oversight

The Jersey City Housing Authority, Jersey City, NJ, Did Not Always Obligate or Disburse Replacement Housing Factor Capital Fund Grants in a Timely Manner

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-03-18.

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

                                                                  Issue Date
                                                                     March 18, 2011
                                                                  Audit Report Number
                                                                       2011-NY-1008




TO:         Edward T. De Paula, Director, Office of Public Housing, 2FPH


                           For
FROM:       Edgar Moore, Regional Inspector General for Audit, NY/NJ Region, 2AGA


SUBJECT: The Jersey City Housing Authority, Jersey City, NJ, Did Not Always Obligate or
         Disburse Replacement Housing Factor Capital Fund Grants in a Timely Manner

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Jersey City Housing Authority’s (Authority) administration of its
             Replacement Housing Factor (RHF) grants received under the capital fund
             program. This is the third audit report regarding the Authority’s 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 objective was to determine whether the Authority
             obligated and expended its RHF grants in accordance with HUD regulations.

 What We Found
             Authority officials did not always obligate or expend RHF funds in a timely
             manner. They failed to obligate at least 90 percent of the Authority’s 2007 RHF
             grants within 24 months and disburse 100 percent of its 2004 RHF grants within
             48 months of the date of availability of the funds. This deficiency was the result
             of a lack of adequate controls and procedures to ensure that RHF funds were
             obligated and expended within the prescribed time limits. Consequently,
             $877,607 of the Authority’s 2007 RHF funds was not obligated, and more than
             $2.2 million of its 2004 RHF funds was not expended within the specified period
           according to HUD regulations. Therefore, not all needed capital improvements
           were accomplished within program time limits.


What We Recommend

           We recommend that the Director of HUD’s New Jersey Office of Public Housing
           (1) recapture more than $3.1 million in RHF capital funds or reduce future capital
           funds by this amount because of the delayed obligation and expenditure of these
           funds, and (2) direct Authority officials to establish and implement procedures to
           ensure that the Authority obligates and expends its capital fund grants within 24
           and 48 months, respectively, from the date that funds become available to the
           Authority.

           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 February 18, 2011. On February 15, 2011, 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.




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                           TABLE OF CONTENTS

Background and Objective                                                           4

Results of Audit

      Finding: Authority Officials Did Not Always Obligate or Disburse RHF Funds   5
               in a Timely Manner

Scope and Methodology                                                              7

Internal Controls                                                                  8

Appendixes
   A. Schedule of Questioned Costs                                                 10
   B. Audited Comments and OIG’s Evaluation                                        11




                                            3
                      BACKGROUND AND OBJECTIVE

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 operations 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,
obtained a $10 million loan under the Capital Fund Financing Program in 2007, and received
$7.8 million in capital funds under the American Recovery and Reinvestment Act of 2009. We
have audited the Authority’s administration of these capital fund programs and issued two audit
reports (Audit Report No. 2011-NY-1001 and 2011-NY-1007) in October 2010 and March 2011,
respectively. This audit was a spinoff review based on the prior audits’ results.

Replacement Housing Factor (RHF) grants are awarded through the capital fund program to
public housing authorities that have removed their units from inventory for the sole purpose of
developing new public housing units. A public housing authority may receive RHF grants for
these removed units for a period of up to 5 years. Also, funding for an additional 5-year period
can be awarded if HUD determines that the public housing authority has met HUD’s
requirements and made substantial progress for the projects funded by the end of the first 5-year
RHF grant. During the past 10 years (2000–2009), more than $10 million in RHF funds have
been awarded to the Authority for redevelopment purposes.

The objective of this audit was to determine whether the Authority obligated and expended its
RHF capital fund grants in accordance with HUD regulations.




                                                4
                                 RESULTS OF AUDIT


Finding: Authority Officials Did Not Always Obligate or Disburse RHF
         Funds in a Timely Manner
Contrary to HUD regulations, Authority officials did not always obligate or expend RHF funds
in a timely manner. They failed to obligate at least 90 percent of the Authority’s 2007 RHF
grants within 24 months and disburse 100 percent of its 2004 RHF grants within 48 months after
the date of availability of the funds. This deficiency was the result of a lack of adequate controls
and procedures to ensure that RHF funds were obligated and expended within the prescribed
time limits. Consequently, $877,607 of the Authority’s 2007 RHF funds was not obligated, and
more than $2.2 million of its 2004 RHF funds was not expended within the period specified in
HUD regulations. Therefore, not all needed capital improvements were accomplished within
program time limits.



 RHF Grants Were Not
 Obligated or Expended in a
 Timely Manner

               The regulations at 24 CFR (Code of Federal Regulations) 905.10 and 905.120 and
               various HUD Office of Public and Indian Housing notices required housing
               authorities to obligate at least 90 percent of their RHF grants within 24 months and
               disburse 100 percent of their grants within 48 months from the date of availability of
               the funds. The amendments to annual contributions contracts (contract) signed
               between the Authority and HUD also imposed this rule for the RHF grants received
               by the Authority. However, Authority officials did not always comply with HUD
               regulations and contract agreements while obligating and expending the RHF grants.
               Specifically,

                       Grants number NJ39R009501-07 and NJ39R009502-07 were awarded to
                       the Authority on September 13, 2007, with the amounts of $145,494 and
                       $732,113, respectively. None of these funds was obligated until
                       December 1, 2009, which was 2½ months after the obligation deadline of
                       September 12, 2009, as indicated in the contract agreement. The
                       aforementioned HUD regulations provide that housing authorities may
                       request an extension from HUD of the time frame to obligate the funds.
                       However, the Authority did not submitted such a request to HUD.

                       Grant number NJ39R009501-04 was awarded to the Authority on
                       September 14, 2004, with an amount of more than $2.8 million.
                       According to the contract agreement, the whole grant should have been
                       disbursed by September 13, 2008. However, the Authority only disbursed


                                                 5
                  $906,182 by the expenditure deadline, which represented only 32 percent
                  of the total grant. Therefore, the remaining $1.9 million was not expended
                  in a timely manner.

                  Grant number NJ39R009502-04 was awarded to the Authority on
                  September 14, 2004, with an amount of $330,011. According to the
                  contract agreement, the whole grant should have been disbursed by
                  September 13, 2008. However, the Authority did not disburse any of this
                  grant until May 7, 2009, which was approximately 8 months after the
                  expenditure deadline of September 13, 2008. Therefore, $330,011 was not
                  expended in a timely manner.

          Thus, Authority officials did not have adequate controls and procedures in place to
          ensure that RHF funds were obligated and expended within the contract agreement
          deadlines. As a result, more than $3.1 million in RHF grant funds was not properly
          obligated or expended within the specified period according to HUD regulations and
          contracts. Consequently, not all needed capital improvements were accomplished
          within program time limits.

Recommendations

          We recommend that the Director of the New Jersey Office of Public Housing

          1A. Recapture $3,118,327 in RHF capital fund grants or reduce future capital
              funds by this amount because of the delayed obligation and expenditure of
              the funds.

          1B. Direct Authority officials to establish and implement procedures to ensure
              that the Authority obligates and expends its RHF funds within 24 and 48
              months, respectively, from the date that the funds become available to the
              Authority.




                                           6
                        SCOPE AND METHODOLOGY

Our review focused on whether the Authority obligated and expended RHF capital funds in
accordance with HUD requirements. To accomplish our objective, 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 HUD’s monitoring report and independent accountant audit reports.

       Reviewed contracts signed between HUD and the Authority.

       Reviewed reports from HUD systems, such as the Line of Credit Control System
       (LOCCS). We also verified LOCCS information with the Authority and HUD Public
       Housing officials, as well as with source documentation such as contracts signed between
       HUD and the Authority. We determined that the dollar amount of obligations and
       disbursements in LOCCS was sufficiently reliable for purposes of our audit.

The audit initially covered the period from April 1, 2007, through December 31, 2009. We
extended the period as needed to accomplish our objective. We performed the audit fieldwork
from January through October 2010 at the Authority’s office located at 400 U.S. Highway #1,
Jersey City, NJ. We conducted additional audit verification and confirmation from October
through December 2010 at HUD’s Newark, NJ, field office.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               7
                              INTERNAL CONTROLS

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

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

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objectives:

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

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

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

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

               We assessed the relevant controls identified above.

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


                                                 8
Significant Deficiency

            Based on our review, we believe the following item is a significant deficiency:

                   The Authority did not implement effective controls to ensure that RHF
                   grants were obligated and expended within specific time limits (see finding).




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS


                      Recommendation number            Ineligible 1/

                                 1A                    $3,118,327

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.




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    Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION


    Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 1




                             11
    Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                             12
     Ref to OIG Evaluation   Auditee Comments




Comment 3




                              13
                         OIG Evaluation of Auditee Comments

Comment 1   Authority officials stated that they had complied with the obligation and
            expenditure deadlines posted in LOCCS. However, the deadlines in LOCCS were
            different from those indicated in the Annual Contribution Contracts (ACC)
            Amendments, which were mutually agreed upon and signed by the Authority and
            HUD. The obligation and expenditure start dates were effective as of the dates
            HUD signed and executed the ACC Amendments. Authority officials did not
            provide any documentation that requested HUD officials to extend the obligation
            and expenditure deadlines. Therefore, the deadlines for obligating and expending
            funds in the ACC Amendments were still applicable. The Authority should have
            complied with the obligation and expenditure end dates established in the ACC
            Amendments instead of relying on the end dates in LOCCS. HUD explained
            these procedures in several notices including Notice 2003-10, 2003-19, 2004-15,
            2005-22, and 2010-21. As a result, we recommend recovery of the funds as
            required in 24 CFR 905.120 for untimely obligation and expenditure.

            To make the report clearer, we adjusted the scope and methodology section in the
            report to reflect that only the dollar amounts of the obligations and disbursements
            in LOCCS were sufficiently reliable.


Comment 2   Authority officials stated that HUD regulations provide that a public housing
            authority (PHA) can choose to accumulate its replacement housing factor funds
            with HUD’s approval, and the obligation deadline will be reset to be from 24
            months from the date the PHA accumulates adequate funds to undertake
            replacement housing. Authority officials believed that HUD relied on this
            accumulation option to extend the obligation dates in LOCCS. Therefore,
            Authority officials concluded that they complied with all obligation and
            expenditure dates for RHF funds since they followed LOCCS information.

            HUD regulations require that a PHA must submit an RHF plan if it wishes to
            accumulate one or more years of RHF funds. Without an RHF plan, the Authority
            has no authorization to accumulate funding. HUD issued numerous notices and
            published guidelines on the HUD website and provided detail instructions for the
            preparation of the RHF plan. During the audit Authority officials stated that they
            had not submitted a RHF plan to HUD requesting approval to accumulate funds.
            Review of the mixed-finance amendments to the consolidated annual contribution
            contracts for multiple projects, which were provided by Authority officials after
            the exit conference, disclosed that these amendments did not serve the same
            purpose as a RHF plan nor contained the necessary information required by HUD
            regulations for the accumulation option (see Comment 3). As a result, Authority
            officials did not submit the required RHF plans for HUD’s approval as a means
            for justifying accumulating replacement funds, and were therefore required to
            obligate and expend the funds within 24 and 48 months respectively from the
            dates when the funds became available to the Authority. Thus, we recommend



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            recovery of the funds as required in 24 CFR 905.10 and 905.120 for untimely
            obligation and expenditure because funds were accumulated without a HUD-
            approved plan.


Comment 3   Authority officials stated that HUD’s approval of mixed-finance ACC
            amendments for various projects support that HUD approved the accumulation of
            RHF funds. However, review of the mixed finance ACC amendments revealed
            that these amendments did not specify (1) the Authority’s intention to accumulate
            its RHF grants and why it needed to do so; (2) the number of years of grant
            funding the Authority would accumulate; and (3) the grants, including estimated
            amounts by fiscal year, the Authority would accumulate. In addition, these
            amendments inadequately included a grant already included in another approved
            amendment, and improperly mixed different increments of RHF funding, which is
            not in compliance with HUD requirements. Moreover, these ACC amendments
            were signed more than 24 months from the dates when the RHF funds became
            available to the Authority. As a result, these amendments cannot be regarded as a
            RHF plan. Without obtaining HUD’s approval for the accumulation option,
            Authority officials were required to comply with the 24 and 48-month
            requirements respectively while obligating and expending the RHF grants.




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