oversight

HUD's Monitoring of the Performance-Based Contract Administrators Was Inadequate

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-02-06.

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

                                                                 Issue Date
                                                                         February 6, 2009
                                                                 Audit Report Number
                                                                          2009-SE-0002




TO:        Rodger J. Boyd, Deputy Assistant Secretary, Office of Native
           American Programs, PN



FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: NAHASDA Program Income from 1937 Act Properties


                                    HIGHLIGHTS

 What We Audited and Why

      We audited the U.S. Department of Housing and Urban Development (HUD) Office of
      Native American Program’s (ONAP) rules regarding calculation of program income
      under the Native American Housing and Self-Determination Act of 1996 (NAHASDA).
      The scope was limited to NAHASDA-assisted housing which originated from the former
      Housing Act of 1937 (1937 Act). We selected this subject for review based on ONAP’s
      agreement to use rent collected from low-income tenants of HUD-subsidized tribal
      housing to repay $246,600 in unallowable and undocumented expenses charged to the
      Tulalip Housing Authority’s NAHASDA grants.

      Our objectives were to determine whether ONAP’s guidance on calculating program
      income for the NAHASDA-assisted 1937 Act housing projects was consistent with
      generally accepted accounting principles. We also wanted to determine whether the
      effects of implementing this guidance were consistent with the purpose and goals of
      NAHASDA. The audit steps were designed to provide an understanding of the
      accounting for program income from 1937 Act-assisted properties and the requirements
      affecting development of policy and guidance.

 What We Found

      Policies established by ONAP allowed tribal housing authorities to redirect and abuse
      rent revenue from NAHASDA-assisted Low Rent program units developed under the
     1937 Act. This condition occurred because HUD’s program income regulations are
     ambiguous and ONAP’s corresponding program income guidance is not consistent with
     generally accepted accounting principles. Further, ONAP allowed tribal authorities to
     claim these funds as unrestricted income retroactively to 1998 and use the funds to cover
     expenditures that are not permitted under NAHASDA.

     As a result, tribal housing authorities redirected and abused millions of dollars in rent
     collected from low-income Native Americans living in NAHASDA-assisted units. While
     the total amount of redirected revenue is not known, we observed over $12.6 million
     redirected from 1937 Act properties. Nationwide, ONAP’s program income guidance
     provided tribes the opportunity to redirect up to $40 million per year in rent revenue from
     NAHASDA-assisted 1937 Act properties. This amount totals about $400 million in
     NAHASDA-assisted rental revenue that is currently unrestricted or available to be
     retroactively reclassified as unrestricted by restating accounting records back to 1998.
     HUD lacks assurance that all of these funds have been used to maintain existing rental
     properties or to assist other families in obtaining affordable housing in conformance with
     the purpose and goals of NAHASDA.

What We Recommend


     We recommend that HUD’s Deputy Assistant Secretary, Office of Native American
     Programs, (1) take immediate action to suspend the redirecting of revenue from
     NAHASDA-assisted 1937 Act units unless all costs for operation, maintenance,
     rehabilitation, and capital improvement have been reimbursed by offsetting expenses
     against revenue of those units in a method consistent with self-sufficiency and (2) rescind
     Public and Indian Housing Notice 2000-18 and associated guidance, such as Program
     Guidance Memorandums 2001-3T and 2002-12, until appropriate guidance can be
     designed that supports the purpose and goals of NAHASDA.

     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 a discussion draft to ONAP on November 21, 2008, and held an exit
     conference on December 4, 2008. ONAP disagreed with our report findings. ONAP
     believes the tribal ownership of income from 1937 Act properties was a policy
     determined in negotiated rulemaking and is a matter of self-determination.

     The complete text of the auditee’s response, along with our evaluation of that response,
     can be found in appendix A of this report.




                                              2
                           TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit                                                                  6
    Finding 1: HUD’s Guidance Allowed Tribes to Redirect and Abuse Rent Revenue
               from Low-Income Housing

Scope and Methodology                                                             18

Internal Controls                                                                 20

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                       22
   B. ONAP Made a Management Decision to Not Restrict the Use of Revenue from     49
      1937 Act Properties

   C. HUD’s Guidance on Program Income Did Not Require Housing Authorities to     50
      Match Revenues and Expenses from NAHASDA-Assisted 1937 Act Units

   D. Purpose and Goals of NAHASDA and Implementing Regulations                   53
   E. Regulations and Guidance for Program Income                                 59
   F. Criteria for Management Controls                                            61
   G. Government Auditing Standards for Reporting Abuse                           63
   H. Schedule of Rent Revenue Redirected from 1937 Act Properties                64




                                           3
                      BACKGROUND AND OBJECTIVES

Previous Assistance under the 1937 Act

The Housing Act of 1937 (1937 Act), as amended, included grants to Indian housing authorities
for the development, modernization, and operation of several low-income housing programs
including the Low Rent and Mutual Help homeownership programs. Operation of the Low Rent
program was provided by a subsidy program in which funding was provided to meet the
operating needs that could not be met by existing rental revenue. Therefore, the 1937 Act
regulations and annual contributions contracts for the Low Rent program did not use program
income terminology. The Mutual Help program allowed Indian housing authorities to help low-
income Indian families purchase a home. A family made monthly payments based on 15 to 30
percent of its adjusted income. Payments credited to an equity account were used to purchase
the home.

The operating subsidies were provided to each Indian housing authority (authority) to offset, in
part, the cost of operating its dwelling units in accordance with Section 9(a) of the 1937 Act as
amended. Operating subsidies were considered grant funds. The performance funding system
was the formula used to calculate the amount of operating subsidy for each authority.

The operating subsidy was equal to the allowable expense level plus the allowable utilities
expense level plus other costs less the estimated operating income of the project. Essentially, the
allowable expense level was based on what it would cost a well-managed authority of
comparable location and characteristics to operate based on such variables as local government
wage rate index, number of bedrooms per high rise family project, and number of bedrooms per
unit. The resulting allowable expense levels were arrived at by application of the formula using
these variables.

Assistance under NAHASDA

The Native American Housing and Self-Determination Act of 1996 (NAHASDA) reorganized
the U.S. Department of Housing and Urban Development’s (HUD) system of housing assistance
to Native Americans, eliminating several assistance programs and replacing them with a block
grant program. The purpose and goals of NAHASDA and implementing regulations are attached
to this report in appendix D.

The primary objectives of NAHASDA are

(1) To assist and promote affordable housing activities to develop, maintain, and operate
    affordable housing in safe and healthy environments on Indian reservations and in other
    Indian areas for occupancy by low-income Indian families;

(2) To ensure better access to private mortgage markets for Indian tribes and their members and
    to promote self-sufficiency of Indian tribes and their members;



                                                 4
(3) To coordinate activities to provide housing for Indian tribes and their members with federal,
    state, and local activities to further economic and community development for Indian tribes
    and their members;

(4) To plan for and integrate infrastructure resources for Indian tribes with housing development
    for tribes; and

(5) To promote the development of private capital markets in Indian country and to allow such
    markets to operate and grow, thereby benefiting Indian communities.

The two programs authorized for Indian tribes under NAHASDA are the Indian Housing Block
Grant, a formula-based grant program, and Title VI Loan Guarantee, which provides financing
guarantees to Indian tribes for private market loans to develop affordable housing. The Indian
Housing Block Grant formula currently uses the fiscal year 1996 national average operating
subsidy, adjusted for inflation and local area costs, as the basis for per unit funding to an Indian
tribe to operate 1937 Act housing.

NAHASDA’s Negotiated Rulemaking

Section 106 of NAHASDA requires HUD to ―establish any requirements necessary to provide
for the transition‖ from assistance under the 1937 Act to assistance under NAHASDA. Section
106(b)(2)(A) provides that all regulations be created through the negotiated rulemaking process
under subchapter III of chapter 5 of title 5, United States Code. Accordingly, the Secretary of
HUD established the Native American Housing Assistance and Self-Determination Negotiated
Rulemaking Committee to negotiate and develop a proposed rule implementing NAHASDA.

The committee consisted of 58 members. Forty-eight of these members represented
geographically diverse small, medium, and large Indian tribes. There were 10 HUD
representatives on the committee. A number of HUD officials, committee members, and guests
commented on the scrutiny placed upon Indian housing as a result of a Seattle Times report on
the mismanagement of Indian housing funds and the resulting media attention and congressional
hearings. The Assistant Secretary for Public and Indian Housing stated that the stories
highlighted the issues in Native American housing and that HUD needed to address the issues.
He made it clear that the committee existed, in part, to respond to the troubles with past
programs. On March 12, 1998, HUD published the final rule implementing the NAHASDA
regulations at 24 CFR [Code of Federal Regulations] 1000.

Our Objective

Our objective was to determine whether HUD’s Office of Native American Programs’ (ONAP)
guidance on calculating program income for the NAHASDA-assisted 1937 Act housing projects
was consistent with generally accepted accounting principles. We also wanted to determine
whether the effects of implementing this guidance were consistent with the purpose and goals of
NAHASDA.




                                                  5
                                 RESULTS OF AUDIT

Finding 1: HUD’s Guidance Allowed Tribes to Redirect and Abuse
Rent Revenue from Low-Income Housing
Policies established by ONAP allowed tribal housing authorities to redirect and abuse rent
revenue from NAHASDA-assisted Low Rent program units developed under the 1937 Act. This
condition occurred because HUD’s program income regulations are ambiguous and ONAP’s
corresponding guidance documents were not consistent with generally accepted accounting
principles. As a result, tribal housing authorities redirected and abused millions of dollars in rent
collected from Native Americans living in NAHASDA-assisted units. While the total amount of
redirected revenue is not known, we observed over $12.6 million redirected from 1937 Act
properties. Nationwide, ONAP’s program income guidance provided tribes the opportunity to
redirect up to $40 million per year in rent revenue from NAHASDA-assisted 1937 Act Low Rent
program properties. This amount totals about $400 million in NAHASDA-assisted rental
revenue that is currently unrestricted or available to be retroactively reclassified by the tribes as
unrestricted by restating the accounting records back to 1998. HUD lacks assurance that all of
these funds have been used to maintain existing rental properties or to assist other families in
obtaining affordable housing in accordance with the purposes and goals of NAHASDA.


 HUD’s Implementation of
 NAHASDA

       The 1937 Act grants were cancelled by NAHASDA, Section 502. Section 502 provides
       that 1937 Act assets ―shall be considered and maintained as affordable housing for
       purposes of this Act.‖ Section 203(b) states that tribes ―shall, using amounts of any
       grants received under [NAHASDA], reserve and use for operating assistance under
       section 202(1) such amounts as may be necessary to provide for the continued
       maintenance and efficient operation of [1937 Act] housing.‖ In addition, NAHASDA
       Section 210 specified that 1937 Act unobligated reserves and cash accounts were to
       transition into the new program.

       Accordingly, tribes can operate 1937 Act assets without assistance or can apply for
       assistance under NAHASDA. To determine what restrictions are placed on revenue
       received from occupants of any NAHASDA-assisted 1937 Act units, tribal housing
       authorities must comply with 24 CFR 1000.62 and were instructed to follow the guidance
       of Public and Indian Housing (PIH) Notice 2000-18, section 3.4, both found in appendix
       E of this report.

       The regulations at 24 CFR 1000.62(a) state, ―Program income does not include any
       amounts generated from the operation of 1937 Act units unless the units are assisted with
       grant amounts and the income is attributable to such assistance.‖ If grant funds are not
       used to assist a 1937 Act unit, any revenues would not be program income. However, if


                                                 6
        grant funds are used, the asset generates program income when that income is
        ―attributed‖ to the assistance. There is no definition of the word ―attribute‖ in the
        regulation. Section 1000.62(d) continues, ―Costs incident to the generation of program
        income shall be deducted from gross income to determine program income.‖

        These rules on program income apply to all NAHASDA-assisted 1937 Act units, both
        rental and homeownership units. However, homeownership units do not typically create
        program income until the end of the homeownership agreement. Also, those revenues are
        not easily estimated and are less restricted than other NAHASDA program income.1
        Therefore, this report’s discussion focuses on the immediate impact of unrestricted funds
        produced by 1937 Act Low Rent program units.

    Development of Program
    Income Rules and Guidance

        During the development of negotiated rules, a committee, consisting of tribal
        representatives and officials from ONAP, discussed the rules relating to the calculation of
        program income for NAHASDA-assisted 1937 Act units. According to the committee
        meeting notes, ―The committee discussed how the problem of separating program income
        from other income for accounting purposes would be addressed. One acceptable solution
        of these accounting questions would be as follows:

                 Step 1. Determine the recipient’s net income. (Total accrued income less total
                 accrued expenses equal total net income.)
                 Step 2. Determine the funding source of the recipient’s assets…‖

        The notes show an objection by an Office of General Counsel staff attorney, who stated
        that the language was not consistent with the regulations. She stated that the regulations
        did not permit subtracting total expenses from total assets to find net income.

        After some additional discussion, the Deputy Assistant Secretary for ONAP stated that
        one reason the committee had experienced difficulty in developing the language was
        because there were not enough technical experts present to ensure the members of the
        validity of their work. She stated that she wanted to make sure that such technical
        experts would be present during the joint development of guidance, later issued in PIH
        Notice 2000-18.

        Despite the concern for technical accuracy, ONAP did not nominate any of its own
        accounting professionals to the committee developing program income accounting
        guidance.



1
 Mutual Help program homeownership proceeds of sale are restricted to any housing activity, community facility, or
economic development activity, as published on page 15779 of the Federal Register/Vol. 64, No. 62/Thursday,
April 1, 1999/Notices.


                                                        7
    Tribes Allowed to Redirect
    Rent Revenue from Assisted
    Units

         A seven-member workgroup consisting of four tribal/tribally designated housing entities
         and three HUD representatives was appointed by the co-chairs of the NAHASDA
         Negotiated Rulemaking Committee to develop guidance for calculating program income
         for the NAHASDA-assisted 1937 Act units. PIH Notice 2000-18, issued on April 20,
         2000, was the product of that workgroup. According to section 3.4 of the notice, ―When
         1937 Housing Act units are assisted with IHBG [Indian Housing Block Grant] funds, the
         income from the units is program income if it is attributable to the IHBG assistance.‖ It
         continues, ―Program income is the amount of total income for a project identified as
         Formula Current Assisted Stock (FCAS) on the tribe’s Formula Response Form that
         exceeds [estimated 1996 rent revenues]2 times the number of units in the project.‖

         Based upon the guidance provided by the notice, ONAP officials instructed tribes to
         deduct expenses of generating income to determine program income only if they were
         using the income to pay these costs. This guidance allowed tribes to declare that the rents
         collected for their 1937 Act units were not being used for the operation and maintenance
         of these units.

         ONAP further instructed that for the 1937 Act units, the tribes could then deduct and
         redirect the estimated 1996 rent revenue amount from the total rent revenue collected to
         determine the final program income amount. In practice, most or all of the rental income
         could be redirected before applying the expenses related to the operation of the rental
         units since the rental income usually did not exceed the estimated 1996 revenue amounts.
         Expenses that would have otherwise been covered by rent revenue were paid with
         NAHASDA grant funds.

         The following chart compares the use of HUD assistance and related rental revenues
         from 1937 Act Low Rent program housing units before and after the implementation of
         the NAHASDA program income accounting guidance found in PIH Notice 2000-18.




2
 Section 3.4 of the notice defines 46 percent of the allowable expense level for the recipient as the surrogate for the
national average rents received for 1937 Act units in the last year of the 1937 Act programs for Indians. The
allowable expense level and 46 percent of the allowable expense level for each Indian tribe with 1937 Act units are
set forth in the appendix to PIH Notice 2000-18, and the levels are defined in 24 CFR 1000.302.


                                                           8
Program Income Guidance Was
in Conflict with NAHASDA
Goals and Generally Accepted
Accounting Principles


    The redirected rent revenues were not considered program income by ONAP, and tribes
    were permitted to use these funds for any purpose, including purposes unrelated to
    affordable housing, without restrictions. Consequently, ONAP guidance created an
    unnecessary obligation for the government to pay for the operations and maintenance of
    units with NAHASDA grant funds when rent revenues were already available to cover
    these expenses.

    Using NAHASDA funds instead of rent revenue to cover expenses results in less
    NAHASDA funds being available for affordable housing activities, counter to the goals
    established by Congress for both NAHASDA and the 1937 Act. Those goals are to
    provide funding to assist and promote affordable housing activities for Indian tribes as
    well as NAHASDA’s goal of promoting the self-sufficiency of Indian tribes and their


                                            9
        members. Further, the calculation of program income allowed under the notice was
        inconsistent with the fundamentals of accounting, since it did not provide for the
        matching of rental unit operating expenses against the rental income generated by these
        units.

        The notice’s guidance for the calculation of program income deviated from the regulation
        at 24 CFR 1000.62(d), which states, ―Costs incident to the generation of program income
        shall be deducted from gross income to determine program income.‖ Instead, the
        guidance invented a method of fund-based accounting, which split the accounting for
        operational expenses from revenue collections based on a perception of unrestricted
        ownership of those revenues by the tribes. This separation resulted in an unrestricted
        revenue stream for the tribe that was unrelated to operations.

        This new unrestricted revenue stream was roughly equivalent to former rent collections
        under the 1937 Act, which were restricted to supporting low-income housing.
        NAHASDA program income guidance stated that the income that was received from the
        1937 Act units before the enactment of NAHASDA must be considered when calculating
        program income. ONAP officials determined that historical 1937 Act rent revenues were
        allowed to be redirected from the program as unrestricted revenue since the previous
        grants were canceled.

        To meet the requirements of 24 CFR 1000.62(d) and conform with generally accepted
        accounting principles, tribes should have been instructed to deduct the operating expenses
        of the unit from the rents collected (gross income) before determining that program or
        unrestricted income existed. Following this principle and the regulation would prevent
        having to use NAHASDA funds to make up for the redirecting of rent revenues needed
        for the operation of these units, freeing up NAHASDA funds to provide additional
        housing assistance to low-income individuals.

        The amount allowed to be redirected is a mathematical formula based on figures in the
        appendixes to PIH Notice 2000-18. The calculation equals the number of 1937 Act
        current assisted stock rental units claimed by tribes for 2008 funding, times 46 percent of
        the monthly allowable expense level figure for each tribe as published in PIH Notice
        2000-18, times 12 months. The following examples demonstrate the calculation for four
        tribal housing authorities.

           Tribe             Low-rent   Allowable    Times 12    Times 46      Annual maximum
                               units     expense      months      percent     unrestricted income
                                           level
Oneida Tribe                 194               184          12         46%               $ 197,042
Salish and Kootenai Tribes   414               211          12         46%                 482,194
Navajo Nation                3,528             293          12         46%               5,706,046
Warm Springs Tribes          100               220          12         46%                 121,440
Total                        4,236                                                      $ 6,506,722




                                                10
         Total rent revenue was reduced by this annual maximum before tribes matched the
         remaining revenue and expenses from operations to compute remaining income, which
         was attributed to NAHASDA assistance. In those instances in which tribes collected less
         rent from these units than the maximum unrestricted income, unrestricted income was
         limited to actual rent revenue.

         However, this method fails to match the ―costs incident to the generation of program
         income‖ with ―gross income to determine program income‖ as required by 24 CFR
         1000.62(d) and generally accepted accounting principles.3 Instead of using gross income
         (revenue), the guidance matched costs with a reduced income figure after redirecting rent
         revenue as unrestricted income.

    1937 Act Unit Rent Revenue
    Was Used for Wasteful or
    Abusive Expenditures


         When rental income from NAHASDA-assisted 1937 Act rental units was treated by the
         tribes as unrestricted funds in accordance with the notice, the use of that income was not
         monitored by ONAP. In the examples of NAHASDA-assisted 1937 Act housing
         observed during our external audit work, most tribal authorities left no significant rent
         revenue to pay expenses after redirecting the estimated 1996 rent revenue amounts as
         unrestricted income from the rents collected. In addition, some tribal authorities used the
         unrestricted income for wasteful or abusive expenditures including (1) lobbying
         expenses; (2) misuse by housing officials for items such as excessive pay and bonuses,
         excessive travel reimbursements, entertainment, gifts, and personal expenses; (3)
         reimbursements to NAHASDA for ineligible costs; and (4) ineligible business
         enterprises.

         After first observing this abuse at the Tulalip Housing Authority, we reviewed the use of
         income from NAHASDA-assisted 1937 Act properties at four more tribal housing
         authorities. We observed over $11 million in expenditures that would be considered
         abuses under NAHASDA.

         Our first exposure to the issue was during the resolution of our audit report
         recommendations for the Tulalip Housing Authority (Audit Report Number 2005-SE-
         1001). ONAP agreed to allow rent collected from low-income tenants of HUD-
         subsidized tribal housing to repay $246,600 in unallowable and undocumented expenses.
         Those expenses included food, stipends, travel, entertainment, cell phone charges, and
         credit card reimbursements. As a result of this observation, we reviewed the use of 1937
         Act unit income at four additional tribal housing authorities.


3
 To be allowable under federal awards, costs must meet general guidelines, which include generally accepted
accounting principles. Those requirements are incorporated into OMB Circular A-87 (2 CFR 225, appendix A,
paragraph C.1.g) and OMB Circular A-133 (subpart B, section .505.a.). These circulars are both requirements of the
NAHASDA negotiated regulations.


                                                       11
The Warm Springs Housing Authority (Warm Springs) converted the rent revenue from
its NAHASDA-assisted 1937 Act properties into unrestricted income. Although it used
some of the unrestricted income funds for operation of other low-income housing, it also
used those funds to pay $119,861 in unsupported compensation of housing officials and
$204,456 in unsupported travel expenses questioned during a 2003 ONAP monitoring
review. Later, the tribe removed the housing board and hired a new executive director.
To repay these findings, the Northwest ONAP office allowed the tribe to retroactively
calculate and claim the maximum unrestricted income back to 1998 although Warm
Springs did not have sufficient records to attribute NAHASDA’s share of that revenue.

Since then, additional uses of income generated from 1937 Act properties have included
$121,390 in unallowable tenant bad debt written off primarily in the 2003 financial audit,
$18,495 in other HUD-rejected expenses, and $6,964 in additional questioned travel from
a Warm Springs internal audit. Warm Springs also used $11,176 for unreimbursed
personal expenses of former board members and key employees on Warm Springs credit
cards. These expenses included travel, entertainment, fuel, local meals, late fees, finance
charges, and other miscellaneous expenses.

The Oneida Housing Authority’s independent auditor identified approximately $100,000
in abusive expenditures in 2006 alone. These expenditures were from local funds which
included unrestricted income from 1937 Act units. The abusive expenditures led to the
removal of the housing board by the tribe and notification to HUD of the abuses. The
abuses included excessive board stipends, excessive travel and lodging costs, excessive
per diem payments, payment of hotel costs for days with no business activities, and
excessive room and vehicle upgrades.

In contrast, the Salish and Kootenai Housing Authority used unrestricted income from
NAHASDA-assisted 1937 Act units to fund low-income housing tax credit properties.
Although, its program income system did not follow the guidance to recognize capital
improvements funded by NAHASDA, the records existed to correct the system. We did
not observe abuses of the revenue from 1937 Act units.

Also, the Southwest ONAP office issued a monitoring report of the Navajo Housing
Authority on September 7, 2005. Southwest ONAP reported that unrestricted income
from its 1937 Act units was used for what were otherwise ineligible expenditures,
including

       $1.9 million for the Cabinets Southwest project (Cabinet plant) and more than
       $3.7 million for the Flexcrete Building System project (Concrete block
       manufacturing);

       More than $4.1 million for the Chaco Trails project, a planned community
       intended for families of all income levels to include housing rentals, property
       sales, and economic development, which was questioned by Southwest ONAP as
       an ineligible economic development; and




                                        12
            $765,435 paid for lobbying expenditures during the period January 2004 through
            June 2007.

Tribes Allowed to Repay
Inappropriate Expenditures
Using 1937 Act Rent Revenue


     We reviewed additional monitoring reports issued by ONAP but did not identify
     significant findings related to existing program income guidance. However, we noted
     that other reports with monetary findings totaling almost $2.2 million were often resolved
     by repaying grants with revenue from NAHASDA-assisted 1937 Act units. Over $1.4
     million of the $2.2 million came from the redirected rent revenues. This ONAP policy
     allowed housing authorities to use rent from low-income Native Americans to repay the
     following violations and abuses:

         Recipient name and                         Findings and observations
        Monitoring report date

      Lower Elwha Housing          Financial management systems were not adequate, and
      Authority                    $31,080 in grant costs was not supported. The authority
                                   supported the expenditures except for $2,971 in miscellaneous
      Dec. 15, 2005
                                   unallowable expenditures repaid using unrestricted income.

      Tulalip Tribes Housing       Financial management systems were not adequate. The
      Authority                    authority reconstructed and supported grant expenditures
                                   except for $425,256.02, which was repaid with unrestricted
      Jan. 6, 2003
                                   income. Those expenditures were for excessive or abusive
                                   payments for travel, stipends, personal expenses, food,
                                   entertainment, cell phone charges, and petty cash.

      Makah Housing Authority      Financial management systems were not adequate. The
                                   authority reconstructed and supported grant expenditures. The
      Jan. 27, 2003
                                   $939,843 in questioned costs was offset by reducing future
                                   grants, but $39,550 in paving work for ineligible program
                                   participants was repaid with proceeds of sale from 1937 Act
                                   housing.
      Puyallup Tribe               The authority's Elder's Preservation Program assisted families
                                   who were not eligible to receive NAHASDA funds or families
      Aug. 19, 2005
                                   who did not sufficiently demonstrate eligibility. The authority
                                   charged $42,613 of these expenditures to unrestricted income
                                   but later agreed to reduce its NAHASDA grant amounts
                                   because of insufficient unrestricted income.




                                              13
   Recipient name and                          Findings and observations
  Monitoring report date

Quileute Housing Authority   The authority used at least $365,439 in housing money to
                             finance construction of a day care center. Based on the
Aug. 2, 2002
                             analysis of the regional ONAP Administrator, this issue was not
                             pursued as a finding since the tribe could hypothetically claim
                             sufficient unrestricted income to cover these costs. Later, the
                             2008 monitoring review showed that the tribe did not have a
                             system or records to properly calculate unrestricted income.

Yakima Nation Housing        The authority made a retroactive adjustment to 2000 to reclaim
Authority                    unrestricted income previously used to pay the expense of
                             maintaining and operating 1937 Act housing. HUD
(No report issued)
                             acknowledged that it would not review or control the use of
                             unrestricted income.

Muscogee (Creek) Nation      The authority repaid the program from proceeds of sale of 1937
                             Act properties for $93,501 for consulting contracts to a related
July 31, 2003
                             party of the approving official, $66,471 in excessive
                             administrative costs, and $24,719 for a passenger van
                             purchased under a drug elimination grant.

Pueblo of Jemez              The Pueblo of Jemez repaid the program $54,768 from
                             unrestricted income for ineligible expenditures for $21,606 in
Aug. 22, 2003
                             unrelated college tuition, a $1,377 undocumented purchase,
                             and $7,895 in credit card late fees, tuition, food, and fuel
                             charges. The remaining ineligible costs were not specified.

Te-Moak Tribe                The authority calculated unrestricted income for 2005 and used
                             it to pay $120,690 in ineligible costs for monthly payments to
Aug. 1, 2005
                             the board chairperson, attorney fees associated with the tribe's
                             gaming operation, ineligible travel expenses, and other
                             miscellaneous expenses. HUD acknowledged that it would not
                             review or control the use of unrestricted income.

Turtle Mountain Housing      Financial management systems were not adequate. The
Authority                    authority calculated $700,745 in unrestricted income for 2001
                             and used it to repay $179,607.50 in development expenses
Aug. 2, 2000
                             incurred without an environmental review and $114,562.06 for
                             other undocumented expenses.

White Mountain Apache        The authority calculated unrestricted income for 2006 and used
Housing Authority            it to pay ineligible costs for $7,735 and $3,442 payments to two
                             individuals and $32,847 for the cost of an election dispute.
May 27, 2004

Cherokee Nation of           Environmental reviews were not performed, and restrictions to
Oklahoma                     the deeds of purchased units did not meet requirements. The
                             $506,102 spent for these homes was repaid using proceeds
June 8, 2007
                             from the sale of 1937 Act units.




                                        14
         Recipient name and                          Findings and observations
        Monitoring report date

      Pueblo of Laguna              Financial management systems were not adequate, and
                                    $93,035 in grant costs was ineligible. The authority stated that
      Oct. 29, 2003
                                    the expenditures for an ambulance and entertainment/social
                                    expenditures were paid using unrestricted income.


Opportunity to Redirect $40
Million in 1937 Act Unit Rent
Revenue Annually for
Unrestricted Uses


     Based on observed practices and guidance in section 3.4 of the notice, ONAP provided
     tribal housing authorities the opportunity to redirect up to about $40 million a year in rent
     revenue from NAHASDA-assisted 1937 Act Low Rent program properties. The annual
     amount allowed to be redirected equals the number of 1937 Act current assisted stock
     rental units claimed by tribes for 2008 funding times 46 percent of the monthly allowable
     expense level figure for each tribe as published in the appendix of the notice times 12
     months.

     ONAP also allowed tribes to retroactively calculate their unrestricted income from their
     1937 Act properties back to 1998 and to reprogram these funds for purposes that did not
     meet the requirements of the NAHASDA program. Thus, as much as $400 million ($40
     million times 10 years) in NAHASDA funds could be used to substitute for the redirected
     revenues from the 1937 Act properties.

Typical Grants Management
Controls Were Not In Place

     OMB Circular A-123, Management Accountability and Control, revised June 21, 1995,
     provided the criteria for implementing management controls within the NAHASDA
     regulations. The following paragraph from Circular A-123 sets the tone for
     management’s responsibilities. See appendix F for additional excerpts from the circular.

        ―The proper stewardship of Federal resources is a fundamental responsibility of
        agency managers and staff. Federal employees must ensure that government
        resources are used efficiently and effectively to achieve intended program results.
        Resources must be used consistent with agency mission, in compliance with law and
        regulation, and with minimal potential for waste, fraud, and mismanagement.‖

     Accordingly, ONAP was responsible for establishing controls to ensure that NAHASDA
     funds would be used for the purposes and goals stated in the NAHASDA statute.
     However, ONAP did not institute adequate controls to do so.


                                               15
     Specifically,

             ONAP could have taken more steps to protect affordable housing for low-income
             Native Americans by restricting rent revenue from NAHASDA-subsidized 1937
             Act properties for NAHASDA-related use but, instead, made a management
             decision to remove restrictions from this income (see appendix B for complete
             discussion).

             ONAP’s guidance on program income did not require housing authorities to
             match revenues and expenses from NAHASDA-assisted 1937 Act units (see
             appendix C for complete discussion).

OIG’s Responsibility for
Reporting Abuse

     The auditor’s responsibility for reporting such abuse observed during performance audits
     is explained in sections 7.33, 7.34, and 8.21 of the Government Accountability Office’s
     Government Auditing Standards (GAO-07-731G), July 2007 revision. These sections are
     attached to this report as appendix G. Abuse involves behavior that is deficient or
     improper when compared with behavior that a prudent person would consider reasonable
     and necessary business practice given the facts and circumstances.

     Abuse does not necessarily involve fraud, violation of laws, regulations, or provisions of
     a contract or grant agreement.

Conclusion


     HUD’s program income regulations and ONAP’s corresponding guidance found in PIH
     Notice 2000-18 were ambiguous and inconsistent with the NAHASDA goals to provide
     funding to assist and promote affordable housing activities for Indian tribes and promote
     self-sufficiency of Indian tribes and their members. Further, the calculation of program
     income allowed under the notice was inconsistent with generally accepted accounting
     principles since it did not provide for the matching of the operating expenses of the rental
     units against the rental income generated by these units. As a result, the application of
     these policies allowed tribal housing authorities to redirect and abuse millions of dollars
     in rent collected from low-income Native Americans living in NAHASDA-assisted 1937
     Act units.

     ONAP’s program income guidance provided tribes the opportunity to redirect up to $40
     million per year in rent revenue from NAHASDA-assisted 1937 Act Low Rent program
     properties. This amount totals about $400 million in NAHASDA-assisted rental revenue
     that was or is currently available to be retroactively redirected for unrestricted uses.
     When tribes redirected rent revenue from these 1937 Act properties they effectively
     reduced assistance available to other low-income Native Americans since the total grant


                                              16
    amount remained the same. While some tribes used these unrestricted funds wisely, the
    funds were too often wasted and abused rather than used to assist the intended
    beneficiaries of the program. Since ONAP has permitted retroactive adjustments,
    additional funds may be redirected in the future.

Recommendations


     We recommend that the Deputy Assistant Secretary, Office of Native American
     Programs,

     1A Take immediate action to ensure the correct matching of total revenues with total
        expenses in tribal housing authority’s future calculations of net income and the
        subsequent attribution of program income.


     1B Rescind PIH Notice 2000-18 and associated program guidance, such as Program
        Guidance Memorandums 2001-3T and 2002-12, until appropriate guidance can be
        designed that conforms with generally accepted accounting principles and supports
        the purpose and goals of NAHASDA.

     1C Suspend the restatement of tribal records for the purpose of redirecting prior period
        revenue from NAHASDA-assisted 1937 Act units unless all costs for operation,
        maintenance, rehabilitation, and capital improvement have been reimbursed by
        offsetting expenses against revenue of those units in a method consistent with self-
        sufficiency.




                                           17
                         SCOPE AND METHODOLOGY

Our objective was to determine whether ONAP’s guidance on calculating program income for
the NAHASDA-assisted 1937 Act housing projects complied with NAHASDA, implementing
regulations found in 24 CFR 1000.62, and external requirements such as OMB Circular A-87
and generally accepted accounting principles. The audit steps were designed to provide an
understanding of the accounting for program income from 1937 Act-assisted properties and the
requirements affecting development of policy and guidance.

To accomplish our objectives, we reviewed ONAP criteria and guidance to calculate program
income from NAHASDA-assisted 1937 Act housing projects and related supporting
documentation at its offices in Denver, Colorado, and Washington, DC. We compared these
criteria to the actual practices observed in resolution of Audit Report 2005-SE-1001 of the
Tulalip Housing Authority in Marysville, Washington, dated October 21, 2004.

We then reviewed a sufficient number of tribal housing authority cost accounting systems to
confirm whether those accounting systems were capable of tracking modernization and capital
expenditures at the housing unit level if the tribes chose to redirect unrestricted income. We also
reviewed their systems to track the transition of units from a 1937 Act identity to a NAHASDA
identity. Finally, we observed the use of income generated from NAHASDA-assisted 1937 Act
units.

We selected for review four tribal housing authorities, covering program income calculations and
records through 2006. Of the 30,701 NAHASDA-assisted 1937 Act housing units nationwide,
we selected a diverse group of housing authorities representing 7,354 NAHASDA-assisted 1937
Act rental and homeownership units, covering a full range of economic opportunity and
administrative capability.

       Housing authority        Location                Audit report no.       Issue date
       Warm Springs             Warm Springs, OR        2008-SE-1001          Oct. 30 2007
       Oneida                   Oneida, WI              2008-SE-1002            Feb. 20,
                                                                                  2008
       Salish & Kootenai        Pablo, MT               2008-SE-1003            Apr. 28,
                                                                                  2008
       Navajo                   Window Rock, AZ         Southwest ONAP          Sept. 7,
                                                        Monitoring Report         2005

The tribes included the Navajo Nation, the largest tribe in the country, and the Salish & Kootenai
Nation, which participated in writing the program income guidance in PIH Notice 2000-18.
Both housing authorities are well represented in Native American housing organizations and
within ONAP. The remaining two tribes encountered management control problems at their
housing authorities and took action to regain control of housing operations.




                                                18
The audit work was conducted between September 26, 2006, and July 3, 2008. Our review
covered the period October 1, 1997, to December 31, 2006, which corresponds to the effective
date of the NAHASDA program through the latest calendar year of operations available for audit
at the tribal housing authorities. We performed our review in accordance with generally
accepted government auditing standards.




                                              19
                             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, 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. 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 management’s policies to oversee NAHASDA grantees’ activities to
              carry out the purpose and goals of NAHASDA and its administrative capacity to
              provide the proper stewardship of federal resources.

              Policies and procedures that HUD has in place to reasonably ensure
              implementation of HUD directives according to relevant requirements.

       We assessed the relevant controls identified above.

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

 Significant Weaknesses


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

              ONAP’s policies did not always ensure that tribal resources were fully used to
              assist and promote affordable housing activities to develop, maintain, and operate
              affordable housing in safe and healthy environments. It supported a tribe’s
              ability to use revenue from low-income housing programs for any other purpose,
              without restrictions, even when grant funds must be used to fund operations,
              maintenance, rehabilitation, or capital improvements. When used by the tribes,
              this practice reduces housing opportunities for low-income Native Americans.


                                               20
ONAP did not create adequate guidance for the determination of program income
from NAHASDA grants. The guidance created was known to be unclear before
approval and issuance and resulted in significant abuse. ONAP issued a number
of clarifications to its program income guidance to support an interpretation that
allowed rent revenue from NAHASDA-assisted low-income housing to be
redirected. The abuses observed as a result of this guidance run counter to
NAHASDA’s goals and the plain meaning of 24 CFR 1000.62. Moreover, the
practice is inconsistent with the proper matching of revenues and expenses under
generally accepted accounting principles. The guidance provided the maximum
unrestricted funds to tribes, thereby reducing funds available for the stated
purpose and goals of NAHASDA and drawing into question the enforceability of
ONAP criteria.




                                21
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments




Comment 1



Comment 2



Comment 3
Comment 4


Comment 5




                            22
Comment 6

Comment 7


Comment 8



Comment 9


Comment 10




Comment 11


Comment 8


Comment 12




             23
Comment 13




Comments
2 and 3

Comment 3


Comment 14


Comment 15


Comment 16


Comment 17




             24
Comment 18


Comment 19




Comment 20




Comment 8



Comment 21


Comment 22
Comment 23




             25
Comment 24




Comment 25




Comment 26




Comment 25




Comment 8




             26
Comment 27


Comment 6


Comment 21



Comment 25




Comment 25



Comment 28


Comment 29




Comment 30




             27
Comment 31




Comment 32




Comment 33




Comment 34




             28
Comment 34




Comment 9


Comment 8


Comment 35




Comment 36




             29
Comment 6




            30
31
32
Comment 6




            33
34
35
36
Comment 6




            37
38
Comment 6




            39
                         OIG Evaluation of Auditee Comments

Comment 1   NAHASDA’s Negotiated Rule and the PIH Notice 2000-18, dated May 30, 2000
            both state that the revenues from unassisted 1937 Act units are no longer program
            income, but both criteria require additional analysis and attribution of this revenue
            when assisted by NAHASDA. (See appendix E) Those criteria do not address
            the practice of redirecting rent revenue from NAHASDA-assisted 1937 Act units
            prior to matching expenses with revenue.

            The OIG’s audit finding of abuse relates to the practice of redirecting rent
            revenue, whether it originated from informal guidance or was intended by the
            Negotiated Rule. In instances where former 1937 Act properties receive
            continued assistance under NAHASDA, the negotiated rule at 24 CFR 1000.62(d)
            states that ―costs shall be deducted from gross income to determine program
            income.‖ Continuing assistance while allowing tribes to redirect that same
            property’s rent revenue, without deducting expenses, created the opportunity for
            abuse discussed in this report.

Comment 2   ONAP believes the tribal right to redirect rent revenue from NAHASDA-assisted
            1937 Act properties was a policy determined in negotiated rulemaking and is a
            matter of self-determination. However, the policy relied upon to redirect the rent
            revenue was first documented after rulemaking and the clearance process for the
            notice. It was expressed in informal NAHASDA Program Guidance 2001-3T on
            October 11, 2000:

               “Frequently Asked Questions:

               Q.1: Can I deduct costs necessary for the generation of program
               income from gross income to determine program income?

               A.1: Yes; you may use the gross income to pay the costs necessary
               for generating the income and deduct the amount of these costs from
               gross income to determine program income. You may deduct these
               costs only if you are using the income to pay these costs.‖

Comment 3   The policy’s inconsistency with generally accepted accounting principles
            rendered the plain meaning of the NAHASDA regulation at 24 CFR 1000.62(d)
            ambiguous.

            As a result of this ONAP policy, ―costs incident to the generation of program
            income‖ are no longer required to ―be deducted from gross income to determine
            program income‖ as stated in the negotiated regulation. Accordingly, a correction
            to this policy error should not require additional negotiation.




                                             40
            Costs are currently deducted from a preliminary ―net income‖ after first paying
            the tribes an implied entitlement for NAHASDA’s use of 1937 Act government
            furnished assets, contrary to the restrictions in 2 CFR 225, appendix B, (11)(c).

               c. The computation of depreciation or use allowances will exclude:

                   (2) Any portion of the cost of buildings and equipment borne by
                 or donated by the Federal Government irrespective of where title
                 was originally vested or where it presently resides;

Comment 4   The PIH notice contains technical accounting guidance and is therefore an
            accounting matter. Consider that the title of PIH Notice 2000-18 is ―Accounting
            for Program Income under the Native American Housing Assistance and Self-
            Determination Act (NAHASDA).‖

            While ONAP and the OGC do not believe that their accounting policy must
            comply with generally accepted accounting principles, the accounting policies
            they constructed have a significant impact on financial report presentation in the
            areas of restricted and unrestricted assets, and operating and non-operating
            revenues.

            The informal guidance for this accounting policy permits multiple funds per
            housing unit, allowing removal of NAHASDA-assisted 1937 Act operating
            revenue from rent, thereby creating non-operating revenue for an authority’s
            unrestricted fund. The policy was first documented in informal guidance issued
            after negotiated rulemaking and the notice. (See comments 1 and 2)

Comment 5   NAHASDA Program Guidance 2001-3T was not submitted for departmental
            review to receive concurrence by the OIG and other interested parties. The OIG
            did not have an opportunity to review this policy, nor did we have this
            information at the time of negotiated rulemaking or review of the notice so that
            we could identify or quantify the potential abuse.

            While the Office of Management and Budget cleared the regulations, there were
            no objections to redirecting rent revenue from NAHASDA-assisted units because
            no such policy was expressed in either the regulation or PIH Notice 2000-18.

            Since the regulation and notice both discuss that NAHASDA be attributed
            program income in return for its assistance and those criteria also require
            matching of revenues and expenses, there would have been no reason to object to
            those documents.

Comment 6   ONAP included four legal opinion memorandums with its response defending the
            legality of their program income accounting policy.




                                             41
            While legal opinions may conclude that certain policies are not an overt violation
            of the Act or regulation, we are nonetheless responsible for reporting abuses
            stemming from those policies. The OGC’s legal and accounting opinions do not
            have a bearing on our observation of abuse based on GAO’s Government
            Auditing Standards for reporting abuse. (See appendix G to our report.)

            According to the GAO, abuse does not necessarily involve fraud, violation of
            laws, regulations, or provisions of a contract or grant agreement. However,
            discussion of OGC’s legal and accounting opinions and ONAP’s implementation
            of the guidance serves to demonstrate our understanding of existing controls and
            those that should be in place to prevent such abuse.

Comment 7   When the then-Associate General Counsel stated an opinion on the restrictions on
            proceeds of sale of 1937 Act housing, subsequent to negotiated rulemaking, he
            ―determined that the use of proceeds for housing of low income persons was a
            policy decision, rather than a legal requirement. The situation is akin to the use of
            program income after the closeout of a grant.‖ The use of program income after
            the closeout of the 1937 Act grants is addressed by this regulation and program
            income accounting policy.

            The opinion continued that ―…HUD might be subject to criticism if the proceeds
            are not required to be used for housing for low-income Indian families.‖ Proceeds
            are generated at the same time the government’s assistance to these homes ends.
            However, the 1937 Act rental homes discussed in this audit report may rely upon
            NAHASDA support indefinitely which presents an additional dimension to the
            program’s risk of abuse.

            While we agree with the comments and concerns expressed above by the then-
            Associate General Counsel, a subordinate was named to the committee generating
            the program income policy, contrary to ONAP’s response. We did not observe
            similar concerns expressed in subsequent opinions related to non-federal and
            program income from former 1937 Act rental units.

Comment 8   The accounting principle of matching revenues and expenses complies with
            NAHASDA negotiated regulations, and the program income accounting notice
            implementing the policy. In fact, 24 CFR 1000.62(d) mirrors the matching
            principle. We did not observe any conflict between the generally accepted
            accounting principles and either the NAHASDA Act or regulation.

            Accounting principles do not impose legal requirements on the use of revenue or
            NAHASDA funds. Rather, they standardize accounting practices used to
            calculate how much program income exists, in order to prevent redirecting those
            funds for abusive activities. Calculations based on the regulation and notice place
            restrictions on the future use of program income. Also, the matching principle
            does not impose any requirement in contravention of NAHASDA or the
            Regulation because it is part of the regulation.



                                             42
              However, the ONAP policy, as discussed in Comment 3, appears to not only be
              the cause of the reported abuse, but contravenes the regulation when it prevents
              the matching of revenues and expenses to determine program income and renders
              the plain meaning of 24 CFR 1000.62(d) ambiguous.

Comment 9     As stated in ONAP’s response, this language was previously removed at ONAP’s
              request and is not relevant to the final report. We deleted the term ―skimming‖ in
              favor of ―redirecting‖ to avoid confusion with unauthorized owner distributions
              under HUD’s Multifamily programs, generally referred to as ―equity skimming‖.
              The term ―skimming‖ itself is neither technically inaccurate nor an implied
              violation based on common definitions and current NAHASDA rules.

Comment 10 While we removed redundant language from our discussion of internal controls,
           please refer to pages 11 through 15 of this report for examples of tribal leaders’
           actions that were inconsistent with the housing needs of low-income Native
           Americans.

Comment 11 Our audit finding relies upon the GAO standards for reporting abuse (see
           appendix G). We believe the redirecting of revenue occurred through the
           misapplication of generally accepted accounting standards. Due to the legal
           opinions, we are not stating an opinion on compliance with the NAHASDA Act
           and implementing regulations found in 24 CFR 1000.62, and external
           requirements, other than the fundamentals of generally accepted accounting
           principles.

              This report and the audit objective are consistent with the Office of Inspector
              General’s mission, which is to:

                      Promote the integrity, efficiency, and effectiveness of HUD programs and
                      operations to assist the Department in meeting its mission.
                      Detect and prevent waste, fraud, and abuse.
                      Seek administrative sanctions, civil recoveries, and/or criminal
                      prosecution of those responsible for waste, fraud, and abuse in HUD
                      programs and operations.

              We believe the degree of abuse observed during this audit warrants keeping the
              Secretary, Congress, and the American public fully and currently informed.

Comment 12 We agree that the guidance was developed consistent with OGC’s legal advice.
           However assessing the resulting abuse against the purpose and goals of
           NAHASDA is a reasonable objective. Our assessment is consistent with the OIG
           mission discussed in comment 11. As discussed in comment 7, we did not
           observe consideration for potential abuses during the development of the guidance
           or in the supporting legal opinions.




                                               43
Comment 13 The negotiated program income regulation is the basis for parts of the PIH notice,
           however the notice introduced a number of new concepts and methodologies to
           attribute income to NAHASDA in return for its assistance of former 1937 Act
           units. Since the publication of the notice, other informal guidance and legal
           opinions have rendered portions of the notice and regulation ambiguous and
           unenforceable. As a result, the policy fails to attribute any significant income to
           NAHASDA or even reimburse NAHASDA for the continued expense of
           operating 1937 Act units.

Comment 14 Indian Housing Authorities provided services to Native American tribes. To that
           end, there is no significant difference in meaning. We have changed the text to
           accommodate ONAP.

Comment 15 The transition requirements were not negotiated, however the statute’s
           instructions for transition requirements are nonetheless part of Section 106 titled:
           ―Regulations.‖

Comment 16 The Seattle Times article explained abuses of government funds. Creation of
           non-federal funds from redirected revenues extends the opportunity for abuse and
           alleviates ONAP oversight responsibilities by removing these funds from the
           scope of monitoring activities. However, our audit observed where ONAP
           reported similar abuses to those in the Seattle Times and knowingly accepted rent
           collected from NAHASDA subsidized housing as repayment. (See comment 10.)

Comment 17 NAHASDA provides tribes the opportunity to define affordable housing
           programs to achieve the goals of economic self-sufficiency and self-determination
           for tribes and their members. Self-determination does not imply full discretionary
           powers.

              The scope of self-determination exists within many constraints, including the
              NAHASDA Act and regulations; other applicable acts and regulations such as
              those of the Office of Management and Budget, Environmental Protection
              Agency, Department of Labor, etc; Government Accountability Office standards;
              and other external requirements as specifically stated in the NAHASDA Act and
              regulations. NAHASDA’s goal of self-determination is not an acceptable basis to
              defend the abuse of rent revenue from NAHASDA-assisted 1937 Act low-income
              housing.

Comment 18 ONAP disagreed with our findings and concluded that they are incorrect. For an
           explanation of how ONAP rendered the regulation and notice ambiguous, see
           comment 3. In comments 3, 4, and 8 we discuss how the guidance is inconsistent
           with generally accepted accounting principles. Finally, comment 5 explains that
           ONAP did not express their intention to redirect the revenue from NAHASDA-
           assisted 1937 Act units until after the review and comment period for the
           regulation and notice. The fund accounting procedures used to redirect the
           revenue are discussed in comment 4.



                                              44
Comment 19 ONAP correctly asserts ―that income from the operation of 1937 Act rental units
           is not program income (and therefore is not subject to any Federal requirement),
           unless the 1937 Act units are assisted with grant funds and the income is
           attributable to such assistance.‖ However, ONAP’s restatement of the regulation
           does not support their position for these reasons:

                     The rent revenue they allow to be redirected is not ―income‖ because
                     expenses have not been deducted against ―gross income‖ (revenue) as
                     required in 24 CFR 1000.62(d).
                     The units under question are assisted with NAHASDA grant funds, which
                     mean their income cannot be automatically considered nonfederal funds.
                     If the units are assisted with grant funds, any income, after deducting
                     expenses, can be attributed to NAHASDA’s assistance. Considering that
                     NAHASDA has assisted these properties for over 10 years, the case could
                     be made that all income is attributable to NAHASDA assistance.

Comment 20 ONAP is correct in stating that PIH Notice 2000-18 provides guidance on when
           income is attributable to NAHASDA assistance. In practice, however, the
           measures for when income is attributed to NAHASDA are often unattainable.

              Section 3.4 of the notice states that all income from a 1937 Act unit is
              NAHASDA program income once cumulative NAHASDA funding for
              rehabilitation and capital expenditure meets or exceeds 40 percent of the
              maximum allowable dwelling construction and equipment cost, effective with the
              October 1, 1997 enactment of NAHASDA. However, ONAP has not defined
              what expenses constitute rehabilitation nor does ONAP require housing
              authorities to track rehabilitation on a per unit basis. As such, ONAP cannot
              identify when rehabilitation of a property exceeds 40 percent.

              We found during resolution of our Warm Springs Housing Authority audit report,
              that ONAP does not believe it can enforce the rules associated with attributing
              assistance to NAHASDA, and does not require tribal housing authorities to keep
              records to do so. As a result, NAHASDA may have substantially rehabilitated a
              1937 Act unit beyond 40 percent of its replacement cost, and no income would be
              attributed to NAHASDA. (See Audit Report No. 2008-SE-1001, dated Oct. 30
              2007.) ONAP has shifted the burden of proof to the government by not enforcing
              an acceptable accounting system at the tribes.


Comment 21 ONAP officials have maintained this position even in examples where
           NAHASDA paid all costs of maintaining and operating a tribe’s 1937 Act low-
           income housing and the resulting rent revenue was redirected and abused.

              The ONAP policy failed to recoup the NAHASDA expenditures and/or attribute
              an acceptable amount of income for the NAHASDA assistance. As a result, the


                                             45
              ONAP policy classified the 1937 Act unit’s rent revenue as non-federal and
              allowed those funds to be redirected to abuses and other activities that do not
              support affordable housing for Native Americans.

Comment 22 The sections we have quoted are relevant to the cancellation of the former 1937
           Act grants and transition into assistance under NAHASDA. The act does not
           contain any language suggesting revenue from assisted properties should be
           abandoned as unrestricted non-federal funds. This was a policy decision, as
           discussed in comment 7.

Comment 23 The response to the second and third paragraph on page 6 is not consistent with
           ONAP’s mission since the points referred to support assistance of affordable
           housing, not the redirection of funds away from affordable housing.

Comment 24 The first sentence on page 7 correctly restates the regulation by discussing when
           income is ―attributed‖ to assistance.

Comment 25 As discussed in comment 5, there were no OIG objections to redirecting rent
           revenue from NAHASDA-assisted units during the Departmental clearance
           process because no such policy was expressed in either the regulation or the
           notice. The OIG did not have an opportunity to review this policy nor did we
           have this information at the time of negotiated rulemaking or review of the notice
           so that we could identify or quantify the potential abuse.

Comment 26 The chart on page 9 presents the substance of the transactions over the form. A
           housing authority’s non-profit status has no effect on the fact ONAP allows them
           to treat NAHASDA-assisted 1937 Act housing as a profit center to provide funds
           for other activities that are also not normally associated with non-profits.

              The chart is a measure of ONAP’s controls over the operation of assisted housing.
              The chart reflects the maximum allowable profit from redirected funds and is not
              intended to represent any specific tribe’s decision whether it redirects rent. Some
              tribes do not currently redirect the maximum amount, however many have
              changed their policy and ONAP has allowed tribes to retroactively recalculate and
              redirect past rent revenues.

Comment 27 Based on language in the notice and the decision not to offset revenues against
           expenses through matching, ONAP has created an implied entitlement to a new
           unrestricted income stream to the tribe. We did not observe any consideration
           exchanged for this income stream, other than the continued use of 1937 Act
           properties under NAHASDA. As discussed in comment 3, the rules under OMB
           Circular A-87 restrict payment for the use or depreciation of assets previously
           furnished by the government.

              Guidance in PIH Notice 2000-18, section 3.4, stated that to attribute income to
              NAHASDA, the amount of rent collected before the enactment of NAHASDA



                                               46
              must be considered. A figure for each tribe was included as an appendix to the
              notice.

              However, there was never any income under the 1937 Act program since funding
              was only provided as a subsidy for the authority’s operating shortfall. Program
              income terminology was not used in the 1937 Act regulations and annual
              contributions contracts, since funding was provided as a subsidy for the
              authority’s operating shortfall. Therefore, redirecting amounts equal to the
              authority’s previous rent revenues is a new income stream that is passive in nature
              and is not earned as a result of any tribal investment in operations.

              In practice, HUD allows tribes to first redirect rent, up to the pre-NAHASDA rent
              figures, before calculating income. However, redirecting any income, after
              offsetting expenses as described in this report, the regulation, and the notice,
              would not cause the abuse of current NAHASDA assistance.

Comment 28 ONAP did not have sufficient management controls in place to prevent this abuse
           or even prevent ONAP’s participation in creating and defending the income
           stream used to support the abuse. Comment 6 addresses the legal opinion
           defending the policy.

Comment 29 The rent revenue is not subject to any Federal requirement based on a policy
           decision of ONAP and the informal guidance to circumvent the matching of
           revenue and expenses on NAHASDA-assisted 1937 Act units. See comment 21.

Comment 30 The policy to which the OIG objects originated from informal guidance that did
           not pass through the Departmental clearance process. It is not part of the
           regulation or the notice. No renegotiation is required, only the enforcement of 24
           CFR 1000.62(d), clarification of the notice to properly use terms such as income
           and revenue, and creation of guidance that adheres to generally accepted
           accounting principles.

Comment 31 ONAP has misunderstood the dates provided in our Scope and Methodology
           section. We reviewed activities of Navajo Housing authority through 2006 during
           another review conducted during this audit’s fieldwork, described as September
           2006 to July 2008. During that fieldwork, we reviewed the Navajo monitoring
           report, dated September 7, 2005 and performed those steps deemed necessary to
           complete our scope of work. We concluded that it was not necessary to issue a
           separate report on the Navajo since the Southwest ONAP’s scope and findings
           were sufficient to satisfy our audit objective.

Comment 32 Our review of the four tribes was not intended to be a statistical sample. It was
           intended to demonstrate the lack of controls present within ONAP. Based on our
           observations, we believe we have demonstrated that fact.




                                              47
Comment 33 The process of negotiated rulemaking occurred within the constraints of the
           NAHASDA Act. There was no requirement in the Act or resulting negotiated
           regulation that requires the redirection of revenue away from assisted housing and
           to eventual abuses. Please refer to pages 11 through 15 of this report for
           examples of tribal leaders’ actions that were inconsistent with the housing needs
           of low-income Native Americans.

Comment 34 We are not aware of any misstated requirements. We have presented our
           observations of the requirements here to assist in identifying the underlying
           causes of the abuse identified in this report. The legal opinions do not have a
           bearing on that determination as discussed in comment 6, but those opinions
           remain the official opinion of the Department.

Comment 35 As discussed in comment 8, accounting principles do not impose legal
           requirements on the use of revenue or NAHASDA funds. Rather, they
           standardize accounting practices used to calculate how much program income
           exists, in order to prevent redirecting those funds to abuse. Calculations based on
           the regulation and notice place restrictions on the future use of program income.
           The current disagreement over the calculation merely impacts how much of the
           rental revenues become program income.

Comment 36 The examples of violations and abuse in appendix H were funded from rent
           collected from tenants of NAHASDA-assisted 1937 Act housing. These rent
           collections could have been used for affordable housing, but were used with the
           knowledge and consent of ONAP officials to pay for violations and abuse
           identified in audit and monitoring findings. This is not intended to be a complete
           list and represents only those examples that were readily identifiable when we
           reviewed existing ONAP monitoring reports during our fieldwork.




                                              48
Appendix B

        ONAP MADE A MANAGEMENT DECISION TO NOT
        RESTRICT THE USE OF REVENUE FROM 1937 ACT
                       PROPERTIES

OMB’s Common Rule at 24 CFR 85.25(h) allowed HUD to determine future restrictions on
revenues from former 1937 Act properties. As a result, HUD’s policies released the restriction
on most of the 1937 Act property rent revenues, even when operating expenses were paid
entirely by the NAHASDA grants.

While HUD’s Office of General Counsel argued that their implementation was within HUD’s
authority under NAHASDA, HUD could have taken more steps to protect affordable housing for
low-income Native Americans. HUD’s Office of General Counsel determined that it was a
HUD policy decision, rather than a legal requirement that no restrictions were to apply to 1937
Act rent revenue after implementation of NAHASDA. HUD determined that upon
implementation of NAHASDA, which included the termination of the 1937 Act grants and
annual contributions contract provisions, 24 CFR 85.25(h) gave it the authority to determine the
future use of ―income‖ from assets constructed under the 1937 Act. HUD’s choice was to not
restrict use of these funds unless the units were assisted by NAHASDA and the income was
attributed to that assistance.

When tribes elected not to receive NAHASDA assistance, there was no risk to the program.
However, HUD took a position that while NAHASDA specified that former 1937 Act reserves,
cash accounts, and the responsibility for maintaining and operating 1937 Act assets were
transitioned into the new program, HUD could strip NAHASDA-assisted 1937 Act units of their
future revenue stream and allow the tribes to use that revenue for other purposes without
restrictions. The policy eliminated the property’s self-sufficiency and drew significant resources
from other NAHASDA activities.




                                               49
Appendix C

   HUD’S GUIDANCE ON PROGRAM INCOME DID NOT
 REQUIRE HOUSING AUTHORITIES TO MATCH REVENUES
AND EXPENSES FROM NAHASDA-ASSISTED 1937 ACT UNITS
HUD’s guidance on program income was inconsistent with NAHASDA and the regulations
because it did not require housing authorities to match revenues and expenses from NAHASDA-
assisted 1937 Act units. The program rules under 24 CFR 1000.62(d) specify that income is net
of expenses. Based on our observations at several tribes, expenses often exceeded rent receipts,
resulting in a net loss and the need for federal assistance.

However, ONAP guidance for calculating program income was vague, and ONAP interpreted
the term ―income‖ in a manner inconsistent with generally accepted accounting principles for
housing authorities and the purpose and goals of NAHASDA. As a result, ONAP did not
enforce the process of offsetting the revenue and expenses from NAHASDA-assisted 1937 Act
units as required under program rules and generally accepted accounting principles’ matching
principle because it believed that rent from pre-NAHASDA units was owed to the tribes and
could be redirected from operations before program income for those units was calculated.

ONAP’s Guidance on Program Income Was Inconsistent with NAHASDA and the
Regulations

ONAP’s guidance on calculating program income for NAHASDA-assisted 1937 Act housing
projects assumed that all revenue from 1937 Act units, as of implementation of NAHASDA,
were the property of the tribes. For a NAHASDA-assisted 1937 Act unit, we believe that this
assumption was inconsistent with the purpose and goals of NAHASDA. The guidance was also
inconsistent with the regulations in its (1) differing treatment of receipts from Low Rent and
Mutual Help program operations (gross versus net income used), (2) restrictions placed on sales
proceeds from conveyance of Mutual Help program properties but not on the more significant
long-term revenue stream from NAHASDA-assisted 1937 Act Low Rent program units, and (3)
required provisions that were not included in the regulations.

The regulations at 24 CFR 1000.62 are ambiguous and resulted in additional guidance being
developed by ONAP. That guidance provided a definition for income ―attributable to‖
NAHASDA assistance. The definition, as implemented, was inconsistent with NAHASDA and
regulations, generally accepted accounting principles for housing authority self-sufficiency, and
OMB Circular A-87 requirements that establish standards for allowable costs such as
reasonableness. The guidance did not require matching of revenues and expenses and obligated
the government to unnecessarily fund operations and maintenance when rent revenues were
already available. Our observations at several tribes demonstrated that none of the tribes
successfully followed the guidance and only one attributed any significant revenues to
NAHASDA assistance. Our attempts to recover wasted funds disclosed that ONAP guidance
was unenforceable according to advice from the HUD Office of General Counsel.



                                               50
Under a typical federal grant program, income produced by assisted assets is either consumed by
the assisted program, restricted for specified purposes, or returned to the federal grant program
or the government’s interest is released at the end of the grant. In this example, the form of
assistance changed from several programs under the 1937 Act into one grant program under
NAHASDA. As part of the transition process, the 1937 Act grants were cancelled. However,
rather than transitioning the government’s interest in revenue from the former 1937 Act
properties to the new program as they did with the responsibility for the assets, HUD officials
agreed to release their interest in the revenues to the tribes even when the property required
assistance.

Calculation of Income Did Not Follow Generally Accepted Accounting Principles

The term ―income‖ in NAHASDA’s program income guidance was undefined and inconsistently
applied. The government’s representatives on the program income subcommittee did not
adequately consider the generally accepted accounting principles for proprietary funds and
special governmental units such as housing authorities. The basis of the inconsistency is the
requirement to match revenues and expenses of these 1937 Act units to calculate net income for
program income accounting purposes. While proper matching would result in offsetting
operating expenses against operating revenue, the staff attorney who participated in writing the
guidance interpreted that the tribes could redirect rent revenue from the calculation of income
before offsetting expenses. When this occurred, NAHASDA grant funds were necessary to pay
the expenses of 1937 Act rentals.

The attorney’s interpretation was based on construction of multiple funds to separate the
calculation of net income between NAHASDA and the 1937 Act. However, this interpretation
does not comply with the generally accepted accounting principles for housing authorities.
According to OMB Circular A-133, Audits of States, Local Governments, and Non-Profit
Organizations, the term ―generally accepted accounting principles‖ has the meaning specified in
generally accepted auditing standards issued by the American Institute of Certified Public
Accountants (AICPA). AICPA’s Audit and Accounting Guide for Audits of State and Local
Governmental Units states that if the criteria for proprietary funds are met, housing authorities
should be reported as enterprise funds.

An enterprise fund is a proprietary fund for which the government decided one of the following:

    a. The costs of providing goods and services are to be financed or recovered primarily
       through user charges.

    b. The periodic determination of revenues earned, expenses incurred, and net income is
       appropriate for capital maintenance, public policy, management control, accountability,
       or other purposes.

While housing authorities met both conditions under the 1937 Act and NAHASDA, the first
condition may not fully apply since there is no minimum rent set by NAHASDA. However, the
second condition does apply since NAHASDA requires annual audits in conformance with OMB
Circular A-133, Government Auditing Standards, and accounting based on generally accepted
accounting principles.


                                               51
Accounting principles for proprietary funds are generally those applicable to similar businesses
in the private sector. The measurement focus is on the determination of net income, financial
position, and cash flows. For purposes of calculating net income, all assets, liabilities, equities,
revenues, expenses, and transfers relating to the government’s business are accounted for in a
single proprietary fund, rather than a series of proprietary funds.

ONAP Program Guidance Memorandums 2001-3T and 2002-12 discussed a requirement for
separating funds between the 1937 Act and NAHASDA operations for purposes of measuring
and matching revenues and expenses. The guidance and a subsequent Office of General Counsel
opinion, written by the same staff attorney, implied that revenue could only be matched to
expenses that were paid with that revenue. This requirement did not reflect either generally
accepted accounting principles for proprietary funds or commercial practices. Instead, generally
accepted accounting principles require the accounting measurement to occur in one fund, with
any split of the resulting income reflected in the restricted and unrestricted portions of the
financial statements.




                                                 52
Appendix D

 PURPOSE AND GOALS OF NAHASDA AND IMPLEMENTING
                  REGULATIONS
The following criteria state the purpose and goals of NAHASDA and associated programs:

NAHASDA
(P.L. 104-330 as amended by P.L. 105-276, P.L. 106-568, P.L. 107-292, and P.L. 108-393)

   “TITLE II--AFFORDABLE HOUSING ACTIVITIES
   SEC. 201. NATIONAL OBJECTIVES AND ELIGIBLE FAMILIES.

       (a) PRIMARY OBJECTIVE- The national objectives of this Act are--
           (1) to assist and promote affordable housing activities to develop, maintain, and
               operate affordable housing in safe and healthy environments on Indian
               reservations and in other Indian areas for occupancy by low-income Indian
               families;

          (2) to ensure better access to private mortgage markets for Indian tribes and their
              members and to promote self-sufficiency of Indian tribes and their members;

          (3) to coordinate activities to provide housing for Indian tribes and their members
              with Federal, State, and local activities to further economic and community
              development for Indian tribes and their members;

          (4) to plan for and integrate infrastructure resources for Indian tribes with housing
              development for tribes; and

          (5) to promote the development of private capital markets in Indian country and to
              allow such markets to operate and grow, thereby benefiting Indian communities.

       (b) ELIGIBLE FAMILIES-
           (1) IN GENERAL- Except as provided under paragraphs (2) and (4), assistance under
               eligible housing activities under this Act shall be limited to low-income Indian
               families on Indian reservations and other Indian areas.

          (2) EXCEPTION TO LOW-INCOME REQUIREMENT- A recipient may provide
              assistance for homeownership activities under section 202(2), model activities
              under section 202(6), or loan guarantee activities under title VI to Indian families
              who are not low-income families, to the extent that the Secretary approves the
              activities pursuant to such section or title because there is a need for housing for
              such families that cannot reasonably be met without such assistance. The
              Secretary shall establish limits on the amount of assistance that may be provided
              under this Act for activities for families who are not low-income families.


                                               53
       (3) NON-INDIAN FAMILIES- Notwithstanding paragraph (1), a recipient may
           provide housing or housing assistance provided through affordable housing
           activities assisted with grant amounts under this Act for a non-Indian family on an
           Indian reservation or other Indian area if the recipient determines that the
           presence of the family on the Indian reservation or other Indian area is essential to
           the well-being of Indian families and the need for housing for the family cannot
           reasonably be met without such assistance.

       (4) LAW ENFORCEMENT OFFICERS- A recipient may provide housing or housing
           assistance provided through affordable housing activities assisted with grant
           amounts under this Act for a law enforcement officer on an Indian reservation or
           other Indian area, if--
           (A) the officer—
               (i) is employed on a full-time basis by the Federal Government or a State,
                   county, or lawfully recognized tribal government; and
               (ii) in implementing such full-time employment, is sworn to uphold, and make
                   arrests for, violations of Federal, State, county, or tribal law; and
           (B) the recipient determines that the presence of the law enforcement officer on
               the Indian reservation or other Indian area may deter crime.

       (5) PREFERENCE FOR TRIBAL MEMBERS AND OTHER INDIAN FAMILIES-
           The Indian housing plan for an Indian tribe may require preference, for housing or
           housing assistance provided through affordable housing activities assisted with
           grant amounts provided under this Act on behalf of such tribe, to be given (to the
           extent practicable) to Indian families who are members of such tribe, or to other
           Indian families. In any case in which the applicable Indian housing plan for an
           Indian tribe provides for preference under this paragraph, the recipient for the
           tribe shall ensure that housing activities that are assisted with grant amounts under
           this Act for such tribe are subject to such preference.

       (6) EXEMPTION- Title VI of the Civil Rights Act of 1964 and title VIII of the Civil
           Rights Act of 1968 shall not apply to actions by federally recognized tribes and
           the tribally designated housing entities of those tribes under this Act.‖

“SEC. 202. ELIGIBLE AFFORDABLE HOUSING ACTIVITIES.
   Affordable housing activities under this title are activities, in accordance with the
   requirements of this title, to develop or to support affordable housing for rental or
   homeownership, or to provide housing services with respect to affordable housing,
   through the following activities:

       (1) INDIAN HOUSING ASSISTANCE- The provision of modernization or operating
           assistance for housing previously developed or operated pursuant to a contract
           between the Secretary and an Indian housing authority.




                                            54
(2) DEVELOPMENT- The acquisition, new construction, reconstruction, or
    moderate or substantial rehabilitation of affordable housing, which may include
    real property acquisition, site improvement, development of utilities and utility
    services, conversion, demolition, financing, administration and planning,
    improvement to achieve greater energy efficiency, and other related activities.

(3) HOUSING SERVICES- The provision of housing-related services for affordable
    housing, such as housing counseling in connection with rental or homeownership
    assistance, establishment and support of resident organizations and resident
    management corporations, energy auditing, activities related to the provision of
    self-sufficiency and other services, and other services related to assisting owners,
    tenants, contractors, and other entities, participating or seeking to participate in
    other housing activities assisted pursuant to this section.

(4) HOUSING MANAGEMENT SERVICES- The provision of management
    services for affordable housing, including preparation of work specifications, loan
    processing, inspections, tenant selection, management of tenant-based rental
    assistance, and management of affordable housing projects.

(5) CRIME PREVENTION AND SAFETY ACTIVITIES- The provision of safety,
    security, and law enforcement measures and activities appropriate to protect
    residents of affordable housing from crime.

(6) MODEL ACTIVITIES- Housing activities under model programs that are
    designed to carry out the purposes of this Act and are specifically approved by the
    Secretary as appropriate for such purpose.

(7) COMMUNITY DEVELOPMENT DEMONSTRATION PROJECT.—

 (A) IN GENERAL.—Consistent with principles of Indian self-determination and
    the findings of this Act, the Secretary shall conduct and submit to Congress a
    study of the feasibility of establishing a demonstration project in which Indian
    tribes, tribal organizations, or tribal consortia are authorized to expend amounts
    received pursuant to the Native American Housing Assistance and Self-
    Determination Reauthorization Act of 2002 in order to design, implement, and
    operate community development demonstration projects.

 (B) STUDY.—Not later than 1 year after the date of enactment of the Native
     American Housing Assistance and Self-Determination Reauthorization Act of
     2002, the Secretary shall submit the study conducted under subparagraph (A) to
     the Committee on Banking, Housing, and Urban Affairs and the Committee on
     Indian Affairs of the Senate, and the Committee on Financial Services and the
     Committee on Resources of the House of Representatives.




                                     55
          (8) SELF-DETERMINATION ACT DEMONSTRATION PROJECT.

            (A) IN GENERAL.—Consistent with the provisions of the Indian Self-
                Determination and Education Assistance Act (25 U.S.C. 450 et seq.), the
                Secretary shall conduct and submit to Congress a study of the feasibility of
                establishing a demonstration project in which Indian tribes and tribal
                organizations are authorized to receive assistance in a manner that maximizes
                tribal authority and decision-making in the design and implementation of
                Federal housing and related activity funding.

            (B) STUDY.—Not later than 1 year after the date of enactment of the Native
                American Housing Assistance and Self-Determination Reauthorization Act of
                2002, the Secretary shall submit the study conducted under subparagraph (A) to
                the Committee on Banking, Housing, and Urban Affairs and the Committee on
                Indian Affairs of the Senate, and the Committee on Financial Services and the
                Committee on Resources of the House of Representatives."

NAHASDA Regulations at 24 CFR 1000
(as published on pages 12351 and 12352 of the Federal Register/Vol. 63, No. 48/Thursday,
March 12, 1998/Rules and Regulations)

   Ҥ 1000.1 What is the applicability and scope of these regulations?
      Under the Native American Housing Assistance and Self-Determination Act of 1996 (25
      U.S.C. 4101 et seq.) (NAHASDA) the Department of Housing and Urban Development
      (HUD) provides grants, loan guarantees, and technical assistance to Indian tribes and
      Alaska Native villages for the development and operation of low income housing in
      Indian areas. The policies and procedures described in this part apply to grants to eligible
      recipients under the Indian Housing Block Grant (IHBG) program for Indian tribes and
      Alaska Native villages. This part also applies to loan guarantee assistance under title VI
      of NAHASDA. The regulations in this part supplement the statutory requirements set
      forth in NAHASDA. This part, as much as practicable, does not repeat statutory
      language.‖

   Ҥ 1000.2 What are the guiding principles in the implementation of NAHASDA?
      (a) The Secretary shall use the following Congressional findings set forth in section 2 of
          NAHASDA as the guiding principles in the implementation of NAHASDA:

          (1) The Federal government has a responsibility to promote the general welfare of the
              Nation:

              (i) By using Federal resources to aid families and individuals seeking affordable
                  homes in safe and healthy environments and, in particular, assisting
                  responsible, deserving citizens who cannot provide fully for themselves
                  because of temporary circumstances or factors beyond their control;




                                               56
         (ii) By working to ensure a thriving national economy and a strong private
             housing market; and
         (iii) By developing effective partnerships among the Federal government, state,
             tribal, and local governments, and private entities that allow government to
             accept responsibility for fostering the development of a healthy marketplace
             and allow families to prosper without government involvement in their day-to-
             day activities.

      (2) There exists a unique relationship between the Government of the United States
          and the governments of Indian tribes and a unique Federal responsibility to Indian
          people.

      (3) The Constitution of the United States invests the Congress with plenary power
          over the field of Indian affairs, and through treaties, statutes, and historical
          relations with Indian tribes, the United States has undertaken a unique trust
          responsibility to protect and support Indian tribes and Indian people.

      (4) The Congress, through treaties, statutes, and the general course of dealing with
          Indian tribes, has assumed a trust responsibility for the protection and
          preservation of Indian tribes and for working with Indian tribes and their members
          to improve their housing conditions and socioeconomic status so that they are able
          to take greater responsibility for their own economic condition.

      (5) Providing affordable homes in safe and healthy environments is an essential
          element in the special role of the United States in helping Indian tribes and their
          members to improve their housing conditions and socioeconomic status.

      (6) The need for affordable homes in safe and healthy environments on Indian
          reservations, in Indian communities, and in Native Alaskan villages is acute and
          the Federal government should work not only to provide housing assistance, but
          also, to the extent practicable, to assist in the development of private housing
          finance mechanisms on Indian lands to achieve the goals of economic self-
          sufficiency and self-determination for Indian tribes and their members.

      (7) Federal assistance to meet these responsibilities should be provided in a manner
          that recognizes the right of Indian self-determination and tribal self governance by
          making such assistance available directly to the Indian tribes or tribally
          designated entities under authorities similar to those accorded Indian tribes in
          Public Law 93–638 (25 U.S.C. 450 et seq.)

         (b) Nothing in this section shall be construed as releasing the United States
             government from any responsibility arising under its trust responsibilities
             towards Indians or any treaty or treaties with an Indian tribe or nation.‖

Ҥ 1000.4 What are the objectives of NAHASDA?
   The primary objectives of NAHASDA are:



                                           57
          (a) To assist and promote affordable housing activities to develop, maintain and
              operate affordable housing in safe and healthy environments on Indian
              reservations and in other Indian areas for occupancy by low-income Indian
              families;

          (b) To ensure better access to private mortgage markets for Indian tribes and their
              members and to promote self sufficiency of Indian tribes and their members;

          (c) To coordinate activities to provide housing for Indian tribes and their members
              and to promote self sufficiency of Indian tribes and their members;

          (d) To plan for and integrate infrastructure resources for Indian tribes with housing
              development for Indian tribes; and

          (e) To promote the development of private capital markets in Indian country and to
              allow such markets to operate and grow, thereby benefiting Indian communities.‖

Ҥ 1000.6 What is the nature of the IHBG program?
The IHBG program is formula driven whereby eligible recipients of funding receive an equitable
share of appropriations made by the Congress, based upon formula components specified under
subpart D of this part. IHBG recipients must have the administrative capacity to undertake the
affordable housing activities proposed, including the systems of internal control necessary to
administer these activities effectively without fraud, waste, or mismanagement.‖




                                               58
Appendix E

  REGULATIONS AND GUIDANCE FOR PROGRAM INCOME

The following regulations and guidance relate to program income accounting for NAHASDA-
assisted 1937 Act units.

NAHASDA Regulations at 24 CFR 1000
(as published on pages 12359 and 12360 of the Federal Register/Vol. 63, No. 48/Thursday,
March 12, 1998/Rules and Regulations)

   Ҥ 1000.62 What is considered program income and what restrictions are there on its
   use?

       (a) Program income is defined as any income that is realized from the disbursement of
           grant amounts. Program income does not include any amounts generated from the
           operation of 1937 Act units unless the units are assisted with grant amounts and the
           income is attributable to such assistance. Program income includes income from fees
           for services performed from the use of real or rental of real or personal property
           acquired with grant funds, from the sale of commodities or items developed,
           acquired, etc. with grant funds, and from payments of principal and interest earned on
           grant funds prior to disbursement.

       (b) Any program income can be retained by a recipient provided it is used for affordable
           housing activities in accordance with section 202 of NAHASDA. If the amount of
           income received in a single year by a recipient and all its subrecipients, which would
           otherwise be considered program income, does not exceed $25,000, such funds may
           be retained but will not be considered to be or treated as program income.

       (c) If program income is realized from an eligible activity funded with both grant funds
           as well as other funds (i.e., funds that are not grant funds), then the amount of
           program income realized will be based on a percentage calculation that represents the
           proportional share of funds provided for the activity generating the program income.

       (d) Costs incident to the generation of program income shall be deducted from gross
           income to determine program income.‖

PIH Notice 2000-18
( Dated, May 30, 2000)

   “3.4. Income generated from the operation of 1937 Housing Act units assisted with
   IHBG grants.

       IHBG funds may be used for the operation and maintenance and the rehabilitation of
       1937 Housing Act units. When 1937 Housing Act units are assisted with IHBG funds, the


                                               59
income from the units is program income if it is attributable to the IHBG assistance. To
determine how much of the income is program income when the IHBG funds are used for
operation and maintenance of rental units, the amount of income received from such units
before the date of the enactment of NAHASDA (10/01/1997) must be considered.

Instead of having to determine and track the actual amount of rent received for each 1937
Housing Act rental unit as of the date of the enactment of NAHASDA, a surrogate will
be used. This surrogate is 46% of the Allowable Expense Level (AEL) for the recipient.
This number reflects the national average for rents received for 1937 Housing Act units
in the last year of the 1937 Housing Act programs for Indians. The AEL and 46% of the
AEL for each Indian tribe with 1937 Housing Act units are set forth in the Appendix. The
AEL is defined in §1000.302. Program income is the amount of total income for a project
identified as Formula Current Assisted Stock (FCAS) on the tribe’s Formula Response
Form that exceeds 46% of the per unit AEL times the number of units in the project. The
calculation may be done monthly or annually.‖




                                       60
Appendix F

             CRITERIA FOR MANAGEMENT CONTROLS

The following requirements relate to the responsibilities of managers for assessing the risks
faced by agency programs:

   OMB Circular A-123, Management Accountability and Control, Revised June 21, 1995

       I. INTRODUCTION
       ―The proper stewardship of Federal resources is a fundamental responsibility of agency
       managers and staff. Federal employees must ensure that government resources are used
       efficiently and effectively to achieve intended program results. Resources must be used
       consistent with agency mission, in compliance with law and regulation, and with
       minimal potential for waste, fraud, and mismanagement.‖

       II. ESTABLISHING MANAGEMENT CONTROLS

       ―Standards. Agency managers shall incorporate basic management controls in the
       strategies, plans, guidance and procedures that govern their programs and operations.
       Controls shall be consistent with the following standards, which are drawn in large part
       from the "Standards for Internal Control in the Federal Government," issued by the
       General Accounting Office (GAO).

       General management control standards are:

               Compliance with Law. All program operations, obligations and costs must
               comply with applicable law and regulation. Resources should be efficiently and
               effectively allocated for duly authorized purposes.

               Reasonable Assurance and Safeguards. Management controls must provide
               reasonable assurance that assets are safeguarded against waste, loss, unauthorized
               use, and misappropriation. Management controls developed for agency programs
               should be logical, applicable, reasonably complete, and effective and efficient in
               accomplishing management objectives.

               Integrity, Competence, and Attitude. Managers and employees must have
               personal integrity and are obligated to support the ethics programs in their
               agencies. The spirit of the Standards of Ethical Conduct requires that they
               develop and implement effective management controls and maintain a level of
               competence that allows them to accomplish their assigned duties. Effective
               communication within and between offices should be encouraged.‖




                                                61
HUD Handbook 1840.1, Chapter 1-3, Departmental Management Control Program

   A. ―Management controls are policies and procedures adopted by managers to ensure
      that program objectives are efficiently and effectively accomplished within planned
      timeframes, within budgetary limitations and with the intended quality and quantity
      of output. ...‖

   B. ―The Management Control Program includes a risk assessment. Primary
      Organization Heads (POHs) and their managers must review the activities or group
      of activities in the functional areas to determine susceptibility to losses which would
      result if effective management controls are not in place. Also, front-end risk
      assessments (FERAs) are to be performed for new or significantly revised programs
      or administrative functions (see Chapter 8).‖

   D. ―Implementation of the Management Control Program requires involvement by
      managers and supervisors at all levels. All managers and supervisors are
      responsible for ensuring that adequate management controls exist so that activities
      under their control are conducted in an effective and efficient manner. Major roles
      and responsibilities are as follows:‖

      4. ―POHs are responsible for program implementation in their respective functional
         areas. This includes the designation of Management Control Coordinators
         (MCCs), evaluation of management controls, implementation of corrective
         actions, reporting, quality control, and assuring that accountability for
         management controls is built into all performance evaluation systems
         (EPPES/EPAS).‖




                                           62
Appendix G

  GOVERNMENT AUDITING STANDARDS FOR REPORTING
                    ABUSE

The following requirements relate to the auditor’s responsibility for reporting abuse observed
during performance audits under GAO’s Government Auditing Standards (GAO-07-731G), July
2007 Revision:

Abuse         ―7.33 Abuse involves behavior that is deficient or improper when compared with
              behavior that a prudent person would consider reasonable and necessary business
              practice given the facts and circumstances. Abuse also includes misuse of
              authority or position for personal financial interests or those of an immediate or
              close family member or business associate. Abuse does not necessarily involve
              fraud, violation of laws, regulations, or provisions of a contract or grant
              agreement.

              7.34 If during the course of the audit, auditors become aware of abuse that could
              be quantitatively or qualitatively significant to the program under audit, auditors
              should apply audit procedures specifically directed to ascertain the potential effect
              on the program under audit within the context of the audit objectives. After
              performing additional work, auditors may discover that the abuse represents
              potential fraud or illegal acts. Because the determination of abuse is subjective,
              auditors are not required to provide reasonable assurance of detecting abuse.‖

Reporting     8.21 ―When auditors conclude, based on sufficient, appropriate evidence, that
              fraud, illegal acts, significant violations of provisions of contracts or grant
              agreements, or significant abuse either has occurred or is likely to have occurred,
              they should report the matter as a finding.‖




                                               63
Appendix H

           SCHEDULE OF RENT REVENUE REDIRECTED
                 FROM 1937 ACT PROPERTIES

Our audit included reviewing policies and practices at four tribes and ONAP monitoring reports.
Our observations identified over $12.6 million in revenue redirected from low-income housing
programs under NAHASDA. The total amount of revenue actually redirected from 1937 Act
properties is not known.


  Report        Tribal Housing Entity          Amount               Description
   Date
10/30/2007 Warm Springs Housing Authority      $119,861 Unsupported compensation of
                                                         housing officials
10/30/2007 Warm Springs Housing Authority      $204,456 Unsupported travel expenses
                                                         questioned during a 2003
                                                         ONAP monitoring review
10/30/2007 Warm Springs Housing Authority      $121,390 Unallowable tenant bad debt
                                                         written off
10/30/2007 Warm Springs Housing Authority        $18,495 HUD-rejected expenses
10/30/2007 Warm Springs Housing Authority         $6,964 Questioned travel from a
                                                         Warm Springs internal audit
10/30/2007 Warm Springs Housing Authority        $11,176 Unreimbursed personal
                                                         expenses of former Authority
                                                         board members and key
                                                         employees on Authority credit
                                                         cards
  9/7/2005 Navajo Housing Authority            $765,435 Lobbying expenditures during
                                                         the period January 2004
                                                         through June 2007
  9/7/2005 Navajo Housing Authority           $1,900,000 The Cabinets Southwest project
                                                         (Cabinet plant)
  9/7/2005 Navajo Housing Authority           $4,189,196 The Chaco Trails project (Mixed
                                                         Income Development)
  9/7/2005 Navajo Housing Authority           $3,786,453 The Flexcrete Building System
                                                         project
                                             $11,123,426 Amounts reported on Page 12




                                              64
    Report Tribal Housing Entity           Amount Description
      Date
12/15/2005 Lower Elwha Housing              $2,971 Ineligible expenditures
           Authority
  1/6/2003 Tulalip Housing Authority      $425,256 Unallowable expenditures
                                                   reimbursed
 8/19/2005 Puyallup Tribe                  $42,613 Families who were not eligible to
                                                   receive NAHASDA funds
  8/2/2002 Quileute Housing Authority     $365,439 Construction of a day care center
 8/22/2003 Pueblo of Jemez                 $54,768 Ineligible expenditures
  8/1/2005 Te-Moak Tribe                  $120,690 Ineligible costs for monthly
                                                   payments to the board chairperson,
                                                   attorney fees associated with the
                                                   Tribe's gaming operation, ineligible
                                                   travel expenses and other
                                                   miscellaneous expenses
  8/2/2000 Turtle Mountain Housing        $179,607 Development expenses performed
           Authority                               without an environmental review
  8/2/2000 Turtle Mountain Housing        $114,562 Undocumented expenses
           Authority
 5/27/2004 White Mountain Apache            $7,735 Ineligible costs
           Housing Authority
 5/27/2004 White Mountain Apache            $3,442 Inelegible payments to two
           Housing Authority                       individuals
 5/27/2004 White Mountain Apache           $32,847 The cost of an election dispute
           Housing Authority
10/29/2003 Pueblo of Laguna                 $93,035 Ineligible grant costs
                                         $1,442,965 Amounts reported on Page 13

                                        $12,566,391




                                              65