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)