oversight

HUD Could Improve Its Financial Reporting Process for Obtaining Information on Public Housing Authorities' Pension and Other Postemployment Benefit Obligations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-27.

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

                                                                 Issue Date
                                                                      June 27, 2011
                                                                 Audit Report Number
                                                                      2011-NY- 0002




TO:         Sandra B. Henriquez, Assistant Secretary for Public and Indian Housing



FROM:       Edgar Moore, Regional Inspector General for Audit, 2AGA


SUBJECT: HUD Could Improve Its Financial Reporting Process for Obtaining Information on
         Public Housing Authorities’ Pension and Other Postemployment Benefit
         Obligations


                                    HIGHLIGHTS

 What We Audited and Why

             We performed a review of the U.S. Department of Housing and Urban
             Development’s (HUD) controls over public housing authorities’ (PHA) reporting
             and accounting for pension and other postemployment benefit obligations. Our
             concern was whether HUD needed to take action to reduce benefits or provide
             additional funding to ensure the continued viability of PHAs. Our objectives
             were to determine whether HUD verified that PHAs (1) submitted independent
             public accountant (IPA) reports that complied with HUD and Governmental
             Accounting Standards Board (GASB) requirements when reporting on accrued
             pension liability and other postemployment benefit obligations, (2) properly
             reported supporting information for their computations of the pension and other
             postemployment liability costs, and (3) reported that they set aside the necessary
             amount of monetary assets to meet their accrued pension and other
             postemployment benefit obligations.
What We Found


           HUD had procedures to generally ensure that PHAs properly reported and accounted
           for pension and other postemployment liabilities and reported that they reserved
           sufficient funds to cover these costs. Specifically, HUD (1) reasonably verified that
           PHAs submitted financial data schedules and IPA reports that generally complied
           with HUD and GASB requirements when reporting on accrued pension liabilities
           and other postemployment benefit obligations, and (2) generally verified that PHAs
           properly reported supporting information for their computations of pension and other
           postemployment liability costs. However, although HUD had general procedures to
           determine whether PHAs reported that they set aside the necessary amount of
           monetary assets to meet their accrued pension and other postemployment benefit
           obligations, improvements could be made in the financial reporting process.


What We Recommend

           We recommend that the Assistant Secretary for Public and Indian Housing require
           PHAs to report more information on pension and other postemployment benefit
           obligations by prescribing a contra-asset line item in the restricted monetary asset
           section of its financial data schedule template for PHAs to report amounts (such
           as contributions, earmarks, forfeitures, etc.) that will be used by PHAs to pay their
           future pension and other postemployment benefit obligations.


Auditee’s Response

           We discussed the results of our review during the audit and at an exit conference
           held on June 13, 2011. On June 16, 2011, officials from HUD’s Public and
           Indian Housing Division in headquarters provided their written comments and
           generally disagreed with the draft report finding. The complete text of the
           auditee’s response, along with our evaluation of that response, can be found in
           appendix A of this report




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                           TABLE OF CONTENTS


Background and Objectives                                                        4

Results of Audit
      Finding: HUD Could Improve Its Financial Reporting Process for Obtaining   6
               Information on PHAs’ Accrued Pension and Other Postemployment
               Benefit Obligations

Scope and Methodology                                                            11

Internal Controls                                                                13

Appendixes
      A.      Auditee Comments and OIG’s Evaluation                              15




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                     BACKGROUND AND OBJECTIVES

There is a national and worldwide financial crisis that has forced governments to adopt austere
budgetary measures. Many State and local governments have not funded their pension and
postemployment liabilities for many years. There are concerns that many governments will have
to either declare bankruptcy or drastically reduce services to pay these liabilities. The U.S.
Department of Housing and Urban Development (HUD) funds more than 4,115 public housing
authorities (PHAs) that employ many thousands of employees that will receive pensions and/or
postemployment benefits. Pensions and postemployment benefits may be funded by Emergency
Economic Stabilization Act of 2008 or American Recovery and Reinvestment Act of 2009
funding but are principally funded by operating subsidies, capital funds, and housing choice
voucher administrative fees.

Based on housing authority executive summaries in HUD’s Office of Public and Indian Housing
Information Center (PIC) system, the entire universe of low-rent and Section 8 units
administered by the 4,115 PHAs nationwide amounted to more than 1.18 and 2.24 million units,
respectively. The 44 PHAs sampled in our review administered 452,830 or 38 percent of low-
rent units and 650,218 or 29 percent of Section 8 units as of March 17, 2011. For fiscal year
2010, the PHAs in our sample were authorized low-rent operating subsidies and Section 8
voucher certificate funding of more than $1.9 and $6.3 billion, respectively.

The U. S. Government Accountability Office (GAO) reported in 2008 that State and local
government pension plans are not covered by most of the substantive requirements or the
insurance program operated by the Pension Benefit Guaranty Corporation under the Employee
Retirement Income Security Act of 1974, which applies to most private employer benefit plans.
GAO also found that Federal law generally does not require State and local governments to
prefund or report on the funded status of pension plans.

Although HUD has general procedures to ensure that its PHAs nationwide properly reported
pension and other postemployment benefit liabilities for their employees and to HUD; PHAs
may be underestimating their ability to pay these liabilities, which could result in a potential
financial crisis for individual housing authorities including bankruptcy and/or require the
diversion of resources from other accounts/programs to pay these liabilities in the future. Thus
the benefits promised to employees may not be reasonable and sustainable within the present
funding structure. For example, HUD’s Real Estate Assessment Center staff recently sampled
83 PHAs and analyzed their accrued pension and other postemployment benefit costs and
determined that the PHAs monetary assets of $1.4 billion may not be enough to cover accrued
pension and other postemployment benefit costs of $1.9 billion and other accrued liabilities of
$390 million. Accordingly, although not presently required, information regarding PHA funds
that have been or should be earmarked for the payment of these liabilities is needed; otherwise
HUD may be burdened with large subsidy payments to PHAs in the future.

The objectives of this audit were to determine whether HUD verified that PHAs (1) submitted
independent public accountant (IPA) reports that complied with HUD and Governmental
Accounting Standards Board (GASB) requirements when reporting on accrued pension liability


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and other postemployment benefit obligations, (2) properly reported supporting information for
their computations of the pension and other postemployment liability costs, and (3) reported that
they set aside the necessary amount of monetary assets to meet their accrued pension and other
postemployment benefit obligations.




                                                5
                                 RESULTS OF AUDIT


Finding: HUD Could Improve Its Financial Reporting Process for
         Obtaining Information on PHAs’ Accrued Pension and Other
         Postemployment Benefit Obligations

HUD had procedures to generally ensure that PHAs properly reported and accounted for
pensions and postemployment liabilities and reported that they reserved sufficient funds to cover
these costs. Specifically, HUD (1) reasonably verified that PHAs submitted financial data
schedules and IPA reports that generally complied with HUD and GASB requirements when
reporting on accrued pension liabilities and other postemployment benefit obligations, and (2)
generally verified that PHAs properly reported supporting information for their computations of
pension and other postemployment liability costs. However, although HUD had general
procedures to determine whether PHAs reported that they set aside the necessary amount of
monetary assets to meet their accrued pension and other postemployment benefit obligations,
improvements could be made in the financial reporting process.


 HUD Reasonably Verified That
 PHAs Submitted Financial
 Reports That Generally
 Complied With HUD and
 GASB Requirements


               Interviews with the assessment manager of HUD’s Office of Public and Indian
               Housing, Real Estate Assessment Center and personal observation revealed that
               the Real Estate Assessment Center had a system of controls to evaluate PHAs
               audited financial statement information, including pension and other
               postemployment benefit costs. HUD’s procedures provide for commenting and
               documenting their review concerns in its Financial Assessment Subsystem for
               Public Housing (FASS-PH) to show that PHA financial statement information
               was reviewed for validity and compliance with applicable accounting
               requirements. An examination of the reviews performed by HUD staff revealed
               that detailed reviews of the financial information and the notes to the financial
               information had been performed for all the PHAs in our sample and deficiencies
               noted were communicated and resolved with the PHA’s independent public
               accountants who performed their audits. As a result, the reporting and disclosure
               of pension and other postemployment benefits for the PHAs in our sample were
               generally satisfactory. Specifically, 41 of 44 PHAs in our sample generally
               complied with the pension plan reporting requirements of GASB 27 by
               calculating, measuring, recognizing, and displaying pension expenditures and
               related liabilities, assets, and note disclosures in their audited financial statements.
               For the remaining three housing agencies in our sample (the Massachusetts


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           Department of Housing and Community Development, New York City
           Department of Housing Preservation and Development, and New Jersey
           Department of Community Affairs), the exact amount of pension costs reported
           could not be easily determined because the PHAs’ operations were reported in a
           consolidated financial statement with another government entity in a blended
           manner. Nevertheless, we did not take exception because a blended presentation
           is permitted under GASB 34 and the entity-specific information related to the
           operations of the PHA is presented in HUD’s Financial Assessment Subsystem –
           Public Housing (FASS-PH).

           A total of 23 of the 44 PHAs in our sample reported in their notes to the financial
           statements that they provided some form of other postemployment benefits to
           their employees. As a result, we observed that these 23 PHAs satisfactorily
           reported other postemployment benefit transactions on a systematic, accrual basis
           of measurement. These PHAs also reported and recognized other
           postemployment benefit costs over a period that approximated employee’s
           average years of service and provided information about the actuarial accrued
           liabilities associated with other postemployment benefits and the extent of
           funding as required by GASB Statement 45. For the other 21 of 44 PHAs, we
           confirmed with the independent public accountants who prepared their financial
           statements, that they do not offer post employment benefits to their employees.
           Accordingly, we believe that HUD reasonably verified that PHAs submitted
           financial data schedules and IPA reports that generally complied with HUD and
           GASB requirements when reporting on accrued pension liability and other
           postemployment benefits.

HUD Generally Verified That
PHAs Properly Reported
Supporting Information for
Their Computations of Pension
and Other Postemployment
Liability Costs

           HUD’s Real Estate Assessment Center staff generally verified that PHAs properly
           reported supporting information for their computations of pension and other
           postemployment liability costs. The data in the notes to PHAs’ financial
           statements as well as their supporting schedules were properly supported by the
           financial data schedules evaluated by the Real Estate Assessment Center through
           FASS-PH and IPA reports. Disclosures for pension and other postemployment
           benefit transactions were generally reported in accordance with GASB Statements
           27 and 45, and the PHAs tested in our sample properly reported the computations
           and assertions concerning their pension and other postemployment benefit
           obligations. As mentioned earlier Real Estate Assessment Center officials
           established procedures where financial information is reviewed by automated and
           manual procedures. Real Estate Assessment Center procedures generally ensure



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            that the reported notes to the financial statements include all the required
            disclosures including the actuarial assumptions, funding and benefits policy,
            amount of the actuarially computed required contribution, actual payment for
            pension expense, and unfunded liability for these benefits. For example Real
            Estate Assessment officials determined that the audited financial statement for a
            housing authority had not disclosed all the information required by GASB 45 and
            that the information required to be reported related to the computation of the
            PHAs pension liability was not available. Therefore, HUD’s Real Estate
            Assessment Center officials advised the PHA and their independent public
            accountant to separately report restricted and unrestricted cash and investments
            and provide information on the funding status of the other post employment
            benefit plan including the unfunded liability and required annual contribution.
            Real Estate Assessment Center officials had detailed notes for their reviews
            conducted for all the audited financial statements for the PHAs in our sample that
            indicated that they reconciled the reported amounts related to pensions and other
            post employment benefit costs and followed up on discrepancies with the
            independent public accountants who had performed the audits. Therefore, the
            PHAs properly reported supporting information for their computations of their
            retirement plan costs as required by GASB.

HUD Could Improve Its
Financial Reporting Process

            Although the audited financial information including the notes to the financial
            statements submitted by PHAs generally provided adequate disclosures, HUD
            officials’ ability to monitor PHAs would be enhanced by having additional
            information available. For example, the total amount of monetary assets (cash
            and investments unrestricted/restricted) reported by the PHAs in the sample
            selection amounted to approximately $5 billion. Contrastingly, accrued pension
            and other postemployment benefit liabilities amounted to more than $2.1 billion.
            Therefore, it would appear that the PHAs in our sample would have post or net
            monetary assets of more than $2.9 billion after applying their liquid cash and
            investment assets to meet their accrued pension and other postemployment benefit
            liabilities. However, it was not certain whether the monetary assets for these
            PHAs were entirely available because they may have been earmarked for other
            purposes.

            We noted that the template on which PHAs reported their financial information to
            HUD did not have the appropriate accounts to identify those monetary assets that
            were to be used to pay pension and other postemployment liabilities. Generally
            accepted accounting principles require that to be useful, financial information
            must be relevant, reliable, and prepared in a consistent manner. Therefore, it
            would be more appropriate to identify the monetary assets that would be used to
            pay pension liabilities and other postemployment benefits.




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             Analysis of the asset section of the financial data schedules submitted to HUD in
             FASS-PH by the 44 PHAs in our sample disclosed that 42 PHAs reported
             significant amounts in the “unrestricted/restricted” cash and investment line items
             which would be available to cover their obligations and debts. However, the
             remaining two PHAs, the housing authorities of Baltimore and Seattle, did not
             have current financial data in FASS-PH but did have information in current IPA
             audit reports. Therefore, for these two PHAs, it was not possible by reviewing
             FASS-PH data to determine which of the cited asset accounts were used to
             reserve/provide monetary assets to pay pension and other postemployment benefit
             obligations because they did not clearly identify the assests that were restricted or
             reserved for the payment of these liablities. As a result, based on the data
             submitted through FASS-PH, HUD could not readily determine whether all PHAs
             set aside sufficient amounts of cash and investments to meet their accrued pension
             and other postemployment benefit obligations.

             Real Estate Assessment Center officials indicated that it was the PHAs’
             responsiblity to adequately determine their operating costs/obligations and pay for
             such items with the current level of operating subsidies and funds received from
             HUD. Although this position is reasonable because of foreseeable congressional
             budgetary constraints, it is our opinion that HUD should play a more active and
             innovative role in assisting PHAs in addressing their rising pension and other
             postemployment benefit costs. Although Federal laws generally do not require
             State and local governments to prefund or report on the funded status of pension
             plans, generally accepted accouting principles require that for financial
             information to be useful, it must be relevant, reliable, and prepared in a consistent
             manner. Therefore, we believe that HUD should be proactive by prescribing a
             contra-asset line item in the asset section of its financial data schedule template
             for PHAs to report the amounts (such as contributions, earmarks, forfeitures, etc.)
             that will be used by PHAs to pay their future pension and other postemployment
             benefit obligations.

             Adding this requirement for PHAs would result in financial reporting that is more
             relevant, reliable, and consitently prepared. Also, this measure could result in
             improving the accuracy of financial reporting by PHAs and improve the ability of
             HUD officials and other interested parties to determine whether PHAs have the
             ability to pay their pension and other employment benefit obligations going
             forward.

Conclusion

             HUD had procedures to generally ensure that PHAs properly reported and
             accounted for pensions and postemployment liabilities and reserved sufficient
             funds to cover these costs. Specifically, HUD (1) reasonably verified that PHAs
             submitted financial data schedules and IPA reports that generally complied with
             HUD and GASB requirements when reporting on accrued pension liability and



                                               9
           other postemployment benefit obligations, and (2) adequately verified that PHAs
           properly reported supporting information for their computations of pension and
           other postemployment liability costs. However, although HUD had general
           procedures to determine whether the PHAs reported that they set aside the
           necessary amount of monetary assets to meet their accrued pension and other
           postemployment benefit obligations, improvements could be made in the financial
           reporting process. The HUD-prescribed asset line items in the financial data
           schedule template did not facilitate disclosure of funds reserved for the payment
           of pension and other postemployment benefit obligations.

Recommendations

    We recommend that the Assistant Secretary for Public and Indian Housing

           A.     Prescribe a contra-asset line item in the restricted asset section of its
                  financial data schedule template within FASS-PH for PHAs to report
                  amounts (such as contributions, earmarks, forfeitures, etc.) that will be
                  used by PHAs to pay their future pension and other postemployment
                  benefit obligations.




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                         SCOPE AND METHODOLOGY

The audit focused on determining whether HUD had procedures in place to ensure that PHAs
nationwide properly recorded and accounted for pension and postemployment liabilities for their
employees and reported that they reserved sufficient monetary assets to cover these costs. To
accomplish our objectives, we

           Reviewed relevant GASB statements and applicable Federal regulations.

           Interviewed staff from the HUD, Office of Public and Indian Housing, Real Estate
           Assessment Center, and corresponded with staff from the Office of Inspector General
           for Audit.

           Obtained an understanding of the HUD’s management controls and procedures
           through analyzing its internal control structure.

           Acquired a nonstatistical sample of 44 PHAs for detailed testing by importing the
           fiscal year 2009 management planning risk assessment scores into Audit Command
           Language (ACL) and selecting a sample based on PHAs that had a “combined size
           category” of extra large (10,000-plus Section 8 and low-rent housing units). Thus,
           the results apply only to the items selected and cannot be projected to the universe or
           population.

           Analyzed reports from HUD’s computer systems, including the financial data
           schedule submitted to HUD through FASS-PH and evaluated the information with
           the audited financial statements and reconciled the reported amounts. Determined
           that the data used for the PHAs in our sample was sufficiently reliable in relation to
           the objectives of the audit. However, the data related to all other PHAs in HUD’s
           universe is presented for background purposes only.

           Downloaded IPA reports from FASS-PH and the Federal Audit Clearing House.

           Reviewed the sampled PHAs’ financial statements such as their balance sheets,
           income statements, and notes to the financial statements and determined that all of the
           reviews performed by the Real Estate Assessment Center staff had been properly
           documented and deficiencies communicated to the independent public accountants
           and/or PHAs.

           Identified and tested the amounts reported by PHAs for accrued pension and other
           postemployment benefit liabilities (line item 357 of the FASS-PH financial data
           schedule) and evaluated the amounts reported for unrestricted cash, unrestricted
           investments, restricted cash, and restricted investments.




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           Reviewed the executive summaries in HUD’s Public and Indian Housing Center
           (PIC) system for the 44 PHAs in our sample to determine the number of apartment
           units that were applicable to our sample and the applicable PHA funding (see
           background section).

           Analyzed the total amount of monetary assets (cash and investments
           unrestricted/restricted) reported by the PHAs in the sample selection, which
           amounted to approximately $5 billion. Contrastingly, accrued pension and other
           postemployment benefit liabilities amounted to more than $2.1 billion.

The audit generally covered the period January 1, 2008, through December 31, 2010. We
performed our audit fieldwork from September 2010 through February 2011 at the HUD OIG
Office of Audit in Newark, NJ.

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




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                              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
               objectives:

                      Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

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

                      Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

                      Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

               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.


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Significant Deficiency
           We evaluated the internal controls relevant to the audit objectives in accordance with
           generally accepted government auditing standards. Our evaluation of internal
           controls was not designed to provide assurance on the effectiveness of HUD’s
           internal controls as a whole. Accordingly, we do not express an opinion on the
           effectiveness of HUD’s internal controls.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




                         15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 3


Comment 4




                         17
                         OIG Evaluation of Auditee Comments

Comment 1   The 44 PHAs in the OIG sample did have significant monetary assets in excess of
            their liabilities for pensions and other post employment benefit liabilities.
            However, a recent review by the HUD REAC staff revealed that the monetary
            assets for 83 PHA’s in their sample may not be enough to cover the accrued
            liabilities for pension and other post employment benefits. Therefore, the report
            recommendation to prescribe a contra-asset line item in the restricted asset section
            of the reporting template is intended to facilitate the disclosure of the monetary
            assets that are available for the payment of pension and other post employment
            benefit liabilities, which would facilitate identifying those PHAs with and without
            significant monetary assets/reserves available to fund these liabilities.

Comment 2   OIG’s report does indicate that HUD’s procedures generally comply with GASB
            requirements; however, to prevent excessive requests for operating subsidies in
            the future, to be used for pension and other post employment benefit obligations
            HUD should be proactive and consider seeking legislation and/or establishing
            administrative requirements that would require restricting the amount of funds
            PHAs have available for the strict purpose of paying future pension and other post
            employment benefits. While current GASB requirements do not require PHAs to
            disclose the monetary assets that will be used to satisfy pension and other post
            employment benefit liabilities, GASB does not prohibit reporting this
            information. Therefore if HUD established procedures to require this type of
            disclosure, HUD’s procedures would still be in compliance with GASB standards
            and this information would result in more accurate financial reporting by PHAs
            and improve the ability of HUD officials and other interested parties to determine
            whether PHAs have the ability to pay their pension and other employment benefit
            obligations going forward.

Comment 3   The reallocation and/or offset of funds that HUD is proposing will also affect the
            ability of a PHA to use reserves for program operations; however, our
            recommendation will not prevent funds from being used, but will only restrict
            fund usage to pay for future pension and other post employment benefits.
            Further, implementing the audit recommendation would reinforce determining
            whether PHAs will have sufficient monetary assets available for the future
            payment of pension and other post employment benefit liabilities, an issue that is
            significant given the current budget environment.

Comment 4   HUD’s agreement is responsive to our suggestion and would be a starting point to
            ensuring that PHAs begin to consider the monetary impact of benefits provided;
            however, as part of the audit resolution process, HUD officials should conduct an
            analysis to determine whether it is more feasible to offset/recapture operating
            reserves or ensure that PHAs properly disclose whether funding for employee
            pension and other post employment benefit liabilities are restricted and secure for
            payment when due in the future.




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