Issue Date
September 22, 2009
Audit Report Number
2009-KC-1010
TO: Frances M. Cleary, Deputy Director, Office of Public Housing, 7APH
//signed//
FROM: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
SUBJECT: The Kansas City, Kansas, Housing Authority Inappropriately Spent Federal
Funds for Nonfederal Development Activities
HIGHLIGHTS
What We Audited and Why
We reviewed the development activities of the Kansas City, Kansas, Housing
Authority (Authority) to determine whether the Authority improperly spent
federal public housing funds when developing and operating nonfederal
developments. We conducted the audit because of a citizen complaint received
by our office.
What We Found
The Authority inappropriately spent federal funds for nonfederal development
activities. It transferred nearly $1 million from its public housing general fund
bank account to the Community Housing Investment Group’s (the Authority’s
nonprofit affiliate) bank account between January 2002 and December 2006. It
also inappropriately spent federal funds for payroll costs when staff worked on
nonfederal development activities. None of the nonfederal developments that
staff worked on were projects covered by the annual contributions contract, nor
had HUD approved the use of public housing funds for these activities.
What We Recommend
We recommend that HUD require the Authority to repay its public housing
program nearly $184,000 from nonfederal sources for federal funds that were
inappropriately used and not yet repaid and to implement adequate procedures to
ensure that it does not spend HUD assets on nonfederal activities without HUD
approval. Additionally, HUD should require the Authority to provide
documentation to support payroll costs allocated to HUD programs or reimburse
its HUD programs from nonfederal sources for costs that it cannot adequately
support. HUD should also require the Authority to implement an acceptable
method for allocating future payroll costs.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
The Authority generally agreed with our conclusions and recommendations but
disagreed with our calculation of questioned payroll costs. We provided the draft
report to the Authority on August 20, 2009, and requested a response by
September 11, 2009. It provided written comments on September 11, 2009.
The complete text of the auditee’s response, along with our evaluation of that
response, can be found in appendix B of this report.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding 1: The Authority Inappropriately Spent Federal Funds for Nonfederal 6
Development Activities
Finding 2: The Authority Inappropriately Spent Federal Funds for Payroll Costs 9
When Staff Worked on Nonfederal Development Activities
Scope and Methodology 12
Internal Controls 13
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 15
B. Auditee Comments and OIG’s Evaluation 16
3
BACKGROUND AND OBJECTIVE
The Kansas City, Kansas, Housing Authority (Authority) was chartered by the State of Kansas in
1957. The Authority’s mission is to help families and individuals with low and moderate
incomes by providing safe, affordable, quality housing; partnering with community services and
agencies; and promoting economic opportunity. The Authority is governed by a 12-member
board of commissioners that provides oversight to the agency and its staff.
The Authority owns and operates 2,045 public housing units that provide housing options for the
disabled, elderly, and families whose income meets U.S. Department of Housing and Urban
Development (HUD) guidelines. The Authority also administers a Section 8 Housing Choice
Voucher program that enables 1,469 low-income families to rent from a private landlord with
rental assistance administered by the Authority. The Authority received $6.2 million for its
public housing program and $8.4 million for its Section 8 program for fiscal year 2008.
To participate in HUD’s public housing programs, the Authority executed an annual
contributions contract with HUD on January 23, 1996. The annual contributions contract defines
the terms and conditions under which the Authority agreed to develop and operate all projects
under the agreement. The contract defines a project as any public housing developed, acquired,
or assisted by HUD under the United States Housing Act of 1937, as amended. The contract
states that the Authority may withdraw public housing funds only for the payment of the costs of
development and operation of the projects under the contract or other purposes approved by
HUD.
Due to concerns about housing authority development activities nationwide, on June 20, 2007,
HUD’s Office of Public and Indian Housing (PIH) issued Notice PIH 2007-15 (HA),
“Applicability of Public Housing Development Requirements to Transactions between Public
Housing Agencies and their Related Affiliates and Instrumentalities.” This notice reaffirmed the
requirements of public and Indian housing programs, including the annual contributions contract,
that apply to public housing development activities.
In accordance with its agency plan, a public housing agency may form and operate wholly
owned or controlled subsidiaries or other affiliates. Such wholly owned or controlled
subsidiaries or other affiliates may be directed, managed, or controlled by the same persons who
constitute the board of directors or similar governing body of the public housing agency or who
serve as employees or staff of the public housing agency but remain subject to other provision of
law and conflict-of-interest requirements. Further, a public housing agency, in accordance with
its agency plan, may enter into joint ventures, partnerships, or other business arrangements with
or contract with any person, organization, entity, or governmental unit with respect to the
administration of the programs of the public housing agency such as developing housing or
providing supportive/social services subject to either Title I of the United States Housing Act of
1937, as amended, or state law.
4
The Authority set up a nonprofit
affiliate, Community Housing
Investment Group, in 2001 so the
Authority could develop mixed-
financed properties to create new
public housing for low-income
families. The Authority’s board of
commissioners’ chairman and the
executive director sit on the board
of directors for the nonprofit
affiliate. The nonprofit affiliate
tried to develop four different
projects, but only Delaware
Highlands Assisted Living was
completed.
Delaware Highlands Assisted Living
Delaware Highlands Assisted Living is a 121-unit property that began development in 2003 and
opened in September 2006. It was not constructed using mixed financing, nor does it contain
public housing units. The Authority’s executive director has managed the daily operations of the
property since September 2008.
Our audit objective was to determine whether the Authority improperly spent federal public
housing funds when developing and operating nonfederal developments.
5
RESULTS OF AUDIT
Finding 1: The Authority Inappropriately Spent Federal Funds for
Nonfederal Development Activities
The Authority inappropriately spent federal funds for nonfederal development activities. This
condition occurred because the executive director relied on consultants, who told him it was
acceptable to spend public housing funds on nonfederal development and repay the funds when
permanent financing was in place. As a result, the Authority did not have nearly $1 million of its
public housing funds available for the intended purpose, which was to provide decent and safe
housing for low-income families, the elderly, and persons with disabilities.
Authority Used Public Housing
Funds to Pay Nonfederal
Development Expenses
The Authority inappropriately spent HUD public housing funds for nonfederal
development activities. According to the Authority’s annual contributions
contract with HUD, the Authority may withdraw money from its public housing
fund only for the payment of the costs and operation of the projects covered under
the contract. The nonfederal developments were not approved projects under the
contract.
The Authority transferred nearly $1 million from its public housing general fund
bank account to the Community Housing Investment Group’s (the Authority’s
nonprofit affiliate) bank account between January 2002 and December 2006. In
addition to the transfers, the Authority wrote a $500 check from its public housing
general fund account for an application to the Internal Revenue Service for
nonprofit status on behalf of the nonprofit affiliate. When the nonprofit affiliate
received bond sale proceeds and construction loans in March 2005, it repaid the
Authority nearly $803,000 but later used another $23,000 in federal funds. The
nonprofit affiliate still owed about $184,000 to the public housing general fund as
of May 2009.
Public housing
Calendar year funds used Balance
2002 (includes $500 check) $163,367 $163,367
2003 $81,832 $245,199
2004 $676,262 $921,461
2005 (January through March) $42,349 $963,810
2005 (March repayment) ($802,835) $160,975
2005 (April through December) $5,272 $166,247
2006 $17,654 $183,901
6
The nonprofit affiliate used the inappropriately transferred money to pay
predevelopment costs for two planned developments. Only one of the two
planned developments materialized, Delaware Highlands Assisted Living. The
predevelopment expenses included the land purchase for Delaware Highlands
Assisted Living and fees for attorneys, architects, and appraisers.
Executive Director Relied on
Consultants
The executive director relied on consultants, who told him it was acceptable to
spend public housing funds on nonfederal development and repay the funds when
permanent financing was in place. The executive director stated that the
consultants told him the Authority could use the HUD funds as long as the
Authority accounted for and repaid the funds when it obtained other sources of
financing. The executive director relied on this information and presented it in
the same way to the Authority’s board of commissioners. The commissioners
also relied on this advice.
In addition, the executive director told us that the Authority’s independent auditor
did not consider the debt owed by the nonprofit affiliate to the Authority to be a
reportable finding. He told us that because the consultants and the independent
auditor thought this practice was acceptable, he relied on their advice as experts in
their respective fields.
Public Housing Funds Were
Not Available for Intended
Purposes
Beginning in 2002 and continuing through May 2009, the Authority had not had
nearly $1 million of its public housing funds available for the intended purpose,
which was to provide decent and safe housing for low-income families, the
elderly, and persons with disabilities.
In addition, as of May 2009, the nonprofit affiliate owed the Authority about
$184,000, with no apparent ability to repay the funds until the Delaware
Highlands Assisted Living facility generates sufficient funds to begin repayment.
The facility’s audited financial information, for the period ending December 31,
2008, showed that the facility had an operating loss of nearly $1 million since it
opened in September 2006. Therefore, persons intended to benefit from the
public housing funds will receive less assistance than they would have until the
Authority secures funds to repay the public housing program.
7
Recommendations
We recommend that the Deputy Director, Office of Public Housing, require the
Authority to
1A. Repay its public housing program from nonfederal sources for any federal
funds inappropriately used, including $183,901 owed by the Community
Housing Investment Group as of March 31, 2009.
1B. Implement adequate procedures to ensure that it does not spend HUD
funds on nonfederal programs and activities without HUD approval.
These procedures should include following Notice PIH 2007-15, which
addresses spending HUD-related assets in relation to development
activities.
8
Finding 2: The Authority Inappropriately Spent Federal Funds for
Payroll Costs When Staff Worked on Nonfederal
Development Activities
The Authority inappropriately spent federal funds for payroll costs when staff worked on
nonfederal development activities. This condition occurred because the Authority’s executive
director did not understand the requirements. As a result, public housing tenants did not receive
the full benefit of Authority employees’ time and efforts for which the Authority paid nearly $1.5
million in payroll costs.
Authority Spent Federal Funds
on Nonfederal Activities
The Authority inappropriately paid payroll costs (salaries and benefits) from its
federal public housing funds for staff that worked on nonfederal development
activities. The annual contributions contract between the Authority and HUD
allows the Authority to use public housing funds only for the costs of
development and operation of the projects under the contract or other purposes
approved by HUD. None of the nonfederal developments that staff worked on
beginning in January 2002 was covered by the annual contributions contract, nor
had HUD approved the use of public housing funds for payroll costs when staff
worked on these nonfederal efforts.
Five Authority employees spent a portion of their time working on nonfederal
development activities beginning in January 2002. Beginning in January 2003,
staff worked on developing Delaware Highlands Assisted Living, a nonfederal
development, which opened in September 2006. After the facility opened, two
additional staff members began spending time on nonfederal activities.
Authority Did Not Track Time
for Nonfederal Activities
Authority staff that worked on nonfederal development activities did not track
their time spent on federal or nonfederal activities. The annual contributions
contract requires the Authority to maintain records that identify the source and use
of funds in a way that allows HUD to determine that all funds are and have been
spent in accordance with each specific program requirement. Further, Office of
Management and Budget Circular A-87 states that when employees work on
multiple activities, the employer must support salary distributions with personnel
activity reports or equivalent documentation.
9
The executive director and department heads were primarily the employees who
worked on nonfederal development activities. The Authority did not require its
managers to keep detailed records of their activities. As a result, the Authority
had no records of staff time spent on federal or nonfederal activities and,
therefore, could not support payroll costs charged to the public housing program
during the nonfederal development period.
In addition, the Authority’s executive director began managing the daily
operations of Delaware Highlands Assisted Living in September 2008. The
nonfederal development had incurred losses of nearly $1 million since opening in
2006. The nonprofit affiliate’s board members fired three management agents
during this period. As a result, the nonprofit affiliate’s board members instructed
the executive director to manage Delaware Highland Assisted Living’s daily
operations in an attempt to make the nonfederal development profitable. The
executive director told us that he expected to manage the nonfederal development
for at least the next year.
Authority Management Did Not
Understand Requirements
The executive director did not understand HUD requirements. He believed that it
was the Authority’s responsibility to pay salaries for Authority staff working on
nonfederal developments because the board of commissioners instructed him to
carry out the development activities.
The board of commissioners
• Created a nonprofit to develop low-income housing,
• Appointed the executive director as a member of the nonprofit board, and
• Expected the executive director to aggressively pursue developing low-
income housing.
The executive director told us that he believed it was his responsibility to carry
out the board of commissioners’ wishes and in hindsight he should have kept
track of the time he and other staff spent on the nonfederal activities. He also told
us that he tried to work on the nonfederal activities outside the normal 40-hour
work week but had no documentation to support this assertion. In addition, he
told us that he tried to limit the amount of time his staff spent on the nonfederal
development activities.
Authority Tenants May Have
Been Underserved
Public housing tenants did not receive the full benefit of Authority employees’
time and efforts for which the Authority paid nearly $1.5 million in payroll costs.
10
Further, without an acceptable method of allocating such costs, the Authority will
pay at least $194,000 in unsupported payroll costs, excluding benefits, from
federal funds within the next year. When the Authority used federal funds to pay
for employee time spent on activities other than public housing activities, it
deprived the Authority’s public housing tenants of funds that should have been
spent on their needs.
Recommendations
We recommend that the Deputy Director, Office of Public Housing, require the
Authority to
2A. Provide documentation to support payroll costs allocated to HUD
programs or reimburse its HUD programs from nonfederal sources for
costs that it cannot adequately support. These costs should include
$1,452,462 allocated from April 1, 2002, to March 31, 2009.
2B. Implement an acceptable method for allocating future payroll costs, such
as daily activity reports or equivalent documentation, for services
performed. This measure will ensure that an estimated $194,079 in
payroll costs that will be allocated in the next year will be put to better
use.
11
SCOPE AND METHODOLOGY
Our review generally covered the period January 2002 through February 2009 and was expanded
as necessary. We performed on-site work from March through July 2009 at the Authority’s
office located at 1124 North 9th Street, Kansas City, Kansas.
To achieve our audit objective, we conducted interviews of the Authority’s staff and members of
its board of commissioners. We also conducted interviews of HUD staff at the Kansas City,
Kansas, Office of Public Housing. We reviewed the Authority’s policies and procedures,
development files, general ledgers, payable files, payroll files, and audited financial statements.
We also reviewed the Authority’s annual plan, board of commissioners meeting minutes,
correspondence with HUD, annual contributions contracts, bank statements, and bank loan
documents. In addition, we reviewed federal regulations and HUD requirements.
We reviewed reports generated from the Authority’s computerized accounting system for
evidence of spending public housing assets without prior HUD approval. We used the
computerized data for background information purposes only; therefore, we did not conduct tests
of the data or controls governing the data. We did not use the data to support audit conclusions
but used only original source documents to reach our conclusions.
We assigned a value to the potential savings to the Authority if HUD implements our
recommendations. If HUD implements recommendation 2B requiring the Authority to
implement an acceptable method for allocating future payroll costs, it will protect an estimated
$194,079 in salaries for staff who will likely work on nonfederal development activities in the
next fiscal year. The estimate will be a recurring benefit; however, our estimate reflects only the
initial year of this benefit.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
12
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:
• Controls to ensure that the Authority complied with its annual
contributions contract with HUD regarding the use of federal funds.
• Controls to ensure that the Authority complied with Office of
Management and Budget Circular A-87, “Cost Principles for State, Local,
and Indian Tribal Governments,” regarding support for payroll costs and
funding sources used for these costs.
• Controls to ensure adequate oversight of the Authority’s daily operations.
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 Weakness
Based on our review, we believe that the following item is a significant weakness:
• The Authority did not have adequate controls in place to ensure that its
spending of federal funds complied with federal regulations and its annual
contributions contract with HUD (findings 1 and 2).
13
Separate Communication of
Minor Deficiencies
We reported a minor internal control issue to the auditee in a separate memorandum,
dated September 8, 2009.
14
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Unsupported Funds to be put
number 2/ to better use 3/
1A $183,901
2A $1,452,462
2B $194,079
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.
If HUD requires the Authority to implement an acceptable method for allocating future
payroll costs, it will protect future payroll costs for staff that will likely work on
nonfederal development activities in the next fiscal year. The estimate will be a recurring
benefit; however, our estimate reflects only the initial year of this benefit.
15
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
16
Comment 1
**We redacted names to protect the individual’s or entity’s privacy.
17
Comment 1
Comment 2
Comment 3
18
Comment 4
Comment 5
Comment 6
19
Comment 7
20
21
22
23
OIG Evaluation of Auditee Comments
Comment 1 Notice PIH 2007-15 of June 2007, reiterated HUD restrictions on federal funding
that already existed in annual contributions contracts between public housing
authorities and HUD. The Authority entered into an annual contributions contract
with HUD on January 23, 1996, well before OIG issued audit report 2004-AT-
0001 in 2004. The contract stated the Authority may withdraw public housing
funds only for the payment of development and operation costs of the projects
under the contract or other purposes approved by HUD. Delaware Highlands
Assisted Living did not contain public housing units, was not covered under the
contract, nor was it approved by HUD.
Comment 2 We disagree that HUD changed its guidelines as a result of OIG audit report
2004-AT-0001. The OIG report pointed out to HUD an apparent misconception
by public housing authorities regarding how such entities could use federal funds
in development activities. HUD subsequently reminded public housing
authorities of federal funding use restrictions that already existed in their annual
contributions contract.
Comment 3 Our report did not detail the makeup of the $184,901 in federal funds
inappropriately used for development activities. The $183,901 due from the
nonprofit affiliate to the Authority was made up of $163,367 for Bethany Hospital
development efforts and $20,534 for Delaware Highlands Assisted Living.
Comment 4 The Authority’s annual plans described development activities in vague terms and
stated that the Authority intended to pursue replacement of public housing units
and development of assisted housing. The annual plans did not state that the
Authority intended to use public housing funds for developments that did not
contain public housing units.
Comment 5 The Authority accurately reported the amount due from its nonprofit affiliate in its
annual audited financial statements. However, the Authority did not disclose in
the notes to the financial statements that the amount due from the affiliate
represented federal funds spent for nonfederal development activities.
Comment 6 We agree that the Authority was not without use of $1 million during the entire
audited time period. However, nearly $1 million of the Authority’s funds were
not available for the intended purpose as of March 2005. The chart on page 7 of
this audit report demonstrates the flow of federal funds to/from nonfederal
development activities between January 2002 and December 2006.
Comment 7 The $1.5 million questioned represents payroll costs for employees that spent time
working on federal and nonfederal activities during periods of the development
efforts. These employees did not track the time they spent on federal or
nonfederal activities. Therefore, we questioned their payroll costs for those
periods in which they worked on both types of activities.
24
The Kansas City, Kansas, Housing Authority Inappropriately Spent Federal Funds for Nonfederal Development Activities
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-22.
Below is a raw (and likely hideous) rendition of the original report. (PDF)