oversight

The Housing Authority of the City of Los Angeles, Los Angeles, CA, Charged Its Recovery Act Program Without Applying Cost Reductions or Credits Related to Insurance Reimbursements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-05-05.

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

                                                     U.S. Department of Housing and Urban Development
                                                                   Office of Inspector General
                                                                                                Region IX
                                                                        611 West Sixth Street, Suite 1160
                                                                                Los Angeles, CA 90017
                                                                                   Voice (213) 894-8016
                                                                                     Fax (213) 894-8115


                                                                 Issue Date

                                                                              May 5, 2011
                                                                 Audit Report Number

                                                                          2011-LA-1802



MEMORANDUM FOR: K.J. Brockington, Director, Los Angeles Office of Public Housing, 9DPH

                          Dane M. Narode, Associate General Counsel for Program Enforcement,
                          CACC



FROM:                     Tanya E. Schulze, Regional Inspector General for Audit, 9DGA

SUBJECT:                  The Housing Authority of the City of Los Angeles, Los Angeles, CA,
                          Charged Its Recovery Act Program Without Applying Cost Reductions or
                          Credits Related to Insurance Reimbursements


                                     INTRODUCTION

We reviewed the hazard-damaged units that the Housing Authority of the City of Los Angeles
(Authority) is rehabilitating using formula grant American Recovery and Reinvestment Act of
2009 (Recovery Act) Public Housing Capital Fund program (program) funds. We selected the
Authority based upon the results of our capacity review of the Authority’s Recovery Act
program (see Office of Inspector General (OIG) audit report #2011-LA-1002, issued November
4, 2010) and concerns regarding the possibility of the Authority using Recovery Act program
funds for the rehabilitation of hazard-damaged units while simultaneously obtaining insurance
reimbursements related to those units from its commercial property insurance carrier. Our
objective was to determine whether the Authority’s use of Recovery Act program funds on
hazard-damaged units subject to property insurance reimbursements was in accordance with U.S.
Department of Housing and Urban Development (HUD) requirements.

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 review.
                               SCOPE AND METHODOLOGY

We performed our onsite review work at the Authority’s administrative office at 2600 Wilshire
Boulevard, Los Angeles, CA, from January through March 2011. The review generally covered
the period March 18, 2009, through March 14, 2011. To accomplish our review objective, we

       Reviewed applicable laws and regulations; Public Law 111-5, American Recovery and
       Reinvestment Act of 2009; HUD’s regulations at 24 CFR (Code of Federal Regulations)
       Parts 85, 905, 941, and 968; Office of Management and Budget (OMB) Circular A-87;
       HUD’s Comprehensive Grant Program Guidebook 7485.3 G; HUD’s Public and Indian
       Housing Notice 2009-12 (HA), providing information and procedures for processing the
       formula allocation of Recovery Act program grants; and the Authority’s amended annual
       contributions contract agreement with HUD.
       Reviewed the Recovery Act program-funded contracts that the Authority executed to
       rehabilitate hazard-damaged units.
       Reviewed the Authority’s property insurance policy related to the hazard-damaged units.
       Reviewed documentation for a total of 29 hazard-damaged units that the Authority was
       rehabilitating using formula Recovery Act program funds.
       Reviewed the Authority’s internal policies and procedures related to property insurance
       claims and reimbursements for hazard-damaged public housing units.
       Reviewed the property insurance claims the Authority submitted to its property insurance
       carrier.
       Reviewed the cost of repairs reimbursed from property insurance and the Authority’s
       general ledger account(s) into which the property insurance reimbursements were
       deposited.
       Interviewed Authority officials and staff regarding the Authority’s processes for filing
       property insurance claims and for the posting of the receipt of insurance reimbursements
       to its general ledger.
       Interviewed the Authority’s insurance carrier’s officials regarding the Authority’s
       property insurance coverage, claims history, and process for reimbursing property
       damage claims.

We did not perform our review in accordance with generally accepted government auditing
standards. Our review solely focused on the policies and procedures the Authority had in place
to ensure that its property insurance claims and receipt of property insurance reimbursements
complied with all applicable regulations and other requirements; thus, this report is significantly
reduced in scope and should not be considered a detailed analysis or assessment of the
Authority’s internal controls and operations. These facts do not affect the significance of the
condition identified in this memorandum.

                                        BACKGROUND

The Recovery Act, signed into law on February 17, 2009, provided $4 billion for the program to
be used for capital and management activities for public housing agencies as authorized under
Section 9 of the U. S. Housing Act of 1937. The Recovery Act required that $3 billion of these



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funds be distributed by the same formula used for amounts made available in fiscal year 2008.
The remaining $1 billion was to be awarded on a competitive basis.

The Authority was organized as a public housing authority in 1938 to provide low-cost housing
to individuals meeting established criteria. The Authority is a State-chartered public agency that
provides the largest stock of affordable housing in the Los Angeles area. The Authority has 14
public housing developments and a total of 6,514 units.

The Authority was awarded $33 million from the Recovery Act program; $25 million was its
proportional share of the $3 billion formula grant, and $8 million was part of the $1 billion
competitive grant. The formula and competitive Recovery Act program funds were made
available to the Authority on March 18 and September 24, 2009, respectively.

Before this review, we had completed a capacity review of the Authority’s formula program
grant awarded under the Recovery Act (see OIG audit report #2011-LA-1002, issued November
4, 2010). The capacity review revealed that the Authority generally had adequate capacity to
manage and administer its Recovery Act program funding. However, it identified weaknesses
that could impact the Authority’s ability to effectively manage and administer its Recovery Act
program funding, including not properly procuring two of its contracts for the repair of 12 fire-
damaged units at Nickerson Gardens. We did not review property insurance reimbursements as
part of the capacity review.

The Authority’s commercial property insurance policy deductible was $50,000 and applicable to
any one occurrence. Once the insurance carrier assesses the property damages, it reimburses the
Authority for damages in two payments. The initial payment is for the majority of the property
damages above the deductible. The final payment is a small holdback that is held until
rehabilitation of the property is nearly complete or complete.

                                   RESULTS OF REVIEW

The Authority improperly charged its Recovery Act program $75,370 and an additional pending
amount of $8,018 without applying cost reductions or credits related to insurance
reimbursements to its program. This condition occurred because the Authority lacked controls to
prevent the duplication of charges related to property losses and to credit the appropriate
program when costs are reimbursed from insurance. As a result, the Authority did not ensure
that program funds were disbursed in accordance with applicable laws and regulations, fulfill the
Recovery Act program’s intent, or make the best full use of the program’s funds.

The Authority Submitted Insurance Claims for Recovery Act-Funded Rehabilitation
Of the 29 hazard-damaged units the Authority was rehabilitating using formula grant Recovery
Act program funds, it received insurance reimbursements for two fire-damaged units and was
being reimbursed for a third fire-damaged unit. The Authority had already received the initial
reimbursement payments totaling $73,906 from its insurance carrier for the fire-related property
damages to a Rancho San Pedro unit and a second Nickerson Gardens unit before charging its
Recovery Act program for the rehabilitation cost. The Authority then received $2,597 in
holdback payments for the two units after charging its program. In addition, the Authority had



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submitted a claim to the insurance carrier for a third fire-damaged unit, also located at Nickerson
Gardens. The Authority had not received reimbursement for the third unit but expected to
receive a total of $6,885.

Violation of Applicable Laws and Regulations
The Authority violated applicable laws and regulations because it charged its program for
rehabilitation work already reimbursed by its insurance carrier and did not credit its program for
an insurance reimbursement received after it had charged its program.

Notice 2009-12 (HA), section V, Recovery Act Capital Fund Grant Distribution, states that under
the Authority’s amended annual contributions contract agreement with HUD, the Authority
accepted responsibility for ensuring that capital and management activities would be carried out
in accordance with all HUD regulations and other requirements applicable to the program and
Recovery Act.

Guidebook 7485.3 G, paragraph 2-20(A)(5), states “Duplication of costs for repair of a unit
damaged by fire or natural disaster where costs are being reimbursed from insurance” are
ineligible physical improvement costs.

OMB Circular A-87, attachment A, paragraph (C)(4), states that applicable credits, such as
insurance reimbursements, related to allowable costs shall be appropriately credited to the
Federal award either as a cost reduction or cash refund. Further, Attachment A, paragraph
(D)(1), states, “The total cost of Federal awards is comprised of allowable direct cost of the
program, plus its portion of allowable indirect costs, less applicable credits.”

The payment vouchers that the Authority submitted to HUD included certifications that the
“funds requested on this voucher are correct and the amount requested is not in excess of
immediate disbursement needs for this program. In the event the funds provided become more
than necessary, such excess will be promptly returned as directed by HUD.” Each voucher
included a warning that HUD would prosecute false claims and statements, which could result in
criminal and/or civil penalties.

Contrary to the applicable laws and regulations cited above, the Authority charged its Recovery
Act program $99,837 for the complete rehabilitation of one unit at Rancho San Pedro and
$68,616 for ongoing rehabilitation of a second unit at Nickerson Gardens without applying the
initial insurance reimbursements of $73,906 as cost reductions. In addition, the Authority did
not credit its Recovery Act program for the Rancho San Pedro unit’s holdback reimbursement.
The initial insurance reimbursements and holdback were instead posted to the Authority’s
respective public housing development sites’ other revenue/income accounts. Since the
Authority had not posted the Nickerson Gardens unit’s holdback to its general ledger as of
March 14, 2011 (the conclusion of audit fieldwork), we were advised that this reimbursement
would be posted to the appropriate Authority program. However, given the Authority’s prior
activity, it did not appear that the Authority would have credited the Recovery Act program if we
had not inquired into the matter. This would also be the case for the anticipated insurance
payments related to the third unit.




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      Unit     Public housing        Recovery Act      Initial payment       Final (holdback)
                development         program funds      from insurance         payment from
                                        charged                                 insurance
                                    Date     Amount     Date     Amount      Date       Amount
                                   drawn               posted               posted
       1      Rancho San Pedro     1/27/10 $99,837    10/27/09 $58,155      9/15/10      $1,464
       2      Nickerson Gardens    2/24/11 $68,616     9/15/10 $15,752 Unknown-          $1,133
                                                                             to be
                                                                          determined
       3      Nickerson Gardens    2/24/11 $40,870                   In process
                Totals                  $209,323            $73,906               $2,597

We attribute the Authority’s violation of applicable laws and regulations to a lack of controls to
prevent the duplication of charges related to property losses and to credit the appropriate
program when costs are reimbursed from insurance. Due to poor communication between and
among the Authority’s departments, the Authority’s Housing Services, Human Resources, and
Asset/Grant Management Departments’ staff did not provide sufficient supporting
documentation to the Finance Department staff to assist in determining the appropriate general
ledger accounts to which insurance reimbursements should be credited. The Authority relied on
its officials to identify appropriate charges and determine to which accounts applicable credits
were due. As a result, it did not ensure that program funds were disbursed in accordance with
applicable laws and regulations, fulfill the Recovery Act program’s intent, or make the best full
use of the program’s funds.

                                   RECOMMENDATIONS

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

1A.    Reimburse the Recovery Act program $75,370 ($73,906 + $1,464) for the insurance
       reimbursements posted to other accounts.

1B.    Confirm that the $1,133 holdback and anticipated $6,885 in insurance reimbursements
       associated with the Nickerson Gardens units are appropriately posted to the Recovery Act
       program. These amounts ($8,018) will be considered funds to be put to better use.

1C.    Revise its policies and procedures to ensure that cost reductions are applied before
       disbursing Recovery Act funds and that credits are applied once reimbursements are
       received by the Authority. This measure will assure HUD that capital funds, including those
       provided under the Recovery Act, will be disbursed in accordance with applicable laws and
       regulations.

We recommend that HUD’s Associate General Counsel for Program Enforcement

1D.    Determine legal sufficiency and if legally sufficient, pursue remedies under the Program
       Fraud Civil Remedies Act against the Authority and/or its appropriate personnel for
       improperly charging its Recovery Act program as discussed in this audit memorandum.




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                                   AUDITEE’S RESPONSE

We provided the Authority a discussion draft memorandum on April 8, 2011, and held an exit
conference with the Authority’s officials on April 20, 2011. The Authority provided written
comments on April 22, 2011. The Authority generally agreed with the finding and
recommendations 1A to 1C, but disagreed with recommendation 1D for HUD to consider Civil
Action.

The complete text of the auditee’s response, along with our evaluations of that response, can be
found in appendix B of this memorandum.




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                                    APPENDIXES

Appendix A

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

                Recommendation            Ineligible 1/    Funds to be put to
                       number                                   better use 2/
                               1A             $75,370
                               1B                                      $8,018

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/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified. If the
     Authority implements our recommendation to confirm that the $1,133 insurance
     holdback reimbursement and anticipated $6,885 have been appropriately posted to the
     Recovery Act program, it will ensure that $8,018 in funds is put to better use.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




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Comment 1




Comment 2




            9
10
                         OIG Evaluation of Auditee Comments


Comment 1   As discussed in the body of the report, the OIG found that the issue primarily
            resulted from a lack of controls and communication between departments. We
            found no information to suggest that HACLA intentionally duplicated or failed to
            credit the Recovery Act Capital Fund program.

Comment 2   The recommendation for HUD to consider administrative sanctions against the
            Authority remains unchanged. Each voucher included a warning that HUD would
            prosecute false claims and statements, which could result in criminal and/or civil
            penalties. The recommendation illustrates the significance of the Authority’s
            need for controls to prevent the duplication of charges related to property losses
            and to credit the appropriate program when costs are reimbursed from insurance.




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