Issue Date
October 19, 2010
Audit Report Number
2011-NY-1001
TO: Edward T. De Paula, Director, Office of Public Housing, 2FPH
Dane M. Narode, Associate General Counsel for Program Enforcement, CACC
Craig T. Clemmensen, Director of Departmental Enforcement Center, CACB
FROM:
Edgar Moore, Regional Inspector General for Audit, 2AGA
SUBJECT: The Jersey City Housing Authority, Jersey City, NJ, Had Administration
Weaknesses in Its Capital Fund Programs
HIGHLIGHTS
What We Audited and Why
We audited the Jersey City Housing Authority’s (Authority) administration of its
capital fund programs. We selected the Authority because of the size of its capital
fund programs and because of its U.S. Department of Housing and Urban
Development (HUD) risk rating. Our audit objectives were to determine whether
the Authority (1) obligated and expended funds under the Public Housing Capital
Fund program (CFP) and Capital Fund Financing program (CFFP) in accordance
with HUD regulations, and (2) had a financial management system in place that
complied with program requirements.
What We Found
The Authority did not always comply with HUD regulations while obligating and
expending capital funds, and its financial management system did not always
comply with program requirements. Specifically, the Authority (1) inadequately
used capital funds for a development that was subject to be converted to tenant-
based assistance, (2) drew down capital funds without proper supporting
documentation, (3) inappropriately obligated bond proceeds under the CFFP, (4)
inadequately disbursed CFFP bond proceeds for preaward costs, and (5) lacked a
plan for using force account labor. Consequently, (1) more than $1.3 million in
capital funds was inappropriately disbursed for a public housing development that
was subject to be converted to tenant based assistance, (2) more than $2 million in
drawdowns was not adequately supported, (3) $338,236 in CFFP bond proceeds was
inappropriately obligated, (4) $53,452 of the CFFP bond proceeds was ineligibly
disbursed for costs incurred before HUD’s approval of this program, and (5) $1.1
million in force account labor charges was incurred without a plan or analysis of the
cost effectiveness of the activities.
There were control weaknesses in the Authority’s financial management system.
Specifically, accounting records and financial reports were not complete,
accurate, and current; and the obligation of funds cannot be effectively tracked
and monitored. As a result, the Authority’s internal controls were not sufficient to
safeguard assets and ensure their use in accordance with applicable requirements.
What We Recommend
We recommend that the Director of HUD’s New Jersey Office of Public Housing
instruct the Authority to (1) provide supporting documents to HUD for the more
than $3.3 million in capital funds spent on the Montgomery Gardens
Development, and for unsupported draw downs, and reimburse any costs
determined to be ineligible; (2) conduct the required annual reviews to identify
developments that should be converted to the tenant based program; (3) deobligate
$338,236 obligated for contingencies under the CFFP; (4) reimburse $53,452 in
ineligible preaward costs to the CFFP bond proceeds from annual capital funds;
(5) establish an adequate force account labor plan; and (6) develop procedures
that will improve the accounting system and internal controls to ensure that
accounting records and financial reports are accurate, current, complete, and
adequately supported with source documents.
We also recommend that of HUD’s Departmental Enforcement Center and
Associate General Counsel for Program Enforcement determine whether further
administrative actions should be pursued for not carrying out the actions certified to
in the five year plans in relation to the conversion of Montgomery Gardens.
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 discussed the results of our review during the audit and at an exit conference
held on October 1st, 2010. On October 1st, 2010, Authority officials provided
their written comments and generally disagreed with the draft report findings. The
complete text of the Authority’s response, along with our evaluation of that
response, can be found in appendix B of this report.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: The Authority Did Not Always Comply With HUD Regulations 5
While Obligating and Expending Capital Funds
Finding 2: There Were Weaknesses in The Authority’s Financial Management 12
System
Scope and Methodology 15
Internal Controls 16
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 18
B. Audited Comments and OIG’s Evaluation 19
3
BACKGROUND AND OBJECTIVES
The Jersey City Housing Authority (Authority) is a nonprofit corporation organized under the
laws of the State of New Jersey to provide housing for qualified individuals in accordance with
U.S. Department of Housing and Urban Development (HUD) rules and regulations. The
Authority is governed by a board of commissioners, which is essentially autonomous but is
responsible to HUD and the State of New Jersey’s Department of Community Affairs. The
executive director is appointed by the board to manage the daily operation of the Authority.
The Authority is responsible for development, maintenance, and management of public housing
for low- and moderate-income families residing in Jersey City. Operating and modernization
subsidies are provided to the Authority by HUD. The Authority received capital fund program
formula grant subsidies from HUD of more than $5 million annually from 2006 to 2009. During
the period from April 1, 2007 to March 31, 2009, more than $1.1 million of capital funds was
expended for Montgomery Gardens Development, a public housing development, which should
have been converted to tenant-based assistance and may be subject to demolition. In addition,
operating subsidies were also used for this development; for instance, approximately $2.3 million
in operating subsidies was disbursed for program year 2008.
In August 2007, the Authority incurred a $10 million long-term liability as part of the Capital
Fund Financing Program (CFFP) to perform modernization work for its low-rent projects. Under
this program, HUD recognizes that some authorities may not have enough funds in a single year
to make all of the improvements necessary to adequately maintain their public housing.
Therefore, it allows an authority to borrow private capital to make improvements and pledge,
subject to the availability of appropriations, a portion of its future-year annual capital funds to
make debt service payments for either a bond or conventional bank loan transaction. The
Authority pays the debt service from the capital fund grants. More than $248,0001 of the $10
million bond proceeds were allocated for the expenses associated with the Montgomery Gardens
development.
The objectives of the audit were to determine whether the Authority (1) obligated and expended
funds under the Public Housing Capital Fund program (CFP) and Capital Fund Financing
program (CFFP) in accordance with HUD regulations, and (2) had a financial management
system in place that complied with program requirements.
1
This amount includes $5,867 and $242,179 expended for design services and replacement of an oil tank at the
Montgomery Gardens development (see the sections “Inadequate Usage of Capital Funds” and “Inadequate
Disbursement of CFFP Proceeds” in Finding 1).
4
RESULTS OF AUDIT
Finding 1: The Authority Did Not Always Comply With HUD
Regulations While Obligating and Expending Capital Funds
The Authority did not always comply with applicable HUD regulations while obligating and
expending capital funds. Specifically, it (1) inadequately used capital funds for a development that
was subject to be converted to tenant-based assistance, (2) drew down capital funds without proper
supporting documentation, (3) inappropriately obligated bond proceeds of the CFFP, (4)
inadequately disbursed CFFP bond proceeds for preawarded costs, and (5) lacked a plan for using
force account labor. This noncompliance occurred because Authority officials were unfamiliar with
applicable HUD requirements and did not develop and implement adequate controls over the
Authority’s capital fund activities. As a result, (1) more than $1.3 million in capital funds was
inappropriately disbursed for a public housing development that was subject to be converted to
tenant-based assistance, (2) more than $2 million in drawdowns was not adequately supported, (3)
$338,236 in bond proceeds was inappropriately obligated, (4) $53,452 in bond proceeds was
ineligibly disbursed for the preaward costs, and (5) $1.1 million in force account labor charges was
incurred without a plan or analysis of the cost effectiveness of the activities.
Inadequate Use of Capital
Funds
The Authority inappropriately used more than $1.3 million on a development that
should have been converted to tenant-based assistance and may be subject to
demolition. Specifically, the Montgomery Gardens Development should have
been mandatorily converted to the tenant-based assistance program, and its
maintenance expenses should have been covered by the Authority’s operating
funds; thus, public housing capital funds should not have been used.
Regulations at 24 CFR (Code of Federal Regulations) 968.112(b) state that except
in the case of emergency work, a housing authority shall only expend capital
funds on a development for which it has determined and agreed that the
completion of the improvements will reasonably ensure the long-term viability of
the project at a reasonable cost or for reasonable nonroutine maintenance to keep
the property habitable until the tenants are relocated or the development is
demolished. Further, Section 968.112(o) states that the use of capital funds to
provide public housing operating assistance is an ineligible cost.
In addition, regulations at 24 CFR 972.100 provide that public housing authorities
are required to annually review their public housing inventories and identify
developments or parts of developments, which must be removed from their stock
of public housing operated under annual contributions contracts with HUD.
5
Public housing authorities must follow specific procedures to develop and carry
out conversion plans to remove identified units from their public housing
inventories.
The regulations at 24 CFR 972.139 also indicate that if a public housing authority
fails to properly identify a development for required conversion or does not
submit a conversion plan for a development, HUD will take actions described in
paragraphs (b) and (c) of 24 CFR 972.139.
Moreover, on December 28, 2006, HUD notified the Authority that the
Montgomery Gardens development was a potential required conversion
candidate. The Authority acknowledged this notification and certified to HUD
that it was going to conduct an assessment of the development in its 5-year and
annual plans submitted and approved in 2007 and 2008 respectively.
However, the Authority did not (1) conduct an annual review of its public housing
stocks to identify developments or parts of developments, which must be removed
from its housing stock because they were not economically viable, and (2) develop
and carry out a conversion plan to remove these identified housing units, including
transitioning the residents to other affordable housing. Consequently, 435 units at
the development continued to be operated under the low-rent public housing
program, but should have been converted to tenant-based assistance due to a high
vacancy rate of more than 40 percent. Authority officials stated that they were not
aware of the requirement to mandatorily convert developments to the tenant-based
assistance program. However, this explanation did not agree with the information
submitted to HUD in the Authority’s 5-year and annual plans for 2007 and 2008 as
stated above.
Instructions at the Appendix for 24 CFR 971, entitled Methodology of Comparing
Cost of Public Housing With Cost of Tenant-Based Assistance, provides the
guidance on how to do the cost analysis. However, this analysis was not done.
As a result, the Authority had expended $429,561 and $682,769 of its annual CFP
grants for the development during fiscal years ending March 31, 2008 and 2009,
respectively. In addition, $242,179 in bond proceeds obtained through its CFFP
was allocated to a contractor for replacing an oil tank at the development. As of
December 31, 2009, $210,480 of the $242,179 had been expended, and the
difference of $31,699 will be disbursed upon the completion of the project.
Therefore, the total disbursement of more than $1.3 million from CFP and CFFP
funds is considered to be unsupported pending an eligibility determination by
HUD, and the remaining $31,699 contractual amount should be considered as
funds to be put to better use if the obligation is canceled and the funds are used
for other eligible purposes. In addition, the Authority expended over $2.3 million
of operating subsidy during fiscal year 2008 for this project that was subject to
mandatory conversion.
6
Unsupported Drawdowns
The Authority did not always maintain adequate and complete documentation to
support drawdowns of capital funds. Office of Management and Budget (OMB)
Circular A-87 states that allowable costs must be adequately documented.
However, $1,658,259 in hard costs and relocation costs was not supported with
proper documentation, such as contractors’ requests for payments, vendors’
invoices, and cancelled checks. The following schedule includes information
regarding the source of funding associated with these drawdowns.
Year of funding Drawdowns for hard
and relocation costs
2003 CFP $ 683,534
2005 CFP $ 506,957
2006 CFP $ 467,768
Total: $1,658,259
In addition, HUD’s Line of Credit Control System (LOCCS) indicates that the
Authority drew down $972,755 for management improvement and administrative
costs incurred from April 1, 2007, through March 31, 2008. However, the
Authority’s records and documents revealed that only $589,133 was expended for
management improvements and administrative costs. Regulations at 24 CFR
85.20 require that grantees and subgrantees maintain records, which adequately
identify the source and application of funds provided for financially assisted
activities. According to Authority officials, the discrepancy might be due to the
accounting procedures, which allowed the Authority to disburse the funds drawn
down from LOCCS under the budget of management improvement and
administrative costs for other expenses such as dwelling structure costs instead.
However, the documentation provided did not support this explanation and the
$383,622 discrepancy in the application of these funds.
We attribute these deficiencies to the Authority lacked adequate accounting
controls to ensure that adequate and complete documentation was maintained to
support the use of the capital funds. As a result, the more than $2 million for
these drawdowns was not supported by source documents and is, therefore,
considered to be questioned costs.
Inappropriate Obligation of
Bond Proceeds Under CFFP
The Authority did not properly obligate bond proceeds under the HUD-approved
CFFP. Within the CFFP, HUD permits a public housing authority to borrow
7
private capital to make improvements at housing projects and pledge a portion of
its future-year capital funds to make debt service payments. HUD approved the
Authority’s CFFP application in July 2007. In August 2007, the Authority
obtained $9,635,997 in CFFP bond proceeds net of financing costs. The
Authority reported that all of the $9.6 million in bond proceeds had been
obligated as of September 30, 2009. However, $1,109,116 out of the $9.6 million
was obligated as a contingency fund for construction cost overruns, which was
$338,236 more than the maximum contingency amount allowed. Regulations at
24 CFR 968.325(a) state that contingencies shall not exceed 8 percent of the total
grant. This deficiency was because Authority officials misinterpreted HUD
regulations. Therefore, $338,236 in CFFP funds was not appropriately obligated
and should be deobligated and used for other eligible activities.
Inadequate Disbursement of
CFFP Proceeds
The Authority improperly disbursed $53,452 in CFFP bond proceeds to reimburse
the costs incurred before HUD approved the CFFP. In late 2005 and the
beginning of 2006, the Authority awarded three contracts for services related to
its public housing projects. Since HUD did not approve this program until July
2007 and the bond proceeds were not received until August 2007, the Authority
originally used 2005 CFP grant funds to pay the contractors and obtained
reimbursement from CFFP bond proceeds when the funds became available.
OMB Circular A-87 indicates that the preaward costs are allowable only with the
written approval of the awarding agency. The Authority did not notify HUD that
CFFP bond proceeds would be used to cover the preaward costs. Authority
officials explained that they had thought that because the annual statement
submitted to HUD included the budget for all of the activities financed by the
bond proceeds, no other notification was required. However, the annual statement
did not identify the activities, which had incurred costs before HUD’s approval of
the program. As a result, $53,452 was ineligibly disbursed from CFFP proceeds
and should be reimbursed from regular capital funds.
Contract Contract Contract Cost Date Date HUD
signed work paid paid to approved
proceeded contractors program
1 10/19/05 01/02/06 $23,565 06/30/06 and 07/26/07
08/31/06
2 11/02/05 01/02/06 $24,020 02/28/06 07/26/07
3 01/11/06 03/13/06 $ 5,867 01/31/07 07/26/07
Total $53,452
8
Lack of a Plan for Using Force
Account Labor
The Authority did not develop and implement a plan for using its force account
labor (its own employees) to perform capital improvements. Nevertheless, it used
force account labor extensively for its capital improvement activities. The
Authority’s accounting data disclosed that during fiscal years 2008 and 2009 the
Authority incurred a total of $2,218,424 in force account labor and materials costs
with average annual costs of $947,112 and $162,100 for force account labor and
material costs, respectively. The following schedule summarizes these costs.
Year of funding Labor costs Material costs Total
2004 CFP $19,957 $2,560 $22,517
2005 CFP $161,344 $98,559 $259,903
2006 CFP $547,072 $96,273 $643,345
2007 CFP $713,028 $123,277 $836,305
2008 CFP $452,824 $3,530 $456,354
Grand Total Costs: $1,894,225 $324,199 $2,218,424
Average annual costs: $947,112 $162,100 $1,109,212
Regulations at 24 CFR 968.120 state that a public housing authority may
undertake the activities using force account labor only when specifically approved
by HUD in the capital fund budget or annual statement. In addition, the
instruction of the annual statement (form HUD-50075.1) requires public housing
authorities to identify major work categories that will be accomplished by force
account labor.
However, the Authority’s annual plan submitted to HUD did not identify the
activities that would be carried out by force account labor or provide the budget
for the estimated labor and material costs for these activities. The Authority did
not have an in-house plan either for using force account labor costs. The
Authority’s documentation consisted of a payroll budget, which only indicated
annual salary and benefit costs of the employees and did not specify the funding
source, or the activities that the employees would be assigned to. Moreover, there
was no documented analysis, which showed that force account labor was more
economical than contract labor. As a result, HUD was precluded from effectively
monitoring the Authority’s force account labor activities and may not be able to
determine whether the CFP was carried out efficiently and effectively. In
addition, due to the lack of an adequate audit trail it was not possible to determine
which drawdowns were used to pay force account labor and material costs.
However, the average annual amount of more than $1.1 million disbursed for
force account labor and material cost for next year could be considered as funds to
be put to a better use if the Authority establishes procedures and a plan for using
force account labor to ensure that it is cost effective.
9
Conclusion
The Authority did not always comply with applicable regulations while obligating
and expending capital funds. Consequently, (1) more than $1.3 million in capital
funds was disbursed, which could have been saved if the public housing
development had been converted to a tenant-based program, (2) more than $2
million in drawdowns was not adequately supported, (3) $338,236 of the bond
proceeds was inappropriately obligated, (4) $53,452 of the bond proceeds was
ineligibly disbursed for the preaward costs, and (5) HUD was precluded from
effectively monitoring and evaluating the Authority’s capital fund programs. We
attribute these deficiencies to Authority officials’ unfamiliarity with HUD
regulations and the lack of adequate controls over capital fund activities.
Recommendations
We recommend that the Director of the New Jersey Office of Public Housing instruct the
Authority to
1A. Provide documentation to HUD for the $1,322,810 in capital funds expended
for the Montgomery Gardens Development so that HUD can make an
eligibility determination, and any amounts determined to be ineligibile should
be repaid from non-Federal funds.
1B. Provide documentation to HUD for the $31,699 in bond proceeds obligated
for the Montgomery Gardens Development so that HUD can make an
eligibility determination and deobligate any amount determined to be
ineligible, thus putting these funds to better use.
1C. Conduct an annual review of its housing stock to identify developments or
parts of developments, which must be removed from its housing stock, and
develop and carry out a conversion plan for any identified developments or
parts of developments.
1D. Submit to the Office of Public Housing supporting documentation for the
$2,041,881 in unsupported drawdowns so that HUD can make an eligibility
determination and reimburse HUD for any costs determined to be ineligible.
1E. Deobligate $338,236 of the bond proceeds under the CFFP, which is
currently obligated as contingency funds, and use these funds for other
eligible activities.
1F. Reimburse $53,452 in ineligible preaward costs to the CFFP bond proceeds
from annual capital funds.
10
1G. Submit documentation to support the eligibility of $2,218,424 of force
account labor and material costs incurred in program years 2008 and 2009
and repay any amounts determined to be ineligible from nonfederal funds.
1H. Establish an adequate force account labor plan and submit it to HUD for
approval before using any additional force account labor. The plan shall
identify the activities that would be carried out by force account labor and
provide a budget for estimated labor and material costs for each activity,
thus ensuring that $1,109,212 in annual force account labor and material
costs will be put to better use.
We also recommend that HUD’s Associate General Counsel for Program
Enforcement and the Director of HUD’s Departmental Enforcement Center
1I. Pursue appropriate administrative sanctions for failing to enforce HUD’s
requirements regarding the conversion of the Montgomery Gardens
Development, as was certified to in the Authority’s five year and annual
plans.
11
Finding 2: There Were Weaknesses in the Authority’s Financial
Management System
The Authority had weaknesses in its financial management system. Specifically, (1) accounting
records and financial reports were not complete, accurate, and current; and (2) the obligation of
funds could not be effectively tracked and monitored. These deficiencies occurred because the
Authority did not develop and implement effective controls to ensure that the financial
information on its capital fund activities was complete and accurate. As a result, the Authority’s
internal controls were not sufficient to safeguard assets and ensure their use in accordance with
applicable requirements.
Inaccurate Accounting Records
and Financial Reporting
Although regulations at 24 CFR 85.20(b)(1) and (2) provide that housing agencies
must maintain financial records that are accurate and current and that adequately
identify the source and application of funds provided for assisted activities, the
Authority’s accounting records did not reflect current, complete, and accurate
financial information for its capital fund-financed activities. For instance, HUD’s
Line of Credit Control System (LOCCS) reports disclosed that as of March 31,
2008, the Authority had drawn down more than $4.7 and $3 million from capital
fund grants in 2005 and 2006, respectively; however, the Authority only recorded
$3.7 and $2.8 million, respectively, in its accounting system. Authority officials
explained that the discrepancies were caused by accounting mistakes and
computer system errors. Several drawdowns from 2005 and 2006 grants were
mistakenly recorded as having come from other years’ grants. In addition, there
was a computer system malfunction, which prevented the prior year’s ending
balance of drawdowns for soft costs from being transferred to the current year’s
beginning balance.
Further, Authority officials backdated the Authority’s adjustment entries. For
example, when we notified Authority officials in April 2010 that the Authority’s
journal entries related to the reimbursement of CFFP bond proceeds from the
2005 CFP grant contained errors, the Authority made an adjustment and
backdated it to February 28, 2010. Authority officials stated that they tried to fix
the errors before the fiscal year ending date of March 31, 2010, and that they were
allowed to backdate transactions as long as the annual audit had not started.
Regulations at 24 CFR 85.20(b)(1) provide that accurate, current, and complete
disclosure of the financial results of financially assisted activities must be made in
accordance with the financial reporting requirements of the grant or subgrant.
Regulations at 24 CFR 85.20(b)(3) require that effective control and
accountability be maintained for all assets.
12
Therefore, the backdating of accounting transactions may violate the requirements
for current and accurate records and the complete disclosure of the results of
operations. Thus, the backdating of accounting entries could reduce
accountability and is a control weakness.
Moreover, the Authority’s accounting procedures allowed it to draw down capital
funds from LOCCS for administrative and management improvement expenses
but use the funds to cover other expenses such as dwelling structure costs, etc.,
(see finding 1). Proper accounting records were not maintained to track these
transactions, and the budget in LOCCS was not revised to reflect the actual use of
these funds. Therefore, there was a risk that certain expenses such as
administrative costs may have exceeded the HUD-allowed threshold because the
costs were not properly recorded. Consequently, financial reports submitted to
HUD, such as financial data schedules and performance and evaluation reports
may not have accurately reflected the results of the Authority’s operations.
Other deficiencies were also noted in the financial reports. For example, (1) the
financial data schedule for fiscal year 2008 provided a lump sum of less than $1.7
million for operating expenses without providing a detailed breakdown of the
costs, (2) the Authority overlooked $32,064 in administrative costs and did not
include it in the operating expenses reported in the financial data schedule for
fiscal year 2008, and (3) the amount of CFFP bond proceeds obligated for fees
and costs on the summary page of the performance and evaluation report did not
reconcile with that on the supporting pages.
Ineffective Tracking System for
Fund Obligation
Authority officials did not have an effective system for tracking and monitoring
the obligation of capital funds. Regulations at 24 CFR 85.20(b)(2) and (6)
provide that housing authorities must maintain adequate accounting records
regarding obligated and unobligated balances and that the accounting records
must be supported by source documents. The Authority maintained an Access
database to track its contracts; however, the database did not reflect the funding
sources for the contracts. Authority officials said that they had to refer to hard-
copy contract files to identify the funding sources. As a result, it was difficult to
track and monitor obligations by program and detect errors, especially when the
contracts were financed by multiple years’ grants and/or various programs. We
attribute this issue to inadequate controls of the Authority’s financial system.
Conclusions
The Authority had weaknesses in its financial management system. Specifically,
(1) accounting records and financial reports were not complete, accurate, and
current; and (2) the obligation of funds could not be effectively tracked and
13
monitored. These deficiencies occurred because the Authority did not develop
and implement effective controls to ensure that the financial information on its
capital fund activities was complete and accurate. As a result, the Authority’s
internal controls were not sufficient to properly safeguard assets and ensure their
use in accordance with applicable requirements.
Recommendations
We recommend that the Director of the New Jersey Office of Public Housing instruct the
Authority to
2A. Develop procedures that will improve the accounting system and internal
controls to ensure that accounting records and financial reports are accurate,
current, complete, and adequately supported with source documents. At a
minimum, the system should permit the tracing of funds at a level that ensures
that such funds are not used in violation of the restrictions and prohibitions of
applicable statutes.
14
SCOPE AND METHODOLOGY
Our review focused on whether the Authority obligated and expended capital funds in
accordance with HUD requirements and had an adequate financial system in place. To
accomplish our objectives, we
Reviewed relevant HUD regulations, program requirements, and applicable laws.
Obtained an understanding of the Authority’s management controls and procedures.
Interviewed appropriate personnel of HUD and the Authority.
Reviewed reports from HUD systems, such as the Line of Credit Control System
(LOCCS), the Financial Assessment Submission-Public Housing Authority System
(FASPHA), and the Public and Indian Housing Information Center system (PIC).
Reviewed the Authority’s files and records, including performance and evaluation
reports, financial data schedules, general ledgers, and bank statements.
Reviewed HUD’s monitoring report and independent accountant audit reports.
Traced amounts included in financial data schedules to general ledgers.
Analyzed the Authority’s obligations and disbursements of annual grants of the CFP and
bond proceeds of the CFFP.
Selected and tested a nonrepresentative sample of $679,048 in drawdowns, which represents
6 percent of the Authority’s total drawdowns of $11,119,980 for hard and relocation costs
incurred during the audit period. Since there are several instances in which the Authority
drew down funds twice for the same cost items within short periods, we extended our
sample to include drawdowns beyond our audit period. Our total tested drawdowns
amounted to $2,302,208.
The audit generally covered the period April 1, 2007, through December 31, 2009. We extended
the period as needed to accomplish our objectives. We performed our audit fieldwork from
January through June 2010 at the Authority’s office located at 400 U.S. Highway #1, Jersey City,
NJ.
We conducted our 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.
15
INTERNAL CONTROLS
Internal control is a process adapted 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
16
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
Significant Deficiencies
Based on our review, we believe the following items are significant deficiencies:
The Authority did not have adequate controls over compliance with laws and
regulations, as it did not always comply with HUD regulations while
obligating and disbursing capital funds (see finding 1).
The Authority did not implement effective controls to safeguard assets and
ensure that the financial information on its capital fund activities was
complete, accurate, and current (see findings 2).
17
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to be put
number Ineligible 1/ Unsupported 2/ to better use 3/
1A $1,322,810
1B $31,699
1D $2,041,881
1E $338,236
1F $53,452
1H $1,109,212
Total $53,452 $3,364,691 $1,479,147
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or Federal, State, or local
policies or regulations.
2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of the audit. Unsupported
costs require a decision by HUD program officials. This decision, in addition to
obtaining supporting documentation, might involve a legal interpretation or clarification
of departmental policies and procedures.
3/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. These amounts include reductions in outlays, deobligation of funds,
withdrawal of interest, costs not incurred by implementing recommended improvements,
avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
that are specifically identified. In this instance, if the Authority implements our
recommendation to establish and implement procedures that will ensure the adequate
obligation and disbursement of CFFP bond proceeds and develop an adequate force account
labor plan, HUD can be assured that these funds will be put to better use.
18
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
19
Ref to OIG Evaluation Auditee Comments
Comment 1
20
Ref to OIG Evaluation Auditee Comments
Comment 1
21
Ref to OIG Evaluation Auditee Comments
Comment 2
22
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 4
Comment 5
23
Ref to OIG Evaluation Auditee Comments
Comment 5
Comment 6
24
Ref to OIG Evaluation Auditee Comments
Comment 6
Comment 1
Comment 6
Comment 6
Comment 7
25
OIG Evaluation of Auditee Comments
Comment 1 Authority officials stated that the conversion of the Montgomery Gardens
development was not mandatory because it was not included in HUD’s Candidate
Cluster Reports from January 2007 to March 2008. We disagree with the
Authority because the development suffered long-term high vacancy rates. The
Cluster Reports indicated that the vacancy rates at the development were above 30
percent during October 2005 to November 2006. The vacancy report submitted
by the Authority to the HUD field office disclosed the rate was more than 40
percent as of March 2010, which was quoted in our audit report. Currently, the
vacancy rate reached 53 percent (only 203 out of 434 units are occupied as stated
in the Authority’s comments). HUD required housing authorities to review the
cluster list to ensure that it is complete and accurate, including identifying any
developments/units that should be included in the list as additional clusters. Since
the Cluster Reports were generated based on the data provided by the housing
authorities and Authority officials acknowledged the high vacancy issues at
Montgomery Gardens development along with other problems such as physical
obsolescence, higher rates of turn-down by prospective tenants, and increasing
crime and vandalism, Authority officials should have contacted HUD to include
the development into the cluster list and started the mandatory conversion process
by conducting the assessment, and developing and implementing the conversion
plan as prescribed in 24 CFR 972.106. Moreover, no evidence was provided that
the Authority conducted the assessment as it certified to HUD in its 5-year and
action plans of 2007 and 2008.
Authority officials also indicated that $462,256 of its annual CFP grant for the
year ended March 31, 2009, had been expended for Montgomery Gardens and not
the $682,769 cited in the report. However, no documentation was provided to
support the amount quoted by the Authority in it comments, therefore, we will not
change the amount in the audit report. The amount of CFP funds expended on
Montgomery Gardens will have to be resolved as a part of the audit resolution
process.
Further, Authority officials stated that they had initiated a voluntary relocation
program and a mix-financing revitalization plan for the Montgomery Gardens
development in the summer of 2008. However, regulations at 24 CFR 972.115
provide that developments without HUD-approved HOPE VI revitalization plans
are fully subject to the required conversion standards. Therefore, since the
Montgomery Gardens development did not have an approved Hope VI
revitalization plan it was still required to be converted to tenant-based assistance.
As a result, if the conversion had been carried out in a timely manner, as required
by HUD regulations, more than $1.3 million in CFP and CFFP funds would have
been saved.
Comment 2 Authority officials stated that the supporting documentation for CFP expenses
were in the general ledger and its subsidiary documents, such as accounts
26
payables, journal vouchers, material requisitions, etc. They state that it is
common that programs incur expenses in one fiscal year with funding being
received in the following fiscal year. Authority officials indicated that prior
audits had not noted any instances of inadequate documentation or disallowed
costs; they provided summaries of expenses vs. receipts showing that costs per
grant were not exceeded and funds were received after the costs were incurred.
Authority officials agreed that budgeted amounts for each line item had not been
revised to reflect the financial information in the CFP annual statements. As
such, they state that if the revisions had happened, they would be able to draw
down funds for the corresponding work item expenses.
However, regulations at 24 CFR 85.20 state that fiscal control and accounting
procedures of a grantee must be sufficient to permit the tracing of funds to
expenditures, and grantees and subgrantees must maintain records that identify
the source and application of funds provided for financially assisted activities.
Furthermore, regulations at 24 CFR 85.20(b)(6) state that the accounting records
must be supported by source documentation such as cancelled checks, paid bills,
payrolls, time and attendance records, contract and subgrant award documents,
etc. However, draw downs of CFP funds were not traceable to the general ledger
records. In addition, source documentation was not provided by Authority
officials even after repeated requests.
Comment 3 Authority officials agreed that they did not limit contingency funding to be less
than 8 percent of total CFFP bond proceeds. As such, Authority officials agreed
to use $145,728 of surplus contingency funds from completed contracts for other
CFFP work items and amounts from the revised (lower) contingency reserves for
the uncompleted contracts to develop additional work items under the CFFP.
Thus, the Authority officials’ comments are responsive to the finding.
Comment 4 Authority officials indicated that the preaward costs incurred were allowable,
therefore, they will submit a request for approval of these cost from HUD and the
CFFP Trustee. However, since HUD had not approved the incurrence of these
expenses, prior to the funds being awarded, the $53,452 of costs incurred is
ineligible and should be reimbursed from the regular capital funds.
Comment 5 Authority officials stated that the hourly wage rate for its force account labor was
approved by HUD and its annual budget was reviewed and approved by the
executive director and board of commissioners. Authority officials indicated that
they would make every effort to identify capital work items that will be done
using force account labor for approval by HUD. Furthermore, Authority officials
agreed to seek technical assistance from HUD to develop an external plan for
skilled trade employees to supplement its current internal plan of force account
labor.
However, HUD’s approval of hourly wage rates and an annual budget does not
preclude Authority officials from the responsibility for informing HUD of the
27
specific activities that will be carried out by force account labor and seeking
HUD’s approval for these activities. In addition, as noted in the audit report, the
Authority’s current annual budget did not disclose the funding sources and
activities to be completed by force account labor, and there was no documentation
to show that the use of force account labor was more economical than contract
labor; therefore HUD was precluded from effectively monitoring or evaluating the
use of force account labor.
Comment 6 Authority officials state that the accounting records were maintained in a manner
acceptable to both HUD and 3rd party auditors. Authority officials agreed that
some of the CFP funds, which had been received, had been posted to the incorrect
grant account number in the general ledger, but total CFP funds received each
year agreed with LOCCS. Authority officials agreed to follow up regarding the
computer system malfunction issue, realign LOCCS CFP drawdowns to reflect
actual line item expenses, and ensure that future CFFP performance and
evaluation report summary pages reconcile with supporting pages in the report.
Lastly, Authority officials agreed that the correction of the reimbursement
transaction was dated as of February 2010, although the correction was made in
April 2010. However, they did not consider the adjustment as being “backdated”
because the adjustment was made after the date of the reimbursement transaction.
Authority official’s comments were generally responsive to the finding. However,
HUD cannot identify financial discrepancies between the financial data submitted
to HUD and supporting accounting records because the supporting documents are
only maintained at the Authority, not in HUD’s systems. Also, 3rd party audits
are only designed to provide reasonable assurance about whether the financial
statements are free of material misstatements and are not a guarantee that all costs
are properly classified, eligible and supported; therefore, it is essential for
procedures to be developed that will ensure that accounting records are accurate,
complete and adequately supported by source documents. Further, generally
accepted accounting procedures require that all the transactions, including
corrective adjusting entries, should be recorded at the actual date of the
transaction.
Authority officials were provided with additional information regarding the
findings for the FDS reports and any questions should be resolved during the
audit resolution process.
Comment 7 Authority officials indicated that the current system for tracking obligations was
adequate and met HUD requirements, but agreed that if the contract register
included the source of funds it would have facilitated the reviewer, therefore
officials agreed to make every effort to include this information in the future.
Based on these comments it’s clear that the information maintained was not easily
obtainable, therefore, the findings reflect that improvement is needed in this area.
Nevertheless, regulations at 24 CFR 85.20 (b) (2) and (6) require that adequate
accounting records be maintained to support obligated and unobligated balances.
28
The Jersey City Housing Authority, Jersey City, NJ, Had Administration
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-10-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)