oversight

The Saginaw Housing Commission, Saginaw, MI, Did Not Fully Implement Prior Audit Recommendations and Continued To Use Its Public Housing Program Funds for Ineligible Purposes

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-08-09.

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

                                                                 Issue Date
                                                                          August 9, 2011
                                                                 
                                                                 Audit Report Number
                                                                          2011-CH-1012




TO:        Willie C. Garrett, Director of Public Housing, 5FPH


FROM:
         Kelly Anderson, Regional Inspector General for Audit, (Region V), 5AGA
SUBJECT: The Saginaw Housing Commission, Saginaw, MI, Did Not Fully Implement
           Prior Audit Recommendations and Continued To Use Its Public Housing
           Program Funds for Ineligible Purposes

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Saginaw Housing Commission’s Public Housing program. The
             audit was part of the activities in our fiscal year 2011 annual audit plan. We
             selected the Commission based upon our previous audit report on the
             Commission’s use of public housing funds, audit report number 2006-CH-1018,
             issued September 28, 2006, and an indication that the Commission was
             continuing to use Federal funds for unapproved purposes. Our objective was to
             determine whether the selected audit recommendations were implemented and
             whether the Commission used U.S. Department of Housing and Urban
             Development (HUD) funds for unapproved purposes.

 What We Found

             The Commission did not fully implement prior audit recommendations and
             continued to use its program funds for ineligible purposes. HUD and the
             Commission did not enter into a repayment agreement for recommendations 1C
             and 2A from audit report number 2006-CH-1018 until January 24, 2011. The
             repayment agreement stated that the Commission agreed to make payments
             beginning February 1, 2011, and ending March 1, 2014. The Commission made
           its first payment on June 7, 2011. The Commission also continues to use program
           revenues for ineligible purposes.

           The Commission did not effectively administer its HUD programs and violated
           HUD’s and its own requirements. Specifically, it did not ensure that Public
           Housing Program Capital Funds were drawn and expended for eligible purposes.
           The Commission inappropriately used more than $1.5 million in capital funds,
           was unable to support the use of nearly $395,000 in capital funds, maintained
           capital funds on hand in excess of $411,000, caused the U.S. Treasury to lose
           more than $71,000 in interest, inappropriately earned more than $13,000 in
           interest from its bank, and did not appropriately categorize nearly $822,000 in
           capital fund draws from HUD’s system.

           The Commission did not ensure that its Public Housing Operating Fund program,
           Section 8 Housing Choice Voucher program, and Homeownership program funds
           were used for eligible purposes. It inappropriately used nearly $181,000 and was
           unable to support the use of more than $30,000 in operating program, voucher
           program, and Homeownership program funds.

           The Commission did not ensure that the capital funds and operating program
           funds were used for eligible purposes. The Commission inappropriately used
           more than $127,000 in capital funds to demolish structures at its inappropriately
           obtained property and used nearly $108,000 in operating program funds to operate
           and maintain the property.

What We Recommend


           We recommend that the Director of HUD’s Detroit Office of Public Housing
           require the Commission to (1) reimburse its program from non-Federal funds for
           the improper use of more than $2 million in program funds, (2) provide
           documentation or reimburse its program more than $836,000 from non-Federal
           funds for the unsupported payments cited in this audit report, and (3) implement
           adequate procedures and controls to address the findings cited in this audit report.

           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 our review results and supporting schedules to the Director of
           HUD’s Detroit Office of Public Housing and the Commission’s executive director
           during the audit. We provided our discussion draft audit report to the

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Commission’s executive director, its board chairman, and HUD’s staff during the
audit. The Commission declined our offer to conduct an exit conference.

We asked the executive director to provide comments on our discussion draft
audit report by July 27, 2011. The executive director provided written comments,
dated July 27, 2011. The executive director generally agreed with the findings
with the exception of finding 4. The complete text of the auditee’s response,
along with our evaluation of that response, can be found in appendix B of this
report except for eight pages of documentation that was not necessary for
understanding the Commission’s comments. A complete copy of the
Commission’s comments was provided to the Director of HUD’s Detroit Office
of Public Housing.




                                3
                           TABLE OF CONTENTS

Background and Objective                                                         5

Results of Audit
      Finding 1: The Commission Did Not Implement Prior Audit Report
                 Recommendations                                                 8

      Finding 2: The Commission Inappropriately Administered Its Capital Fund
                 Grants                                                         14

      Finding 3: The Commission Inappropriately Used Its Programs Funds.        19

      Finding 4: The Commission Used Its Public Housing Program Funds for Its
                 Unapproved Purposes                                            23

Scope and Methodology                                                           26

Internal Controls                                                               29

Follow-up on Prior Audits                                                       31

Appendixes
   A. Schedule of Questioned Costs                                              32
   B. Auditee Comments and OIG’s Evaluation                                     33
   C. Federal and the Commission’s Requirements                                 39




                                            4
                       BACKGROUND AND OBJECTIVE

The Saginaw Housing Commission was established in July 1947 by the City of Saginaw to
provide safe, decent, sanitary, and affordable housing and create opportunities of self-sufficiency
and economic independence to low- and moderate-income residents of Saginaw. The
Commission’s primary funding source is the U.S. Department of Housing and Urban
Development (HUD) under the regulation of the State of Michigan’s Act 18 of 1933, MCL
125.651-709e. The Mayor of the City of Saginaw appoints all Housing Commission Board
members and the City Council ratifies the appointments with a majority vote. Appointments are
for five-year terms, and residents of the Commission’s housing developments are eligible for
appointment. The board is a five-member volunteer board. The Commission’s executive
director is appointed by the board and is responsible for coordinating established policy and
carrying out the Commission’s day-to-day operations.

The Commission signed an annual contributions contract with HUD to provide public housing to
low-income residents of Saginaw, Michigan. The Commission managed 632 public housing
units, 1,197 Section 8 Housing Choice Voucher program units, and 71 Shelter Plus Care program
units as of March 2011. It also managed four McKinney Act homeless/handicapped units, two
Turnkey III Homeownership units, and five Special Needs Assistance Program units. The
Commission receives Public Housing Operating Fund program funds from HUD to operate its
public housing units. It receives Public Housing Program Capital Fund grant funds from HUD
for capital and management activities, including the modernization and development of public
housing. The Capital Fund also permits public housing agencies to use capital funds for
financing activities, including payments of debt service and customary financing costs, in
standard public housing agency developments and in mixed-finance developments which include
public housing. The Commission also received American Recovery and Reinvestment Act
funding during 2009.

In May 2001, the Commission's board approved the purchase of the former Saginaw County
Fairgrounds property.

On September 17, 2001, the Commission requested permission from HUD to use its operating
program reserves as collateral for a loan to its nonprofit, Saginaw Housing Development
Corporation, so that the nonprofit could purchase the property. On September 17, 2001, HUD
responded to the Commission, stating that its operating program reserves could only be used for
public housing purposes pursuant to the United States Housing Act of 1937. Pursuant to the
statute, the use of the operating program reserve is not permitted because the reserves would be
used for other than the Commission's purpose. HUD also stated that it is immaterial that the
funds will just be used as collateral because the funds will be at risk of being spent in the event
that the nonprofit defaults on the loan.

On July 2, 2002, the Commission entered into an agreement to purchase the property. On
December 26, 2002, it completed the purchase of the property. HUD denied the Commission’s
request to purchase the property. Therefore, the property was purchased inappropriately. The
property was not included in the Commission’s annual contributions contract.

                                                 5
We completed an audit of the Commission's Public Housing program on September 28, 2006, and
issued audit report number 2006-CH-1018. The audit report contained two recommendations for
the Commission to reimburse its program from non-Federal funds.

We reported two findings in our September 28, 2006 audit of the Commission's Public Housing
Operating Fund program. Finding 1 of the audit report identified that the Commission
improperly used nearly $536,000 of its program funds to pay for the property’s acquisition costs
and lost more than $25,000 in interest income that would have been realized if the funds had
been invested. The Commission also did not file a required declaration of trust to evidence its
covenant not to convey or encumber the property and to protect HUD’s rights and interests. The
former executive director and the board of commissioners did not exercise prudent oversight of
the Commission’s use of program funds to ensure that Federal requirements were followed. As a
result, fewer funds were available to serve the Commission’s public housing residents and
HUD’s interest in the property was not secured.

Finding 2 of the audit report identified that the Commission entered into eight rooftop lease
agreements without HUD’s approval. It also improperly used more than $12,000 in revenue from
the agreements to pay for expenses not related to its program. The revenue paid for inappropriate
expenses such as meals and refreshments for its board meetings, appraisal services related to the
property purchase, and contributions to the mayor’s college scholarship fund and other events
honoring the City’s mayors. The former executive director and the board of commissioners did not
exercise adequate oversight of the lease agreements and related revenue to ensure that Federal
requirements were followed. As a result, fewer funds were available for the Commission’s program
operations.

On March 23, 2009, the Commission’s board approved the request for proposal from a cleaning
and hauling company to demolish structures on the property. On March 26, 2009, it entered into
an agreement with the company to demolish storage buildings located on the property. In April
and May 2009, the Commission paid the company a total of $127,050 for the completion of the
demolition activities. The Commission used its 2006 capital funds to pay for the unapproved
demolition activities.

The Commission did not include its intention to use its 2006 capital funds to demolish structures
at the property in its Capital Fund budget or public housing agency plan. However, even if the
Commission had included its use of the capital funds for the fairgrounds, its annual contributions
contract with HUD prohibits the use of the funds.

On May 25, 2010, the Commission signed a revised Capital Fund annual statement and included
the statement in its fiscal year 2010 annual plan. The statement included the use of the 2006
capital funds for the demolition of structures at the property after the funds were expended. The
Commission's 2010 public housing agency plan also shows the Commission’s plan to use
additional operating program funds for the demolition of structures at the property.

During the Commission’s July 26, 2010, board meeting, the board of commissioners approved
the demolition of additional structures at the property to include the grandstand, bomb shelter, all



                                                 6
other structures, concrete, and leveling the property. The commissioners suggested that the
property should be used for a green space project to include an urban garden and windmills.

On August 20, 2010, HUD notified us that the Commission continued to use program funds
inappropriately and that the Commission used public housing capital funds to demolish
structures at the Saginaw County Fairgrounds property.

On November 5, 2010, HUD issued the Commission an order to cease and desist from using any
Public Housing Program Capital Fund program or Recovery Act funds without prior
authorization from HUD’s Detroit field office. The Commission will be placed on a zero
threshold for both of these programs until further notice. The zero threshold means that any
HUD funds requested will not be available for drawdown without supporting documentation and
review by HUD. In addition, all contracts must be submitted to HUD for review and approval
before execution.

On March 18, 2011, HUD placed the Commission on a zero threshold for its public housing
operating funds until further notice. The zero threshold means that any HUD funds requested
will not be available for drawdown without supporting documentation and review by HUD. In
addition, all contracts must be submitted to HUD for review and approval before execution.

Our objective was to determine whether the selected audit recommendations were corrected and
whether the Commission used HUD funds for unapproved purposes, to include determining
whether the Commission (1) fully implemented the recommendations from audit report 2006-
CH-1018; (2) used its capital funds for eligible purposes and was making draws from HUD’s
system appropriately; (3) used its operating program, voucher program, and homeownership
program funds appropriately; and (4) used non-program funds to maintain its property.




                                               7
                               RESULTS OF AUDIT

Finding 1: The Commission Did Not Implement Prior Audit Report
                        Recommendations
The Commission did not fully implement the recommendations from our prior audit report,
2006-CH-1018, issued September 28, 2006. It did not enter into a repayment agreement for
recommendations 1C and 2A from the audit report until January 24, 2011. The Commission also
did not make its first payment until June 7, 2011, when it agreed to make payments beginning
February 1, 2011. It also continued to use its Public Housing Program revenues for ineligible
purposes contrary to its implementation of policies and procedures in accordance with
recommendation 2C of the prior audit report. These deficiencies occurred because the
Commission lacked adequate procedures and controls to ensure that the recommendations were
fully implemented. As a result, HUD lacked assurance that the Commission would reimburse its
program in a timely manner for the inappropriate expenditures and in accordance with its
repayment agreement. HUD also lacked assurance that the Commission was using its program
revenue appropriately.


 Prior Audit Findings and
 Recommendations From Report
 Number 2006-CH-1018


              We completed an audit of the Commission's Public Housing program on September
              28, 2006, and issued audit report number 2006-CH-1018. The audit report contained
              two recommendations for the Commission to reimburse its program from non-
              Federal funds.

              We reported two findings in our audit report of the Commission's Public Housing
              Operating Fund program. Finding 1 of the audit report identified that the
              Commission improperly used nearly $536,000 of its program funds to pay for the
              fairgrounds property’s acquisition costs and lost more than $25,000 in interest
              income that would have been realized if the funds had been invested. The
              Commission also did not file a required declaration of trust to evidence its
              covenant not to convey or encumber the property and to protect HUD’s rights and
              interests. The former executive director and the board of commissioners did not
              exercise prudent oversight of the Commission’s use of program funds to ensure
              that Federal requirements were followed. As a result, fewer funds were available
              to serve the Commission’s public housing residents and HUD’s interest in the
              property was not secured.

              Finding 2 of the audit report identified that the Commission entered into eight
              rooftop lease agreements without HUD’s approval. It also improperly used more

                                              8
than $12,000 in revenue from the agreements to pay for expenses not related to its
program. The revenue paid for inappropriate expenses such as meals and
refreshments for its board meetings, appraisal services related to the property
purchase, and contributions to the mayor’s college scholarship fund and other
events honoring the City’s mayors. The former executive director and the board
of commissioners did not exercise adequate oversight of the lease agreements and
related revenue to ensure that Federal requirements were followed. As a result,
fewer funds were available for the Commission’s program operations.

We recommended that the Director of HUD’s Detroit Office of Public Housing
require the Commission to:

1A. Reimburse its program $535,903 from non-Federal funds ($507,860 for the
    property purchase plus $28,043 for legal costs) for the improper use of
    program funds to pay for the property’s acquisition costs.

1B. File a declaration of trust on the property to protect HUD’s interest and
    rights if the property has not been sold.

1C. Reimburse its program $25,132 from non-Federal funds for the lost income
    cited in this finding.

1D. Implement procedures and controls to ensure that it follows Federal
    requirements to include HUD’s approval when purchasing property in the
    future and the investing of excess program funds.

2A. Reimburse its program $12,289 from non-Federal funds ($8,000 for the
    appraisal services for the unauthorized property purchase, $3,097 for meals
    and refreshments for board members, and $1,192 for contributions) for the
    improper use of program revenue cited in this finding.

2B. Submit its current communication lease agreements to HUD for approval.

2C. Implement adequate procedures and controls to ensure that it follows
    HUD’s requirements regarding the use of its program revenue and
    applicable lease agreements.

We also recommend that the Director of HUD’s Departmental Enforcement
Center

1E. Pursue administrative sanctions against the Commission’s former executive
    director and the board of commissioners involved with the improper
    purchase of the property.




                                 9
Management Decisions for
Audit Report 2006-CH-1018

          Finding 1 Agreed Upon Management Decisions

          In response to recommendation 1A, the Commission was required to retain a
          licensed realtor to list the property for sale. Upon successful sale of the property,
          the Commission was to reimburse its program with non-Federal funds. The
          property had not been sold but was listed for sale until April 2011.

          In response to recommendation 1B, the Commission was required to file a
          declaration of trust on the property to protect HUD’s interest and rights if the
          property had not been sold. The Commission filed a declaration of trust on
          September 25, 2006.

          In response to recommendation 1C, the Commission was required to reimburse its
          program from non-Federal funds in four annual installments of $6,283 beginning
          July 1, 2009 and ending July 1, 2012. HUD and the Commission did not enter
          into a repayment agreement until January 24, 2011.

          In response to recommendation 1D, the Commission was required to implement
          procedures and controls to ensure that it followed Federal requirements to include
          HUD’s approval when purchasing property in the future and the investing of
          excess program funds. According to documentation provided by the Commission
          to HUD, procedures and controls were implemented.

          Recommendation 1E was for action from HUD’s Departmental Enforcement
          Center. In a September 2007 memorandum, the Departmental Enforcement
          Center declined to take administrative action due to the age of the violations that
          originated in 2001. This decision was due to debarment case law and a lack of
          evidence of present irresponsible behavior on the part of the individuals.

          Finding 2 Agreed Upon Management Decisions

          In response to recommendation 2A, the Commission was required to reimburse its
          program from non-Federal funds in four annual installments of $2,967 beginning
          July 1, 2009 and ending July 1, 2012. However, the installments only totaled
          $11,868 which was $421 lower than the recommended repayment of $12,289.
          HUD and the Commission did not enter into a repayment agreement until January
          24, 2011.

          In response to recommendation 2B, the Commission was required to submit its
          current communication lease agreements to HUD for approval. The Commission
          submitted the lease agreements to HUD on June 28, 2007.




                                           10
           In response to recommendation 2C, the Commission was required to implement
           adequate procedures and controls to ensure that it followed HUD’s requirements
           regarding the use of its program revenue and applicable lease agreements. The
           Commission submitted its updated procedures and controls.

Recommendations Not Fully
Implemented


           On August 20, 2010, HUD notified us that the Commission continued to use
           program funds inappropriately and that it used its public housing capital funds to
           demolish structures at the Saginaw County Fairgrounds property.

           Results of Review

           The review determined that although the Commission had effectively
           implemented recommendations 1B, 1D, 1E, and 2B, the appropriate action was
           not taken for the remaining recommendations in the audit report. During the
           onsite review, it was determined that the Commission did not implement or fully
           implement the following recommendations.

              Recommendation 1A. The Commission did list the Saginaw County
               Fairgrounds Property for sale at $699,900 with a licensed realtor. HUD did
               not issue a repayment agreement with the Commission in the event the
               property was sold. We recommend ensuring that the Commission reimburses
               its program and uses the additional proceeds if any, appropriately. The
               Commission’s listing agreement with the licensed realtor expired on April 26,
               2011. The Commission should be required to enter into a new listing
               agreement with a licensed realtor to list the property for sale. It should also be
               required to provide documentation showing how the sale price of the property
               was derived.
              Recommendation 1C. The agreed-upon management decision stated that the
               Commission would reimburse its program from non-Federal funds in four
               annual installments of $6,283, beginning July 1, 2009, and ending July 1,
               2012. The Commission’s executive director said that he was not aware of the
               Commission's requirement to repay its program from non-Federal funds for
               the recommendations cited in the audit report. We recommended that HUD
               execute a repayment agreement to ensure that the repayment of
               inappropriately used funds was completed. On January 24, 2011, HUD and
               the Commission executed a repayment agreement for the repayment of the
               funds cited in the audit report.
              Recommendation 2A. The agreed upon management decision stated that the
               Commission would reimburse its program from non-Federal funds in four
               annual installments of $2,967 beginning July 1, 2009, and ending July 1,
               2012. As mentioned above, the Commission’s executive director said that he
               was not aware of the Commission's requirement to repay its program from

                                             11
              non-Federal funds for the recommendations cited in the audit report. On
              January 24, 2011, HUD and the Commission executed a repayment agreement
              for the repayment of funds cited in the audit report.
             Recommendation 2C. This recommendation was closed in HUD’s Audit
              Resolution and Corrective Action Tracking System. However, we determined
              that the Commission’s implemented policies and procedures to ensure that it
              followed HUD’s requirements regarding the use of its program revenue and
              applicable lease agreements were not being followed. Therefore, we
              recommend reopening this recommendation.

          As previously stated, on January 24, 2011, HUD executed an official repayment
          agreement with the Commission for the reimbursement of disallowed costs cited
          in recommendations 1C and 2A. The repayment agreement states that the
          Commission owes its Public Housing program $37,421 ($25,132 for
          Recommendation 1C and $12,289 for Recommendation 2A). The Commission
          agreed to make 37 payments of $1,000 on the first of the month, beginning
          February 1, 2011, until the amount is paid in full. The last payment of $421 is
          due March 1, 2014. If HUD finds that the Commission is not complying with the
          repayment agreement, HUD will provide a written statement specifying the facts
          of the alleged non-compliance and reasonable opportunity for the Commission to
          resolve or cure the alleged non-compliance. The Commission must make an
          annual certification to HUD regarding the status of its ability to pay some or all of
          the amounts specified in this agreement. As of June 22, 2011, the Commission
          had made one payment in accordance with its executed repayment agreement.


Timely Payments Not Made

          The Commission did not make timely payments in accordance with its repayment
          agreement. The repayment agreement stated that the Commission would begin
          making payments on February 1, 2011. It made its first payment on June 7, 2011.
          Before the execution of the repayment agreement in January 2011, HUD verbally
          told the Commission that it should use coin laundry receipts to make the
          payments. According to the executive director, the payment was delayed because
          the Commission wanted clarification from HUD regarding what funds to use,
          recording the repayment agreement as a liability, and establishing a separate
          account for the payments. Additionally, it was the Commission’s executive
          director and its lawyers’ contention that the coin laundry revenue was program
          income and could not be used to make payments for the Commission's repayment
          agreement with HUD.

          Despite this assertion, the Commission continued to use its program revenue for
          inappropriate expenditures such as meals and refreshments as cited in finding 2 of
          our prior audit report and finding 3 of this audit report. Therefore, the
          Commission did not follow the policies and procedures it implemented in



                                           12
             accordance with its agreed-upon management decision for recommendation 2C
             from our prior audit report.

Conclusion

             The corrective action verification identified that the Commission did not
             implement all recommendations in the prior audit report. It had not implemented
             adequate procedures and controls to ensure that it followed HUD’s requirements
             regarding the use of its program revenue. As a result, HUD lacked assurance that
             the Commission used its program revenue appropriately.

Recommendations

             We recommend that the Director of HUD’s Detroit Office of Public Housing

             1A. Extend the final action target date accordingly for the repayment of funds
                 cited in recommendation 1A of our prior audit report.

             1B. Require the Commission to submit payments in accordance with its
                 executed repayment agreements for recommendations 1C and 2A of our
                 prior audit report.

             1C. Require the Commission to enter into an updated listing agreement with a
                 licensed realtor for the sale of the Saginaw County Fairgrounds Property.

             1D. Require the Commission to submit, to HUD for approval, the property
                 appraisal it used to determine the sale price of the Saginaw County
                 Fairgrounds Property.

             1E. Require the Commission to implement procedures and controls to ensure it
                 follows its policies and procedures regarding its use of program revenue and
                 applicable lease agreements.

             1F. Ensure the Commission makes the appropriate accounting entries into its
                 system to ensure the liability and repayment amounts for its repayment
                 agreement are appropriately recorded.




                                            13
Finding 2: The Commission Inappropriately Administered Its Capital
                           Fund Grants
The Commission inappropriately administered its Public Housing Capital Fund grants. It did not
comply with HUD’s or its requirements when drawing down and expending funds for its Capital
Fund grants. It did not ensure that the capital funds were used for eligible purposes. These
deficiencies occurred because the Commission lacked adequate Capital Fund grant knowledge
and procedures and controls to ensure that its capital funds were used appropriately, that capital
funds were only drawn down when there was an immediate need and returned if the funds were
drawn in excess of that immediate need, and that capital funds were drawn and expended from
the appropriate line items. As a result, the Commission inappropriately used more than $1.5
million in capital funds, was unable to support the use of nearly $395,000 in capital funds,
maintained capital funds on hand in excess of $411,000, caused the U.S. Treasury to lose more
than $71,000 in interest, inappropriately earned more than $13,000 in interest from its bank, and
did not appropriately categorize nearly $822,000 in capital fund draws from HUD’s system.


 Capital Funds Used for
 Ineligible Expenditures

               We reviewed 100 percent of the Commission’s disbursements from its revolving
               fund cash account for its capital fund for the period July 1, 2005, through
               February 28, 2011. We reviewed the disbursements to determine whether the
               costs were necessary and reasonable low-income housing expenses for capital and
               management activities, including the modernization and development of public
               housing.

               The Commission did not effectively use its capital funds for capital and
               management activities, including the modernization and development of public
               housing. It did not follow HUD’s, Office of Management and Budget Circular A-
               87, or its requirements for the use of its capital funds. Between July 1, 2005, and
               February 28, 2011, the Commission inappropriately used $1,934,312 from its
               capital fund. The inappropriate expenditures included $1,539,629 for costs that
               were not necessary and reasonable and $394,683 for costs without adequate
               supporting documentation. The inappropriate expenditures included check
               payments, credit card transactions, petty cash transactions, and legal expenses.

               The Commission used its capital funds for ineligible expenses, including but not
               limited to, the following:

                     Money owed to the City of Saginaw for past pension contributions and
                      retiree benefits;
                     Legal expenses for its non-profit corporations;
                     Legal expenses in conjunction with a lawsuit to prevent a half-way house
                      from being built in the Commission’s neighborhood;
                                               14
                  In-town meals for the former and current executive directors;
                  Lunches for its board members and Commission staff;
                  Christmas parties, entertainment, and videography for its public housing
                   residents;
                  Christmas parties and entertainment for its staff;
                  Gift cards for residents;
                  Refreshments;
                  T-shirts and logo mugs;
                  Flowers, T-shirts, and supplies for Beautification Day;
                  A computer learning center that was not HUD-approved;
                  Resident field trips; and
                  Alcohol.

Insufficient Controls over
Draws from HUD’s System

            We reviewed 100 percent of the Commission’s draws to and disbursements from
            its conventional reserves account for its Capital Fund for the period July 1, 2005,
            through February 28, 2011. We also reviewed the Commission’s capital fund
            expenditures to determine whether it drew down funds from HUD’s system in
            accordance with HUD’s requirements. We reviewed draws for the fiscal years
            2005 through 2009 Capital Fund grants.

            We determined that the Commission did not draw down and disburse its capital
            funds in accordance with HUD’s requirements. It made 142 draws from
            December 29, 2006, when it drew down nearly $29,000 for an $11,378 expense.
            For more than 4 years, the Commission drew down capital funds and did not
            expend them in accordance with HUD’s requirements. As of April 8, 2011, the
            Commission had a capital funds balance of $411,228. We calculated the daily
            interest lost by the U.S. Treasury and determined that the Commission caused the
            treasury to lose $71,043 in interest on the inappropriate draws. We determined
            that it also earned $13,085 in interest from its bank for the inappropriate draws.

            HUD’s regulations at 24 CFR 85.20(b)(1) and (2) provide that housing authorities
            must provide accurate, current, and complete disclosure of financial results of
            financially assisted activities and must maintain records that adequately identify
            the source and application of funds provided for the activities. However, the
            Commission incorrectly categorized the expenses when reporting to HUD. We
            determined that 38 draws for nearly $822,000 were misclassified. For example,
            $47,139 was drawn down from the Commission’s capital funds for dwelling
            structure expenses. However, the draw amount was used for non-expendable
            dwelling equipment and the information recorded in HUD’s Line of Credit
            Control System did not reflect the actual use of these funds. Commission officials
            said that it was human error that caused the drawdown of funds from one budget
            category and the use the funds for other purposes. Therefore, $821,660 in Capital
            Fund expenses was incorrectly reported to HUD. HUD was not aware of this

                                             15
             issue due to Commission officials’ improper recording and reporting in HUD’s
             system.

             Section 401(A) of the Commission’s annual contributions contract with HUD
             states that promptly after execution of this contract, the Commission shall enter
             into and thereafter maintain, one or more agreements, which are herein
             collectively called the General Depositary Agreement, in a form prescribed by the
             Government, with one or more banks selected as depositary by the Commission,
             each of which shall be, and continue to be, a member of the Federal Deposit
             Insurance Corporation. We determined that the Commission did not maintain a
             general depositary agreement with its bank for the conventional reserves account.

Weaknesses in the
Commission’s Procedures and
Controls

             The deficiencies described above occurred because the Commission lacked
             adequate Capital Fund grant knowledge and procedures and controls to ensure
             that its capital funds were (1) used appropriately, (2) only drawn when there was
             an immediate need and returned if the funds were drawn in excess of the
             immediate need, and (3) drawn and expended from the appropriate line items.
             The Commission’s former and current executive directors and its board of
             commissioners did not ensure that the capital funds were used for their intended
             purposes.

             The Commission was unable to explain why the ineligible expenditures occurred
             and why the capital funds continued to be drawn down from HUD’s system. The
             current executive director said that he did not believe the questioned items were
             ineligible and that he could not speculate about what happened before he began
             his career at the Commission, as finance director from September 2009 to March
             2010, and as the executive director since March 2010. He believed that the
             misclassified draws from HUD’s system were due to human error.

             On November 5, 2010, HUD issued the Commission an order to cease and desist
             from using any Capital Fund grant or Recovery Act funds without prior
             authorization from HUD. The Commission was placed on a zero threshold for
             both of these programs until further notice. The zero threshold means that any
             HUD funds requested will not be available for drawdown without supporting
             documentation and review by HUD. In addition, all contracts must be submitted
             to HUD for review and approval before execution.

Conclusion

             As a result of the Commission’s failure to follow HUD’s requirements for the use
             of capital funds, it used more than $1.5 million in capital funds for ineligible

                                             16
          purposes, was unable to support the use of nearly $395,000 in capital funds,
          maintained capital funds on hand in excess of $411,000, caused the U.S. Treasury
          to lose more than $71,000 in interest, inappropriately earned more than $13,000 in
          interest from its bank, and did not appropriately categorize nearly $822,000 in
          capital fund draws from HUD’s system.

          The Director of HUD’s Detroit Office of Public Housing stated that HUD relies
          on the information presented in the HUD draw down request, form HUD-50080-
          COMP, it receives from the Commission. When the Commission submits the
          form, it certifies that the data reported and funds requested on the voucher are
          correct and the amount requested is not in excess of immediate disbursement
          needs. If the funds provided become more than necessary, such excess will be
          promptly returned, as directed by HUD. The form also contains a warning that
          HUD will prosecute false claims and statements. Conviction may result in
          criminal and civil penalties.

Recommendations


          We recommend that the Director of HUD’s Detroit Office of Public Housing
          require the Commission to

          2A.     Reimburse its Capital Fund $1,539,629 from non-Federal funds for the
                  ineligible payments cited in this finding.

          2B.     Return the $411,228 in excess capital fund draws cited in this finding.

          2C.     Correctly categorize $821,660 in capital fund draws to the appropriate line
                  items and correct the financial records in HUD’s system accordingly to
                  ensure that the proper categories were charged.

          2D.     Provide supporting documentation or reimburse its Capital Fund $394,683
                  from non-Federal funds for the unsupported costs cited in this finding.

          2E.     Reimburse the U.S. Treasury $71,043 from non-Federal funds for the
                  interest lost cited in this finding.

          2F.     Reimburse its Capital Fund $13,085 from non-Federal funds for the
                  inappropriately earned interest cited in this finding.

          2G.     Implement adequate procedures and controls to ensure that all capital
                  funds drawn and disbursed are for eligible activities and comply with
                  HUD’s requirements.




                                           17
2H.   Develop procedures to improve the accounting system and internal
      controls to ensure that funds will be drawn down and used as budgeted,
      and financial reports are accurate, current, and complete.

2I.   Enter into and maintain one or more general depositary agreements, in a
      form prescribed by HUD, with one or more banks selected as a depositary
      by the Commission, each of which shall be, and continue to be, a member
      of the Federal Deposit Insurance Corporation.




                              18
Finding 3: The Commission Inappropriately Used Its Programs Funds
The Commission did not comply with HUD’s or its requirements for the use of its Public
Housing Program Operating Fund, Section 8 Housing Choice Voucher, and Homeownership
program funds. It did not ensure that the funds were used for eligible purposes. These
deficiencies occurred because the Commission lacked adequate program knowledge and
procedures and controls to ensure that the funds were used appropriately. As a result, the
Commission misused nearly $181,000 in programs funds and could not support its use of more
than $30,000 in operating and voucher program funds.


 Non-rental Income
 Commingled with its Program
 Operating Funds

              We reviewed 100 percent of the Commission’s disbursements from its revolving
              fund cash account for its Public Housing Program Operating Fund, Section 8
              Housing Choice Voucher, and Homeownership program funds for the period July
              1, 2005, through February 28, 2011. We reviewed the disbursements to determine
              whether the costs were necessary and reasonable. We also determined that the
              Commission commingled its non-rental income with its Public Housing Program
              Operating Funds. This caused the non-rental income to no longer be flexible in
              its permitted uses. Normally, non-rental income is only subject to the restraint of
              being used for low-income housing or to benefit the Commission’s residents.
              However, when the funds are commingled, the funds may only be used for
              operating subsidy purposes.


Operating, Voucher, and
Homeownership Program
Funds Used for Ineligible
Expenditures


              The Commission did not follow HUD’s or Office of Management and Budget
              Circular A-87 requirements regarding the use of its operating, voucher, or
              homeownership programs funds. Between July 1, 2005, and February 28, 2011,
              the Commission inappropriately used $210,886 in the programs funds. The
              inappropriate expenditures included $180,649 for costs that were not necessary
              and reasonable. The Commission also used $30,236 in operating and voucher
              program funds for costs without adequate supporting documentation. The
              inappropriate expenditures included check payments, credit card transactions,
              petty cash transactions, and legal expenses.



                                              19
           The Commission used the programs’ funds for ineligible expenses, including but
           not limited to, the following:

              Legal expenses for its non-profit corporations;
              Legal expenses in conjunction with a lawsuit to prevent a half-way house
               from being built in the Commission’s neighborhood;
              In-town meals for the executive director (former and current);
              Donations to non-profit organizations;
              Christmas parties, entertainment, and videography for it public housing
               residents;
              Christmas parties and entertainment for its staff;
              Lunches for its board members;
              Lunches for its staff;
              Refreshments;
              Flowers for its staff and board members;
              T-shirts, logo mugs, logo magnets, logo stress balls;
              Book bags and school supplies for its public housing residents’ children;
              Family Self-Sufficiency Program graduation parties;
              Resident picnics;
              Finance charges and late fees for its credit card;
              Vehicle purchase for the current executive director; and
              Hotel and travel charges for the current executive director, executive assistant,
               and board members to attend a former executive director’s funeral in Chicago,
               IL.

Weaknesses in Procedures and
Controls

           The deficiencies described above occurred because the Commission lacked
           adequate program knowledge and procedures and controls to ensure that the
           operating program, voucher program, and homeownership program funds were
           used appropriately.

           The Commission’s former and current executive directors and its board of
           commissioners did not ensure that the programs’ funds were used for their
           intended purposes.

           The Commission was unable to explain why the ineligible expenditures occurred.
           The current executive director said that he did not believe the questioned items
           were ineligible and that he could not speculate about what happened before he
           began his career at the Commission. As mentioned in Finding 2, the executive
           director served as the finance director from September 2009 to March 2010,
           before his present position began in March 2010.



                                            20
             The Commission posted expenses to its central office cost center beginning in
             fiscal year 2006. During interviews with the Commission on February 24, 2011,
             February 25, 2011, March 14, 2011, March 15, 2011, April 6, 2011, and May 5,
             2011, the Commission said that it did not maintain a center, but planned to
             implement a center as of July 1, 2011. During an interview on June 7, 2011, the
             executive director said that the Commission had implemented a center for fiscal
             year 2010. The Commission’s 2010 annual audited financial statements
             supported this statement. However, we could not determine whether the center
             was fully implemented in fiscal year 2010.

             The Commission could not explain why costs were posted to the center beginning
             in fiscal year 2006. The finance director said that possibly the previous finance
             director had tried to implement a cost center in 2006 and she believed that all
             costs were removed from the center at the end of fiscal year 2006. She could not
             explain why the costs continued to be posted to the center after fiscal year 2006.
             The Commission was unable to provide its general ledger for the center to show
             that the center had been fully implemented and that the expenses posted to the
             center in previous years had been corrected.

             On March 18, 2011, HUD placed the Commission on a zero threshold for its
             public housing operating funds until further notice. The zero threshold means that
             any HUD funds requested would not be available for drawdown without
             supporting documentation and review by HUD. In addition, all contracts must be
             submitted to HUD for review and approval before execution.


Conclusion

             As a result of the Commission’s lack of adequate program knowledge and
             procedures and controls to ensure that the funds were used appropriately, it
             misused nearly $181,000 in operating, voucher, and homeownership program
             funds and it could not support its use of more than $30,000 in operating and
             voucher program funds. HUD and the Commission lacked assurance that HUD
             funds were used according to HUD’s and the Commission’s requirements.

             The Commission inappropriately expended $180,649 ($163,835 in operating
             program, $9,614 in voucher program, and $7,200 in homeownership program
             funds) and could not support its use of $30,236 ($18,954 in operating program
             plus $11,282 in voucher program funds).

Recommendations


             We recommend that the Director of HUD’s Detroit Office of Public Housing
             require the Commission to



                                             21
3A.   Reimburse its appropriate programs $180,649 from non-Federal funds for
      the ineligible payments cited in this finding.

3B.   Provide supporting documentation or reimburse its appropriate programs
      $30,236 from non-Federal funds for the unsupported costs cited in this
      finding.

3C.   Implement adequate procedures and controls to ensure that its programs
      funds are used in accordance with Federal and its requirements.




                              22
Finding 4: The Commission Used Its Public Housing Program Funds
                    for Unapproved Purposes
The Commission used its Public Housing Program Operating Fund and Capital Fund grant funds
for a property that it purchased without HUD approval. The property was also not included in its
annual contributions contract with HUD. The Commission used more than $127,000 in capital
funds and nearly $108,000 in program operating funds for the unapproved purpose. This
condition occurred because the Commission lacked adequate Capital Fund and operating
program knowledge and procedures and controls to ensure that capital funds and operating
program funds were used appropriately. As a result, the U.S. Treasury paid interest on the
capital funds (see Finding 2) and fewer funds were available to serve the Commission’s public
housing residents.


 Capital Funds Used To
 Demolish Structures at
 Fairgrounds Property

              Contrary to HUD’s requirements, the Commission used $127,050 of its capital
              funds for its fairgrounds property that was not included in its annual contributions
              contract with HUD. The property was purchased by the Commission in
              December 2002 after HUD stated that the property was not eligible under the
              program. The Commission used its public housing operating reserves to purchase
              the property. The use of program funds did not comply with HUD’s regulations,
              the Commission’s annual contributions contract, and Office of Management and
              Budget Circular A-87.

              On March 23, 2009, the Commission's board approved the request for proposal
              from a cleaning and hauling company to demolish structures on the property. On
              March 26, 2009, it entered into an agreement with the company to demolish
              storage buildings located on the property. In April and May 2009, the
              Commission paid the company a total of $127,050 for the completion of the
              demolition activities. The Commission used its 2006 capital funds to pay for the
              unapproved demolition activities.

              The Commission did not include its intention to use its 2006 capital funds to
              demolish structures at the property in its Capital Fund budget or public housing
              agency plan. However, even if the Commission had included its use of the capital
              funds for the fairgrounds, its annual contributions contract with HUD prohibits
              the use of the funds.

              On May 25, 2010, the Commission signed a revised Capital Fund annual
              statement and included the statement in its fiscal year 2010 annual plan. The
              statement included the use of the 2006 capital funds for the demolition of
              structures at the property. The Commission’s 2010 public housing agency plan

                                               23
           also includes the Commission’s plan to use additional operating funds for the
           demolition of structures at the property.

           During the Commission’s July 26, 2010, board meeting, the board of
           commissioners approved the demolition of additional structures at the property to
           include the grandstand, bomb shelter, all other structures, concrete, and leveling
           the property. The commissioners suggested that the property should be used for a
           green space project to include an urban garden and windmills.

           As previously discussed, HUD issued the Commission an order to cease and
           desist from using any capital funds or Recovery Act funds without prior
           authorization from HUD’s Detroit field office on November 5, 2010.

Operating Funds Used for
Unapproved Purposes


           We reviewed the Commission’s general ledger detailing the amount of operating
           program funds the Saginaw Housing Development Corporation owed to the
           Commission. We also reviewed the disbursements from the Commission’s
           revolving cash fund account. The review was conducted to determine whether the
           costs for the corporation were adequately recorded in the Commission’s general
           ledger. The Commission’s general ledger did not contain entries for all operating
           program funds that the corporation owed to the Commission. It did not record
           miscellaneous operating, maintenance, and legal expenses that the corporation
           owed to the Commission.

           The Commission used its operating program funds to operate and maintain the
           property. The property was purchased in the Commission’s name but operating
           proceeds and expenses were recorded through the corporation, the Commission’s
           wholly-owned nonprofit. The Commission paid the expenses incurred by the
           corporation with the Commission’s operating program funds. The corporation
           repaid the Commission with funds generated through the leasing of the buildings
           for storage space, use of the property’s racetrack, and other community events.
           The property generated a profit in fiscal years 2004 and 2006. However, the
           property’s expenses exceeded the income it earned in fiscal years 2003, 2005, and
           2007 through 2011 resulting in a deficit of $91,667, which the corporation has not
           reimbursed to the Commission. The Commission also disbursed $9,036 in
           operating program funds for its property’s expenses that were not recorded as
           owed to the Commission or reimbursed to it. Additionally, it used $6,989 in
           operating program funds for legal expenses for the corporation which were also
           not recorded as owed to or reimbursed to it. As of February 28, 2011, the
           Commission had used $107,692 ($91,667 plus $9,036 plus $6,989) in operating
           program funds to support the operation and maintenance of the property.




                                           24
             On March 18, 2011, HUD issued the Commission an order to cease and desist
             from using any public housing operating funds without prior authorization from
             HUD’s Detroit field office. The Commission was placed on a zero threshold for
             the program until further notice.

Weaknesses in Procedures and
Controls

             The deficiencies described above occurred because the Commission lacked
             adequate Capital Fund and operating program knowledge and procedures and
             controls to ensure that capital funds and operating program funds were used
             appropriately. The Commission’s former and current executive directors and its
             board of commissioners did not ensure that its funds were used for their intended
             purposes.

             During the Commission’s October 15, 2007, board meeting, the former executive
             director stated that the Commission’s operating program funds would be used to
             cover the expenses at the property once the property’s income had been depleted.


Conclusion

             The Commission used its operating program and Capital Fund grant funds for a
             property that it purchased without HUD approval. The property was also not
             included in its annual contributions contract with HUD. The Commission used
             more than $127,000 in capital funds and nearly $108,000 in program operating
             funds for the unapproved purpose. This condition occurred because the
             Commission lacked adequate Capital Fund and operating program knowledge and
             procedures and controls to ensure that capital funds and operating program funds
             were used appropriately. As a result, the U.S. Treasury paid interest on the capital
             funds (see Finding 2) and fewer funds were available to serve the Commission’s
             public housing residents.

Recommendations


             We recommend that the Director of HUD’s Detroit Office of Public Housing
             require the Commission to

             4A.    Reimburse its Capital Fund $127,050 from non-Federal funds for the
                    ineligible payments cited in this finding.

             4B.    Reimburse its operating fund $107,692 from non-Federal funds for
                    ineligible payments cited in this finding.



                                              25
                        SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

      Applicable laws; regulations; HUD’s program requirements at 24 CFR (Code of Federal
       Regulations) Parts 5, 85, 905, 941, 964, 968, 970, and 990; Public and Indian Housing
       Notices 96-18, 2001-3, 2007-9, 2007-15, and 2010-34; HUD Guidebook 7485.3G; HUD
       Handbooks 2000.06 REV-3, 7475.1, and 7510.1G; The United States Housing Act of
       1937 as amended; 42 U.S.C. (United States Code), chapter 8, subchapter I, 1437g; Office
       of Management and Budget Circular A-87; HUD’s public housing annual contributions
       contract; Section 8 Housing Choice Voucher program - annual contributions contract;
       and Michigan Compiled Laws.

      The Commission’s accounting records; bank statements; annual audited financial
       statements for fiscal years 2006, 2007, 2008, 2009, and 2010; computerized databases;
       policies and procedures; board meeting minutes pertinent to the program; and
       organizational chart.

      HUD’s files for the Commission.

We also interviewed the Commission’s employees and HUD staff.

Finding 2

We reviewed 100 percent of the Commission’s draws to and disbursements from its conventional
reserves account and revolving fund cash account for its Capital Fund for the period July 1,
2005, through February 28, 2011. We also reviewed the Commission’s capital fund expenditures
to determine whether it drew down funds from HUD’s system in accordance with HUD’s
requirements. We reviewed draws for the fiscal years 2005 through 2009 Capital Fund grants.

We determined from our review of the Commission’s capital fund expenditures from its
revolving fund cash account that 553 transactions totaling $1,539,629 were used for ineligible
expenditures and 295 transactions totaling $394,683 were unsupported.

Our review of the Commission’s conventional reserves account determined that the Commission
made 142 draws from its Capital Fund accounts after it maintained funds on hand. The total
funds on hand totaled $411,288. We used the U.S. Treasury’s 10-year interest rates to calculate
the daily interest that accrued on the excess capital funds that were drawn down. We determined
that the Commission cost the Federal Government $71,043 by maintaining the excess capital
funds. We obtained the average daily interest rate for the Commission’s bank account and
calculated the amount of interest it earned for the capital funds on hand. We determined that the
Commission inappropriately earned $13,085 in interest by drawing and holding the excess
capital funds.



                                               26
Our review of the Commission’s capital fund draws and supporting documentation determined
that from October 26, 2009, through November 5, 2010, the Commission misclassified 38 draws
totaling $821,660 for its fiscal years 2007, 2008, and 2009 Capital Fund grants.

Finding 3

We reviewed 100 percent of the Commission’s disbursements from its revolving fund cash
account for its operating, voucher, and homeownership programs for the period July 1, 2005,
through February 28, 2011. We reviewed the disbursements to determine whether the costs were
necessary and reasonable.

Our review of the Commission’s revolving fund cash account determined that 1,131 transactions
totaling $180,649 (988 transactions totaling $163,835 in operating program funds, 57
transactions totaling $9,614 in voucher program funds, and 86 transactions totaling $7,200 in
homeownership program funds) were used for ineligible expenditures and 101 transactions
totaling $30,236 (85 transactions totaling $18,954 in operating program funds and 16
transactions totaling $11,282 in voucher program funds) were unsupported.

Finding 4

We reviewed the Commission’s general ledger detailing the amount of operating program funds
the corporation owed to the Commission. We also reviewed the disbursements from the
Commission’s revolving cash fund account. We reviewed the disbursements to determine
whether the costs for the corporation were adequately recorded in the Commission’s general
ledger.

We determined that in addition to the $91,667 recorded in the Commission’s ledger as funds the
corporation owed to the Commission, the Commission disbursed $9,036 in operating program
funds for expenses that were not recorded as owed to the Commission or reimbursed to the
Commission. The Commission also disbursed $6,989 in operating program funds for legal
expenses for the corporation which was also not recorded as owed to the Commission or
reimbursed to the Commission.

We performed our onsite audit work from November 2010 to April 2011 at the Commission’s
office located at 1803 Norman Street, Saginaw, MI, and HUD’s Detroit field office. The audit
covered the period April 1, 2006, through October 31, 2010, but was expanded when necessary
to include other periods.

We relied in part on data maintained by the Commission in its systems. Although we did not
perform a detailed assessment of the reliability of the data, we performed a minimal level of
testing and found the data to be adequately reliable for our purposes.

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



                                               27
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               28
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

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

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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
               objective:

                  Effectiveness and efficiency of operations – Policies and procedures that the
                   audited entity has implemented to provide reasonable assurance that a program
                   meets its objectives, while considering cost effectiveness and efficiency.

                  Reliability of financial reporting – Policies and procedures that management has
                   implemented to provide reasonable assurance regarding the reliability of
                   financial reporting and the preparation of financial statements in accordance with
                   generally accepted accounting principles.

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

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.



                                                 29
Significant Deficiencies


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

                   The Commission did not fully implement recommendations 1A, 1C, and 2A
                    when it did not make timely payments in accordance with its repayment
                    agreement with HUD and did not fully implement recommendation 2C
                    from audit report 2006-CH-1018 (see finding 1).

                   The Authority lacked adequate procedures and controls to ensure compliance
                    with Federal and its requirements regarding (1) the drawing and expending
                    of its capital funds, (2) the expenditure of funds for its operating, voucher,
                    and homeownership programs, and (3) the drawing and expending of its
                    capital funds and operating program funds for ineligible purposes (see
                    findings 2, 3, and 4).




                                              30
                 FOLLOW-UP ON PRIOR AUDITS


Saginaw Housing Commission
Improperly Used Public
Housing Funds to Purchase
Property, Report #2006-CH-
1018


          This audit is a follow up on a review completed by the Office of Inspector
          General of the Commission’s Public Housing program, issued on September 28,
          2006 (audit report number 2006-CH-1018).




                                        31
                                   APPENDIXES


Appendix A

                 SCHEDULE OF QUESTIONED COSTS


                  Recommendation                            Unsupported
                      number              Ineligible 1/         2/
                        2A                 $1,539,629
                        2B                                    $411,288
                        2D                                     394,683
                        2E                  71,043
                        2F                  13,085
                        3A                  180,649
                        3B                                     30,236
                        4A                 127,050
                        4B                 107,692
                       Totals             $2,039,148          $836,207

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.




                                             32
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         33
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 1




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 3

Comment 1




Comment 2




Comment 4




Comment 5
Comment 6
Comment 7




Comment 2

Comment 8




                         35
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         36
                         OIG Evaluation of Auditee Comments

Comment 1   The Commission’s proposed actions should improve its program operations, if
            fully implemented.

Comment 2   The Commission posted expenses to its central office cost center beginning in
            fiscal year 2006. During interviews with the Commission on February 24, 2011,
            February 25, 2011, March 14, 2011, March 15, 2011, April 6, 2011, and May 5,
            2011, the Commission said that it did not maintain a center, but planned to
            implement a center as of July 1, 2011. During an interview on June 7, 2011, the
            executive director said that the Commission had implemented a center for fiscal
            year 2010. The Commission’s 2010 annual audited financial statements support
            this statement. However, we could not determine whether the center had been
            fully implemented in fiscal year 2010.

            The Commission could not explain why costs were posted to the center beginning
            in fiscal year 2006. The finance director said that possibly the previous finance
            director had tried to implement a cost center in 2006 and she believed that all
            costs were removed from the center at the end of fiscal year 2006. She could not
            explain why the costs continued to be posted to the center after fiscal year 2006.
            The Commission was unable to provide its general ledger for the center to show
            that the center had been fully implemented and that the expenses posted to the
            center in previous years had been corrected.

Comment 3   Before the execution of the repayment agreement in January 2011, HUD verbally
            told the Commission that it should use coin laundry receipts to make the
            payments. According to the executive director, the payment was delayed because
            the Commission wanted clarification from HUD regarding what funds to use,
            recording the repayment agreement as a liability, and establishing a separate
            account for the payments. Additionally, it was the Commission’s executive
            director and its lawyers’ contention that the coin laundry revenue was program
            income and could not be used to make payments for the Commission's repayment
            agreement with HUD.

            Despite this assertion, the Commission continued to use its program revenue for
            inappropriate expenditures such as meals and refreshments as cited in finding 2 of
            our prior audit report and finding 3 of this report.

Comment 4   We agree that the Commission used budgeted line items 1406 and 1408 to pay the
            City of Saginaw for past pensions and benefits. However, the Commission also
            used budgeted line item 1410 to pay the City for past pensions and benefits. The
            Commission may pay salaries and benefits with its capital funds but only to the
            extent that the salaries and benefits are allocated to actual work performed for the
            Capital Fund. The Commission failed to provide adequate documentation to
            support that the capital funds used to repay the City of Saginaw were directly
            related to Capital Fund activities.

                                             37
Comment 5   The Commission failed to provide adequate documentation to support that this
            finding has been corrected.

Comment 6   The Commission failed to provide adequate documentation or updated policies
            and procedures to support that this finding has been corrected.

Comment 7   We agree that the alcohol purchases occurred under the previous administration.
            However, the Commission had $394,683 in capital fund expenditures without
            adequate supporting documentation. The inappropriate expenditures included
            check payments, credit card transactions, petty cash transactions, and legal
            expenses. Therefore, we could not substantiate the Commission’s assertion that
            the current administration never used its program funds for alcohol purchases.

Comment 8   The Commission’s general ledger did not contain entries for all operating
            program funds that the corporation owed to the Commission. It did not record
            miscellaneous operating, maintenance, and legal expenses that the corporation
            owed to the Commission.

            The Commission used its operating program funds to operate and maintain the
            property. The property was purchased in the Commission’s name but operating
            proceeds and expenses were recorded through the corporation, the Commission’s
            wholly-owned nonprofit. The Commission paid the expenses incurred by the
            corporation with the Commission’s operating program funds. The corporation
            repaid the Commission with funds generated through the leasing of the buildings
            for storage space, use of the property’s racetrack, and other community events.
            The property generated a profit in fiscal years 2004 and 2006. However, the
            property’s expenses exceeded the income it earned in fiscal years 2003, 2005, and
            2007 through 2011 resulting in a deficit of $91,667, which the corporation had not
            reimbursed to the Commission. The Commission also disbursed $9,036 in
            operating program funds for its property’s expenses that were not recorded as
            owed to the Commission or reimbursed to it. Additionally, it used $6,989 in
            operating program funds for legal expenses for the corporation which were also
            not recorded as owed to or reimbursed to it. As of February 28, 2011, the
            Commission had used $107,692 ($91,667 plus $9,036 plus $6,989) in operating
            program funds to support the operation and maintenance of the property.




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Appendix C

     FEDERAL AND THE COMMISSION’S REQUIREMENTS

Finding 1
HUD Handbook 2000.06 REV-3, appendix 1, defines a corrective action verification as a
verification review conducted by the OIG or the Chief Financial Officer to determine whether
the corrective actions, as reported by the HUD action officials, have been completed. This
review will also verify that the corrective actions taken were sufficient to correct the audit
identified deficiency.

Finding 2
Legal requirements at 42 U.S.C., chapter 8, subchapter I, 1437g(d)1. state that in general, the
HUD Secretary will establish a capital fund for the purpose of making assistance available to
public housing agencies to carry out capital and management activities. Section (j)6 states that
any obligation entered into by a public housing agency will be subject to the right of the
Secretary to recapture the obligated amounts for violation by the public housing agency of the
requirements of this subsection.

Office of Management and Budget Circular A-87, attachment A, C.1. states that to be allowable
under Federal awards, costs must meet the following general criteria:
a. Be necessary and reasonable for proper and efficient performance and administration of
    Federal awards;
b. Be allocable to Federal awards under the provisions of this circular;
c. Be authorized or not prohibited under State or local laws or regulations;
d. Conform to any limitations or exclusions set forth in these principles, Federal laws, terms and
    conditions of the Federal award, or other governing regulations as to types or amounts of cost
    items;
e. Be consistent with policies, regulations, and procedures that apply uniformly to both Federal
    awards and other activities of the governmental unit;
g. Except as otherwise provided for in this circular, be determined in accordance with generally
    accepted accounting principles; and
j. Be adequately documented.

Circular A-87, attachment B, 14. states that costs of entertainment, including amusement,
diversion, and social activities and any costs directly associated with such costs, such as tickets
to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable.
Attachment B, 20. states that the costs of goods or services for personal use of the governmental
unit's employees are unallowable regardless of whether the cost is reported as taxable income to
the employees.




                                                39
Circular A-87, attachment B, 43(a). states that travel costs are the expenses for transportation,
lodging, subsistence, and related items incurred by employees who are in travel status on official
business of the governmental unit. Such costs may be charged on an actual cost basis, on a per
diem or mileage basis in lieu of actual costs incurred, or on a combination of the two, provided
the method used is applied to an entire trip and not to selected days of the trip, and results in
charges consistent with those normally allowed in like circumstances in the governmental unit’s
non-federally-sponsored activities.

24 CFR 85.20(b)(7) states that procedures for minimizing the time elapsing between the transfer
of funds from the U.S. Treasury and disbursement by grantees and subgrantees must be followed
whenever advance payment procedures are used. When advances are made by letter-of-credit or
electronic transfer of funds methods, the grantee must make drawdowns as close as possible to
the time of making disbursements.

24 CFR 905.10(k)(1) states that eligible Capital Fund expenses include the development,
financing, and modernization of public housing projects, including the redesign, reconstruction,
and reconfiguration of public housing sites and buildings (including accessibility improvements)
and the development of mixed-finance projects.

Public and Indian Housing Notice 2010-34, section VII. states the public housing agency shall
requisition funds only when payment is due and after inspection and acceptance of the work and
shall distribute the funds within 72 hours of receipt of the funds.

HUD’s public housing annual contributions contract, section 307(D). states that no funds of any
project may be used to pay any compensation for the services of members of the local authority.

HUD Handbook 7475.1, chapter 2, section 3(a). states that the public housing agency's boards of
commissioners have the primary responsibility for ensuring that the public housing agency is
operated in an efficient and economical manner and that its financial integrity is maintained.

HUD Guidebook 7485.3G, chapter 2, section 7, part 2-20.D. states that ineligible administrative
and other related costs include:
1. Cost of entertainment, including food and beverages, amusements, social activities, or
   stipends to residents;
3. Litigation expenses, except where approved by HUD; and
4. Travel which is not in connection with comprehensive grant training of the development and
   implementation of the comprehensive grant program.

HUD Guidebook 7485.3(G), chapter 12-11, A.5. states that if the public housing agency uses
comprehensive grant program funds for ineligible purposes, the field office may use an order to
require the agency to repay HUD from non program funds. If such repayment is not
forthcoming, the field office may recommend withholding of a portion of the agency’s next
year’s grant.




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HUD’s Public and Indian Housing Low Rent Technical Accounting Guidebook 7510.1G,
Introduction, number 3, states that the objective of the Public and Indian Housing Low-Rent
Technical Accounting Guide is to:
     Provide guidance on the financial management standards required by regulation and the
       annual contributions contract,
     Identify the types of financial information the public housing agency must maintain in
       order to report to HUD, and
     Prescribe the uniform chart of accounts the public housing agency must use to ensure
       consistency in reporting to HUD the source and application of funds for operating income
       and expense, and for development and modernization costs.

HUD’s Public and Indian Housing Low Rent Technical Accounting Guidebook 7510.1G,
chapter 2-16. states that funds provided by HUD are to be used by the public housing agency
only for the purposes for which the funds are authorized. Program funds are not fungible and
withdrawals should not be made for a specific program in excess of the funds available on
deposit for that program. As generally used, the term commingling of funds refers to the use of
one program's funds to pay expenditures for, and in excess of the funds available for, another
program. A public housing agency does not commingle funds by pooling funds or by making
expenditures for various programs from a single account used to pool funds.

HUD’s public housing annual contributions contract section 309 states that the local authority
shall maintain complete and accurate books of account and records, as may be prescribed from
time to time by the Government, in connection with the development and operation of the
projects, including records which permit a speedy and effective audit.

Section 4.5 of the Commission's travel policy states that the maximum daily meal allowance,
including gratuities, shall be $51. Gratuities for meals shall be included in the meal cost to be
eligible for reimbursement. Meals charged to hotel rooms shall be included under the meal
reimbursement categories on the statement of expenses form. The cost of alcoholic beverages is
not eligible for reimbursement. Conference-supplied meals are exceptions to the maximum daily
meal allowances. However, the daily meal allowance should be reduced according to the
number of meals provided.

Section 2(i)1.2.2 of the Commission's credit card usage policy states that use within the
jurisdiction of the Commission is limited to the following:
(a) Authorized purchases of materials or supplies from a source for which the Commission does
not have a standard purchase agreement or a monthly charge account,
(b) Purchase of gasoline from a source for which the Commission does not have a credit card,
(c)Emergency relocation to hotel in event of catastrophe displacing an agency resident, and
(d)Temporary relocation of a resident for abatement or unit rehabilitation.

Section 2(i)1.3 of the Commission's credit card usage policy states that all credit card usage must
be in accordance with all other applicable HUD and Commission policies and procedures.




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Finding 3

The United States Housing Act of 1937, as amended, section 9(l). states that a public housing
agency that receives income from nonrental sources, as determined by the HUD Secretary, may
retain and use such amounts without any decrease in the amounts received under this section
from the Capital or Operating Fund. Any such nonrental amounts shall be used only for low-
income housing or to benefit the residents assisted by the public housing agency.

HUD’s Public and Indian Housing Notice 2007-15, section II, A(2). states that public housing
funds may not be used to pay the cost of forming an affiliate or instrumentality created for the
sole purpose of developing low-income housing tax credit or market rate developments that do
not include any public housing units. In this event, the organizational costs must be paid with
non-public housing funds, which include de-federalized fees paid to the central office cost
center.

24 CFR 5.109(h) states that if a State or local government voluntarily contributes its own funds
to supplement federally funded activities, the State or local government has the option to
segregate the Federal funds or commingle them. However, if the funds are commingled, the
requirements of this section apply to all of the commingled funds.

24 CFR 990.280(b)(1) states that financial information to be budgeted and accounted for at a
project level shall include all data needed to complete project-based financial statements in
accordance with accounting principles generally accepted in the United States of America
including revenues, expenses, assets, liabilities, and equity data. The public housing agency
shall also maintain all records to support those financial transactions. At the time of conversion
to project-based accounting, a public housing agency shall apportion its assets, liabilities, and
equity to its respective projects and HUD-accepted central office cost centers.

Circular A-87, attachment B, part 12(a). states contributions or donations, including cash,
property, and services, made by the governmental unit, regardless of the recipient, are
unallowable from a Federal award.

HUD's Section 8 Housing Choice Voucher program, annual contribution contract, section 11.
states that:
a. The public housing agency must use Section 8 Housing Choice Voucher program receipts to
    provide decent, safe, and sanitary housing for eligible families in compliance with the U.S.
    Housing Act of 1937 and all HUD requirements. Program receipts may only be used to pay
    program expenditures.
b. The public housing agency must not make any program expenditures, except in accordance
    with the HUD-approved budget estimate and supporting data for a program.
c. Interest on the investment of program receipts constitutes program receipts.
d. If required by HUD, program receipts in excess of current needs must be promptly remitted to
    HUD or must be invested in accordance with HUD requirements.




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Finding 4

The United States Housing Act of 1937, as amended, Section 9(e). states the HUD Secretary
shall establish an operating fund for the purpose of making assistance available to public housing
agencies for the operation and management of public housing, including: (A) procedures and
systems to maintain and ensure the efficient management and operation of public housing units,
including amounts sufficient to pay for the reasonable costs of review by an independent auditor
of the documentation or other information maintained pursuant to section 6(j)(6) by a public
housing agency or resident management corporation to substantiate the performance of that
agency or corporation.

24 CFR 941.205(a) states that in order to be considered as eligible project expenses, all
development-related contracts entered into by the public housing agency shall provide for
compliance with the provisions of the annual contributions contract.

Catalog of Federal Domestic Assistance number 14.872. states that the Capital Fund provides
funds annually to public housing agencies for capital and management activities, including
modernization and development of public housing. The Capital Fund permits public housing
agencies to use capital funds for financing activities, including payments of debt service and
customary financing costs, in standard public housing agency developments and in mixed-
finance developments which include public housing.




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