oversight

The Pennsylvania Housing Finance Agency, Harrisburg, PA, Generally Administered Its Tax Credit Assistance program Funded Under the Recovery Act in Accordance With Applicable Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-11-08.

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

                                                                                Issue Date
                                                                                    November 8, 2010
                                                                                Audit Report Number
                                                                                    2011-PH-1003




TO:                Clifford Taffet, Director, Office of Affordable Housing Programs, DGH

                   //signed//
FROM:              John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
                      3AGA

SUBJECT:           The Pennsylvania Housing Finance Agency, Harrisburg, PA, Generally
                    Administered Its Tax Credit Assistance Program Funded Under the Recovery
                    Act in Accordance With Applicable Requirements

                                              HIGHLIGHTS

    What We Audited and Why

                   We audited the Pennsylvania Housing Finance Agency (Agency) because it
                   received $95.1 million in Tax Credit Assistance Program (Program) funds under
                   the American Recovery and Reinvestment Act of 2009 (Recovery Act), which
                   was the largest amount of these funds awarded in Region III.1 Our objective was
                   to determine whether the Agency administered its Program in accordance with the
                   requirements of the Recovery Act and applicable U.S. Department of Housing
                   and Urban Development (HUD) requirements.

    What We Found


                   The Agency generally administered its Program in accordance with Recovery Act
                   and HUD requirements. However, it incurred ineligible costs totaling $135,590
                   and could not support costs totaling $151,936. In addition, it did not obtain
                   required lobbying certifications from contractors and subcontractors, and it
                   understated its job creation information that it reported to the Federal reporting
                   Web site.
1
    Region III encompasses Pennsylvania, Virginia, Maryland, West Virginia, Delaware and the District of Columbia.
What We Recommend


           We recommend that HUD require the Agency to reimburse its Program $135,590
           for the ineligible costs identified by the audit and provide documentation to
           support $151,936 in unsupported costs identified by the audit or reimburse its
           Program from non-Federal funds for any costs that it cannot support. In addition,
           the Agency should obtain the required lobbying certifications from contractors
           and subcontractors and develop and implement controls to ensure that accurate
           job information is reported on the Federal reporting Web site.

           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 provided a discussion draft audit report to the Agency on October 7, 2010,
           and discussed it with the Agency at an exit conference on October 13, 2010. The
           Agency provided written comments to the draft audit report on October 22, 2010.
           It agreed with the conclusions and recommendations in the report. The complete
           text of the Agency’s response can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                     4

Results of Audit
      Finding: The Agency Generally Administered Its Program in Accordance   6
      With Applicable Requirements

Scope and Methodology                                                        11

Internal Controls                                                            13

Appendixes
   A. Schedule of Questioned Costs                                           14
   B. Auditee Comments                                                       15




                                           3
                       BACKGROUND AND OBJECTIVE

The Pennsylvania Housing Finance Agency (Agency) was established in 1972 by an act of the
Pennsylvania General Assembly. The Agency’s purpose is the financing of decent, safe, and
affordable homes and apartments for the citizens of Pennsylvania. It is an independent public
corporation that acts on behalf of the State government. The Agency depends on its own ability
to generate revenues to carry out its activities and pay its obligations. It sells taxable and tax-
exempt securities to finance houses and rental units for Pennsylvania. In addition, it administers
housing programs on behalf of the State government. The Agency is also responsible for
administrating the Federal Low-Income Housing Tax Credit (LIHTC) program and is a
subrecipient of the U.S. Department of Housing and Urban Development’s (HUD) HOME
Investment Partnerships Program (HOME). HOME funds are used to develop multifamily rental
housing in all parts of the State that do not receive their own HOME entitlement funds.

A 14-member board governs the Agency. The board membership consists of the State treasurer,
three cabinet secretaries of the State government, six private members appointed by the governor
and confirmed by the Senate, and four members appointed by the leadership of the State Senate
and the House of Representatives. The board appoints the Agency’s executive director, who is
also its chief executive officer.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
of 2009 (Recovery Act) into law. The purpose of the Recovery Act is to jumpstart the Nation’s
ailing economy, with a primary focus on creating and saving jobs in the near term and investing
in infrastructure that will provide long-term economic benefits. The Recovery Act appropriated
$2.25 billion under the HOME program heading for a Tax Credit Assistance Program (Program)
grant to provide funds for capital investments in LIHTC projects. HUD awarded Program grants
to the 52 State housing credit agencies. On June 26, 2009, HUD awarded the Agency $95.1
million in Program funds.

Although Program funds were appropriated under the HOME heading, these funds are not
subject to any HOME requirements other than the environmental review and can only be used in
LIHTC projects, which are administered through the U.S. Department of the Treasury. Program
assistance may only be provided to a qualified low-income project for which a State housing
credit agency has made an allocation of LIHTC under Section 42 of the Internal Revenue Code.
Program assistance can only be provided to projects that were awarded LIHTCs during the
period October 1, 2006, to September 30, 2009. The State housing credit agency is responsible
for the use of its Program grant. Program funds must be used for capital investment in eligible
LIHTC projects. Capital investment means costs that are included in the “eligible basis” of a
project under Section 42 of the Internal Revenue Code. The “eligible basis” includes site
acquisition costs; constructions costs; and architect, developer and legal fees. Program funds
cannot be used for the administrative costs of the State housing credit agency including the cost
of operating the program or monitoring compliance. The State housing credit agency is required
to distribute Program funds competitively and pursuant to its qualified allocation plan. The State
housing credit agency is also required to give priority to eligible projects that are expected to be


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completed within 3 years from the date of the Recovery Act enactment or by February 16, 2012.
Since a major purpose of Program funds is to immediately create new jobs or save jobs at risk of
being lost due to the current economic crisis, the Recovery Act establishes deadlines for the
commitment and expenditure of grant funds and requires State housing credit agencies to give
priority to projects that will be completed by February 16, 2012.

As of July 4, 2010, the Agency had committed $81.7 million and disbursed $36.1 million of the
$95.1 million in Program funds to 28 LIHTC projects. The 28 projects consist of 16 elderly and
12 family projects, which will create or rehabilitate 1,271 assisted housing units. The Agency
was in the process of committing the remaining Program funds to three LIHTC projects.

Our objective was to determine whether the Agency administered its Program in accordance with
the requirements of the Recovery Act and applicable HUD requirements.




                                               5
                                    RESULTS OF AUDIT

Finding: The Agency Generally Administered Its Program in
Accordance With Applicable Requirements
Overall, the Agency administered its Program in accordance with the Recovery Act and HUD
requirements. Specifically, it (1) met the required fund commitment deadline, (2) completed
environmental clearances and obtained HUD approval of requests for release of funds before
executing written agreements, (3) executed written agreements that complied with requirements,
(4) received and disbursed Program funds in a timely manner, and (5) met increased
transparency and reporting requirements. However, although the audit disclosed no material
deficiencies with the Agency’s Program, the Agency incurred ineligible costs totaling $135,590
and could not support costs totaling $151,936. In addition, it did not obtain lobbying
certifications from contractors and subcontractors as required, and it understated its job creation
information that it reported to the Federal reporting Web site.



    The Agency Met the Required
    Commitment Deadline


                   Under the Recovery Act and HUD’s Office of Community Planning and
                   Development (CPD) Notice CPD-09-03-REV,2 the Agency was required to
                   commit at least 75 percent of its Program grant of $95.1 million by February 16,
                   2010. The Agency committed $79.7 million, or 84 percent, of its Program funds
                   by February 16, 2010. The Agency committed these funds to 26 projects. As of
                   July 4, 2010, the Agency had committed $81.7 million to 28 projects, and it was
                   in the process of committing the remaining Program funds to 3 additional
                   projects. Additionally, the Recovery Act limited Program funds to be used only
                   for qualified low-income projects to which the State housing credit agency
                   awarded LIHTCs during the period October 1, 2006, to September 30, 2009. The
                   Agency complied with this requirement.




2
    Revised July 27, 2009



                                                   6
Environmental Clearances
Were Completed and Requests
for Release of Funds Were
Approved Before Written
Agreements Were Executed as
Required

           Under HUD Notice CPD-09-03-REV, the Agency was required to complete an
           environmental clearance and obtain a HUD-approved request for release of funds
           before executing written agreements with project owners. The Agency complied
           with these requirements.

The Agency’s Written
Agreements Complied With
Requirements

           HUD Notice CPD-09-03-REV required the Agency to execute legally binding
           written agreements with each project owner. The written agreements were
           required to set forth all of the Program and crosscutting Federal grant
           requirements applicable to the funding and make these requirements enforceable
           through the recordation of a restriction that is binding on all owners. The
           Agency’s written agreements generally complied with these requirements. The
           Agency supplemented the written agreements by requiring projects to execute an
           indenture of restrictive covenants for LIHTC and the Program, a mortgage note,
           and a Program guaranty.

The Agency Received and
Disbursed Program Funds in a
Timely Manner


           The Agency drew down Program funds from HUD’s automated Line of Credit
           Control System only when the payments were due. Our review of disbursements
           totaling $9.7 million showed that the Agency disbursed the funds within 3
           working days as required by HUD Notice CPD-09-03-REV.

The Agency Met Increased
Transparency and Reporting
Requirements


           Under the Recovery Act and HUD Notice CPD-09-03-REV, the Agency was
           required to post on its Web site a description of its competitive selection criteria



                                             7
                    for awarding Program funds to eligible projects. The Agency was also required to
                    identify all projects selected for funding and post the amount of each Program
                    award on its Web site. The Agency complied with these requirements.

    Not All Program Expenditures
    Were Eligible or Adequately
    Supported

                    The Agency did not ensure that all expenditures of Program funds were eligible
                    and adequately supported. Our review of five project files indicated that the
                    Agency incurred $135,590 in ineligible costs and $151,936 in unsupported costs.
                    The ineligible costs of $135,590 included $124,124 in Program funds for the
                    funding of escrow accounts. HUD Notice CPD-09-03-REV prohibits the funding
                    of escrow accounts. The Agency also used $11,466 in Program funds to pay
                    construction-related costs for commercial space at a residential project. The
                    Agency did not include the construction costs for the commercial space as eligible
                    costs under Section 42 of the Internal Revenue Code. Since these costs were not
                    included in the eligible basis of the project, the costs are ineligible. Further, the
                    Agency’s cost certification guide states that for developments that contain
                    commercial space that the tenants will be charged to use, the cost of this space is
                    not includable in the eligible basis. Agency staff members informed us that they
                    were not aware of the Program requirements regarding the escrow accounts.
                    Regarding the commercial space, Agency staff members stated that they did not
                    notice that the construction costs included commercial space.

                    The unsupported costs of $151,936 included $141,936 for legal services for one
                    project and $10,000 for accounting services for another project. The Agency’s
                    documentation was not sufficient to determine whether these costs were eligible
                    under the Program. Although the Agency had copies of invoices to support the
                    legal services, the invoices lacked sufficient detail to determine whether the costs
                    for meetings and reviewing correspondence and documentation related to the
                    project. The purposes of the meetings and the subjects of the correspondence and
                    documentation reviewed were unknown. Similarly, regarding the accounting
                    services, the invoice did not indicate what specific service was provided and how
                    the services related to the project. Office of Management and Budget (OMB)
                    Circular A-873 states that for a cost to be allowable, it must be necessary and
                    reasonable and adequately documented. Further, regarding legal fees, the
                    Agency’s development cost limits require fees to be itemized, specifically
                    detailing work for property real estate, acquisition legal expenses, obtaining
                    financing, and syndication costs. Agency staff members agreed that additional
                    documentation should have been provided to support these services.


3
    This policy guidance was relocated to 2 CFR, Subtitle A, Chapter II, Part 225.



                                                           8
The Agency Did Not Obtain
Lobbying Certifications as
Required

           Regulations at 24 CFR (Code of Federal Regulations) Part 87 prohibit Program
           funds from being used for lobbying activities. To comply with this requirement,
           all Program contractors and subcontractors that receive more than $100,000 in
           funds must submit a certification for contracts, grants, and cooperative
           agreements. The Agency did not possess documentation to demonstrate that it
           met this requirement. Without the certifications, the Agency has no assurance
           that contractors and subcontractors refrained from lobbying. Agency staff
           members informed us that they were not aware of this requirement and were
           taking action to address the issue.

The Agency Understated Its
Job Creation Information
That It Reported to the
Federal Reporting Web Site

           Although the Agency reported job information by the required deadlines, it did
           not ensure that the information it reported was complete and accurate. OMB
           Recovery Act implementation guidance states that data quality is an important
           responsibility of key stakeholders identified in the Recovery Act. The Agency, as
           the owner of the data submitted, has the principal responsibility for the quality of
           the information submitted. Our test of a sample of contractors and subcontractors
           that submitted payroll time sheets for the quarter ending June 30, 2010, showed
           that job calculator forms which the Agency used to report job information did not
           agree with the supporting time sheets. We compared the time reported on the
           payroll time sheets to the time reported on the job calculator forms and
           determined that two subcontractors underreported the number of hours worked
           during the quarter by 627 hours. Agency staff members stated that the primary
           reason the number of hours reported was understated was because of timing. The
           Agency requires contractors and subcontractors to submit payroll time sheets
           within a week after the end of the pay period. Because the general contractors
           have to submit their job calculator form to the project owner and then to the
           Agency by a certain time, the payroll information for the last two pay periods in
           the quarter (pay periods ending June 20 and June 27, 2010) were not included in
           the totals shown on the job calculator forms. In an effort to meet the Recovery
           Act goal of achieving unprecedented levels of accountability and transparency in
           government spending, the Agency should develop and implement controls to
           ensure that payroll time sheets submitted by contractors and subcontractors are
           reviewed to verify that information provided on job calculator forms is complete
           and accurate.



                                            9
Conclusion


             The Agency generally administered its Program in accordance with the Recovery
             Act and HUD requirements. However, although the audit disclosed no material
             deficiencies with the Agency’s Program, the Agency needs to address the
             ineligible and unsupported costs identified by the audit, obtain lobbying
             certifications from contractors and subcontractors as required, and improve its
             process for reporting job creation information to the Federal reporting Web site.

Recommendations

             We recommend that the Director of the Office of Affordable Housing Programs
             require the Agency to

             1A. Reimburse its Program $135,590 from non-Federal funds for the ineligible
                 costs identified by the audit.

             1B. Provide documentation to support the $151,936 in unsupported costs
                 indentified by the audit or reimburse its Program from non-Federal funds for
                 any costs that it cannot support.

             1C. Obtain and review the required lobbying certifications from contractors and
                 subcontractors.

             1D. Develop and implement controls to ensure that accurate job information is
                 reported on the Federal reporting Web site.




                                             10
                           SCOPE AND METHODOLOGY

We conducted the audit from May through September 2010 at the Agency’s office located at 211
North Front Street, Harrisburg, PA, and our office located in Philadelphia, PA. The audit covered
the period February 2009 through May 2010 but was expanded when necessary to include other
periods. We relied in part on computer-processed data in the Agency’s computer system.
Although we did not perform a detailed assessment of the reliability of the data, we did perform
a minimal level of testing and found the data to be adequate for our purposes.

To accomplish our objective, we reviewed

       Relevant background information.

       The Recovery Act.

       Section 42 of the Internal Revenue Code pertaining to the LIHTC program.

       Program guidance found on HUD’s Web site. The reference material included
       information on requirements for written agreements, the National Environmental Policy
       Act, lead-based paint, and program income.

       The Program agreement between HUD and the Agency, dated June 26, 2009, and
       documents related to the Program application submitted by the Agency to HUD before
       the execution of the Program agreement.

       Correspondence prepared by HUD, the Agency, and other related parties receiving
       Program funds.

       The Agency’s policies and procedures related to financial reporting, general payout
       procedures, monitoring, and program guidelines related to Recovery Act funds and
       LIHTC.

       The Agency’s organizational chart, an employee listing, and its standards of conduct for
       its employees.

       The Agency’s policies and procedures related to the LIHTC program.

       The Agency’s audited financial statements for the periods ending June 30, 2008, and
       June 30, 2009.

       The Agency’s Recovery Act Web site.




                                                11
       Program funding provided to 28 projects, including other sources of funds used to finance
       the construction or rehabilitation of the properties.

       Program agreements between the Agency and the project owners for the 26 projects for
       which the Agency had committed Program funds as of February 16, 2010.

       Job calculator forms for the period ending June 30, 2010, and weekly payroll information
       submitted by the contractors and subcontractors for two projects.

We nonstatistically selected 5 of the 28 projects that were awarded Program funds as of July 4,
2010, to determine whether the costs were eligible and properly supported. The five projects
were awarded a total of $22.7 million in Program funds of the $95.1 million the Agency
received. The amount of Program funds awarded to these five projects ranged from $492,000 to
$7.6 million. The sample of five projects consisted of the projects with the three largest Program
grants and the projects with the two smallest Program grants. As of July 4, 2010, the Agency
had disbursed $36.1 million in Program funds, of which $9.7 million was disbursed to these five
projects.

We visited two of the five sample projects to observe the work progress.

We interviewed relevant Agency staff and officials from HUD’s Office of Affordable Housing
Programs, and Office of Community Planning and Development, Philadelphia Regional 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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               12
                              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
               objective:

                      Policies, procedures, and other management controls implemented to ensure
                      that the Agency administered Program funds in accordance with the
                      Recovery Act and HUD requirements.

               We assessed the relevant controls identified above.

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

               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance regarding the effectiveness of the
               internal control structure as a whole. Accordingly, we do not express an opinion on
               the effectiveness of the Agency’s internal control.




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                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation
                     number              Ineligible 1/     Unsupported 2/
                        1A                $135,590
                        1B                                    $151,936




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.




                                             14
Appendix B

             AUDITEE COMMENTS




                    15
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