oversight

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)

                                                                  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