oversight

New Hampshire Housing Finance Authority Generally Administered Its Cost Allocation, Operating Reserves, and Technology Expenditures as Required

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-18.

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

                                                                            Issue Date
                                                                               November 18, 2008
                                                                            Audit Report Number
                                                                                   2009-BO-1003




TO:           Robert P. Cwieka, Acting Director of Public Housing, 1AP
              Richard L. Hatin, Acting Director of Community Planning and Development,
                       1ADM3
              Joseph Crisafulli, New England Hub Director, Multifamily Housing, Boston
                       Regional Office, 1AHM


FROM:          John A. Dvorak, Regional Inspector General for Audit, Boston Region, 1AGA

SUBJECT: New Hampshire Housing Finance Authority Generally Administered Its Cost
         Allocation, Operating Reserves, and Technology Expenditures as Required



                                          HIGHLIGHTS

    What We Audited and Why


                We completed our review of the New Hampshire Housing Finance Authority’s
                (Authority) cost allocation, operating reserves, and technology expenditures. We
                initiated this survey at the request of the U.S. Department of Housing and Urban
                Development’s (HUD) Office of Public Housing. Our objective was to determine
                whether the Authority properly allocated costs, maintained appropriate reserves,
                and managed its technology equipment and information services. Due to the
                nature of cost allocation, our review was expanded and examined the allocations
                to five major programs1 funded by HUD.




1
  The Housing Choice Voucher, Section 8 New Construction/Substantial Rehabilitation, Section 8 Housing
Assistance Payments – Special Allocations, HOME Investment Partnerships, and Section 8 Moderate Rehabilitation
programs.
What We Found


           The Authority generally administered its cost allocation, operating reserves, and
           technology expenditures in accordance with HUD requirements. However, its
           decision to operate its Information Services and Technology Division on an in-
           house basis was not supported by a cost analysis. We addressed this issue in a
           separate memorandum to HUD management.


What We Recommend


           This report contains no formal recommendations, and no further action is
           necessary


Auditee’s Response


           An exit conference was held with the Authority on November 13, 2008. This
           report did not require a response from the auditee.




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                        TABLE OF CONTENTS

Background and Objectives                   4

Results of Audit                            6

Scope and Methodology                       9

Internal Controls                           10




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                        BACKGROUND AND OBJECTIVES

The State of New Hampshire created the New Hampshire Housing Finance Authority
(Authority) to provide financial and technical assistance to create and preserve housing for low-
to-moderate-income residents of New Hampshire. The Authority administers approximately
3,241 Section 8 vouchers under contract with the U.S. Department of Housing and Urban
Development (HUD). In addition, it issues bonds and grants loans from the bond proceeds. The
Authority has approximately $1 billion in assets and has a staff of 110 employees to carry out its
mission.

HUD provides more than $75 million to the Authority through five major programs.

Fiscal year                                                         2005          2006          2007
Section 8 New Construction/Substantial Rehabilitation         $17,452,831   $17,807,474   $18,019,142
Section 8 Housing Assistance Payments – Special Allocations   $21,305,579   $22,542,603   $23,402,569
HOME Investment Partnerships Program                           $4,678,411    $4,122,821    $6,156,460
Section 8 Moderate Rehabilitation                               $721,655      $710,184       $749,573
Housing Choice Voucher                                        $24,879,327   $25,965,995   $27,518,566
Total                                                         $69,037,803   $71,149,077   $75,846,310


In 2006 and 2007, the Authority’s expenditures for HUD programs were greater than its awards.




The Housing Choice Voucher program and HOME Investment Partnerships program had
operating losses.

Our objective was to determine whether the Authority properly allocated costs, maintained
appropriate reserves, and managed its technology equipment and information services.


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HUD was concerned that (1) the cost allocation system used by the Authority did not
appropriately and fairly assign expenses to the program benefiting from those expenses, (2) the
Authority purchased technical equipment and information services that were not appropriate in
nature and reasonable in price, and (3) the Authority’s decisions regarding cost allocation and
technology expenditures adversely impacted reserves needed to sustain existing programs. Due
to the nature of cost allocation, we did not limit our review to public housing programs; instead,
we examined five major programs funded by HUD including the Housing Choice Voucher,
Section 8 New Construction/Substantial Rehabilitation, Section 8 Housing Assistance Payments
– Special Allocations, HOME Investment Partnerships, and Section 8 Moderate Rehabilitation
programs.




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                                RESULTS OF AUDIT

The Authority generally administered its cost allocation, operating reserves, and technology
expenditures in accordance with HUD requirements. The cost allocations were based on an
acceptable allocation methodology, reserves were maintained at appropriate levels, and the
technology expenditures were for allowable operating costs. Therefore, the plan ensured that
costs incurred benefited the administration of the programs charged, reserves were appropriately
maintained for one week of funding, and technology cost allocations were appropriately
allocated to the benefiting programs.



 Cost Allocation, Reserves, and
 Expenditures Were Appropriate


              The Authority had established a cost allocation plan with a valid methodology.
              The basis for the plan’s methodology was labor hours, which is an allowed basis
              under the applicable regulations. The allocations made to the Housing Choice
              Voucher, Section 8 New Construction/Substantial Rehabilitation, Section 8
              Housing Assistance Payments – Special Allocations, HOME Investment
              Partnerships, and Section 8 Moderate Rehabilitation programs were based on this
              allocation methodology. Programs that were more labor intensive, such as the
              Housing Choice Voucher program, had a greater proportion of the expenses by
              using a basis of labor hours. In addition to the HUD-funded programs, the
              Authority operated other loan programs funded with the proceeds of bonds issued
              by the Authority. The Authority was consistent in its use of the basis of labor
              hours for its programs.

              We reviewed the job descriptions of Authority employees and found that there
              was an appropriate relationship between the duties listed in the job descriptions
              and the methodology used to allocate the associated salary to the benefiting
              programs. We determined that the individual salaries that comprised the bulk of
              the allocated costs were reasonable in price.

              We also reviewed the reserves that the Authority was required to maintain
              according to the applicable HUD regulations. During the audit period, the amount
              of the Authority’s reserves declined dramatically.

                Fiscal year                               2005        2006             2007
                New Construction/Substantial Rehab     $75,922,519 $60,131,867             $0
                Moderate Rehabilitation                 $3,196,806  $2,390,570             $0
                Housing Choice Voucher                    $629,953              $0   $614,286
                Totals                                 $79,749,278 $62,522,437       $614,286

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             The Authority maintained appropriate reserves in accordance with the applicable
             regulations. The decline in reserves was related to changes that HUD had made
             to the methodology for reporting reserves in the audited financial statements.
             HUD changed how reserves are reported to reflect only the administrative fee
             reserve and the housing assistance payment equity reserve. The reserves for the
             new construction/substantial rehabilitation were set-aside accounts for the reserve
             for replacement and/or the residual receipts. These set-aside accounts were for
             the benefit of the individual projects administered by the Authority. HUD no
             longer requires the reporting of these funds in the reserves section of the audited
             financial statements and has eliminated the line item on the required financial
             statement. Under these changes, HUD requires that the Authority maintain no
             more than one week of funding in the reserves, which also contributed to the
             decrease in reserves.

             The Authority spent approximately $1.5 million annually to operate and manage
             its Information Services and Technology Division on an in-house basis. This
             division supports all of the Authority’s technology needs for both HUD-funded
             and non-HUD-funded program operations. The bulk of the costs for this division
             (59 percent) were for salaries and related benefits, which appeared to be
             appropriate for the services provided. The Authority believed its use of an in-
             house information services function provided greater control over operations,
             better protected confidential information, and allowed the Authority to be more
             responsive to the frequent changes in the regulatory environment. Our review
             determined that the Authority appropriately allocated its technology cost
             allocations to the benefiting programs and maintained an inventory of
             technological equipment that was depreciated in accordance with applicable
             accounting standards.

             Our review of the Authority’s Information Services and Technology Division also
             found that the Authority had not formally documented its decision-making
             process for retaining this function on an in-house basis. Specifically, the decision
             by the Authority to retain its information services on an in-house basis was not
             supported by a cost analysis, which would have examined other alternatives, such
             as contracting out. A cost-benefit analysis should be part of any decision-making
             process when funds exceed a threshold beyond which the soundness of the
             decision could be questioned. We addressed this issue in a separate memorandum
             to HUD management.


Conclusion


             The Authority generally administered its cost allocation, operating reserves, and
             technology expenditures in accordance with HUD requirements. However, its
             decision to operate its Information Services and Technology Division on an in-


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          house basis was not supported by a cost analysis. We addressed this issue in a
          separate memorandum to HUD management.


Recommendations

          There are no formal recommendations, and no further action is necessary.




                                          8
                         SCOPE AND METHODOLOGY

For our audit period of July 1, 2005, through June 30, 2008, we

•   Interviewed HUD staff and reviewed monitoring reports to identify control weaknesses.
•   Interviewed Authority staff to determine policies and procedures, understand the operating
    environment and control structure, obtain the cost allocation methodology, and identify
    potential weaknesses.
•   Identified and reviewed applicable legislation, regulations, handbooks, notices, letters, and
    circulars to understand existing regulations and conflicts, if any, in the regulations governing
    the various programs.
•   Reviewed the audited financial statements and accompanying data schedules to understand
    patterns of awards and expenditures.
•   Analyzed the cost allocation plans to determine their basis, propriety with program
    regulations, and consistency in application across programs.
•   Compared the duties in the job descriptions with the methodology for allocating the salary
    associated with each job description. For a representative, nonstatistical sample of 10 job
    descriptions from a population of 73 HUD-funded positions, we traced the associated salary
    to paychecks/electronic funds transfers.
•   Compared the salaries paid to Authority staff with the range of salaries for similar job
    descriptions in Manchester, New Hampshire, maintained by the Bureau of Labor Statistics.
•   Compared reserve requirements with reserve balances while considering changes in how
    reserves were reported.
•   Obtained and reviewed the inventory of software and technology equipment and related
    depreciation expenses.
•   Identified the absence of information service contracts.
•   Reviewed the decision-making process for information services.

We performed our review 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(s). We believe that the evidence obtained provides a reasonable basis for our
conclusions based on our audit objective(s).




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                              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:

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

              We assessed the relevant controls identified above.

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


 Significant Weaknesses


              We found no significant internal control weaknesses within the scope of our audit.




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