oversight

The New York City Housing Authority, New York, New York, Had Administrative Weaknesses in Its Capital Fund Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-25.

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

                                                                  Issue Date
                                                                  November, 25, 2008
                                                                  Audit Report Number
                                                                  2009-NY-1002




TO:        Mirza Negron Morales, Director, Office of Public Housing, 2APH



FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA



SUBJECT: The New York City Housing Authority, New York, New York, Had
         Administration Weaknesses in Its Capital Fund Program

                               HIGHLIGHTS

 What We Audited and Why

            We performed an audit of the New York City Housing Authority’s
            (Authority) administration of its capital fund program as part of the Office
            of Inspector General’s (OIG) strategic plan goals to improve the U.S.
            Department of Housing and Urban Development’s (HUD) fiscal
            accountability. We selected the Authority based on the size of its capital
            fund program, more than $2 billion authorized and more than $1.3 billion
            expended in fiscal years 2001 through 2006, and our preliminary analyses
            of this activity in HUD’s Line of Credit Control System. The objectives
            of the audit were limited to determining whether the Authority (1)
            obligated and disbursed capital funds in a timely manner as prescribed by
            regulations, (2) charged eligible contract costs to the capital fund program,
            and (3) complied with applicable procurement policies and federal
            regulations.

 What We Found
            There were weaknesses in the Authority’s controls over the obligation and
            disbursement of capital funds. Specifically, the Authority (1) lacked
            adequate documentation to support that all funds were obligated within
           prescribed timeframes, (2) charged the capital fund for routine
           maintenance costs that should have been charged to its low-rent housing
           program, and (3) executed contracts with timeframes that exceeded those
           authorized by its procurement policy. These deficiencies occurred
           because the Authority did not have adequate procedures in place to (a)
           document that all capital grant funds were properly obligated within
           prescribed timeframes, (b) charge routine maintenance to the low-rent
           housing program, and (c) ensure that procurement terms complied with
           regulations. As a result, the Authority lacked support that $82 million was
           properly obligated, improperly charged $590,363 in routine maintenance
           expenses to the capital fund, and executed contracts for terms that
           exceeded program limitations.

What We Recommend
           We recommend that the Director of HUD’s New York Office of Public
           Housing, instruct the Authority to (1) provide support that $82 million, in
           capital funds were obligated within prescribed timeframes, (2) reimburse
           $590,363 to the capital fund program for the routine maintenance costs
           charged, and (3) strengthen procurement controls to ensure compliance
           with its policy.

           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 discussed the results of our review during the audit and at an exit
           conference held on July 30, 2008. Authority officials were asked to
           provide written comments by August 14, 2008, which we received on
           August 7 and 12, 2008. Auditee officials generally disagreed with our
           finding. As a result of the auditee comments relating to the concept of
           fungibility, we sought legal guidance from HUD’s Office of General
           Counsel on September 25, 2008. Based upon guidance received on
           October 14, 2008, we adjusted the draft finding as indicated in our
           evaluation of the auditee comments. The complete text of the Authority’s
           response, along with our evaluation of that response can be found in
           appendix B of this report.




                                         2
                         TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding: The Authority Had Administrative Weaknesses in Its Controls over   5
                 Capital Funds

Scope and Methodology                                                             11

Internal Controls                                                                 12

   Appendixes

   A. Schedule of Questioned Costs and Funds to Be Put to Better Use              14
   B. Auditee Comments and OIG Evaluation
                                                                                  15




                                         3
                  BACKGROUND AND OBJECTIVES

The New York City Housing Authority (Authority) was established by the City of New
York as a municipal housing authority in 1934 and is a public benefit corporation
chartered under the New York State Public Housing Law. As such, it possesses all
powers, rights, and duties set forth in Article Five of the State Housing Law. The general
organization and operation of the Authority is governed by Chapter 44-A of the
Consolidated Laws of New York State. The membership of the Authority consists of
three full-time members appointed by the mayor of the City of New York. One member
is designated as the chair and serves at the discretion of the mayor, and the other
members serve for a five-year term. The current general manager of the Authority is Mr.
Douglas Apple.

The Authority provides affordable housing to more than 405,000 low-and-moderate
income New York City residents in 344 housing developments that contain
approximately 159,000 federally funded and 20,000 New York State and City funded
apartments. In addition, the Authority assists approximately 87,000 families through the
Section 8 Housing Choice Voucher program and overseas more than 400 community
facilities.

The Authority receives financial assistance from the U.S. Department of Housing and
Urban Development (HUD), the State of New York, and the City of New York. HUD
provides assistance through annual operating subsidies to provide maintenance and
administrative services to federally aided low-rent public housing developments, Section
8 housing choice voucher assistance to reimburse landlords who provide low-income
families housing at reduced rents, debt service contributions to pay down principal and
interest on maturing debt, and capital funds to assist modernization and development
activities. For the period ending December 31, 2006, HUD provided about $2 billion in
total assistance.

HUD distributes capital funds through annual grants to public housing authorities on a
formula basis. These grants can be used for development, financing, modernization, and
management improvements. The Authority was authorized a total of $2.28 billion in
capital fund grants for the years 2001 through 2006.

The objectives of the audit were limited to determining whether the Authority (1)
obligated and disbursed capital funds in a timely manner as prescribed by regulations, (2)
charged eligible contract costs to the capital fund program, and (3) complied with
applicable procurement policies and federal regulations.




                                            4
                                   RESULTS OF AUDIT

Finding 1: The Authority Had Administrative Weaknesses in Its
           Controls over Capital Funds
There were weaknesses in the Authority’s controls over the obligation and disbursement
of capital funds. Specifically, the Authority (1) lacked adequate documentation to
support that funds were obligated within prescribed timeframes, (2) charged the capital
fund program for routine maintenance costs that should have been charged to its low-rent
housing program, and (3) executed contracts with timeframes that exceeded those
authorized by its procurement policy. These deficiencies occurred because the Authority
did not have adequate procedures in place to (a) document that capital grant funds were
obligated within prescribed timeframes, (b) charge routine maintenance expenses to the
low-rent housing program, and (c) ensure that procurement terms complied with
regulations. As a result, the Authority lacked support that $82 million was properly
obligated, improperly charged $590,363 in routine maintenance expenses to the capital
fund program , and executed contracts with terms that exceeded procurement limitations.


    Inadequate Documentation to
    Support Obligation of Funds
    within Prescribed Timeframes


                  The Authority lacked adequate documentation to support that 2002, 2004,
                  and 2005 capital grant funds were properly obligated within prescribed
                  timeframes. Regulations at 24 CFR (Code of Federal Regulations)
                  905.120(a)(i) require that capital funds be obligated no later than two
                  years after the funds were made available to the housing authority. In
                  addition, 24 CFR (Code of Federal Regulations) 968.305 allows capital
                  fund program grant recipients to exercise the concept of fungibility when
                  obligating its funds. The regulation defines fungibility as a concept which
                  permits a PHA to substitute any work item from the latest approved five-
                  year action plan to any previously approved budget and to move work
                  items among approved budgets without prior HUD approval .

                  While the Authority provided contacts for which it reported obligating
                  capital funds, contracts in the amount of $82 million1 did not have an
                  award date, thus preventing determining when the applicable funds were
                  obligated. In addition, contracts in the amount of $247.8 million were
                  awarded prior to the availability of the funds without assurance that these
                  contracts were not previously used to obligate prior years’ grants.

1
 $2.5 million related to the 2002 capital grant, $58.2 million related to the 2004 capital grant, and $21.3
million related to the 2005 capital grant

                                                      5
Regulations permit movement
of contracts among grant
years
            While Public and Indian Housing Notice 2000-22 cautions that fungibility
            can only be exercised between work items that are included in an
            authority’s latest approved Annual or 5-Year Action Plan, we found little
            definitive guidance on the implementation of the concept of fungibility,
            especially with regard to using a contract to obligate funds that were not
            yet available at the time the contract was executed. The Authority
            maintained that there was no criteria or HUD guidance on the concept of
            fungibility that prohibit the use of previously executed contracts to
            obligate subsequent years’ funds. As a result, we requested guidance from
            the HUD general counsel office as to what is permitted under fungibility
            as defined in HUD’s existing regulations and programmatic guidance, and
            whether 24 CFR (Code of Federal Regulations) 905.120 permits grantees
            to obligate grant funds with contracts awarded prior to the availability of
            funds.

            HUD’s general counsel guidance opined that “fungibility permits a public
            housing agency to substitute a work item from the most recent approved 5-
            Year Plan to any previously approved budget or annual plan”.
            Accordingly, HUD’s general counsel concluded that “a prior year’s
            contract could support a later year’s obligation and meet the requirements
            of section 9(j) of the United States Housing Act of 1937 as implemented
            by 24 CFR (Code of Federal Regulations) 905.120.

            However, HUD’s general counsel further opined that, while the Authority
            could move a work/contract item into another year of the 5-Year Plan or
            another 5-Year Plan and use the contract and work to satisfy its obligation
            requirements, records must (1) support that when the contract was entered
            into there were available capital funds to carry out the contract work and
            (2) show how each year of capital fund grants met the two year obligation
            and four year expenditure requirement.

Obligations supported by
contracts with no award date

            Initially, the Authority did not provide a consolidated contract list to
            support the obligation of approximately $100.8 million in 2002 capital
            grant funds. Therefore, we contacted various departments reported to
            obligate capital funds and identified contracts to support obligation of
            $79.7 million. After we expressed concern to Authority officials that $21.1
            million of obligations were unsupported, Authority officials did provide a

                                         6
                    consolidated list of contracts that were obligated against the 2002 capital
                    grant. However, contracts for $2.5 million lacked an award date.

                    Similarly, Authority officials were unable to initially provide a
                    consolidated list of contracts to support the required obligation of $210
                    million and $206 million for the 2004 and 2005 capital grants,
                    respectively. In response to our requests, the officials provided multiple
                    revised lists of contracts purported to support the obligation of $237.7
                    million of the 2004 capital grant and $358.8 million of the 2005 capital
                    grant, which exceeds the grant amounts and amounts required to be
                    obligated2. However, some of the contract amounts did not provide
                    specific award dates. The lack of an award date prevented a determination
                    as to whether the funds were obligated in a timely manner. As shown in
                    the table below, obligations of $58.2 million and $21.3 million of 2004
                    and 2005 capital grant funds, respectively, were not adequately supported
                    because the contracts did not have an award date with which to determine
                    whether they represented an obligation of funds in a timely manner.

                    Table 1: Schedule of Contracts without an Award Date

                          Description                         2004Grant              2005 Grant
                          Contract amounts provided
                          to support obligations              $ 237,782,112          $ 358,821,098
                          Less: Contract amounts
                          without an award date               ( 85,482,656 )         ( 173,716,195 )
                          Contract amounts with a
                          contract award date                 $ 152,299,456          $ 185,104,903
                          Amount required to be
                          obligated                           $ 210,491,946          $ 206,452,759
                          Less: Obligations supported         ( 152,299,456)         ( 185,104,903)
                          Obligations not supported           $ 58,192,490           $ 21,347,856

       Obligations supported by
       contracts with award dates
       prior to the availability of funds

                    Contracts were provided with award dates prior to the date that the capital
                    grant funds were available for obligation. For instance, while the 2004
                    capital grant was made available for obligation as of September 14, 2004,
                    $107 million in contracts with award dates prior to that were provided to
                    support obligation of that year’s grant. Similarly, while the 2005 capital

2
    24 CFR 905.120(b)(3) requires that 90 percent of a capital grant funds be obligated within two years of
    the funds’ availability. Thus, the Authority was required to obligate $210,491,946 (90 percent of
    $233,879,941) for 2004 and $206,452,759 (90 percent of $229,391,955) for 2005.

                                                       7
            grant was made available for obligation as of August 18, 2005, contracts
            totaling $140.8 million were awarded prior to that date. Further, contracts
            of $1.3 million and $1million that were awarded prior to 1999 and 2000
            were used to support the obligation of 2004 and 2005 capital grants,
            respectively, which is more than five years prior to the funds being made
            available.

            While we recognize that the concept of fungibility allows a housing
            authority to substitute fund obligations and disbursements among grant
            years, implementation of this concept raises issues of timeliness and
            adequate documentation for the substitution of obligations. As noted by
            the HUD general counsel, without the records to show how each year of
            capital fund grants met the two year obligation and four year expenditure
            requirement, there is a question as to whether these contracts were
            previously used to obligate funds from earlier grant years.
            Consequently, regardless of what parameters within which fungibility
            permits a housing authority to substitute fund obligations and
            disbursements among grant years, there needs to be adequate
            documentation to ensure that contracts awarded prior to the availability of
            funds were not previously used to obligate earlier years’ grant funds.

Ineligible Costs Charged to
Capital Funds

            Regulations at 24 CFR (Code of Federal Regulations) 968.112(g)(2)(v)
            requires that a preventive maintenance system should provide for regular
            inspections of building structures, systems, and units and distinguish
            between work eligible to be paid from for low-rent housing funds for
            routine maintenance and from capital grant funds for non-routine
            maintenance. A three-year elevator service contract that was allocated to
            the capital fund program consisted of $590,363 in costs that Authority
            officials stated included making service calls repairing, replacing, and
            lubricating parts, and other preventive maintenance to maintain elevators
            in a safe operating condition. The New York City Office of Public
            Housing advised that these were routine maintenance items that should be
            charged to the low-rent program and not part of a preventive maintenance
            system under the capital fund program. Consequently, we regard the
            $590,363 as an inappropriate charge to the capital fund program.

Contract Terms in Excess of
Prescribed Timeframes

            Seven of fourteen contracts we reviewed were executed with terms that
            exceeded the timeframe allowed by the Authority’s procurement policy.

                                         8
         The Authority’s Contract Procurement Resolution, section 116, entitled
         “Professional Service Contracts,” prohibits the Authority from executing
         contracts for personal, management, legal, or other professional services
         with an initial term in excess of two years without HUD’s prior written
         consent.

         The Authority executed a $16.7 million architect and engineering
         consultant contract for a five-year term; four separate construction
         management service contracts, each valued at $89 million, for three year
         terms; a service contract for survey, inspection, testing, repair and
         alterations to fire alarm systems valued at $819,353 with a term of three
         years, and a $6.6 million elevator service contract for a term of 2.4 years.
         While the Authority may have realized cost efficiencies through these
         extended terms, there was no evidence of HUD approval as required or a
         rationale as to why the contracts exceeded the maximum contract term
         allowed.


Conclusion

         The Authority lacked adequate controls over its capital fund program
         activities to adequately support that obligations were made in a timely
         manner, costs charged to the capital fund program were eligible, and
         contract durations complied with the Authority’s own procurement policy.
         We attribute these deficiencies to weaknesses in the Authority’s controls
         over capital fund program administration.

Recommendations


         We recommend that the Director of HUD’s New York City Office of
         Public Housing instruct the Authority to

         1A. Provide documentation to support that $82 million of contracts were
             properly executed to support the obligation of applicable capital
             grant year funds ($2.5 million from the 2002 capital grant, $58.2
             million from the 2004 capital grant, and $21.3 million from the 2005
             capital grant). If documentation cannot be provided, take
             appropriate action in accordance with 24 CFR (Code of Federal
             Regulations) 905.120.

         1B. Provide documentation to provide assurance that obligations of $107
             million and $140.8 million from the 2004 and 2005 capital grants,
             respectively were not previously used to obligate funds from earlier
             grant years.



                                       9
1C. Strengthen controls over procurement obligation and disbursement
    documentation to ensure that records can readily show how each
    year of capital fund grants meets the two year obligation and four
    year expenditure requirements as stipulated by 24 CFR (Code of
    Federal Regulations) 905.120.

1D. Reimburse the capital fund program from low-rent housing program
    funds for the $590,363 in routine maintenance costs charged to the
    capital fund program.

1E. Review other elevator maintenance contracts to identify any
    additional routine costs that are being charged to the capital fund
    program and ensure that these are appropriately charged to the low-
    rent program, thus ensuring that the funds are put to better use.

1F. Strengthen controls to ensure that routine elevator maintenance costs
    are not charged to the capital fund program, and that contract terms
    comply with its procurement policy.




                            10
        SCOPE AND METHODOLOGY

To accomplish our objectives, we

    Reviewed applicable laws, regulations, and HUD program requirements at 24
    CFR (Code of Federal Regulations) Parts 85, 905 and 968.
.
    Analyzed the Authority’s obligation and disbursement of capital funds in
    HUD’s Line of Credit Control System.

    Reconciled the Authority’s financial data schedules to the amounts reported in
    HUD’s Line of Credit Control System.

    Reviewed HUD’s administrative files and monitoring reports for the
    Authority’s capital fund program. Conducted interviews with the Authority’s
    audit, budget, capital projects, information technology, and finance staff to
    gain an understanding of the internal controls related to the administration of
    the capital fund program.

    Reviewed program policies and procedures, its five-year and annual plan, the
    annual audited financial statements, board of commissioner minutes, budgets,
    general ledgers, contract registers, and Line of Credit Control System
    drawdown vouchers related to the capital fund program.

    Selected a nonrepresentative sample of 14 procurements and reviewed the
    process to ensure compliance with procurement and contract award
    regulations and procedures. These 14 contracts represented $408 million of
    more than $1.3 billion expended in fiscal years 2001 through 2006.

    Conducted interviews and inquiries with HUD’s Office of Public and Indian
    Housing New York City field office, headquarters capital fund program and,
    Real Estate Assessment Center staff, to obtain an understanding of the
    Authority’s capital grant program. In addition, we discussed the concept of
    fungibility with, and obtained a legal opinion on its implementation from,
    HUD’s Office of General Counsel.

We performed our fieldwork between August 2007 and May 2008 at the
Authority’s offices located at 250 Broadway and 90 Church Street, New York,
New York. Our audit generally covered the period January 1, 2003, through
December 31, 2005, and was expanded as necessary.

We performed our audit in accordance with generally accepted government
auditing standards.



                                     11
                          INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved.
        Effectiveness and efficiency of operations,
        Reliability of financial reporting,
        Compliance with applicable laws and regulations, and
        Safeguarding of assets and segregation of duties.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls
               We determined the following internal controls were relevant to our audit
               objectives:

                      Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its
                      objectives.

                      Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that resource use
                      is consistent with laws and regulations.

                      Safeguarding resources - Policies and procedures that management
                      has implemented to reasonably ensure that resources are safeguarded
                      against waste, loss, and misuse.

                      Validity and reliability of data - Policies and procedures that
                      management has implemented to reasonably ensure that valid and
                      reliable data are obtained, maintained, and fairly disclosed in reports

               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.




                                             12
Significant Weaknesses


           Based on our audit, we believe the following items are significant
           weaknesses:

                  The Authority did not ensure compliance with laws and regulations
                  when it did not maintain adequate documentation to support that
                  capital funds were obligated and disbursed in accordance with
                  regulations, and contracts were executed with timeframes in excess
                  of that authorized by its procurement policy.




                                        13
                               APPENDIXES

Appendix A

           SCHEDULE OF QUESTIONED COSTS
          AND FUNDS TO BE PUT TO BETTER USE

           Recommendation        Ineligible 1/   Unsupported 2/
                  number

                          1A                            3/

                          1D        $590,363
                                  _________
                       Total        $590,363


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 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/   To be reasonably precise about the amount involved with the $82 million in
     questioned costs associated with recommendation 1A that is applicable to
     obligations without contract dates, we will defer specifying an amount until HUD
     has had an opportunity to review any documentation provided by the Authority as
     part of the audit resolution process.




                                          14
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        15
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 1




                        16
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 2




Comment 3




                        17
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 3




Comment 4




Comment 4




                        18
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 5




                        19
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        20
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 6




                        21
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 6




Comment 7




Comment 6




Comment 8




                        22
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        23
                     OIG Evaluation of Auditee Comments

Comment 1   Auditee officials maintain that they were not provided sufficient time to
            provide supporting documentation that funds were obligated in a timely
            manner, the audit’s changing scope and methodology complicated the
            submission of documentation, and the full breadth of the documentation
            received is not reflected in the report. An objective of the audit was to
            determine whether capital grant funds were obligated within timeframes
            prescribed by regulation, and documentation to support obligations was
            requested of the auditee beginning in November 2007 through the internal
            audit department in accordance with the protocol established by the
            auditee.

            The lack of adequate documentation was discussed during the course of
            the audit, and was raised as a potential reportable issue at a pre-exit
            conference on January 28, 2008. The issue was discussed again at
             subsequent conferences requested by the auditee on March 18, 2008 and
             March 25, 2008. Subsequent to the latter conference, and in response to a
             series of revised lists of contracts provided by the auditee, we established
             a cutoff to accept additional documentation of April 11, 2008. Further,
             although the auditee had opportunity to continue to gather needed
             documentation, no additional documentation was provided at the exit
             conference held on July 30, 2008. Accordingly, the auditee will have the
             opportunity to provide additional supporting documentation to HUD
             during the audit resolution process; and as recommended if adequate
             documentation is not provided, HUD needs to take appropriate action
             in accordance with 24 CFR (Code of Federal Regulations) 905.120.

Comment 2   The auditee maintains that it has implemented fungibility within
            established HUD guidelines and in accordance with 24 CFR (Code of
            Federal Regulations) 968.305, and that the HUD field office’s
            interpretation of this regulation is not consistent with the regulation.
            Regulations at 24 CFR (Code of Federal Regulations) 968.305 define
            fungibility as a concept which permits a public housing authority to
            substitute any work item from the latest approved five-year action plan to
            any previously approved budget and to move work items among approved
            budgets without prior HUD approval. Finding that there was little written
            guidance on implementing this concept, we sought guidance from HUD
            field office officials as to how they administer this concept. As noted by
            the auditee, the assertion that fungibility would permit the use of contracts
            executed, at most, two years before the obligation start date of a grant
            represents an interpretation by the HUD field office. Consequently, we
            recognize that there is a need for HUD to more clearly define and
            promulgate guidance on the implementation of fungibility. As a result, we
            obtained guidance from HUD’s Office of General Counsel, which
            provided that the auditee can substitute costs from the five year action plan

                                         24
            provided that evidence shows (1) that when the contract was entered into
            there were available capital funds to carry out the contract work and (2)
            how each year of capital fund grants met the two year obligation and four
            year expenditure requirement. As such, we have deleted reference to
            unsupported obligations based upon the two year parameter. However, we
            still conclude that the documentation provided by the auditee is not
            adequate to support a determination that obligations were made in a timely
            manner. First, contracts without execution dates in the amount of $2.5
            million, $58.2 million and $21.3 million were provided to support the
            obligation of 2002, 2004 and 2005 capital grant funds, respectively.
            Without an execution date, one cannot determine if these contracts did in
            fact represent obligation of funds in a timely manner. Additionally,
            auditee officials could not ensure that the contracts provided as support,
            which were executed prior to the date grant funds were made available,
            were not previously used to obligate prior years’ grants. Consequently,
            we have adjusted the report to reflect these facts and we cite $82 million
            as unsupported obligations associated with contracts without an execution
            date.

Comment 3   The auditee cites 24 CFR (Code of Federal Regulations) 968.112(g)(2)(v),
            which states “eligible costs include the establishment of a preventative
            maintenance system or improvement of an existing system, and concludes
            that the elevator maintenance costs are not routine maintenance but are
            part of a larger capital modernization program. However, 24 CFR (Code
            of Federal Regulations) 968.112(g)(2)(v) also states that a preventive
            maintenance system must provide for regular inspections of building
            structures, systems and units and the auditee must distinguish between
            work eligible for operating funds (routine maintenance) and work eligible
            for modernization funding (non-routine maintenance). Therefore, the
            auditee needs to provide documentation to show that the elevator contract
            was part of a preventative maintenance system developed to provide
            regular inspections of its buildings systems and that the maintenance and
            service portion of the contract was not work eligible for operating funds
            (routine maintenance) but for work eligible for modernization funding
            (non-routine maintenance). Otherwise, as recommended, the low-rent
            housing program should reimburse the capital fund program.

Comment 4   The auditee’s planned actions are responsive to our recommendations.
            Note, however, that HUD’s approval of the action plan in no way
            represents approval of contract terms.

Comment 5   The auditee maintains that it has sufficient and appropriate procedures to
            ensure that adequate documentation is maintained to demonstrate that
            capital funds are obligated and disbursed in accordance with 24 CFR
            905.120 (a), and hence, disagrees that it had significant weakness in
            compliance with laws and regulation. However, the auditee’s lack of

                                         25
            available documentation to support that obligations were made in a timely
            manner as stated in the finding represents a weakness in internal controls.

Comment 6   Auditee officials state that they have consistently followed the practices of
            obligating and expensing funds over a five year period in a manner
            prescribed in 24 CFR (Code of Federal Regulations) 968.305 under the
            concept of fungibility substitution. They state that this longstanding
            practice of fungibility substitution was approved by the HUD New York
            Regional Office. Further, they state that the audit’s sole reliance on
            testimonial evidence of a field office official using a two year period is
            contrary to regulations and makes no legal reference to written
            instructions.

            We recognize that there is a need for HUD to more clearly define and
            promulgate guidance on the implementation of fungibility. As a result, we
            sought guidance from HUD’s Office of General Counsel, which clarified
            the issue (see comment 2). Accordingly, we have deleted reference to
            unsupported obligations based upon the two-year parameter as was
            contained in our discussion draft. Nevertheless, fungibility was not the
            sole basis for the finding, nor is whatever timeframes HUD determines are
            appropriate to apply based upon fungibility substitution. As such, we have
            adjusted the finding to reflect our concern about the contracts that did not
            have execution dates and those contracts provided as support, that was
            executed prior to the date capital funds were made available, without
            assurance that these contracts were not already used to obligate capital
            funds from earlier years. As mentioned in comment 2 above, the lack of
            execution dates, etc., supports our analysis that adequate evidence was not
            provided to ensure that capital funds were obligated in a timely manner in
            accordance with regulations.

Comment 7   The auditee states that the $33.7 million cited as an audit exception may
            not be properly justified because the “exclusive use of testimonial
            evidence and oral explanations without adequate and sufficient alternative
            physical and documentary evidence cannot be a reasonable basis for an
            audit exception”. In this case, the oral explanation represented HUD field
            office guidance as to how the field office administers its programs, and as
            such, is a reasonable basis for establishing criteria in the absence of
            alternative physical evidence. Nevertheless, based upon guidance from
            HUD’s Office of General Counsel, we have adjusted the finding and the
            dollars in the report to clarify why the auditee’s support that capital funds
            were obligated in accordance with regulations is still an exception (see
            comment 6).

Comment 8   As requested by the auditee, we have noted in the scope and methodology
            that we conducted interviews with the officials of the Capital Projects
            Division and Information Technology Department.

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