oversight

HUD - Office of Public Housing

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-02-18.

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

                                                                              Issue Date
                                                                                     February 18, 2010
                                                                              Audit Report Number
                                                                                     2010-BO-0001




TO:            Donald Lavoy, Acting Deputy Assistant Secretary for Office of Field Operations, PQ
               Donna Ayala Director, Office of Public Housing, Boston Hub, 1APH
               Henry S. Czauski, Acting Director, Office of the Departmental Enforcement Center, EC


FROM:
               John A. Dvorak, Regional Inspector General for Audit, Region 1, 1AGA

SUBJECT: HUD Was Not Effective in Recovering the New London Housing Authority From
           Troubled Status and Did Not Take the Required Regulatory or Statutory Action



                                           HIGHLIGHTS

    What We Audited and Why

                 We initiated the audit of the U.S. Department of Housing and Urban
                 Development’s (HUD) efforts to recover the City of New London, CT, Housing
                 Authority (Authority) due to its longstanding troubled status. The Authority has
                 had significant management deficiencies for more than 10 years, and HUD
                 identified the Authority as “overall troubled” in May of 2004. Our objective for
                 this audit was to evaluate HUD’s effectiveness in identifying and helping to
                 correct deficiencies at the Authority.1




1
  We also recently completed an audit of the Authority’s Public Housing Capital Fund program, which found that
the Authority did not properly administer its capital funds (report number 2009-BO-1010).


                                                       1
What We Found


         HUD had detected significant deficiencies but had not been effective in
         recovering the Authority from its longstanding troubled status. Although HUD
         provided extensive technical and monetary assistance and entered into a number
         of binding memorandums of agreement requiring improvement, the Authority’s
         condition continued to decline, it could not meet its debt obligations, and it
         remained troubled. The Authority has been troubled primarily due to the poor
         management of its Federal and State housing programs. In addition, its Federal
         housing projects did not meet HUD’s minimum housing standards.

         HUD failed to take action in a timely manner when the Authority failed to make
         substantial progress in correcting its deficiencies. As a result, the Authority’s
         financial condition declined, creditors were not paid, liens were placed on its
         housing projects, and its rent receipts may be placed in receivership unless more
         than $1.7 million in unpaid utility bills is paid by January 2010. In addition, the
         Authority improperly used more than $524,000 in Federal funds for State
         programs, $105,000 for unsupported payments in lieu of taxes, $99,000 in Federal
         capital funds for State security patrols, and $97,000 for unsupported and
         unreasonable renovations and painting.


What We Recommend


         We recommend that the Director of HUD’s Boston Office of Public Housing
         ensure that the Authority (1) establishes and implements a financial/business plan
         to pay its creditors, avoid having a local receivership lien placed against its rents ,
         and remove liens; (2) enters into an agreement to repay more than $900,000 in
         water and sewer bills; (3) properly accounts for its revolving account, stops using
         Federal funds for State programs, and repays its Federal programs an estimated
         $524,879; (4) repays or supports $97,106 paid for unreasonable and unsupported
         contract maintenance costs; and (5) repays or supports $99,939 in Federal funds
         paid for State security patrols.

         We recommend that the Director of the Office of Field Operations (1) implements
         a formal process to report troubled housing agencies to the Assistant Secretary for
         Public Housing for a determination of the corrective actions required by HUD
         regulations and Federal statutes and (2) notifies the Deputy Assistant Secretary
         for Public Housing that the Authority is in danger of having a local receivership
         lien placed against its rents.




                                            2
                 We recommend that the Director of the Departmental Enforcement Center pursue all
                 administrative and/or civil monetary penalties for the regulatory agreement
                 violations disclosed in this finding.2

                 In addition, the Authority has exceeded the maximum statutory recovery period,
                 and our prior audit report number 2009-BO-1010, issued August 7, 2009,
                 recommended that the Deputy Assistant Secretary for Field Operations inform the
                 Assistant Secretary for Public and Indian Housing of the Authority’s inability to
                 improve its score or meet the goals of the memorandum of agreement with HUD
                 and determine the statutory remedies required under section 6(j) of the U.S.
                 Housing Act of 1937. Therefore, the findings in this report should also be
                 considered when implementing that recommendation.

                 For each recommendation in the body of the report without a management
                 decision, please respond and provide status reports in accordance with HUD
                 Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or
                 directives issued because of the audit.

       Auditee’s Response

                 We provided the Deputy Assistant Secretary for Field Operations, the Director of
                 the Boston Office of Public Housing, and the Acting Director of the Departmental
                 Enforcement Center with a draft audit report on December 10, 2009, and
                 requested a response by January 21, 2010. We held an exit conference with HUD
                 officials on December 22, 2009, to discuss the draft report. The Boston Public
                 Housing Director coordinated with the Office of Field Operations and provided
                 HUD’s written comments on January 21, 2010.

                 The complete text of the auditee’s and HUD’s responses, along with our
                 evaluation of these responses, can be found in appendix B of this report.




2
  In implementing this recommendation, the Deputy Director should consider all of the issues discussed in this
report and audit report 2009-BO-1010.


                                                         3
                            TABLE OF CONTENTS

Background and Objective                                                         5

Results of Audit
      Finding 1: HUD Was Ineffective in Recovering the Authority From Troubled   7
      Status and Did Not Take the Required Regulatory or Statutory Action

Scope and Methodology                                                            16

Internal Controls                                                                17

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use             18
   B. Auditee Comments and OIG’s Evaluation                                      19
   C. Authority PHAS Scores                                                      27




                                            4
                           BACKGROUND AND OBJECTIVE

The City of New London, CT, Housing Authority (Authority) provides low-income public
housing for qualified individuals under an annual contributions contract with the U.S.
Department of Housing and Urban Development (HUD). The Authority has contracted with
HUD for financial assistance pursuant to the United States Housing Act of 1937, as amended,
and the State of Connecticut, Department of Economic and Community Development, for
financial assistance for elderly housing projects in the form of capital grants and/or loans. The
contractual obligations of the Authority under sections 4 and 5 of the annual contributions
contract are “to provide decent, safe and sanitary housing for eligible families in a manner that
promotes serviceability, economy, efficiency, and stability of the projects and the economic
social well-being of the tenants.” Section 5 states, “the HA [housing agency] shall develop and
operate all projects covered by this ACC [annual contributions contract] in compliance with all
the provisions of this ACC and all applicable statutes, executive orders, and regulations issued
by HUD.”3 The Authority administers approximately 838 housing units (331 Federal housing
units and 507 State housing units). During 2007,4 the Authority received more than $4.6 million
to operate its housing programs as follows:

     •   $2.13 million from its State programs,
     •   $1.45 million from its low-income public housing program,
     •   $ .86 million from its Section 8 Housing Choice Voucher program, and
     •   $ .18 million from its Public Housing Capital Fund program.

The State program units are two-thirds of the Authority’s portfolio, and HUD has no oversight of
these State programs, nor does it have responsibility for the continued operations of State
programs. HUD only has control over and responsibility for the overall financial health of this
agency as it relates to federally funded programs. However, the Authority has had significant
deficiencies regarding federally funded programs for more than 10 years and has been operating
under a memorandum of agreement with HUD’s Troubled Agency Recovery Center/Recovery
Prevention Corps (Corps) since 1998. HUD identified the Authority as “overall troubled” in
May 2004.

The Corps is organized under the Office of the Deputy Assistant Secretary for Field Operations.
The Corps’s mission is to support the Office of Public Housing field offices to prevent at-risk
housing authorities from becoming troubled and facilitate their recovery from troubled status.
The Corps executes this mission by providing technical assistance, training, and consulting
services to hubs/program centers and troubled housing agencies. The Corps had been primarily
responsible for the Authority’s recovery until August 5, 2003. In 2003, the Director of HUD’s
Boston Office of Public Housing became responsible for monitoring, oversight, and recovery of
“troubled” public housing agencies in its area and ensuring that agencies that did not recover
3
  In addition, all other pertinent sections of the annual contributions contract that are applicable to the Authority’s
administration of HUD funds, including but not limited to section 6 – Cooperation Agreement; section 7 – Covenant
Against Disposition and Encumbrances; section 8 – Declaration of Trust; section 10 – Pooling of Funds; and section
15 – Books of Account, Records, and Government Access
4
  Its last audited financial statements


                                                          5
within 2 years were either referred to the Departmental Enforcement Center and declared in
substantial default 5 or referred to the Assistant Secretary for a determination of whether to
pursue receivership of all or part of the public housing agency under section 6(j)(3) of the United
States Housing Act.

The Office of Field Operations oversees the Director of the Office of Public Housing and the
Corps.

The Assistant Secretary for Public Housing overseas the Office of Field Operations and is
responsible under HUD’s delegation of authority to issue a notice of substantial default or to
petition for a receiver when agencies do not meet the requirements of their annual contributions
contracts or memorandums of agreement, fail to make substantial progress toward remedying
their troubled status, and fail to recover from troubled status within the maximum recovery
period.

Our objective was to evaluate HUD’s effectiveness in identifying and helping to detect and
correct deficiencies at the Authority.




5
    As required by 24 CFR (Code of Federal Regulations) 902.75(b) and (g) and 902.79 - Final Rule


                                                          6
                                        RESULTS OF AUDIT

Finding 1: HUD Was Ineffective in Recovering the Authority From
Troubled Status and Did Not Take the Required Regulatory or Statutory
Action
Over the past 10 years, HUD had not been effective in recovering the Authority from its
longstanding troubled status. Although HUD provided extensive technical and monetary
assistance, the Authority’s condition continued to decline. It could not meet its debt obligations
and remained troubled. The Authority was troubled due to the poor management of its Federal
and State housing programs as evidenced by its improperly awarding and administering
contracts, high vacancy rates, low rent collection rates, and insufficient State rents to fund
operations. In addition, the Authority’s Federal housing projects did not meet HUD’s minimum
housing standards.

HUD did not take timely action when the Authority’s board of commissioners and executive
directors failed to make substantial progress to correct its deficiencies. As a result, the
Authority’s financial condition continued to decline, creditors were not paid, liens were placed
on its housing projects, and projects’ rents may be placed in receivership unless more than $1.7
million in utility bills is paid. In addition, the Authority used more than

    •    $524,000 in Federal funds for State programs,
    •    $105,000 for unsupported payments in lieu of taxes,6
    •    $ 99,000 in Federal capital funds for State security patrols, and
    •    $97,000 for unsupported and unreasonable renovations and painting.



The Authority Had
Longstanding Deficiencies


                  HUD first advised the Authority of its troubled status in 1998 and officially
                  designated it as an “overall troubled” agency in May of 2004 under HUD’s Public
                  Housing Assessment System (PHAS). The troubled status resulted primarily
                  from the Authority’s failing scores in the financial and physical components of
                  the PHAS. The failed score for the financial component indicated the Authority’s
                  inability to effectively manage and administer its housing program funds. Its
                  failed score for the physical component indicated that the general condition of the


6
 A payment in lieu of taxes made to compensate a local government for some or all of the tax revenue that it loses
because of the nature of the ownership or use of a particular piece of real property. Usually it relates to the foregone
property tax revenue.


                                                           7
            properties resulted in units’ not being safe, sanitary, and decent. Appendix C
            provides a history of the Authority’s PHAS scores.


The Authority Failed To
Improve After HUD Provided
Substantial Technical and
Monetary Assistance

            The Corps provided extensive technical assistance by telephone, e-mail, letters,
            and hands-on assistance during on-site reviews. The hands-on assistance included
            developing sample policies and procedures for the Authority to incorporate into
            its operations. More than $830,000 was also provided for services that included
            contracts to prepare the Authority’s annual and 5-year plans, increase
            management proficiency and efficiency, improve housing structures, and evaluate
            and improve tenant security.

            Despite HUD’s assistance and a number of memorandums of agreement requiring
            improvement, the Authority’s board of commissioners and executive directors
            failed to substantially improve its performance, and it remained troubled. The
            Authority was troubled primarily due to poor management, which was further
            compounded by its diversion of Federal funds to its State housing program with
            high vacancy rates, low rent collection rates, and insufficient rents to fund
            operations. In addition, the Authority’s Federal housing projects failed three
            physical inspections including its most recent physical housing inspection in
            February of 2009. Although the Authority had made some progress toward
            reducing vacancy rates, collecting rents, and reducing costs, it continued to
            operate at a deficit and improperly used Federal funds to support its State
            programs.

HUD Did Not Take the
Required Action in a Timely
Manner

            The Authority’s failure to meet its memorandum of agreement requirements and
            recover from troubled status within 2 years constituted a substantial default and
            required the Director of the Boston Office of Public Housing to recommend to
            HUD’s Assistant Secretary for Public and Indian Housing that the Authority be
            declared in substantial default.

            Federal regulations and statutes require the Assistant Secretary to take specific
            actions when troubled agencies fail to meet their memorandum of agreement
            requirements, substantially improve after 1 year, and recover from troubled status
            within 2 years. These actions may not be delegated.



                                             8
                   HUD officially designated the Authority as “overall troubled” on May 26, 2004,
                   when the Authority scored only 38 of 100 possible PHAS points for 2003. The
                   Authority achieved the required improvement in 2005, its first full year of
                   recovery. However, it scored only 40 points in 2006, its second year of recovery.
                   Thus, on December 12, 2007, the Authority should have been referred to the
                   Assistant Secretary for Public Housing, and the Assistant Secretary should have
                   either (1) declared the Authority in substantial default and referred it the
                   Departmental Enforcement Center or (2) taken possession of any or all of the
                   Authority’s projects or programs or initiate actions to appoint a receiver to assume
                   the responsibilities of the Secretary. Under a regulatory declaration of default,
                   HUD and the Authority could jointly manage operations after issuing the notice of
                   default. Further, the regulation does not contain a time limit for remedying the
                   agency problems, and the process may continue indefinitely.

                   Under the statutory provision, HUD would petition the court to appoint a receiver
                   for the Authority. The receiver would not manage the operations but, rather,
                   implement the statutory corrective actions to either sell the assets, divide the
                   agency into smaller entities, combine the agency with another nearby agency, or
                   sell the agency assets to a nonprofit. The statutory remedy results in the
                   reorganization of the entity in a short amount of time with limited HUD resources
                   being consumed.

    The Authority’s Financial
    Condition Continued To Decline

                   The Corps and the Boston region took some corrective action when they directed
                   the Authority to contract for the administration of its Section 8 program.
                   However, HUD did not declare the Authority in substantial default, appoint a
                   receiver, or take possession of the Authority’s public housing programs primarily
                   due to its decision not to employ scarce resources for a small housing authority.
                   In addition, HUD was reluctant to separate management of the Federal and State
                   programs due to the negative effect it would have had on the State programs.
                   Instead, the Director of the Boston Office of Public Housing issued another
                   directive for improvement that was not effective, as evidenced by the Authority’s
                   declining financial and physical condition.

                   Further, neither the Boston Public Housing Director nor the Deputy Assistant
                   Secretary for Field Operations formally referred the Authority to the Assistant
                   Secretary for corrective action, and the Authority was not declared in substantial
                   default or placed in receivership.

                   The Authority’s monthly board minutes provided to HUD showed that its bills
                   past due more than 30 days had increased steadily from $210,000 in January 2006
                   to more than $2.9 million in September 2009.7 This increasing failure to meet its
7
    The $2.9 million was owed by the Authority’s State and Federal programs.


                                                          9
                    financial responsibilities clearly showed that the Authority’s financial condition
                    was not improving. The HUD Boston Office of Public Housing reported to
                    HUD’s Office of Field Operations that the Authority’s financial condition
                    continued to decline. The following graph shows the growth of accounts payable
                    past due more than 30 days.

                       $3,500,000 
                       $3,000,000 
                       $2,500,000 
                       $2,000,000 
                                                                                 Electricity and gas > 30 days past due
                       $1,500,000 
                       $1,000,000                                                Water and sewer > 30 days past due

                         $500,000 
                                                                                 Total payables  > 30 days past due
                                $‐




                    In a March 29, 2009, letter, the HUD regional field office suggested that the
                    administration of all of the Authority’s Federal housing programs should be
                    contracted for, and the Authority’s board of commissioners agreed. HUD stated:

                    “Despite our efforts, the NLHA [Authority] has continued on a steady financial
                    decline, management practices have not improved, and the Authority has failed to
                    maintain acceptable physical conditions in its public housing portfolio. Based on
                    this extended history of poor performance and lack of improvement, we do not
                    believe that the Authority has the management capacity to successfully operate its
                    federal public housing programs in the best interests of its residents and HUD.
                    Consequently, we strongly urge the Board to contract out management of its low
                    rent public housing programs…”

     The Federal Projects’ Rents
     May Be Placed in Receivership

                    On January 23, 2009, the Connecticut Superior Court appointed an inactive
                    receiver of rents for the Authority’s housing projects and established the utility
                    company’s right to record liens on the projects for the estimated $1.7 million in
                    past-due bills. The inactive receivership was conditioned on full repayment by
                    January 2010. The potential liens and receivership of rents were prohibited by the
                    Authority’s contracts with HUD8 and would be detrimental to operating the
                    Federal housing projects. HUD was aware that some utility bills had not been

8
    Annual contributions contract and declaration of trust


                                                             10
           paid, and the Authority had entered into a repayment agreement. However, it did
           not review the agreements and was not aware of the court-appointed receiver or
           the large amount of unpaid Federal utility bills. HUD and the Authority started to
           take action after we informed them of the potential receivership in September
           2009. Although the Authority did not have the $818,000 owed to the utility
           company for Federal projects, it expected to receive $3.1 million from the
           redevelopment of its State housing projects starting in April 2010. Therefore, in
           January 2010 if the utility company exercises its rights and invokes active
           receivership, the Authority will lose the control and use of its rental income to pay
           its operating expenses.

           The Authority also failed to pay the City of New London (City) more than
           $914,000 for water and sewer services. The City initiated a forbearance
           agreement in November 2008 that would have required the Authority to pay its
           current utility bills and an additional $5,000 per month until the debt was retired.
           However, the Authority did not sign the agreement and made only two payments
           during 2009 totaling $10,004. As a result, its Federal programs owed the City
           more than $342,000 for unpaid water and sewer bills, and the City placed liens
           against the Authority’s housing projects.



 The Authority Lacked an
 Adequate Plan To Repay Its
 Creditors

           The Authority did not have an adequate strategic or cash-flow plan for meeting its
           short-term and long-term financial responsibilities. For the short term, each week
           the Authority prioritized its bills and paid as many as possible. For the long term,
           the Authority expected to receive around $2.1 million from redeveloping its State
           properties in February 2010. However, the $2.1 million, if received, would not be
           enough to repay the more than $3.7 million required to bring its Federal and State
           payables current.


The Authority Used More Than
$500,000 in Federal Funds for
State Programs

           The Authority’s annual contributions contract with HUD prohibits using low-
           income public housing funds for other programs. However, the Authority
           reported in its financial statements that it used Federal funds for its State housing
           programs, with more than $224,000 used in 2006 increasing to more than
           $524,000 by the end of 2007. However, we were unable to determine the extent
           of the use of Federal funds for State programs for 2008 or 2009.



                                             11
                  The Authority’s general ledger will require significant adjustment before the
                  amount of Federal funds used for State programs during 2008 or 2009 can be
                  verified. The failure to adequately account for funds occurred due to inadequate
                  financial controls, the lack of formal accounting procedures, and the lack of an
                  effective financial manager since February of 2008. Therefore, we could only
                  identify the improper use of Federal funds from the most recent audited financial
                  statements, which reported that $524,879 in Federal funds had been used for State
                  programs as of December 31, 2007.


    The Authority Could Not
    Support $105,000 in Payments


                  The Authority could not locate supporting documents for the payment of
                  $105,000 in Federal funds paid in lieu of taxes.9 Therefore, these payments were
                  unsupported. The Authority also signed an agreement with the City in September
                  2006, agreeing that it owed the City $500,000 for payments in lieu of taxes and
                  would make quarterly payments of $6,250 until the debt was paid. However, the
                  Authority did not maintain documentation to support how much of the $500,000
                  was owed by Federal programs and how much was owed by State programs.


    The Authority Paid $97,106 for
    Questionable Contract Costs



                  The Authority paid a contractor for painting, cleaning, and renovations that
                  exceeded the contract price and were not properly supported or reasonable. The
                  contractor routinely overcharged for contract-related work, submitting invoices
                  for hundreds of dollars above the allowable contract price, invoicing for the
                  wrong bedroom size, routinely charging for additional work without itemizing the
                  costs, and failing to detail the time spent or identify the materials used. This
                  abuse occurred because the former executive director did not take corrective
                  action when his staff informed him that the contractor was overcharging for work.
                  As a result, we identified $56,516 in unsupported costs and $40,590 in
                  unreasonable costs that must be repaid to the Federal programs.




9
  For the period of January 1, 2006, through September 16, 2009. A payment in lieu of taxes made to compensate a
local government for some or all of the tax revenue that it loses because of the nature of the ownership or use of a
particular piece of real property. Usually it relates to the foregone property tax revenue.



                                                         12
     The Authority Improperly Used
     $99,939 in Capital Funds


                   The Authority improperly used $99,939 in Federal capital funds for security
                   patrols at its State housing projects. This noncompliance occurred because the
                   State did not have sufficient funds to pay for security patrols and the former
                   executive director disregarded the prohibition against using Federal funds for
                   State programs. This problem continued to occur because HUD did not review
                   the invoices supporting police reports, which clearly showed that patrols were
                   being conducted on State sites. Our review identified $84,624 in ineligible
                   payments made for State security patrols, $14,306 in unpaid invoices for security
                   patrols performed at State sites, and $1,009 in payments that were not supported
                   by a police report showing where the patrols were conducted.


     Conclusion



                   HUD was not effective in recovering the Authority from its longstanding troubled
                   status. Despite additional monitoring and assistance over the past 10 years, the
                   Authority’s financial condition continued to deteriorate, and it improperly used
                   $721,924 in Federal funds. The Authority’s condition continued to decline due to
                   its poor management and HUD’s failure to take timely action to obtain effective
                   management for the Authority’s Federal programs. As a result, the condition of
                   the housing did not meet HUD’s minimum standards, creditors were not paid, and
                   the Authority continued to improperly use Federal funds. The Authority needs to
                   be formally reported to the Assistant Secretary for Public Housing for a
                   determination of the corrective actions required by HUD regulations and Federal
                   statutes.10

                   In addition, the Authority had exceeded the maximum statutory recovery period,
                   and our prior audit report, number 2009-BO-1010, issued August 7, 2009,
                   recommended that the Deputy Assistant Secretary for Field Operations inform the
                   Assistant Secretary for Public and Indian Housing of the Authority’s inability to
                   improve its score or meet the goals of its memorandum of agreement with HUD
                   and determine the statutory remedies required under section 6(j) of the U.S.
                   Housing Act of 1937. Therefore, the findings in this report should also be
                   considered when implementing that recommendation.

                   HUD should either declare the Authority in default of its contact with HUD or
                   pursue receivership. If HUD declares a substantial default, the agency will have
                   more time to remedy its problems. However, HUD must be committed to
                   expending more of its limited resources on this small housing authority. HUD
10
     We made this recommendation in our related audit report, 2009-BO-1010.


                                                        13
          may pursue receivership due to intentional violations of the contractual
          requirements; the Authority’s failure to provide decent, safe, and sanitary housing
          to tenants over an extended period; and the amount of resources HUD has already
          committed to this agency.

Recommendations



          We recommend that the Director of HUD’s Boston Office of Public Housing
          require the Authority to

          1A.     Establish and implement a formal written short- and long-term
                  financial/business plan with measurable milestones to pay its creditors, avoid
                  having a local receivership lien placed against its rents, and/or remove the
                  lien.

          1B.     Establish and enter into a formal repayment agreement with the City to
                  repay past-due Federal water and sewer bills.

          1C.     Strengthen and implement controls over the tracking and reporting of
                  Federal public housing operating funds to ensure that the Authority is
                  using these funds for this Federal program only.

          1D.     Correct its revolving account balances and obtain an independent audit of
                  the balances to verify that the account balances are accurate.

          1E.     Determine the amount and repay the Federal programs for the amount of
                  ineligible Federal funds used for non-Federal programs, estimated to be at
                  least $524,879 at the end of 2007, and determine whether any Federal
                  funds were used for non-Federal programs during 2008 and 2009 and
                  repay these funds.

          1F.     Establish and implement accounting controls to ensure that payments in
                  lieu of taxes are properly accounted for and recorded on its books and
                  records.

          1G.     Support or repay $105,000 to its public housing operating fund for
                  unsupported Federal payments in lieu of taxes.

          1H.     Repay $40,590 to its public housing operating fund for unreasonable
                  contract maintenance costs.

          1I.     Support or repay $56,516 to its public housing operating fund for
                  unsupported contract maintenance costs.




                                            14
                 1J.      Support or repay the Public Housing Capital Fund $1,009 for unsupported
                          security patrol costs.

                 1K.      Repay the Public Housing Capital Fund $84,624 for ineligible security
                          patrol costs.

                 1L.      Implement controls to ensure that capital funds are used for Federal
                          projects only, thereby avoiding $14,306 in future payments already owed
                          for security patrols performed at State projects.


                 We also recommend that the Director of the Office of Field Operations

                 1M.      Establish and implement a process by which the Deputy Assistant
                          Secretary of Field Operations can formally report troubled housing
                          agencies to the Assistant Secretary for Public Housing for a determination
                          of the corrective actions required by HUD regulations and Federal
                          statutes.

                 1N.      Notify the Deputy Assistant Secretary for Public Housing that the
                          Authority’s rents are in danger of receivership.

                 We also recommend that the Director of the Departmental Enforcement Center

                 1O.      Pursue all administrative and/or civil monetary penalties for the regulatory
                          and contract violations disclosed in this finding.11




11
  In implementing this recommendation, the Deputy Director should consider all of the issues discussed in this
report and audit report 2009-BO-1010.


                                                        15
                        SCOPE AND METHODOLOGY


We conducted our audit between January and November 2009. We completed our fieldwork at our
office in Hartford, CT, and at the Authority’s offices located at 78 Walden Avenue, New London,
CT. Our audit covered the period January 1, 2006, through December 31, 2008, and was extended
when necessary to meet our audit objective.

To accomplish our audit objective, we

   •   Reviewed relevant HUD regulations, including

       24 CFR (Code of Federal Regulations) Part 902 - Public Housing Assessment System,
       Final Rule;
       24 CFR Parts 968, 901, 902, and 907 - Proposed Rule;
       42 U.S.C. (United States Code) 1437.6(j)(3) - The United States Housing Act of 1937;
       and
       The Authority’s annual contributions contract with HUD

   •   Interviewed and e-mailed key officials and staff including the Director of Field
       Operations, the Director of the Boston Office Public Housing, the Corps’s Deputy
       Director, and the Authority’s executive director(s) to determine what controls were in
       place to monitor and assist the Authority and ensure compliance with 24 CFR Part 902
       and 42 U.S.C. 1437.6(j).

   •   Reviewed the memorandums of agreement, corrective action plans, and HUD directives
       for corrective action.

   •   Interviewed the Authority’s staff and reviewed supporting documentation to verify that
       a. Federal funds were not used for other programs;
       b. Operating funds used for painting, cleaning, and maintenance were in accordance
           with the contract and properly supported; and
       c. Capital funds used for security patrols were not used for State housing projects.

   •   Reviewed the Authority’s board minutes, accounting records, and supporting records to
       verify its financial condition and the status of its accounts payable.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                              16
                              INTERNAL CONTROLS

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

   •   Program operations,
   •   Relevance and reliability of information,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding of assets and resources.

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



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

                •   Controls over identifying and monitoring deficiencies.

                •   Controls over taking corrective actions when the Authority did not recover
                    from troubled status.

              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 that the following item is a significant weakness:

                •   Controls over identifying and monitoring deficiencies. HUD’s procedures
                    did not ensure that effective and timely action was taken when the Authority
                    failed to recover from troubled status within 2 years (see finding 1).




                                               17
                                       APPENDIXES

Appendix A

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

The total questioned cost of $826,924 consists of the following:

 Recommendation        Ineligible 1/      Unsupported 2/    Unreasonable or      Funds to be put
        number                                               unnecessary 3/       to better use 4/
               1E.        $524,879
               1G.                              $105,000
               1H.                                                  $40,590
                1I.                              $56,516
                1J.                               $1,009
               1K.         $84,624
               1L.                                                                       $14,306


1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
       that the auditor believes are not allowable by law; contract; or Federal, State, or local
       policies or regulations.

2/     Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
       or activity when we cannot determine eligibility at the time of the audit. Unsupported
       costs require a decision by HUD program officials. This decision, in addition to
       obtaining supporting documentation, might involve a legal interpretation or clarification
       of departmental policies and procedures.

3/     Unreasonable/unnecessary costs are those costs not generally recognized as ordinary,
       prudent, relevant, and/or necessary within established practices. Unreasonable costs
       exceed the costs that would be incurred by a prudent person in conducting a competitive
       business.

4/     Recommendations that funds be put to better use are estimates of amounts that could be
       used more efficiently if an Office of Inspector General (OIG) recommendation is
       implemented. These amounts include reductions in outlays, deobligation of funds,
       withdrawal of interest, costs not incurred by implementing recommended improvements,
       avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
       that are specifically identified. For this report, these amounts include reductions in
       outlays for security patrols conducted at State housing sites.




                                               18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 3




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 6




Comment 7




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9




                         23
                               OIG Evaluation of Auditee Comments

Comment 1         The Authority’s deficiencies and mismanagement have been long known to HUD
                  and the community; thus, our audit focused on evaluating HUD’s effectiveness in
                  identifying and helping to correct them. We disagree that the report implicates
                  HUD as a contributor to the Authority’s failures and reported that “The Authority
                  has been troubled primarily due to the poor management of its Federal and State
                  housing programs."12 The report credits HUD for detecting significant
                  deficiencies and providing extensive assistance. Nonetheless, HUD’s assistance
                  was not effective or vigilant enough, and the Authority has remained in various
                  stages of troubled status for more than 10 years.

                  Further, although HUD did not contribute to the Authority’s problems, HUD is
                  responsible for oversight and compliance with Federal regulations that require the
                  Assistant Secretary for Public Housing to either issue a notice of substantial
                  default or petition for a receiver when agencies do not comply with their annual
                  contributions contracts and memorandums of agreement, fail to make substantial
                  progress toward remedying their troubled status, and fail to recover from troubled
                  status within the maximum recovery period. However, HUD has neither declared
                  the Authority in substantial default nor taken possession of any or all of the
                  Authority’s projects or programs or petitioned for the appointment of a receiver as
                  required by HUD regulations and Federal statute.

Comment 2         HUD does not have the authority or responsibility for oversight of the Authority’s
                  State programs; thus, our report did not and would not address recovery efforts for
                  State responsibilities in this area. HUD correctly identified the Authority’s State
                  programs as a drain on its resources. However, HUD did not take appropriate
                  action to safeguard Federal program funds when the Authority reported that it
                  used more than $224,000 in Federal funds for its State programs in 2006 and that
                  the amount had grown to more than $524,000 by the end of 2007. Had HUD
                  focused on protecting the Federal programs and proceeded to intervene at the end
                  of 2006 based on the misappropriated funds or replaced management in
                  December of 2007 as required by statute and regulation, the misappropriation of
                  Federal funds might have stopped. As a result, these funds would have been
                  available for Federal expenses, liens would not have placed against Federal
                  projects, and the Federal programs might not be facing potential receivership
                  through the State courts.

Comment 3         The report accurately states that HUD did not take the required action in a timely
                  manner. On December 12, 2007, HUD was required to either (1) declare the
                  Authority in substantial default and refer it the Departmental Enforcement Center,
                  as required by 24 CFR 902.79(a)(3), or (2) take possession of any or all of the
                  Authority’s projects or programs or initiate actions to appoint a receiver to assume
                  the responsibilities of the Secretary, as required by The United States Housing

12
     See “What We Found.”



                                                   24
            Act of 1937, 42 U.S.C. 1437.6(j)(3). Therefore, we considered HUD’s March 29,
            2009, recommendation to be too late and that its alternative solution and
            recommendation not to declare the Authority in substantial default or not to take
            possession of any or all of the Authority’s projects or programs or pursue a
            receivership was not in compliance with Federal regulations or the statute. HUD
            did not fulfill its oversight responsibilities when it did not take appropriate action
            to safeguard Federal program funds when the Authority repeatedly reported that it
            used Federal funds for its State programs. HUD must either declare a substantial
            default or a violation of 6(j). However, if HUD declares a substantial default, it
            has unlimited time in which to rectify the default.

Comment 4   We disagree that an emergency situation arose in 2008 from the use of Federal
            funds for State programs. The Authority’s 2006 and 2007 financial statements
            clearly reported that hundreds of thousands in Federal project funds was used for
            State programs. HUD did not fulfill its oversight responsibilities when it did not
            take appropriate action to safeguard Federal program funds when the Authority
            repeatedly reported that it used Federal funds for its State programs. We believe
            that had HUD intervened in a timely manner, these funds would have been
            available to pay Federal expenses, thus avoiding property liens and the potential
            receivership of rents for nonpayment of utility expenses.

Comment 5   HUD’s alternative solution may have been effective had it been timely. However,
            HUD did not take appropriate action to safeguard Federal program funds when
            the Authority reported that it used more than $224,000 in Federal funds for its
            State programs in 2006 and that the amount had grown to more than $524,000 by
            the end of 2007. In addition, the failure to declare the Authority in substantial
            default leaves the board of commissioners in place, thus risking continued
            mismanagement and poor decision making that may lead to further
            misappropriation of Federal program funds. Therefore, to fully protect the
            Federal projects’ interests and comply with Federal regulations and statutes, we
            recommend that HUD either declare the Authority in substantial default of its
            annual contributions contract and take actions available to the Secretary under 24
            CFR Part 902 or take possession of any or all of the Authority’s projects or
            programs or pursue receivership under 42 U.S.C. 1437.6(j)(3).

Comment 6   HUD’s statement that “Any HUD intervention would have disrupted the
            partnership between the NLHA [Authority] and the developer partner” is
            speculative and, thus, cannot be confirmed. The State redevelopment project has
            proceeded since HUD intervened in March of 2009 and convinced the Authority
            to begin the process of contracting out the management of its Federal and State
            programs. Thus, we could find no credible evidence to support HUD’s
            justification for not intervening and taking action.

Comment 7   We did not remove or revise our discussion of unpaid utility bills because as HUD
            conceded, they were not paid and the Authority’s books and records showed that
            its accounts payable to the utility company totaled $818,716 as of September 9,



                                              25
            2009. HUD is correct to note that the actual amount credited to the Authority’s
            Federal utility accounts by the utility company differs from the Authority’s books
            and records and, thus, must be reconciled before the actual amount can be
            determined. Therefore, this reconciliation should be completed as part of
            recommendation 1A.

Comment 8   The Authority revised the estimated proceeds from the redevelopment of its State
            projects from $2.1 million to $3.1 million. Thus, we updated the report to reflect
            the higher expected proceeds. However, during the audit, neither HUD nor the
            Authority had a written plan or budget to show how the Authority would manage
            and meet its long-term and short-term obligations. In addition, we did not
            consider the statements in HUD’s response to be adequate or accurate. First,
            HUD acknowledged that it did not know the full extent of the Federal programs’
            liabilities. Also, HUD’s statement that the Authority expects to receive $3.2
            million sometime in the spring of 2010 is not accurate. Documents provided by
            the Authority’s attorney showed that the Authority expects to receive only $1.3
            million in the spring of 2010 (see the complete schedule below). In addition, the
            State redevelopments and proceeds are contingent on State bonding, which,
            although approved by the Connecticut Housing Finance Authority, has not been
            passed in the State budget and, thus, is not assured at this time. Thus, our report
            and recommendation 1A remain unchanged and recommend that HUD establish
            and implement a formal written short- and long-term financial/business plan with
            measurable milestones to pay its Federal creditors, remove liens, and avoid
            receivership of rents for nonpayment of utilities.

            4/1/2010 - $1,394,000
            1/1/2011 - $1,226,000
            9/1/2011 - $324,000
            1/1/2014 - $216.000
            Total      $3,160,000

Comment 9   OIG did not and would not recreate the Authority’s books and records during an
            audit. We based our conclusions on the Authority’s existing books and records as
            verified by the supporting source documents and independently audited financial
            statements.

            HUD provides operating funds for payments in lieu of taxes to reimburse cities
            for the substantial cost of providing services to tenants and their children. Thus,
            payments in lieu of taxes [PILOT] expenses are valid expenses that must be paid.
            Further, with no signed agreement to show that the payments were forgiven, we
            considered it unreasonable to suggest that the Authority should not have agreed to
            pay past-due PILOT payments and should have shifted the burden to the
            taxpayers of New London for the full cost of services provided for these tenants.




                                             26
  Appendix C
                              AUTHORITY PHAS SCORES
                             ______________________________________


                                          Authority
                                         PHAS status
                              REAC* PHAS
Fiscal       Status/           notification                                                Total
 year      designation             date       PASS**      FASS***   MASS****   RASS*****   PHAS
 1998        Advisory          10/16/2000       18          18        18          10        64
 1999        Advisory            4/4/2001       15          3         17          9         44
 2000        Advisory          12/31/2001       11          11        25          4         48
 2001     Substd financial      1/16/2004       28          11        26          9         74
 2002     Substd financial      8/28/2003       28          0         25          8         61
 2003     Overall troubled      5/26/2004       14          2         13          8         37
 2004     Overall troubled      7/12/2005       24          0         20          9         53
 2005     Overall troubled      6/17/2006       22          0         22          6         50
 2006     Overall troubled                      14          0         20          6         40
 2007     Overall troubled                      21          0         27          4         52
 2008       Suspended

  * REAC = Real Estate Assessment Center
  ** PASS = Physical Assessment SubSystem
  *** FASS = Financial Assessment SubSystem
  **** MASS = Management Assessment SubSystem
  ***** RASS = Resident Assessment SubSystem

                         Authority
                   SEMAP* (Section 8) status
         Fiscal               Status/
          year             designation            Total score
         2000                Troubled                 12
         2001                Troubled                 28
         2002                Troubled                  4
         2003                Troubled                 58
         2004           Standard performer            81
         2005                Troubled                 15
         2006                Troubled                 26
         2007           Standard performer            89
         2008             High performer             100

  * SEMAP = Section Eight Management Assessment Program

  Note - Yellow highlights indicate failing PHAS scores




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