,778     12,020,158     2,470,620
                Nondwelling equipment          43,536              0         43,536
                Relocation cost            12,572,695      9,432,144     3,140,551
                Development activities      1,319,928        873,378       446,550
                         Total           $395,841,466   $330,194,447   $65,647,019

           An authority official informed us that the amounts included in the September
           2008 performance and evaluation report were not verified or reconciled with the
           authority’s accounting records. The amounts were obtained from the authority’s



                                             15
                    requisition reports.7 Therefore, HUD had no basis for reliance on the reported
                    information submitted by the authority.

    Conclusion


                    The authority did not maintain a financial management system that adequately
                    identified the source and application of Financing Program funds. Its accounting
                    records were incomplete, since they did not reflect the complete and full history
                    of all financial transactions. The noncompliance occurred because the authority’s
                    management did not implement effective controls to ensure that the financial
                    information on its activities was complete and accurate. As a result, the authority
                    could not ensure that program income was adequately accounted for, safeguarded,
                    and used for authorized purposes and in accordance with HUD requirements. The
                    authority must improve its internal controls to properly safeguard assets and improve
                    the administration of its program income.

    Recommendations


                    We recommend that the Director of the Office of Public Housing

                    2A.      Require the authority to submit all supporting documentation showing the
                             eligibility and propriety of more than $18.7 million in unrecorded program
                             income or reimburse the Financing Program from nonfederal funds.

                    2B.      Require the authority to develop and implement an action plan so that
                             $50.3 million in unexpended program income is put to better use. At a
                             minimum, the plan should include activities and target dates and ensure
                             that such funds are used for the benefit of the public housing program and
                             its residents.

                    2C.      Take appropriate monitoring measures to ensure that the Financing
                             Program has in place a financial management system that complies with
                             HUD requirements. At a minimum, the system should ensure that fiscal
                             controls and accounting procedures are sufficient to permit the tracing of
                             funds at a level that ensures that such funds are not used in violation of the
                             restrictions and prohibitions of applicable statutes.

                    2D.      Require the authority to ensure that receipts and disbursements are
                             properly accounted for and in compliance with HUD requirements and
                             that revised performance and evaluation reports are submitted to HUD.


7
    The requisition reports are not the official accounting records. These are spreadsheets used by the authority to
    track advance requests made to the 2003 bond trustee.

                                                           16
Finding 3: The Authority’s Recovery Act Funds Will Inappropriately
           Supplant Expenditures from Other Sources
The authority inappropriately obligated $32.12 million in Recovery Act funds to supplant
expenditures from other nonfederal funds in violation of its annual contributions contract with
HUD. This deficiency occurred because the authority substituted the obligations related to
nonfederal funds with Recovery Act funds. As a result, the authority will use Recovery Act
funds to pay for expenditures that were the responsibility of nonfederal sources.




 Inappropriate Obligations


               The authority’s amendment to the annual contributions contract, section 7(j),
               provides that housing agencies must use Recovery Act funds to supplement and not
               supplant expenditures from other federal, state, or local sources or funds
               independently generated by the grantee. HUD Notice PIH [Public and Indian
               Housing] 2009-12(HA) authorized housing agencies to obligate Recovery Act funds
               starting March 18, 2009 (obligation start date). HUD’s Recovery Act Web site
               clarified that any obligation recorded against the Recovery Act funds must be for
               new work not previously obligated and for activities that occur after the obligation
               start date.

               In April 2009, the authority submitted its annual statement for the Recovery Act
               funds detailing the budget line items and the 39 projects that will benefit from the
               $174 million in capital fund recovery grants. The annual statement reflected more
               than $32.12 million obligated to five public housing developments as of March 31,
               2009. We reviewed the obligations and related supporting documents to determine
               whether the obligations met HUD requirements. The $32.12 million in obligations
               was related to five rehabilitation contracts, totaling $46.18 million, awarded between
               October and November 2008.

                                                       Nonfederal funds         Recovery Act funds
                  Public housing     Contract    Obligation        Obligated       supplanting
                      project         number         date           amount       nonfederal funds
                Narciso Varona       2009-541   Oct. 20, 2008      $9,879,114         $6,384,443
                Manuel F. Rossy      2009-289   Oct. 22, 2008      10,316,000          6,493,889
                Maximino Miranda     2009-595   Oct. 24, 2008      12,392,438          8,951,442
                Ramirez de
                Arellano             2009-574   Oct. 31, 2008      4,040,000           2,543,167
                La Alhambra          2009-619   Nov. 21, 2008      9,555,000           7,749,327
                                    Total                        $46,182,552         $32,122,268
               The five contracts were previously obligated against other federal and local funds
               and awarded before the authorized obligation start date of March 18, 2009. Of the

                                                17
            $46.18 million in contracts awarded in 2008, $32.12 million was obligated against a
            line of credit with a governmental bank (local funds), and $14.06 million was
            obligated against various grants of the Public Housing Capital Fund program. In
            March 2009, the authority substituted the obligations related to the line of credit with
            Recovery Act funds. Therefore, the authority inappropriately obligated $32.12
            million in Recovery Act funds to supplant expenditures from other local sources and
            for activities awarded before the authorized obligation start date. This substitution
            of Recovery Act funds for nonfederal funds will result in the authority using
            Recovery Act funds to pay for expenditures that were the responsibility of the
            nonfederal funds. Of the $32.12 million in inappropriate obligations, the authority
            disbursed more than $462,000 in June 2009. Therefore, the Recovery Act funds
            disbursements were ineligible.

            An authority official informed us that Recovery Act funds were obligated for
            activities awarded before the obligation start date, because the authority believed that
            it was appropriate, and it had obtained HUD approval for this type of transaction.
            The authority did not provide support showing that HUD approved the use of
            Recovery Act funds to supplant expenditures from other sources. Further, this
            practice is in violation of the authority’s annual contributions contract with HUD
            and inconsistent with requirements of the Recovery Act.

            Authority management must improve its controls over its Recovery Act funds to
            ensure that they are properly obligated and that $31.65 million in inappropriate
            obligations is put to better use in accordance with HUD requirements.


Insufficient Capacity


            The authority did not implement effective controls over its Financing Program
            and the activities funded under the Recovery Act to ensure compliance with all
            applicable regulations. As described in findings 1 and 2, the authority
            mismanaged its Financing Program, and its financial management system did not
            fully comply with HUD requirements. In addition, the authority obligated
            Recovery Act funds for activities that occurred before the authorized obligation
            start date in violation of its annual contributions contract with HUD.

            The significant amount of funds under the authority’s management, the restrictive
            program deadlines, and the authority’s inefficient use of its 2003 Financing
            Program (see finding 1) raise concerns regarding the authority’s capacity to
            administer the additional Recovery Act funds.

            The authority currently administers more than $1.3 billion for rehabilitation of its
            public housing projects. Between fiscal years 2005 and 2008, the authority
            received more than $559.8 million in capital funds. In June 2008, it issued $386
            million in bonds under the Financing Program and received an additional $235

                                              18
             million in tax credit investments. In March 2009, pursuant to the Recovery Act,
             the authority received an additional $174 million in capital funds. The program
             deadlines for these funds are near the deadlines for the Recovery Act funds. The
             authority must complete the modernization/rehabilitation efforts and expend more
             than $1.3 billion, according to various program requirements, by September 2012.
             In addition, the authority must obligate more than $840 million in HUD funds,
             about six times its normal level of funding, by the year 2010.

                                                       Obligation deadline year
                         Program                 2008           2009            2010
               Capital funds-2005*            $143,153,018
               Capital funds-2006*                          $137,959,152
               Capital funds-2007*                                           $140,842,826
               Capital funds-2008                                             137,919,872
               Financing Program-2008                                         386,785,824
               Capital fund recovery grant                                    174,579,333
                          Total               $143,153,018 $137,959,152 $840,127,855
             * In June 2008, HUD granted the authority a one-year extension for
               obligation/expenditure of the funds.


Conclusion


             Because the authority did not implement adequate controls and lacked sufficient
             capacity to administer additional funds allocated under the Recovery Act, it
             inappropriately obligated more than $32.12 million in Recovery Act funds. The
             lack of adequate oversight and capacity by the authority to ensure that HUD funds
             were managed in an economical, efficient, and effective manner is a major concern
             in light of the authority’s receiving additional capital funds under the Recovery
             Act. Management must improve its internal controls to assure HUD that it can
             administer the Recovery Act funds in an economical, efficient, and effective
             manner and achieve program goals.

Recommendations


             We recommend that the Director of the Office of Public Housing

             3A. Require the authority to deobligate $31.65 million in Recovery Act funds
                 related to the five contracts awarded before the authorized obligation start
                 date and put the funds to better use.

             3B. Require the authority to reimburse the capital fund program from nonfederal
                 funds $462,715 paid for ineligible Recovery Act expenditures.

                                               19
3C. Require the authority to implement adequate procedures and controls to
    ensure that Recovery Act funds are used effectively and efficiently and in
    accordance with applicable requirements.

3D. Take appropriate monitoring measures to ensure that the authority complies
    with all applicable requirements of the Recovery Act.




                               20
                                 SCOPE AND METHODOLOGY

To accomplish our objectives, we did the following:

           Reviewed applicable laws, regulations, and other HUD program requirements.

           Obtained an understanding of the authority’s management controls and procedures as
           they related to our objectives.

           Analyzed the authority’s obligations and disbursements regarding the Financing Program.

           Interviewed HUD and authority management and staff.

           Reviewed the authority’s files and records, including progress and evaluation reports,
           general ledgers, and bank statements.

           Traced amounts included in progress reports to general ledgers and source documents.

           Reviewed the authority’s latest independent public accountant report.

           Selected a sample of 10 projects and reviewed the amounts the authority reported as
           obligated.8 These 10 projects represented $250 million of more than $606 million of the
           total reported obligations for the period ending November 30, 2005. We reviewed the
           obligations and related supporting documents to determine whether obligations met
           Financing Program requirements.

           Performed site inspections at three public housing projects to verify the progress of the
           rehabilitation efforts. We inspected Pedro Rosario Nieves, Jardines de San Fernando,
           and Jardines de Montellanos public housing projects based on the authority’s progress
           report that showed delays in the rehabilitation efforts.

The authority’s records reflected that between December 2003 and September 2008, the
Financing Program received more than $69.3 million in program income and that $257,244 of
the proceeds had been expended. We examined the authority’s records to verify the availability
of the unexpended program income. According to the bank statements, $50.3 million in program
income had not been spent and the authority could not account for $18.7 million. The authority’s
internal controls were not sufficient to safeguard its program income and ensure that funds had been
used for eligible purposes. Once the proper controls and action plans are developed and
implemented, the authority could put the $50.3 million in unused program income to better use and
ensure that HUD requirements are met.




8
    We selected a nonstatistical sample and did not use these projects for projecting our sample results.

                                                            21
The authority reported to HUD that it had obligated $32.12 million in Recovery Act funds to five
public housing developments as of March 31, 2009. We reviewed the obligations and related
supporting documents to determine whether the obligations met HUD requirements.

We conducted our fieldwork from August 2008 through July 2009 at the authority’s offices in
San Juan, Puerto Rico. Our audit period was December 1, 2003, through July 31, 2008, but we
expanded our audit period as needed to accomplish our objectives.

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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               22
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls 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 resource use is
                      consistent with laws and regulations.

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

              We assessed the relevant controls identified above.

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


 Significant Weaknesses


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

                    The authority’s management did not implement adequate controls to
                    effectively plan and coordinate the execution of its Financing Program
                    activities (see finding 1).

                                               23
The authority’s management did not implement effective controls to safeguard
assets and ensure that the financial information on its Financing Program
activities was complete and accurate (see finding 2).

The authority’s management did not implement adequate controls and lacked
sufficient capacity to administer additional funds allocated under the
Recovery Act (see finding 3).




                          24
                                   APPENDIXES

Appendix A

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


       Recommendation                                                  Funds to be put
           number              Ineligible 1/        Unsupported 2/     to better use 3/

              1A                $57,464,212

              2A                                      $18,701,107

               2B                                                         $50,354,867

              3A                                                           31,659,553

               3B                   $462,715

             Total              $57,926,927           $18,701,107         $82,014,420

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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (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. In this instance, if the authority implements
     recommendation 2B, it will ensure that the unused program income is put to better use for
     the benefit of the public housing program and its residents and that HUD requirements
     are met. By implementing recommendation 3A, funds inappropriately obligated by the
     authority will be available for a more appropriate use consistent with the Recovery Act.



                                               25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3


Comment 3




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 4




Comment 4




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 5



Comment 5




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 6




                         30
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7




                         31
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




                         32
Ref to OIG Evaluation   Auditee Comments



Comment 8




Comment 9




Comment 10




                         33
Ref to OIG Evaluation   Auditee Comments




Comment 11




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 12




                         35
Ref to OIG Evaluation   Auditee Comments



Comment 12




Comment 13




                         36
Ref to OIG Evaluation   Auditee Comments




Comment 14




                         37
Ref to OIG Evaluation   Auditee Comments




Comment 15




                         38
Ref to OIG Evaluation   Auditee Comments




Comment 16




                         39
                         OIG Evaluation of Auditee Comments

Comment 1   The authority stated that it provided additional information that should put OIG
            into a position to remove or modify the proposed findings.

            The additional information provides insight as to why management was unable to
            respond to changing events but did not justify the authority’s inability to fulfill
            requirements under the Financing Program and the Recovery Act. The authority
            represented to HUD and bond investors that in return for the funds provided, it
            would provide specific products and services. Specifically, the authority
            committed to spending $693 million from its 2003 bond proceeds for the
            rehabilitation of more than 8,000 units in 44 public housing projects within four
            years. It modernized only about 3,600 units and placed more than $407 million in
            unexpended 2003 bond proceeds in escrow with the authority’s bond trustee to
            redeem the bonds as they reached maturity. It did not complete the rehabilitation
            efforts contained in the 2003 Financing Program proposal and used more than
            $57.4 million in capital funds to pay for interest expenses on unused borrowed
            capital that did not benefit the public housing developments or its residents. The
            authority did not provide additional information to account for more than $18.7
            million in program income or justify why its accounting system did not contain
            accurate and current accounting records. Although Recovery Act funds provided
            additional Public Housing Capital Fund program funds to create and preserve jobs
            and to help stabilize the economies of state and local governments, the authority
            plans to use $32 million of Recovery Act funds to pay the salaries of already
            employed individuals financed with other funding sources. Accordingly, we did
            not remove or modify the report findings, conclusions, and recommendations.

Comment 2   The authority asserted that the findings were inaccurate, unsupported, and
            inconsistent with audit standards.

            The findings are supported by source documents the authority provided during the
            review. The authority did not provide us with any documentation showing that
            the findings were inaccurate, unsupported, and inconsistent with audit standards.

Comment 3   The authority stated that OIG did not provide an explanation and documentation
            to fully understand the basis for the conclusions. It also requested to meet with
            OIG to discuss the 2008 financing and revise the findings.

            We discussed the findings with authority officials during the audit (March 2009,
            May 2009, and July 2009). We discussed the findings and the report with
            authority officials at the exit conference on September 10, 2009. During the exit
            conference, authority officials requested some specific documentation pertaining
            to the audit findings. On September 10, 2009, we sent the authority the requested
            information.




                                            40
            The audit report did not question the 2008 financing, and the authority did not
            provide additional documentation that warrants a revision to the findings.

Comment 4   The authority discussed the 2008 financing transactions and asserted that the
            associated costs were reasonable.

            As indicated above, the audit report did not question the 2008 financing or the
            reasonableness of the associated costs.

Comment 5   The authority commented that capital funds can be used to make interest
            payments on debt and said the costs were reasonable and benefited public housing
            residents. The authority cited the statutory provision in 42 USC §1437g(d)(1) and
            regulations at 2 CFR Part 225 which permits the use of capital fund assistance to
            finance public housing projects.

            While capital funds can be used to pay for the financing of public housing
            rehabilitation costs, such financing costs are not allocable if the expected benefit
            is not received. In August 2008, more than $407 million in unexpended 2003
            bond proceeds was placed in escrow to redeem the 2003 bonds. Regulations at 2
            CFR Part 225, Appendix A, Part C, Number 3, state that a cost is allocable when
            the goods or services received are assignable to a cost objective “in accordance
            with relative benefits received.” Because such funds were not used to rehabilitate
            public housing , the relative benefit of paying interest on such unused funds was
            not received. We contend that the interest paid for the unused funds is
            unallowable.

Comment 6   The authority asserted that it complied with all legal requirements for obligation
            and expenditure of Financing Program funds.

            We agree that the authority did obligate the 2003 bond proceeds within two years
            as required by HUD. However, the authority did not expend more than $407
            million in 2003 bond proceeds within the prescribed time.

            Section 9(j) of the Act required the authority to obligate its Capital Funds within
            24 months of the date on which the funds became available. Section 9(j)(5)
            required the authority to expend its funds within four years of the date on which
            the funds became available. The statute and HUD’s regulations allow for an
            extension of the expenditure deadline only when the obligation deadline has been
            extended. When the authority submitted its request for extension of the obligation
            deadline in October 2007, the authority had previously submitted to HUD the
            November 2005 Annual Statement/Performance and Evaluation report showing
            that it had already obligated the funds. We therefore maintain our position that
            the extension request was not justified.

Comment 7   The authority stated that there was no requirement to renovate 8,256 units and that
            guidelines in 24 CFR Part 968.125 are not applicable to the Capital Fund
            program.

                                             41
             The authority’s letter to HUD dated November 12, 2003, and HUD’s approval
             letter of December 3, 2003, represented that the 2003 bonds would be used for the
             rehabilitation of more than 8,000 units in about 40 public housing projects. Our
             report shows that the authority fell far short of meeting its goal. The authority's
             assertion that 24 CFR Part 968 is not applicable to the Capital Fund program is
             incorrect. Guidance in HUD Public and Indian Housing notices for the
             processing of Capital Fund grants have repeatedly stated that housing authorities
             agree to comply with Part 968 regulations when signing annual contribution
             contract (ACC) amendments to receive capital funds.

Comment 8    The authority stated that it complied with applicable requirements in carrying out
             modernization projects and that examples in the report are the result of prudent
             practices.

             The examples provided in the report illustrate that the authority did not undertake
             modernization activities in a timely, efficient, and economical manner. The
             authority records showed that of the 44 proposed projects, only 16 had been
             completed, 18 were in process, and 10 had not been funded. In addition, some
             projects were between 314 and 622 days behind schedule. We contend that poor
             planning and poor coordination contributed to the authority’s delays in
             completing its rehabilitation activities.

Comment 9    The authority stated that there is no requirement that Financing program and
             project end dates should coincide and that the projects may use other sources of
             funds. The authority cited project Aristides Chavier as an example of projects
             using other sources of funds.

             Our analysis was based on the contract dates and amounts that were originally
             obligated for these contracts to the Financing Program including project Aristides
             Chavier. The authority did not take into consideration the Financing Program
             expenditure requirement when it executed rehabilitation contracts for 12 housing
             projects. The contracts had end dates that were between 205 and 921 days after
             the expenditure deadline. Since the four-year expenditure deadline expired in
             December 2007, it was improper for the contract end dates to extend beyond that
             date for contracts to be charged to the 2003 Financing Program.

Comment 10 The authority stated that we ignored records produced by the bond trustee
           showing that all program income was clearly accounted for and being used for
           program purposes.

             In December 2008, the authority reported to HUD that more than $66 million in
             unexpended program income was available for future public housing development
             activities and that the funds remained with the trustee. We used bank statements
             from the bond trustee to determine the total amount of interest income through
             September 30, 2008. At the time of our review, the trustee’s and the authority’s

                                              42
              records did not reflect the disposition of more than $18.7 million in interest
              income. We clarified the report to indicate that the authority’s records did not
              reflect the disposition of $18.7 million in interest income. Guidelines in 24 CFR
              85.20(b) require grantees to maintain accounting records that are accurate,
              current, and adequately identify the source and application of funds. In addition,
              Section 15 of the authority’s annual contributions contract with HUD requires that
              the authority must maintain complete and accurate records to permit an effective
              audit. The authority did not provide additional documentation to show the
              disposition and eligibility of the $18.7 million in interest income.

Comment 11 The authority asserted that it spent program income in accordance with the
           financing plan approved by HUD.

              The HUD approval letter for the 2003 Financing Program states that interest
              income will be available for modernization of the authority’s public housing
              properties. However, we did not find a plan for the use of program income as part
              of our review of the 2003 Financing Program documents. The five-year plan
              amendment in relation to the 2003 Financing Program indicated: “Interest income
              generated from the investment of the Bond Proceeds will be used to offset
              financing costs and any unused interest income will be used for the modernization
              of properties included in the five (5) year plan.” The authority, however, did not
              use the interest income to offset financing costs and allowed the accumulation of
              interest income without benefiting the public housing program. We contend that
              the authority needs to develop a specific plan to ensure that such funds are used
              for the benefit of the public housing program and its residents.


Comment 12 The authority asserted that the structure of contracts questioned is similar to
           architectural and engineering type contracts in which specific tasks may be issued
           against the main contract during the contract period.

              The similarity appears to be because notices to proceed had not been issued
              against such contracts. We disagree with this interpretation. These were not
              architectural and engineering type contracts. These were construction contracts
              awarded in 2008 for which other sources of funds (capital funds and local line of
              credit) were identified in the contracts registered with the state controller’s office.
              Our interpretation is consistent with the definition of obligations in 24 CFR Part
              85.3, because the contracts were awarded and would require payment in a current
              or future period. The tasks to be performed under these contracts were
              predetermined before the contracts were awarded. This condition is different
              from architectural and engineering type contracts in which new tasks can be
              added or changed as the contract period progresses. At the time of our review,
              two contractors had submitted invoices that the authority paid with Recovery Act
              funds for services performed prior to the issuance of the notice to proceed and
              before the authorized obligation start date of March 18, 2009. Therefore, the



                                                43
              authority did incur obligations prior to the obligation start date and before the
              notices to proceed were issued.

Comment 13 The authority claimed that it determined that the line of credit was no longer an
           available option to cover the contract costs and that without the ARRA funds, the
           projects would have been unable to proceed.

              The authority did not provide evidence to support the statement during the course
              of the audit or as part of the comments. The authority did not provide us with
              additional documentation showing that the Government Development Bank of
              Puerto Rico cancelled the line of credit and that the contracts were cancelled prior
              to the obligation start date of March 18, 2009.

Comment 14 The authority contended that HUD approved the inclusion of the questioned
           contracts for Recovery Act funding.

              HUD’s letter dated June 2, 2009, advised the authority that Recovery Act funds
              should be used to supplement expenditures, not to supplant expenditures from
              other federal, state, or local resources. We contend that the authority did not meet
              the intent of the Recovery Act requirements by supplanting activities that were to
              be funded from other sources.

Comment 15 The authority stated that it has adequate controls to monitor the use of Recovery
           Act funds and requested that we remove the finding because our finding lacks
           legal support.

              The Recovery Act requires that recovery funds shall supplement and not supplant
              expenditures from other sources. By supplanting previously obligated funds,
              without support for the assertion that the line of credit was no longer available,
              the authority violated Recovery Act requirements. In addition, funds that were
              supposed to provide new and added stimulus to the economy were instead used to
              pay for old work that was already programmed.

Comment 16 The authority concluded that OIG misunderstood and inaccurately portrayed the
           actions of the authority and requested that we redraft the report. It also requested
           to meet with OIG to discuss and review additional documentation associated with
           the 2008 financing.

              We discussed the findings with authority officials during the audit and at the exit
              conference and requested the authority to provide any additional documentation to
              justify their actions. The authority provided comments with attachments on
              September 15, 2009.

              We reviewed the additional information provided to us. We determined that the
              explanations and additional documentation did not justify the authority’s inability
              to fulfill requirements under the Financing Program and the Recovery Act. The

                                               44
authority did not provide documentation showing that our findings were
inaccurate and unsupported. We concluded from the information provided that
the authority did not comply with contract requirements as well as HUD rules and
the applicable statutes controlling the program. Therefore, we did not modify or
remove the report findings, conclusions, and recommendations, and we
determined another meeting was not necessary.

As mentioned above, the report did not question the transactions associated with
the authority’s 2008 financing.




                                45
                                             Appendix C

          SCHEDULE OF REHABILITATED UNITS


 Housing project name Units proposed for rehabilitation Units rehabilitated* Rehabilitation work status
Villa Monserrate                             104                                0                     **
Santiago Iglesia                             132                                0                     **
Felipe Sanches Osorio                        186                                0                     **
EI Manantial                                 200                                0                     **
Jardines de Oriente                          200                                0                     **
Los Peña                                     200                                0                     **
Las Amapolas                                 204                                0                     **
Las Dalias                                   240                                0                     **
Nurciso Verona                               260                                0                     **
Puerta de Tierra                             484                                0                     **
El Coral                                     100                                0                 In process
Villas del Río                               100                                0                 In process
Jardines de Montellanos                      250                                0                 In process
Jardines de San Fernando                       70                              13                 In process
Lagos de Blasina                             240                               32                 In process
La Esmeralda                                   84                              36                 In process
Pedro Rosario Nieves                         210                               42                 In process
Práxedes Santiago                            124                               44                 In process
Catañito Gardens                             124                               44                 In process
Los Mirtos                                   304                               46                 In process
Vista Alegre                                   74                              49                 In process
Turabo Heights                               254                              102                 In process
Trina Padilla de Sanz                        268                              137                 In process
Jardines de Cupey                            308                              154                 In process
Ext. Sábalos Gardens                         300                              183                 In process
Arístides Chavier                            480                              204                 In process
San Fernando                                 334                              206                 In process
Rafael López Nussa                           404                              296                 In process
Ext. Santa Catalina                            24                              24                 Completed
Jardines de Judely                             32                              32                 Completed
Yuquiyú II                                     70                              70                 Completed
Alturas de Country Club                        72                              72                 Completed
Las Violetas                                   88                              88                 Completed
Marini Farm                                  100                              100                 Completed
La Lorenzana                                 100                              100                 Completed
Santiago Veve Calzada                        100                              100                 Completed
Roberto Clemente                             126                              126                 Completed
Ponce de León                                132                              132                 Completed
Colinas de Magnolias                         148                              148                 Completed
Andrés Méndez Liceaga                        150                              150                 Completed
Jardines de Cataño                           180                              180                 Completed
Jardines de Campo Rico                       196                              196                 Completed
San Antonio Carioca                          200                              200                 Completed
La Ceiba                                     300                              300                 Completed
          Total                            8,256                           3,606
* Units rehabilitated as of March 2009 according to the authority’s progress report.
** Although the authority proposed using 2003 Financing Program proceeds for the rehabilitation efforts, no funds were
disbursed for these housing projects.




                                                         46