oversight

Long Branch Housing Authority, Long Branch, NJ, Generally Complied With Capital Fund Program Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-01.

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

                                                                      Issue Date
                                                                           September 1, 2011
                                                                      Audit Report Number
                                                                           2011-NY-1013




TO:              Balu Thumar, Acting Director, New Jersey Office of Public Housing, 2FPH




FROM:            Edgar Moore, Regional Inspector General for Audit, New York/New Jersey
                                                 Region, 2AGA

SUBJECT: Long Branch Housing Authority, Long Branch, NJ, Generally Complied With
         Capital Fund Program Regulations

                                            HIGHLIGHTS

    What We Audited and Why

                   We audited the Housing Authority of the City of Long Branch’s administration of
                   its Public Housing Capital Fund Program (CFP) and Capital Fund Financing
                   Program (CFFP). We selected the Authority after our internal review of the U.S.
                   Department of Housing and Urban Development’s (HUD) oversight of energy
                   performance contracting1 disclosed that Authority officials may have used CFP
                   funds to repay a loan for energy performance contract work. The objectives of
                   this audit were to determine whether Authority officials obligated and disbursed
                   CFP and CFFP funds in accordance with HUD regulations and maintained a
                   financial management system that complied with program requirements.

    What We Found
                   Authority officials generally obligated and disbursed CFP and CFFP funds in
                   accordance with HUD regulations and maintained a financial management system
                   that complied with program requirements. However, they received add-on
                   subsidy incentive payments from HUD, to which they were not entitled, to repay
                   an energy performance contract loan, because they had already used CFP funds
1
    Report no. 2011-NY-0001, issued 02/01/2011
           for the repayment, and did not use proceeds from the sale of Authority land for
           activities as initially approved by HUD. We attribute these issues to Authority
           officials’ unfamiliarity with HUD regulations. Consequently the Authority
           received approximately $1.1 million and was scheduled to receive more than $1.4
           million in additional add-on subsidy incentive payments, to which it was not
           entitled, and used $5 million to fund activities that, while allowable by HUD
           regulations, were not for the purposes HUD had initially approved.


What We Recommend

           We recommend that the Acting Director of the New Jersey Office of Public
           Housing instruct Authority officials to repay the $1.1 million add-on subsidy
           incentive and strengthen controls to ensure that HUD is informed in a timely
           manner of any changes to HUD’s approved use of Authority funds. In addition,
           we recommend that action be taken to deobligate the more than $1.4 million in
           obligated add-on subsidy incentive to which the Authority would have been
           entitled.

           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 the review during the audit and at an exit conference
           held on August 9, 2011. On August 17, 2011, Authority officials provided their
           written comments as requested and generally agreed 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 Objectives                                                    4

Results of Audit

      Finding: Authority Officials Generally Complied With CFP Regulations   5
Scope and Methodology                                                        9

Internal Controls                                                            10

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use         12
   B. Auditee Comments and OIG’s Evaluation                                  13




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                     BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Long Branch is a nonprofit corporation established in 1938
after the passage of the Federal Housing Act of 1937 to provide housing for qualified
individuals. The Authority is governed by a seven-member board of commissioners, which
appoints the executive director, who manages the day-to-day operation of the Authority.

The Authority is responsible for the development, maintenance, and management of public
housing for low- and moderate-income families residing in Long Branch, NJ. It administers 486
low-rent and 695 Section 8 units and manages the financial operations of a for-profit and a
nonprofit limited partnership. The Authority receives operating subsidies, Public Housing
Capital Fund Program (CFP), Capital Fund Financing Program (CFFP), and HOPE VI program
funding from HUD. It received an average of $1 million annually through CFP in fiscal years
2007 through 2010, approximately $4 million under CFFP in 2005, and $20 million in HOPE VI
grants in 2006.

CFP funds are used for repairs, major replacements, upgrading, and other nonroutine
maintenance work to maintain the Authority’s units in a clean, safe, and good condition. CFFP
funds, used to make capital improvements, are obtained through private sources, such as a bond
or conventional bank loan for which the Authority borrows and pledges a portion of its future
annual CFP funds, subject to the availability of appropriations, to make debt service payments.
The HOPE VI program, developed to eradicate severely distressed public housing, provides
funds to make physical improvements and management improvements and to provide social and
community services to address public housing resident needs.

The objectives of this audit were to determine whether Authority officials obligated and
disbursed CFP and CFFP funds in accordance with HUD regulations and maintained a financial
management system that complied with program requirements.




                                               4
                                      RESULTS OF AUDIT

Finding: Authority Officials Generally Complied With CFP Regulations
Authority officials generally obligated and disbursed CFP and CFFP funds in accordance with
HUD regulations and maintained a financial management system that complied with program
requirements. However, they received add-on subsidy incentives from HUD, to which they were
not entitled, to repay an energy performance contract loan, because they had already used CFP
funds for the repayment, and did not use proceeds from the sale of Authority land for activities
approved by HUD. Consequently, the Authority received approximately $1.1 million in add-on
subsidy incentives, to which it was not entitled, and used $5 million to fund activities that, while
allowable by regulation, were not for the purposes HUD had initially approved.



    Obligation and Expenditure of
    CFP and CFFP Funds
    Generally Complied With
    Regulations

                 Authority officials generally complied with regulations at 24 CFR (Code of Federal
                 Regulations) Part 905 for obligating and expending CFP and CFFP funds and
                 maintained a financial management system that complied with CFP and CFFP
                 requirements. Specifically, Authority officials properly obligated the Authority’s
                 $1.1 million in 2008 CFP funds, which we reviewed, and expended for eligible
                 activities $1.2 million, or 57 percent, of the $2.1 million in CFP funds drawn down
                 during the audit period (also reviewed). In addition, during the period May 1, 2005,
                 through February 18, 2009, Authority officials complied with regulations when
                 expending $1.7 million of more than $4 million in CFFP funds reviewed. Further,
                 all CFP and CFFP fund expenditures reviewed were supported by proper
                 procurement and accounting documentation.

    Ineligible Add-On Subsidy
    Incentives Were Received

                 Authority officials requested and received more than $1 million in add-on subsidy
                 incentives, to which the Authority was not entitled, for use in repaying an energy
                 performance contract loan. In accordance with Section 154 of the Energy Policy
                 Act of 2005, HUD encouraged public housing authorities to realize energy
                 savings through energy performance contracting,2 and regulations at 24 CFR


2
 Energy performance contracting is an innovative financing technique that uses cost savings realized from reduced
energy consumption to repay the cost of energy conservation measures. Generally, an authority executes an energy

                                                        5
                 905.10 allow CFP and CFFP funds to be used for capital improvements, which
                 can include various costs for energy efficiency improvements. Accordingly,
                 Authority officials used more than $1.7 million from a $4 million CFFP bond
                 financing and $21,192 in CFP funds to pay for approximately $1.8 million spent
                 on eligible energy improvements made as part of an energy performance contract
                 executed in 2005. Further, under CFFP, a portion of the Authority’s future annual
                 CFP funds were pledged to make debt service payments for the bond.

                 Regulations at 24 CFR 990.185(a) provide that a public housing authority may
                 qualify for an add-on subsidy incentive if the authority undertakes energy
                 conservation measures that are financed by an entity other than HUD.
                 Consequently, Authority officials requested an add-on subsidy incentive, which
                 HUD approved on April 28, 2005, providing the Authority $210,587 annually for
                 the 5-year period from 2006 through 2010. However, since the activities
                 undertaken for which the incentive was provided were financed through HUD
                 sources (CFP and CFFP funds), the Authority was not entitled to receive the add-
                 on incentive. This condition occurred because Authority officials were not
                 familiar with HUD regulations prohibiting the receipt of an add-on subsidy if a
                 loan for energy conservation measures was repaid from HUD-funded sources. As
                 result, the Authority received more than $1 million, to which it was not entitled,
                 and was scheduled to receive $210,587 in add-on subsidies for the next 7 years
                 (more than $1.4 million).


  Land Sale Proceeds Were Not
  Used as Initially Approved

                 Authority officials did not use $5.1 million realized from the sale of the
                 Authority’s land for the purposes initially proposed to and approved by the HUD
                 Special Applications Center in 2004. Rather, other sources of funds were used for
                 these purposes, and approximately $3 million of the land sale proceeds was used
                 in 2010 for other HUD field office approved projects. While funds used from the
                 land sale were applied to HUD-funded eligible activities, the proceeds were not
                 used as initially approved by HUD, and HUD was not informed of or requested to
                 approve the changes. Further, Authority officials requested approval from HUD
                 to use the remaining $2.1 million after we inquired about the status of these funds.

                 In January 2004, Authority officials received approval from the HUD Special
                 Application Center to demolish one of its projects with 46 low-rent units and
                 dispose of adjoining contaminated land. The land was approved to be disposed of
                 through a sale for $5.1 million to the local utility company that had been judged
                 responsible for the land’s contamination. In conjunction with the demolition and
                 sale, the Special Applications Center approved the request to build 46
                 replacement low-income housing units and a community center with the $5.1

service agreement with an energy service company that guarantees that energy use will be reduced by a set amount
after installation of energy conservation measures.

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million. However, contrary to HUD’s approval, Authority officials deposited the
$5.1 million into the Authority’s business activity unrestricted account, which was
used to leverage other sources of funds for other eligible activities.

According to HUD procedures, an authority cannot change the intended use of
sale proceeds without the prior written consent of HUD. Further, Authority
officials did not comply with regulations at 24 CFR 970.35(a)(3), which require
an authority to inform its HUD field office of the use of net proceeds by providing
a financial statement reporting on how the funds were expended by item and
amount, and the field office was requested, by the Special Applications Center to
verify that the funds were used as approved and the Authority’s records
adequately supported this assertion.

In January 2004, Authority officials applied for a HOPE VI grant for
redevelopment of three projects including the project approved for demolition and
disposition. The HOPE VI grant for redevelopment was approved in February
2006, and the HOPE VI funds were used to build the community center. Rather
than using the proceeds as approved, officials used CFP, Replacement Housing
Factor funds, tax credits, and $646,121 from the business activity unrestricted
account to build a 40-unit mixed finance project consisting of 29 Section 8 and 11
tax credit units. This account consisted of the $5.1 million from the land sale,
accrued interest of $200,000, and $750,000 from proceeds of the land lease to the
developer.

Further, in March, 2010, Authority officials used $3 million from the business
activity unrestricted account to purchase a former school with a plan to
rehabilitate it and rebuild 100 affordable housing units for senior citizens. In the
application to the HUD field office, Authority officials identified public housing
funds as the source of funds. In addition, in 2009, Authority officials used
$400,000 to make a zero interest loan to fund startup and operating costs of its
nonprofit subsidiary created to operate the community center. Upon our inquiry
about use of the land sale proceeds contrary to that approved by HUD and the
status of the remaining $2.1 million, Authority officials requested HUD’s
approval to use those funds to build some home -ownership units, which had been
approved in the HOPE VI redevelopment plan.

While the proceeds from the land sale were used for HUD-funded eligible
activities, the proceeds were not used as initially approved by HUD’s Special
Applications Center, and HUD was not informed of or requested to approve the
changes. We attribute this condition to Authority officials’ unfamiliarity with
HUD regulations and their misunderstanding of regulations at 24 CFR 970.19(f),
which require that an authority demonstrate to the satisfaction of HUD that
replacement units are provided in connection with the disposition of the property.
Authority officials believed that since they had met HUD’s requirement of
approved housing replacement units, the Authority could classify the land sale
proceeds as unrestricted and use them for other purposes.

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Conclusion

             Authority officials generally complied with HUD regulations for the obligation
             and expenditure of CFP and CFFP funds and maintained an adequate financial
             management system. However, as a result of Authority officials’ unfamiliarity
             with and misinterpretation of HUD regulations, the Authority erroneously
             received more than $1 million in add-on subsidy incentive to repay a loan to
             finance energy conservation measures and did not use proceeds from its land sale
             in accordance with activities initially approved by HUD or inform HUD of the
             alternate use of these proceeds. Consequently, the Authority received more than
             $1 million in add-on subsidy payments, to which it was not entitled, and HUD
             was not properly informed of the alternate use of $5.1 million in Authority funds.

Recommendations

             We recommend that the Acting Director of the HUD New Jersey Office of Public
             Housing instruct Authority officials to

             1A. Repay the $1,052,935 add-on subsidy incentive the Authority received, to
                 which it was not entitled, from 2006 through 2010.

             1B. Ensure that the $2.1 million in unused land sale proceeds requested for
                 redevelopment of home-ownership units is used as approved by HUD.

             1C. Strengthen controls to ensure that Authority officials use HUD funds in
                 accordance with HUD-approved plans and comply with regulations at 24
                 CFR 970.35(a)(3) so that HUD is informed in a timely manner of any
                 changes and project completion in accordance with regulations.

             We also recommend that the Acting Director of HUD’s New Jersey Office of
             Public Housing take action to

             1D. Deobligate the $1,474,109 in annual add-on subsidy incentive to which the
                 Authority would have been entitled, thus ensuring that these funds are put to
                 better use.




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                        SCOPE AND METHODOLOGY

The 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 the objectives, we

       Reviewed relevant HUD CFP and CFFP regulations at 24 CFR Part 905.

       Obtained an understanding of the Authority’s management and financial controls over
       CFP and CFFP funds.

       Interviewed HUD New Jersey public housing field office personnel and reviewed
       appropriate records.

       Interviewed Authority officials and the Authority’s independent public accountant.

       Reviewed reports from HUD’s Line of Credit Control System and Office of Public and
       Indian Housing Inventory Management System and Information Center, Authority
       financial records, and independent public accountant’s audit reports.

       Traced financial data reported to HUD to the Authority’s records.

       Reviewed the obligation and expenditure of the fiscal year 2008 CFP funds, including
       Replacement Housing Factor funds.

       Selected a nonstatistical sample of 29 drawdowns, representing $1.2 million, or 57
       percent, of the $2.1 million CFP funds drawndown through 134 requisitions during the
       audit period, July 2008 through June 2010. The sample was comprised of a random
       number of small, medium, and large drawdown amounts, and the results cannot be
       projected to the universe.

       Selected a nonstatistical sample of 10 drawdowns representing $1.7 million, or 40 percent
       of the $4.3 million of CFFP funds requisitioned during the period May 1, 2005, through
       February 18, 2009. The sample results cannot be projected to the universe.

The audit covered the period July 1, 2008, through June 30, 2010, and was extended as
necessary. We performed the audit fieldwork from January through March 2011 at the
Authority’s office located at 2 Hope Lane, Long Branch, NJ.

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


                                               9
                              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.

                                                 10
Significant Deficiency


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

                   Authority officials had not established adequate controls to ensure that the
                   Authority only requested HUD funds to which it was entitled and expended
                   funds in accordance with HUD-approved plans (see finding).




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                                   APPENDIXES

Appendix A

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



                    Recommendation                             Funds Put To
                        number             Ineligible 1/       Better Use 2/
                          1A               $1,052,935
                          1D               _________              $1,474,109

                          Total            $1,052,935             $1,474,109



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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 case, if the more than $1.4 million in obligated
     add-on subsidy incentives scheduled to be received is deobligated and returned to the
     program, we can be assured that these funds will be put to better use.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2


Comment 3




                         13
Ref to OIG Evaluation   Auditee Comments




Comment 3

Comment 4

Comment 1




                         14
                         OIG Evaluation of Auditee Comments

Comment 1   Authority officials have agreed to take action responsive to the recommendation.

Comment 2   Authority officials maintain that the Special Applications Center’s approval for
            the use of the $5.1 million land sale proceeds did not preclude leveraging these
            funds to accomplish other eligible activity. However, the approval letter
            explicitly stated that the proceeds generated from the land disposition were to be
            used to build 46 low-income housing units and a community center, and once
            HUD approves a disposition application and an authority’s stated intended use for
            net proceeds, the use of those proceeds can not be changed without the prior
            written consent of HUD.

Comment 3   The report does not dispute the HUD funding eligible accomplishments Authority
            officials achieved through the leveraging of its various funding sources. The
            report notes that various other sources of funding were used to construct the 46
            housing units approved by HUD, and that $3.1 million of those proceeds were
            used in March 2010 to purchase the Gregory School, and HUD approval for the
            use of the remaining funds was recently requested.

Comment 4   Authority officials stated that the sale proceeds from Seaview Manor were placed
            in the redevelopment account under the control of the Authority, which was
            annually audited and was reported in the Authority's financial statements. The
            land sale proceeds and the Section 8 certificate operating reserve funds were also
            deposited into this account, which was identified in the Authority’s financial
            statements as the business activity account. Based upon the transactions
            reviewed, all funds were used for HUD eligible activity; however, the funds
            should have been reported as being restricted to HUD eligible activity.




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