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) “§ 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.‖ “§ 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.‖ “§ 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.‖ “§ 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) “§ 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
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)