oversight

The Housing Authority of the County of Los Angeles, Los Angeles, California, Did Not Reasonably and Equitably Allocate Costs to Its Section 8 Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-04-24.

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

                                                                 Issue Date
                                                                          April 24, 2009
                                                                 Audit Report Number
                                                                          2009-LA-1009




TO:         K.J. Brockington, Director, Los Angeles Office of Public Housing, 9DPH



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

SUBJECT: The Housing Authority of the County of Los Angeles, Los Angeles, California,
           Did Not Reasonably and Equitably Allocate Costs to Its Section 8 Program

                                    HIGHLIGHTS

 What We Audited and Why

      We completed a financial review of the Housing Authority of the County of Los Angeles‟
      (Authority) Section 8 program. We initiated the review in response to several citizen
      complaints alleging mismanagement, waste, and abuse of U. S. Department of Housing
      and Urban Development (HUD) Section 8 funding, including the use of Section 8 funds
      to pay the costs of non-Section 8 programs.

      Our objective was to determine the validity of the above allegations and to determine
      whether the Authority managed and spent its Section 8 funds in accordance with HUD
      rules and regulations.


 What We Found


      The Authority did not properly manage its Section 8 funding in fiscal years 2005 and
      2006 and over-allocated more than $5 million in indirect administrative expenses to its
      Section 8 Assisted Housing program. This condition resulted in the Section 8 program
      bearing a significant portion of administrative expense, while other County programs did
      not receive their fair share of overhead. We found no additional material violations with
      respect to the other areas of the Authority‟s Section 8 program funds.
What We Recommend


     We recommend that the Director of HUD‟s Los Angeles Office of Public Housing
     require the Authority to repay the Section 8 program from nonfederal funds, $2.9 million
     of the $5 million in over-allocations that were charged to restricted funds.

     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


     We provided the Authority the draft report on March 24, 2009, and held an exit
     conference with the Authority on April 1, 2009. The Authority generally disagreed with
     our report.

     We received the Authority‟s response on April 8, 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                                                                        5
        Finding: The Authority Did Not Reasonably and Equitably Allocate Costs to Its
                 Section 8 Program


Scope and Methodology                                                                   10

Internal Controls                                                                       11

Appendixes

   A.   Schedule of Questioned Costs                                                    12
   B.   Auditee Comments and OIG‟s Evaluation                                           13
   C.   Schedule of Expenses Allocated to Assisted Housing                              21
   D.   Criteria
                                                                                        22




                                              3
                      BACKGROUND AND OBJECTIVE

The Housing Authority of the County of Los Angeles (Authority) was created in 1938 to manage
and develop affordable housing. Since then, the Authority has administered federally funded
public housing, rental assistance programs, and special programs and services for residents of
public and assisted housing. The Housing Authority is comprised of two divisions: the Housing
Management Division, which manages public housing and related programs and services, and
the Assisted Housing Division, which administers rental assistance programs, including the
Section 8 Housing Choice Voucher program.

In 1982, the County of Los Angeles‟ (County) board of supervisors created The Los Angeles
County Community Development Commission (Commission) and combined it with the
Authority. The Commission serves the County‟s Affordable Housing and Community and
Economic Development Agency and aims to build better lives and better neighborhoods by
providing services to improve the quality of life in low- and moderate-income neighborhoods.
The Commission has wide-ranging programs that benefit residents and business owners in
unincorporated County areas and various incorporated cities that participate in different
Commission programs. This fiscal year, the agency has a $440 million budget with more than 95
percent of its funding coming from the U.S. Department of Housing and Urban Development
(HUD).

The Section 8 Housing Choice Voucher program assists families in affording decent, safe, and
sanitary housing in the private rental market. The program is the major rental assistance program
administered by the Authority and serves more than 20,000 families within Los Angeles County.
HUD‟s approved budget authorization for the Authority‟s program for fiscal years 2006, 2007,
and 2008 was $181.6, $186.5, and $165 million, respectively. In the same years, HUD also paid
the Authority $16.8, $16.3, and $17.4 million in administrative fees. HUD provides
administrative fees to cover activities that housing authorities undertake in administering the
Housing Choice Voucher program, including the issuance of vouchers, housing search activities,
maintenance of assistance, and termination of payments.

In 2007, the HUD Office of Housing Voucher Programs, Financial Management Division,
conducted a limited financial review of the Authority‟s Housing Choice Voucher program to
ensure that the program was administered in accordance with its consolidated annual
contributions contract program requirements and the Authority‟s administrative plan. The team
found that the Authority‟s cost allocation plan had never been formally adopted by the board of
supervisors and recommended that the Authority have the plan approved by the board.

We initiated the review in response to several citizen complaints alleging mismanagement,
waste, and abuse of HUD Section 8 funding, including the use of Section 8 funds to pay the costs
of non-Section 8 programs. The objective of our audit was to address the complaint allegations
and to determine whether Section 8 funds were managed and spent in accordance with HUD
rules and regulations.




                                               4
                                 RESULTS OF AUDIT

Finding 1: The Authority Did Not Reasonably and Equitably Allocate
           Costs to Its Section 8 Program
The Authority did not equitably distribute indirect administrative expenses to its Section 8
Assisted Housing program. In fiscal years 2005 and 2006, it over-allocated more than $5 million
of the Commission‟s indirect administrative expenses to the Section 8 program. This condition
occurred because the Authority modified its cost allocation methodology and inflated indirect
charges to the Section 8 program to benefit the Commission‟s other programs. As a result, the
Assisted Housing program was overcharged while other County programs did not receive their
appropriate share of overhead expense.


 Authority Contracted for
 the Development of an
 Allocation Plan


       In April 2002, the Authority‟s independent auditor, KPMG LLP (KPMG), developed a
       cost allocation plan that identified procedures to be used in allocating indirect
       administrative expenses from the Commission‟s departments to its programs The
       Commission‟s departments include Personnel, Executive Office, Executive Office of
       Budget, Financial Management, Accounting, Inter-Government Relations, and
       Administrative Services/Development. Overhead costs for these departments were
       allocated to the Authority‟s programs, including Assisted Housing, Community
       Development Block Grant (CDBG), Economic Development, Housing Development and
       Preservation, and Housing Management. The KPMG plan stated that certain expenses
       should be excluded when determining allocation percentages and amounts because they
       would distort allocation bases and “inequitably draw administrative costs in proportion to
       the benefits derived.” These expenses, called “subventions,” are financial assistance
       provided by HUD to grantees that flow through the Authority. Under the Authority‟s
       Section 8 Assisted Housing program, these costs are typically landlord payments, Section
       8 administrative fees, and housing assistance payments for the Family Self-Sufficiency
       program. We reviewed the KPMG plan and determined that it was adequate for
       distribution of cost as it allowed for an equitable distribution of cost to all of the County‟s
       programs by leaving out those expenses that were generated through funds provided by
       HUD.




                                                 5
Plan Modifications Resulted
in Inequitable Cost
Distributions


    In fiscal year 2004, the Authority stated that it wanted to retain subventions in its
    program expenses because their removal was “skewing” departmental billings. Retaining
    subventions in the allocation bases caused CDBG administrative expense to increase, and
    the Authority became concerned due to a 20 percent administrative expense limit
    imposed by HUD on that program. At this time, the Authority began excluding
    subventions only from CDBG to reduce its portion of allocated overhead, while it
    retained subventions in the cost of other programs, including Assisted Housing. This
    practice distorted the cost allocation and resulted in the majority of overhead cost being
    charged to Assisted Housing, as it had the largest subvention amount.

    This practice continued in fiscal years 2005 and 2006 causing more than $5 million in
    excessive indirect administrative expenses to be distributed to the Assisted Housing
    program. The Authority‟s annual contributions contract states that the housing authority
    may only use program receipts and deposits to pay program expenditures in accordance
    with HUD requirements. In addition, Public and Indian Housing Notices 2004-7, 2005-1,
    2006-5, and 2007-14 state that Section 8 fees may not be used for “other housing
    purposes” and may only be used for activities related to Section 8 rental assistance.
    Therefore, the excessive indirect expenses charged by the Authority are not eligible.

    We recalculated the allocations using revised percentages that were based on the original
    KPMG allocation plan methodology. After excluding subventions, we found that in most
    cases, allocated Commission expense should have been approximately 25 percent.
    Therefore, the allocation of cost to Assisted Housing was more than double the
    appropriate amount. The chart below shows the original allocation rates that were used
    by the Authority and the revised rates that it should have used that exclude subvention
    expense. A complete summary of allocated expense is reflected in appendix C of this
    report.




                                            6
                            Fiscal year 2005                        Fiscal year 2006
Commission        Original      Revised        Variance      Original     Revised   Variance
Department       allocation    allocation                   allocation   allocation
                 percentage    percentage                   percentage   percentage
Executive            69.21%         22.92%         46.29%      71.97%       24.56%      47.40%
Office
Executive            69.41%         23.23%         46.18%      72.19%       24.90%      47.28%
Office of
Budget
Financial            69.77%         23.77%         46.00%      72.48%       25.38%      47.11%
Management
Accounting           70.22%         24.49%         45.73%      73.01%       26.25%      46.77%
Inter-               70.35%         24.71%         45.64%      73.15%       26.48%      46.68%
Governmental
Relations
Administrative       70.57%         25.06%         45.51%      73.38%       26.86%      46.52%
Services/
Development
Personnel            28.27%         28.27%         00.00%      30.63%       30.63%       0.00%



  The Authority Stopped
  Retaining Subventions in
  Program Expenses


      In fiscal year 2007, the Authority elected to be reimbursed for its Section 8 overhead
      expenses through HUD‟s new fee-for-service system, which established fixed amounts
      the Authority could charge and receive for overhead from its Section 8 administrative
      fees. The fees collected are considered de-federalized, so any remaining funds would not
      be included in the Section 8 program‟s administrative fee reserve balance. Therefore, to
      maximize its de-federalized funds, the Authority again adjusted its cost allocation
      methodology and stopped retaining subventions for Assisted Housing, as KPMG had
      originally proposed. For several overhead departments, the allocation percentages
      charged to Assisted Housing dropped from more than 70 percent in fiscal year 2006 to
      around 16 percent in fiscal year 2007. Although subventions are now excluded for
      Assisted Housing‟s overhead allocation, no retroactive adjustments were made for prior
      years.




                                               7
Cost Allocation Methodology
was not Documented in
Internal Procedures


   The original KPMG cost allocation methodology was sound, but the Authority did not
   have any written procedures documenting the plan methodology and how it should be
   used. In addition, a 2007 HUD Limited Financial Review found that the Authority had
   used the cost allocation plan since 2002, but had not submitted it for approval to the Los
   Angeles County Board of Supervisors. It actually had more than one version of its cost
   allocation plan in place since 2002 and none had been submitted for approval. After the
   review, the Authority submitted the original KPMG plan to the board and it was
   approved in June 2007. However, the Authority has continued to inappropriately include
   subventions for its Economic Development and Housing Development and Preservation
   divisions, at least through fiscal year 2008, in conflict with KPMG‟s methodology.
   Although the Authority has not followed the Board approved plan, the allocation
   methodology no longer has an impact on the Section 8 program under the fee-for-service
   system, as discussed above.

Conclusion



   The Authority did not manage its Section 8 funding in accordance with HUD
   requirements and charged ineligible expenses to the Section 8 program. Consequently,
   more than $5 million in excessive overhead expense was charged to the Section 8
   program. Had the Authority followed its original cost allocation plan, the Section 8
   program and remaining County programs would have received the appropriate amount of
   allocated expense.

   Authority officials informed us that their pre-2003 Section 8 administrative fee reserves
   offset a portion of the $5 million in over-allocated expenses. HUD regulations allowed
   housing authorities a wider degree of latitude in the use of pre-2003 reserves. We
   verified that more than $2.1 million was available in pre-2003 administrative reserves
   and was allocated to the excessive overhead charges. However, pre-2003 administrative
   funds were not used for the remaining $2.9 million. Post-2003 administrative funds are
   restricted and their use is limited to Section 8 rental assistance and related development
   activities. Accordingly, the Authority must repay these funds to the Section 8 program
   from nonfederal funds.




                                            8
Recommendations


  We recommend that the Director of HUD‟s Los Angeles Office of Public Housing
  require the Authority to

        1A. Repay the Section 8 program $2,953,443 in over-allocations that were
            charged to the program from nonfederal funds.




                                       9
                        SCOPE AND METHODOLOGY

We performed our on-site audit work at the Authority, located in Monterey Park, California,
between July 2008 and February 2009. Our audit generally covered the period July 1, 2004,
through June 30, 2008.

To accomplish our audit objectives, we

           Reviewed more than $12 million in cost allocations to the Section 8 Assisted Housing
           program between fiscal years 2005 and 2008.
           Reviewed applicable HUD regulations, including HUD public and Indian housing
           notices, 24 CFR [Code of Federal Regulations] 982.152, and HUD Low-Rent
           Technical Guide 7510.1 G.
           Reviewed citizen complaints alleging financial mismanagement.
           Reviewed the Authority‟s Section 8 Housing Choice Voucher program consolidated
           annual contributions contract.
           Reviewed the Authority‟s policies, procedures, and internal controls related to its
           administration of its HUD program funds.
           Reviewed Authority and Commission administrative plans, board meeting minutes,
           and organization charts.
           Reviewed the quality assurance and financial management reviews conducted by
           HUD and interviewed appropriate HUD staff.
           Reviewed the 2002 KPMG cost allocation plan as well as fiscal year-end 2004
           through 2008 cost allocation plans.
           Interviewed appropriate Commission management and staff.
           Interviewed officials of KPMG and Vasquez & Vasquez, the Authority‟s former
           independent public accountants.

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.




                                              10
                              INTERNAL CONTROLS

Internal control is an integral component of an organization‟s management that provides
reasonable assurance that the following objectives are achieved:

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

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 over the validity and reliability of data.
              Controls over compliance with applicable laws and regulations.

       We assessed the relevant controls identified above.

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

 Significant Weaknesses


       Based on our review, we believe that the following item is a significant weakness:

       The Authority did not have

              Sufficient policies and procedures to ensure that its cost allocation financial practices
              complied with HUD Section 8 program rules and regulations.




                                                 11
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                          Recommendation          Ineligible 1/
                              number
                                  1A              $2,953,443




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.




                                            12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                                  13
Comment 2




Comment 3




Comment 4




            14
Comment 4




Comment 5




Comment 6




            15
Comment 7




Comment 8




            16
17
                         OIG Evaluation of Auditee Comments

Comment 1   We cannot state that we found no indication of inappropriate use of funds,
            mismanagement, waste or abuse of Section 8 funds, since the over-allocations of
            Commission administrative costs to the Section 8 program was an inappropriate
            use of funds. In the “What We Found” section at the beginning of the report, we
            stated the foregoing and also specifically stated that we found no material
            violations with respect to the remaining areas of the Authority‟s Section 8
            program funds.

Comment 2   An adjustment was made to page 9 of the report so that it specifically
            recommends that repayment be made to the Section 8 program as it does in page 2
            of the report. We continue to recommend HUD require the Authority to make the
            repayment from nonfederal funds to replenish the Section 8 program‟s restricted
            administrative fees that were used for ineligible purposes, so that these funds are
            available to fulfill the needs of the Section 8 program.

Comment 3   While other programs may have benefited from the higher Assisted Housing
            allocation rate, our audit was of the Section 8 program, and those funds are
            restricted and not fungible. Our references to “county programs” were meant to
            denote the Commission/Authority administration of its programs, not the source
            of funding, which would be federal. Although the majority of the
            Commission/Authority‟s funds come from federal sources, we are also aware that
            it does receive some funding from other sources, e.g., tax increments from the
            City of Industry.

Comment 4   Implementation regulations under 53 Federal Register 8050 (March 11, 1988)
            specifically states that the Section 8 program is outside the scope of 24 CFR Part
            85, which established OMB Circular A-87 as regulatory policy. Therefore, as
            confirmed with HUD‟s Office of General Counsel, the requirements of OMB A-
            87 are not applicable to the Section 8 program. However, since the Authority can
            still choose to apply OMB A-87 provisions to its Section 8 program, we reviewed
            the Circular‟s guidance.

            We do not agree with the Authority‟s interpretation of the OMB guidance, as it
            fails to consider key sections of the Circular. OMB Circular A-87 allows
            organizations to charge administrative expenses that cannot be directly identified
            to a particular award, project or service as indirect cost. However, it also states
            that allocation bases comprised of total direct costs should be adjusted for
            distorting or extraordinary expenses and other distorting items, such as pass-
            through funds, major subcontracts, etc., (otherwise known as subventions). An
            equitable distribution of indirect costs can only be determined by removing
            subventions from the Assisted Housing (Section 8) allocation base. This method
            would exclude the expenses that are derived from HUD funding, such as landlord
            payments and Section 8 administrative fees. Otherwise, the base expenses are
            improperly inflated. The adjusted base results in each program (including Section



                                            18
            8) bearing a “fair share of indirect cost in relation to the benefits received from
            those costs”.

            We agree that compliance with the KPMG plan itself is not regulatory. However,
            we endorsed the KPMG plan because it provides for an equitable distribution of
            indirect costs by making adjustments for extraordinary expenditures prior to
            allocation of cost, whereas the Authority‟s deviations from the plan did not result
            in equitable distributions of cost.

            In addition, the Authority states that the percentage of indirect costs it allocated to
            the Section 8 program closely correlate to the Section 8 program‟s actual direct
            costs compared to total direct costs for the entire Commission/Authority.
            However, the figures listed by the Authority, such as $204,846,235 for fiscal year
            2005, actually includes over $184 million in Section 8 funding provided by HUD,
            which includes landlord payments, Section 8 administrative fees, and housing
            assistance payments for Family Self-Sufficiency. The Authority‟s 2005 figure
            also includes over $4 million of fiscal year 2005 overhead allocations and other
            expenditures the KPMG model removes to determine the adjusted direct costs of
            the Section 8 program. The Section 8 program‟s adjusted direct costs were only
            $15.4 million, approximately 27 percent of the Commission/Authority‟s total
            adjusted direct costs.

Comment 5   Our audit report stated “retaining subventions in the allocations bases caused
            CDBG administrative expenses to exceed the 20 percent limit imposed by HUD.”
            The basis for our statement was an e-mail that had been forwarded to us by the
            Manager of the Commission‟s Executive Office of Budget. The e-mail was sent
            by the Commission to KPMG and makes reference to a “real problem emerging”
            due to the 20 percent CDBG administration limitation and states that when CDBG
            subventions were included in program expenses, it raised the amount of
            administrative expense charged to the program. On that basis, the Commission
            asked KPMG whether a modified approach could be used in order to limit the
            amount of administrative expense that would be charged to CDBG. Based on the
            foregoing, we agree that the e-mail does not state that Commission administrative
            expense exceeded the 20 percent limitation, but rather stated concern over the
            increased amount of administrative expense due to retention of subventions in
            program expenses. Therefore, the report statement has been revised accordingly.
            However, we disagree that only CDBG subventions should be excluded because
            they are “true pass-through expenditures incurred by participating cities, county
            departments or community based organizations.” As stated in comment 4,
            subventions should be excluded from all programs because they are not true
            expenses generated by the Commission/Authority‟s departments, but rather
            expenses that are derived from revenue provided by HUD.

Comment 6   We adjusted the significant weakness section of our report to make specific
            reference to the deficiencies we found in the Authority‟s cost allocation process.




                                              19
Comment 7   Although the Authority‟s decision to modify its cost allocation plan correlated
            with HUD‟s conversion to Asset Management (fee-for-service), HUD does not
            require housing authorities to convert their Section 8 programs to fee-for-service.
            The only requirement was that housing authorities convert their low-rent
            programs to asset management. The supplement to HUD-PIH Notice 2006-33
            states that housing authorities may elect to use a fee-for-service methodology and
            that housing authorities may instead choose to maintain a traditional cost
            allocation methodology. Although no documentation has been submitted by the
            Authority as support, according to its response, the fee-for-service option allowed
            the Authority to limit operating subsidy losses to its low-income public housing.
            Therefore, our statement that the Authority adjusted its costs allocation
            methodology to maximize its de-federalized funds is still accurate, since it only
            lowered its overhead allocation to benefit a non-Section 8 program.

Comment 8   PIH Notice 2004-7 was issued April 22, 2004 and expired on April 30, 2005.
            However, part of the Authority‟s fiscal year 2005 funding came from HUD‟s
            fiscal year 2004 appropriations. The Authority‟s 2005 fiscal year ran from July
            2004 through June 2005, while HUD‟s 2004 fiscal year ran from October 2003
            through September 2004. Since the fiscal years overlapped between July and
            September 2004, the notice is applicable to a portion of the 2005 fiscal year.
            However, to address the Authority‟s concerns and fully cover the entirety of fiscal
            years 2005 and 2006, we added PIH Notices 2005-1 and 2006-5 as additional
            supporting criteria. The two notices collectively cover both fiscal years (2005 and
            2006) and also clearly state HUD‟s limitations on the use of administrative fees,
            i.e., “administrative fees shall only be used for activities related to the provision
            of section 8 tenant-based rental assistance, including related development
            activities”.




                                             20
Appendix C

    SCHEDULE OF EXPENSES ALLOCATED TO ASSISTED
                     HOUSING
                       Fiscal year    Fiscal year Fiscal year Fiscal year     Fiscal years
                          2005           2005         2006        2006        2005 & 2006
    Commission           Actual         Revised     Actual       Revised          Excess
    Departments         allocated      allocated   allocated    allocated       expenses
                        expenses       expenses    expenses     expenses       allocated to
                                     (subventions             (subventions       assisted
                                       excluded)                excluded)        housing
                                                                                program
                           (a)           (b)          (c)          (d)       (a - b) + (c - d)
 Executive Office         $281,197       $93,116    $276,799       $94,462          $370,418
 Executive Office of      $617,084      $207,455    $570,802      $197,885          $782,546
 Budget
 Financial                $851,078      $295,337    $812,795      $288,986       $1,079,550
 Management
 Accounting             $1,306,663      $469,853   $1,305,518     $484,946       $1,657,382
 Inter-Governmental       $377,522      $140,130     $378,682     $144,421         $471,653
 Relations
 Administrative           $608,625      $229,212    $577,537      $225,322         $731,628
 Services/
 Development
 Personnel                $635,766      $635,884    $558,625      $558,569              ($62)
 Total                  $4,677,935    $2,070,987   $4,480,758   $1,994,591       $5,093,115




                                          21
APPENDIX D

                                     CRITERIA
 A. Section 8 Housing Choice Voucher Program’s Consolidated Annual Contributions
    Contract:

            Paragraphs 11(a), (b), and (c), state, “the HA [housing agency] must use
            program receipts to provide decent, safe, and sanitary housing for eligible families
            in compliance with the United States Housing Act of 1937 and all HUD
            requirements. Program receipts may only be used to pay program expenditures.
            The HA may not make any program expenditures, except in accordance with the
            HUD-approved budget estimate and supporting data for a program. Interest on
            the investment of program receipts constitutes program receipts.”

            Paragraphs 12(a) and (b), state, “the HA must maintain an administrative fee
            reserve for a program and must use funds in the administrative fee reserve to pay
            administrative expenses in excess of program receipts. If any funds remain in the
            administrative fee reserve, the HA may use the administrative reserve funds for
            other housing purposes if permitted by state and local law.”

            Paragraph 13(c), states, “the HA must only withdraw deposited program receipts
            for use in connection with the program in accordance with HUD requirements.”

            Paragraph 14(a), states, “the HA must maintain complete and accurate books of
            accounts and records for a program. The books and records must be in
            accordance with HUD requirements, and must permit a speedy and effective
            audit.”

 B. 24 CFR 982.152(a)(3), last amended on May 14, 1999, states, “the HA administrative
    fees may only be used to cover costs incurred to perform HA administrative
    responsibilities for the program in accordance with HUD regulation and requirements.”

 C. PIH [Public and Indian Housing] Notice 2004-7, section 8, states, “transfer of amounts
    from the operating (administrative fee) 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.” It also states, “The FFY [federal fiscal year] 2004 Appropriation Act
    stipulates that administrative fees provided from this appropriation shall only be used for
    activities related to the provision of Section 8 rental assistance, including related
    development activities.




                                             22
   Any administrative fees from FFY 2004 funding that are subsequently moved into the
   administrative fee reserve account at year end may not be used for „other housing
   purposes permitted by state and local law‟ [24 CFR 982.155(b)(1)], and must only be
   used for the provision of Section 8 rental assistance, including related development
   activity.”

D. PIH Notice 2007-14, section 8 (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.”

E. PIH Notice 2005-1, section 5, states, “The 2005 Appropriations Act stipulates that
   administrative fees provided from this appropriation shall only be used for activities
   related to the provision of Section 8 tenant-based rental assistance, including related
   development activities. Any administrative fees from 2005 funding (and 2004 funding)
   that are subsequently moved into the administrative fee reserve account at year end must
   only be used for the provision of Section 8 tenant-based rental assistance, including
   related development activity.”

F. PIH Notice 2006-5, section 6(d)(i), states, “The 2006 Appropriations Act stipulated that
   administrative fees provided from this appropriation shall only be used for activities
   related to the provision of section 8 tenant-based rental assistance, including related
   development activities. Examples of related development activities include, but are not
   limited to, unit modification of accessibility purposes and development of project-based
   voucher units. Any administrative fees from 2006 funding (as well as 2004 and 2005
   funding) that are subsequently moved into the undesignated fund balance account in
   accordance with GAAP at year-end must only be used for the same purpose.”

G. PIH Low-Rent Technical Accounting Guide 7510.1G:
   Part 2-5, states, “to be allowable, program costs must be necessary and reasonable for
   administration of the program and if an indirect cost, it must be allocated to the program
   on an equitable basis.”




                                            23