oversight

HUD Lacks Adequate Oversight to Require Public Housing Agencies to Separately Account for Unrestricted and Restricted Section 8 Program Administrative Fees

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-08-07.

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

                                                        U.S. Department of Housing and Urban Development
                                                                      Office of Inspector General
                                                                                                   Region IX
                                                                           611 West Sixth Street, Suite 1160
                                                                         Los Angeles, California 90017-3101
                                                                                       Voice (213) 894-8016
                                                                                        Fax (213) 894-8115

                                                                    Issue Date

                                                                             August 7, 2009
                                                                    Audit Memorandum Number

                                                                              2009-LA-0802



MEMORANDUM FOR:               Milan Ozdinec, Deputy Assistant Secretary for Public Housing and
                              Voucher Programs, PE



FROM:                         Joan S. Hobbs
                              Regional Inspector General for Audit, 9DGA

SUBJECT:                      HUD Lacks Adequate Oversight to Require Public Housing
                              Agencies to Separately Account for Unrestricted and Restricted
                              Section 8 Program Administrative Fees
                              Los Angeles, California


                                       INTRODUCTION

We performed a review of the U.S. Department of Housing and Urban Development’s (HUD)
oversight of public housing agencies’ unrestricted and restricted Section 8 administrative fee
reserves. We initiated this review because in our audits of two housing authorities, neither
agency was able to clearly account for its administrative fee reserve funds and demonstrate that
they were used appropriately. Our objective was to determine whether HUD had policies,
procedures, and controls in place to ensure that public housing agencies properly accounted for
their administrative fees and used them for their intended purpose.

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 review.

                                SCOPE & METHODOLOGY

The scope of our review was limited to determining whether HUD had policies, procedures, and
controls to ensure that public housing agencies met statutory requirements with respect to the use
of administrative fee reserves. Our conclusions were largely based on prior audit work
conducted at the Housing Authority of the City of Los Angeles1 (City Authority) and the
Housing Authority of the County of Los Angeles2 (County Authority).

To accomplish our review objective, we contacted and interviewed appropriate staff in
headquarters and the local Office of Public Housing, the Real Estate Assessment Center, and the
Financial Management Center to determine current policies, procedures, and controls. In
addition, we reviewed applicable HUD handbooks, guidebook, Public and Indian Housing
notices, and the Code of Federal Regulations to gain an understanding of the Office of Public
Housing’s monitoring responsibilities and administrative fee reserves program guidelines.

                                               BACKGROUND

Public housing agencies receive millions of dollars in administrative fees each year from HUD
for the ongoing costs of administering the Section 8 Housing Choice Voucher program. For
fiscal years 2005, 2006, and 2007, the City Authority received more than $106 million in
administrative fees. For fiscal years 2006, 2007, and 2008, the County Authority received more
than $50 million in administrative fees. Unused administrative fees are accumulated in the
unrestricted net assets account and reserved for future eligible expenditure needs. Depending on
the federal fiscal year in which the funds were awarded, administrative fees may be classified as
either “unrestricted” or “restricted.”

Before the enactment of the 2003 Appropriations Act, administrative fee reserves could be used
for “other housing purposes”; however, HUD has taken a lenient interpretation of what
constitutes eligible expenses under this category. Moreover, HUD Handbook 7420.3 states that
public housing agencies are responsible for determining what expenditures are necessary and
reasonable, and the use of the reserves for other housing purposes is a matter left to their
discretion (see appendix B). In 2003, Congress prohibited the use of the reserves for overleasing
costs, but public housing agencies retained the right to use them for other housing purposes.
Accordingly, any administrative fees awarded before federal fiscal year 2004 are generally
referred to as “unrestricted” since public housing agencies have considerable flexibility in how
such funds are spent. In 2004, Congress further limited the use of the reserves for activities
related to the provision of rental assistance under the Section 8 Housing Choice Voucher
program, including related development activities. Because of this provision, administrative fee
reserves awarded after federal fiscal year 2003 are “restricted” (see chart below for graphic
depiction).




1
    Office of Inspector General Report 2008-LA-1015, issued August 21, 2008.
2
    Office of Inspector General Report 2009-LA-1009, issued April 24, 2009.


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We identified a pattern of weakness in the City and County Authorities’ accounting for
administrative fee reserve funds. As a result, we initiated our review to assess HUD’s
monitoring responsibilities with respect to the Section 8 administrative fees.

                                   RESULTS OF REVIEW

HUD lacks the necessary policies, procedures, and controls to ensure agencies segregate
restricted and unrestricted Section 8 program administrative fees. Based on our audit results of
the City and County Authorities, we determined that the agencies inappropriately used restricted
administrative fees for non-program-related purposes without HUD’s knowledge. This occurred
because HUD assumed that public housing agencies maintained adequate accounting systems to
track and separately account for unrestricted and restricted administrative fee reserves. As a
result, HUD could not be assured that administrative fee reserves were tracked and used
properly.




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Housing Authority of the City of Los Angeles

The City Authority’s records showed that it improperly advanced more than $27 million in
restricted HUD program funds to other federal programs to cover its operating deficits. More
than $16 million of the advancement came directly from the Section 8 Housing Choice Voucher
program, but we could not verify how much was paid for by each of its program’s revenue
sources (housing assistance payments, unrestricted and restricted administrative fees, and interest
earned) as its accounting system was not set up to show, on a transactional basis, the debits and
credits in the revenue and liability accounts within each individual program. Instead, a series of
interprogram receivables, which showed that cash was loaned to another program, and payables,
which showed that cash was borrowed from a program, reflected interprogram transfer
transactions.

The City Authority’s chief operating officer claimed that unrestricted administrative fees had
been used for these program transfers all along and as a result, did not violate program rules, yet
the finance officer stated that it was not possible to trace specifically the source of the borrowed
funds. The City Authority maintained a separate spreadsheet that tracked the unrestricted
reserves, but it did not account for any of the more than $16 million in Section 8 program
transfers. Consequently, it could not ensure that funds advanced were completely unrestricted
as all funds, unrestricted and restricted, were commingled into one account in the accounting
system. HUD was unaware of this practice, which had been ongoing for many years. To clearly
identify the transactions that affect both sources of funds, the unrestricted and restricted reserve
funds need to be separate.

Housing Authority of the County of Los Angeles

In fiscal years 2005 and 2006, the County Authority overallocated more than $5 million of the
Los Angeles Community Development Commission’s indirect administrative expenses to the
Section 8 program. Of the overallocated amount, more than $2.1 million was drawn out of
unrestricted funds, and more than $2.9 million was inappropriately drawn out of the restricted
fund. Because the County Authority did not segregate its restricted and unrestricted
administrative fees in its accounting system, we had to manually compute the balances at year
end to determine which type of administrative fee was used for each transaction and how much
administrative fee was affected.

We encountered difficulty in determining the correct balance of both types of reserves since
there were many factors affecting the computation. According to the 2004 year-end settlement
statement, the County Authority had an unrestricted balance of more than $10.2 million. In later
years, this balance would increase or decrease depending on whether the current year yielded a
year-end administrative gain or loss. In instances in which a gain was recognized, the
administrative reserve balance would increase, resulting in the commingling of both types of
funds in the administrative pool. In instances in which a loss was recognized, the administrative
balance would decrease and might reduce the restricted balance first, and then any excess
expenses would be covered by the unrestricted funds. Without a good working knowledge of the
Authority’s cost allocation plan, segregation of both types of funds, effective oversight, and an




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understanding of the rules that govern the administrative fees, the probability of detecting this
deficiency would have been highly unlikely.

Policies, Procedures, and Controls Lacking

   Guidelines – HUD Technical Guidance to Account for Restricted and Unrestricted
   Administrative Fee Reserve Funds Not Provided

   HUD is responsible for developing policy, regulations, handbooks, notices, and guidance to
   implement housing legislation. Although policy information changes regarding restrictions
   imposed on administrative fees in successive federal fiscal years were adequately captured in
   Public and Indian Housing notices, they failed to provide the necessary technical guidance to
   assist public housing agencies in better accounting for restricted and unrestricted reserves in
   their accounting systems. This is because HUD assumed that public housing agencies have
   established a good working accounting system that can adequately track the unrestricted and
   restricted administrative fees in compliance with program requirements. We reviewed other
   criteria, including handbooks, guidebooks, and the Code of Federal Regulations and found
   that they were deficient in citing explicit language requiring the separate accounting of
   restricted and unrestricted funds.

   While both the City and County Authorities appeared to understand the changes in policy,
   they did not implement procedural controls to better account for both types of funds,
   resulting in the loss of fund identity and associated restrictions. For instance, the City
   Authority was unable to adequately show that the unrestricted funds were used to advance its
   program transfers. Similarly, the County Authority could not readily identify the amount of
   unrestricted funds that went to pay for the overallocated expenses.

   Monitoring – Not Enough Emphasis on Monitoring Administrative Fee Reserve Funds

   HUD is responsible for monitoring public housing agencies’ compliance with program
   requirements and performance goals. However, our interviews with staff in headquarters and
   the local Office of Public Housing disclosed a limited emphasis on the monitoring of
   administrative fee reserve funds. Headquarters delegates the monitoring function to the local
   field office, which, in turn, depends on the independent public accountant audit reports to
   identify deficiencies. Although the local field office used a number of systems to manage
   public housing programs, the extent of its system monitoring of administrative fee balances
   was limited to performing research on an as needed basis in the HUD Central Accounting
   and Program System.

   HUD Systems – Failure to Capture Essential Information to Effectively Monitor

   The Real Estate Assessment Center was not readily able to determine the balances associated
   with the unrestricted and restricted funds because public housing agencies could only report
   the total administrative fee reserves into the Financial Assessment Subsystem. As a result,
   the system was not effective in assisting HUD in performing its remote monitoring
   responsibilities.


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      Financial Assessment Subsystem – This system is a secure Web-based system accessible
       on the Internet for external users to use in transmitting financial statements to HUD. It
       does not lend itself to compliance testing as it does not show detailed revenue and
       expense items, nor is it capable of capturing the distinction between unrestricted and
       restricted administrative fees. Public housing agencies are only required to report the
       year-end balance of the administrative fee reserves into the system. The system is not an
       effective monitoring tool for tracking the public housing agencies’ unrestricted and
       restricted administrative reserve balances.

HUD Corrective Action

HUD initiated actions to address our finding by developing a draft Public and Indian Housing
notice to be published this summer. In the draft notice, HUD acknowledged that there was no
requirement for public housing agencies to segregate unrestricted and restricted reserves. To
better track these reserves, beginning with the reporting period ending September 30, 2009,
public housing agencies must report administrative fee reserves accumulated as of federal fiscal
year 2003 separately. The Real Estate Assessment Center was also considering adding an extra
line in the Financial Assessment Subsystem to clearly distinguish between the unrestricted and
restricted funds.

                                    RECOMMENDATIONS

We recommend that the Deputy Assistant Secretary for Public Housing

1A. Develop and implement detailed policies, procedures, and controls to ensure that public
    housing agencies properly account for their administrative fees and use them in compliance
    with HUD rules and regulations. This recommendation includes requiring the public
    housing agencies to separately account for unrestricted reserves so that unrestricted and
    restricted reserves may be more clearly identified.

1B. Consider requesting the Real Estate Assessment Center to add an extra line item in the
    Financial Assessment Subsystem to capture the unrestricted and restricted administrative fee
    reserves to better track those balances.

1C. Require public housing agencies to perform a reconciliation of their administrative fee
    reserves to determine the correct balances in their restricted and unrestricted accounts.
    These amounts will be recognized as the beginning/ending balances in the Financial
    Assessment Subsystem.

                                   AUDITEE’S RESPONSE

We provided a discussion draft report to your office on July 2, 2009. Your department provided
written comments on August 3, 2009. It generally agreed with our findings. The complete text
of your response is in appendix A of this report.




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Appendix A

                        AUDITEE COMMENTS

Ref to OIG Evaluation         Auditee Comments




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Appendix B

                                      CRITERIA

  A. Public Law 108-7 states, “that none of the funds made available in this paragraph may be
     used to support a total number of unit months under lease which exceeds a public housing
     agency's authorized level of units under contract.”

  B. Public Law 108-199 states, “that all such administrative fee amounts provided under this
     paragraph shall only be for activities related to the provision of rental assistance under
     Section 8, including related development activities.”

  C. PIH [Public and Indian Housing] Notice 2003-23, section 8, states, “no funds
     appropriated in FFY [federal fiscal year] 2003 may be used by any PHA [public housing
     agency] to lease more units than are authorized for that PHA. Each PHA must take
     immediate steps to eliminate any current over-leasing, so that unit months leased for its
     FY [fiscal year] 2003 do not exceed unit months available. Effective with PHA fiscal
     years ending June 30, 2003, any over-leasing expenses must be covered by existing ACC
     [annual contributions contract] reserves from pre-2003 appropriations, administrative fee
     reserves or funds already available to the PHA prior to the FFY 2003 appropriation.
     PHAs that are over-leased must take whatever steps are necessary to ensure that any
     over-leasing that cannot be supported from these sources is eliminated. PHAs should
     consult with their Public Housing field office staff for assistance in determining needed
     actions. Any costs for over-leasing will be disallowed from FFY 2003 funds on the year-
     end settlement.”

  D. PIH Notice 2004-7, section 8, states, “PHAs should continue to be aware of the policy
     on unauthorized transfers of the administrative fee reserve. This restriction applies to
     reserves emanating from FFY 2003 and prior years. Transfer of amounts from the
     operating reserve to another non-Section 8 program account does not constitute use of the
     operating reserve for other housing purposes, even if the account to which funds would
     be transferred is designated for housing purposes. Operating reserve funds must be
     expended to be considered used for other housing purposes.”

  E. PIH Notice 2007-14, section (i), states, “any administrative fees from 2007 funding (as
     well as 2004, 2005 and 2006 funding) that are subsequently moved into the
     administrative fee equity account in accordance with generally accepted accounting
     principles at year-end must only be used for the same purpose.”

  F. HUD Handbook 7420.3, chapter 5(c), states, “except for unauthorized transfers or
     unallowable expenditures from the Operating reserve, AHMB [Assisted Housing
     Management Branch] should not judge the advisability of any expenditures for other
     housing purposes, since use of the Operating Reserve for other housing purposes is a
     matter of PHA discretion; the PHA is responsible for determining that such expenditures
     are necessary and reasonable for housing purposes consistent with State and local law.”


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G. PIH Low-Rent Technical Accounting Guide 7510.1G:

      a. Part 2-15 states, “the HA [housing agency] may use pooled funds for any
         expenditure chargeable to the HA programs which have funds on deposit;
         however, funds shall not be withdrawn for a program in excess of the amount of
         funds on deposit for that particular program. The HA should take care to
         maintain supporting documentation for pooled fund transactions in enough detail
         to provide an adequate audit trail.”

      b. Part 2-16 states, “funds provided by HUD are to be used by the HA only for the
         purposes for which the funds are authorized. Program funds are not fungible and
         withdrawals should not be made for a specific program in excess of the funds
         available on deposit for that program.”




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