oversight

Washington State Housing Finance Commission, Seattle, WA, Did not Always Disburse Its Tax Credit Assistance Program Funds in Accordance With Program Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-01-19.

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

                                                                Issue Date
                                                                         January 19, 2011
                                                                 
                                                                Audit Report Number
                                                                             2011-SE-1002




TO:        Virginia Sardone, Acting Director, Office of Affordable Housing, DGH

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, Region X, 0AGA


SUBJECT: Washington State Housing Finance Commission, Seattle, WA, Did not Always
           Disburse Its Tax Credit Assistance Program Funds in Accordance With
           Program Requirements


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Washington State Housing Finance Commission (Commission)
             because it was the largest recipient of the Tax Credit Assistance Program (TCAP)
             grant in the U.S. Department of Housing and Urban Development’s (HUD)
             Region 10. The Commission received more than $43 million in TCAP funds
             from the American Recovery and Reinvestment Act of 2009 (Recovery Act). Our
             objectives were to determine whether the Commission established eligible grant
             projects, entered TCAP information into FederalReporting.gov accurately and
             completely, and paid eligible TCAP expenditures in accordance with the
             applicable Recovery Act and HUD rules and regulations.

 What We Found


             The Commission complied with the applicable Recovery Act and HUD rules and
             regulations in establishing eligible grant projects, and in the entering of TCAP
             information into FederalReporting.gov. However, it did not always disburse
             TCAP funds in accordance with program requirements. The Commission
           reimbursed two project owners for ineligible permanent loan fees, ineligible
           appraisal fees, and unsupported legal costs. It paid these fees because there were
           weaknesses in its oversight process.

What We Recommend


           We recommend that the Director of HUD’s Office of Affordable Housing require
           the Commission to reimburse $170,036 to its U.S. Treasury line of credit from
           non-Federal funds for the ineligible expenditures. We also recommend that the
           Director require the Commission to provide supporting documentation for the
           $17,068 in unsupported costs or reimburse its U.S. Treasury line of credit from
           non-Federal funds. Further, we recommend that the Director require the
           Commission to establish and implement written policies and procedures for the
           review and approval of budgets and draw requests.

           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 the discussion draft of the audit report to the Commission on
           December 23, 2010, and requested its comments by January 6, 2011. The
           Commission provided its written comments on January 6, 2011. It generally
           agreed with the facts upon which the finding and recommendations were based,
           but it disagreed with the characterization that it was a finding.

           The complete text of the auditee’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 Commission Reimbursed Ineligible and Unsupported Costs   6

Scope and Methodology                                                           9

Internal Controls                                                               11

Appendixes
   A.   Schedule of Questioned Costs                                            12
   B.   Auditee Comments and OIG’s Evaluation                                   13
   C.   Criteria                                                                15
   D.   Table of Deficiencies for Finding 1
                                                                                16




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                      BACKGROUND AND OBJECTIVES

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 was to jump-start the
Nation’s economy, with a primary focus on creating and saving jobs in the near term, and to
invest in infrastructure that would provide long-term economic benefits. The Recovery Act
appropriated $2.25 billion under the HOME Investment Partnerships Program (HOME) heading
for a Tax Credit Assistance Program (TCAP) grant to provide funds for capital investments in
low-income housing tax credit projects. The U.S. Department of Housing and Urban
Development (HUD) awarded TCAP grants to the 52 State housing credit agencies. On June 24,
2009, HUD awarded the Washington State Housing Finance Commission (Commission) more
than $43 million in TCAP funds to be used on qualified low-income buildings that were awarded
low-income housing tax credits under section 42 of the Internal Revenue Code (IRC).

Although these funds were appropriated under the HOME heading, TCAP funds are not subject
to any HOME requirements other than the environmental review and can only be used in low-
income housing tax credit projects, which are administered through the U.S. Department of the
Treasury. HUD awarded TCAP grants to facilitate development of projects that received low-
income housing tax credit awards between October 1, 2006, and September 30, 2009. Since a
major purpose of these funds was to immediately create new jobs or save jobs at risk of being
lost due to the current economic crisis, the Recovery Act established deadlines for the
commitment and expenditure of grant funds and required State housing credit agencies to give
priority to projects that would be completed by February 16, 2012. The grantee was required to
distribute the TCAP funds competitively under the requirements of the Recovery Act and
pursuant to its existing qualified allocation plan.

The Commission helps communities across Washington State create more affordable housing,
build quality facilities for a wide range of uses, and lend assistance to those who earn their living
from the land. It finances mortgage loans for affordable single-family homes, apartment
development, and facilities for nonprofit organizations. It also issues tax-exempt 501(c)(3)
bonds to finance nonprofit housing as well as facilities owned by nonprofit organizations. The
Commission finances a spectrum of affordable multifamily housing statewide by means of
allocating Federal low-income housing tax credits and issuing of tax-exempt bonds.

As of September 16, 2010, the Commission had awarded all of its TCAP funds to 10 low-income
housing tax credit projects, two of which had not yet closed, and had disbursed more than $15
million in TCAP funds. The 10 projects are multifamily projects which will create or rehabilitate
652 low-income housing units in Washington State for large families, the elderly, disabled
individuals, and homeless individuals.

According to Recovery.gov, the use of these TCAP funds had resulted in the creation of 82 jobs
as of August 31, 2010.




                                                  4
Our objectives were to determine whether the Commission

      Established eligible grant projects in accordance with HUD rules and regulations,
      Entered TCAP information into FederalReporting.gov accurately and completely, and
      Paid eligible TCAP expenditures in accordance with the applicable Recovery Act and
       HUD rules and regulations.




                                             5
                                  RESULTS OF AUDIT

Finding 1: The Commission Reimbursed Ineligible and Unsupported
Costs
The Commission reimbursed two project owners for ineligible permanent loan fees, ineligible
appraisal fees, and unsupported legal fees (see appendix D). This condition occurred because
there were weaknesses in the Commission’s oversight process. Consequently, it spent more than
$170,000 on ineligible costs, and more than $17,000 on unsupported legal fees. These funds
could have been made available for other eligible TCAP expenses.



 The Commission Used TCAP
 Funds To Pay for Ineligible
 Permanent Loan Fees


              The permanent loan fees were invoiced as permanent loan origination fees,
              administrative fees, monitoring fees, and legal fees for permanent loan financing.
              In one instance, the Commission reimbursed a permanent loan origination fee to
              Washington Community Reinvestment Association at loan closing that had been
              incorrectly included in the approved budget as an eligible expenditure for TCAP.
              Commission staff told us that it and the industry considered permanent loan
              origination fees ineligible as part of the project basis cost under section 42 of the
              IRC (see appendix C).

              Two other invoices included administrative fees and monitoring fees. The
              Commission initially assumed that the administrative fees were for loan
              underwriting costs and the monitoring fees were for construction monitoring.
              When asked, the Commission confirmed with the vendors that these fees
              consisted of a number of eligible and ineligible activities. Since the Commission
              could not further identify the eligibility of these activities and did not want to take
              any unnecessary risk, it stated that it would reclassify these costs as permanent
              loan fees and consider them ineligible since the project had sufficient other
              eligible costs for which to use the TCAP funds.

              The Commission also paid for ineligible legal fees that consisted of bond issuance
              financing and bond approval fees, which it categorized as permanent financing
              fees. It approved the reimbursement even though permanent financing fees were
              not a budgeted line item in the original approved budget. The Commission agreed
              that the industry standard is that permanent loan fees are ineligible costs under
              section 42 of the IRC (see appendix C).




                                                 6
The Commission Paid for
Ineligible Appraisal Fees


            The Commission also agreed that the industry standard is that appraisal fees are
            ineligible basis costs under section 42 of the IRC. When asked, Commission staff
            provided a standard budget form that included various types of costs. The lines
            for some of these costs, including appraisals, were blacked out since the industry
            standard is that these costs are ineligible project basis costs under section 42 (see
            appendix C). However, the Commission paid for these ineligible appraisal fees at
            loan closing for one project. The original approved budget included $10,000 in
            TCAP funding for appraisal fees.

The Commission Paid for
Unsupported Legal Fees


            Unsupported fees were legal fees for which the Commission could not
            specifically identify whether they were related to eligible construction loans or for
            ineligible permanent loan financing. Supporting documentation for invoices
            included vendor bills showing the number of hours for various activities
            performed. Most often, the bills included a description of multiple activities and a
            total number of hours charged for the activities. Consequently, the hours for
            eligible TCAP activities were unidentifiable.

            The TCAP written agreement between the Commission and the project owner
            requires the project owner to request funds spent only on eligible costs, furnish
            invoices for which payment is requested, and identify the applicable line item in
            the development budget. The project owner submitted the invoices as received
            from the vendors, with the hours commingled for multiple tasks, and invoiced
            them as legal fees and HUD legal fees. Neither the vendors nor the project
            owners separated the eligible hours for construction loan tasks from the ineligible
            hours for permanent loan financing tasks to support eligible TCAP
            reimbursements.


The Commission Did Not
Review the Budget and the
Draw Requests in Detail

            There were weaknesses in the Commission’s oversight process. The Commission
            did not review the project budgets and the draw requests in detail to confirm that
            the costs budgeted and invoiced were eligible costs. Before the TCAP grant was
            awarded, the Commission was changing the format of its budget form. It did not




                                              7
          review the information in detail when the budgets were transferred to the new
          form, and some ineligible costs were included in the budget.

          When the Commission reviewed the draw requests, it did not review the
          supporting documentation in detail and did not compare the draw request line
          items to the approved budget to determine eligibility of the costs. The
          Commission believed that it would identify any ineligible costs when it reviewed
          the projects’ certified costs at project completion.

          The Commission spent more than $170,000 on ineligible permanent loan fees and
          appraisal fees and more than $17,000 on unsupported legal fees. These funds
          could have been made available for other eligible TCAP expenses.


Recommendations

          We recommend that the Director of HUD’s Office of Affordable Housing

          1A.     Require that the Commission reimburse its U.S. Treasury line of credit
                  $170,036 from non-Federal funds for the ineligible permanent loan fees
                  and appraisal fees.

          1B.     Require that the Commission provide supporting documentation for the
                  $17,068 in unsupported costs or reimburse its U.S. Treasury line of credit
                  from non-Federal funds.

          1C.     Require that the Commission establish and implement written policies and
                  procedures for the review and approval of budget forms and draw requests
                  to specifically incorporate a review of the detail and verification that the
                  costs are eligible for TCAP funding.




                                            8
                         SCOPE AND METHODOLOGY

We reviewed the Commission’s project selection process, its reported TCAP information, and its
TCAP expenditures to ensure that it established eligible grant projects, entered TCAP
information into Recovery.gov accurately and completely, and paid eligible TCAP expenditures
in accordance with the applicable Recovery Act and HUD rules and regulations. To accomplish
our objectives, we reviewed applicable laws, regulations, HUD requirements, Commission
requirements, Commission policies and procedures, and IRC section 42 eligible basis costs
requirements. We interviewed HUD staff, Commission staff, and Internal Revenue Service staff
to obtain further knowledge of program specificity. We also conducted two site visits.

We reviewed a listing of all the projects that were awarded low-income housing tax credits from
October 1, 2006, to September 30, 2009, under section 42(h) of IRC of 1986 to ensure that the 10
projects selected for TCAP funding were included on that listing and that those projects were
required to be completed by February 16, 2012.

We selected 2 of the 10 projects to review for the full-time equivalency reported. We selected
one project with the highest full-time equivalency reported in Recovery.gov for the quarter
ending March 31, 2010, and another project with the highest TCAP expenditure rate, at 90
percent, for the quarter ending June 30, 2010. For expenditure reporting, we reviewed all
expenditures reported for the quarter ending March 31, 2010.

The Commission was awarded more than $43 million in TCAP funds and as of September 16,
2010, had expended more than $15 million. For our review of expenditures, we reviewed all
draw requests from February through August 2010 for 4 of the Commission’s 10 TCAP projects
to ensure that the expenditures were for TCAP-eligible activities. For this review, we selected

       The two largest projects with the largest dollars spent to date.
           o One project was awarded $11.8 million and had spent $6.3 million.
           o Another project was awarded $11.6 million and had spent $3.3 million.
       The two projects with the highest TCAP expenditure rate with at least 90 percent
        expended.
           o One project was awarded $1.4 million and had spent $1.26 million (90 percent).
           o Another project was awarded $1.1 million and had spent $1 million (91 percent).

We also reviewed 11 of 24 draws of the 7 projects with expenditures to ensure that funds were
expended within 3 days of draw from HUD’s account and that no advances were made to the
project owners. We selected the first and last draws of projects with more than $1.5 million in
expenditures and the first draw for projects with $1.5 million or less in expenditures. However,
for the project that was awarded the $351,518 grant, the first draw was only $80,671, so we
reviewed the two draws that the project had to reach an assurance level for that project.

We did not rely on automated data for our analysis because the Commission did not have an
automated database system for TCAP reimbursements.



                                                9
The audit generally covered the period February 2009 through August 2010. We expanded our
audit period as needed to accomplish our objectives. We performed our audit at the
Commission, 128 2nd Avenue, Seattle, WA); at two project sites in Toppenish and Bellingham,
WA; and at the HUD OIG (Office of Inspector General) office in Seattle, WA, from September
16, 2010 to November 8, 2010.

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.




                                               10
                              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:

                     Controls to ensure that the Commission followed applicable laws and
                      regulations with respect to the eligibility of TCAP projects.
                     Controls to ensure that the Commission followed applicable laws and
                      regulations with respect to the entering of TCAP information into
                      FederalReporting.gov.
                     Controls to ensure that the Commission paid only for eligible costs under
                      TCAP.

               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.

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

                     The Commission did not have adequate controls in place to ensure that
                      reimbursements were only for eligible expenditures for TCAP (finding 1).


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                                     APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                  Recommendation            Ineligible 1/   Unsupported 2/
                         number

                                1A            $170,036
                                1B                                   17,068



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.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                             Auditee Comments
             January 6, 2011 
              
             Attention: Ronald Hosking, Regional Inspector General for Audit 
              
             Washington State Housing Finance Commission Comments on HUD‐OIG Audit of the TCAP 
             program: 
              
             While we do not disagree with the facts upon which the HUD‐OIG finding was made, we do 
Comment 1    disagree with the resulting finding; specifically we take issue with the characterization that there 
             exists a “weakness in our process and oversight” of the TCAP program, that we failed to disperse 
             TCAP funds in accordance with program requirements, and that we failed to have appropriate 
             controls in place to ensure TCAP resources paid for only TCAP eligible costs.  
              
             We feel strongly that, as TCAP Grantee, we have met and continue to meet the spirit and intent of 
Comment 2    the TCAP program.  The basis for our opinion lays in the fact that much of the guidance we have 
             received predominantly directs us to follow practices stipulated in IRS Section 42.  HUD Notice 
             CPD‐09‐03‐REV specifically states, “The TCAP assistance provided to a project must be made in the 
             same manner and subject to the same limitations as required by the state housing credit agency 
             with respect to an award of LIHTC to a project (i.e., as required under Section 42 of the IRC and its 
             implementing regulations).   
              
             In developing the Commission’s TCAP program and processes, “in the same manner as required 
             under Section 42” has meant that a project would be required to follow the “best practices” that 
             have evolved over more than 25 years of LIHTC program activity. The Housing Credit law requires 
             Allocating Agencies to limit Credit allocations to the amount necessary for financial feasibility and 
             viability as a qualified low‐income housing development. As part of their analysis, agencies must 
             evaluate all sources and uses of funds and the reasonableness of development and operating 
             costs. Agencies typically verify expenditures by requiring developers to submit a detailed cost 
             certification.   In January 2000, the IRS issued regulations requiring independent verification of 
Comment 3    sources and uses of funds in the form of a CPA audit report called the Final Cost Certification, 
             based on an accountant’s audit or examination of financial documents and certifications the 
             development owner provides. The Commission’s review and approval of this CPA audit report is 
             the process on which the LIHTC industry relies to verify eligible basis.  Since TCAP funds can only 
             be spent on items that qualify as eligible basis, the Commission built its cost verifying process on 
             the industry standard.   
              
              That said, given our experience with the HUD‐OIG review, we stand corrected in our 
             interpretation and resulting approach.  We now have greater clarity of our charge as the TCAP 
             Grantee and the expectations of HUD.  We have put in place additional controls to more closely 
             govern, on a draw by draw basis, all TCAP project expenses to ensure that only TCAP eligible costs 
             are reimbursed with TCAP resources.  We also have received direction on how to engage the 
             process for reimbursing our US Treasury line of credit with non‐Federal funds as directed and will 
             proceed immediately.      
              
             We appreciate the opportunity to comment. 




                                                     13
                         OIG Evaluation of Auditee Comments


Comment 1    In our discussion of the finding outline, the Commission stated that the
            deficiency existed in its process. The Commission also confirmed that it had not
            planned to review the eligibility of costs for the TCAP program until project
            completion when the project owners submit the final cost certifications for
            eligible basis costs that have been audited by a certified public accountant. This
            resulted in TCAP funds being used to pay for ineligible costs.

Comment 2   Although the HUD notice directed the commission to provide assistance to
            projects in the same manner as required by the state housing credit agency with
            respect to other tax credit projects, the notice also stated that TCAP funds must be
            used only for capital investment in eligible projects. Capital investment means
            costs included in the eligible basis of the project. Further, the grantee was to,
            “…repay TCAP funds that were used for ineligible costs…” By not reviewing
            invoices in detail, but waiting for the project to be completed to review costs for
            eligibility, the Commission used TCAP funds to pay ineligible costs and must
            repay those costs.

Comment 3   Although the Commission was following “best practices” and relying on a final
            cost certification audit report by an independent certified public accountant, this
            would not necessarily identify all ineligible costs as audits typically do not review
            all costs, but only a sampling of costs. Therefore, some ineligible costs could
            potentially be missed and still be paid with TCAP funds. In addition, ineligible
            expenses identified at project completion would have to be reimbursed from non-
            federal funds to the Commission’s Treasury line of credit. The Commission
            would then be at risk of forfeiting TCAP funds that could have been applied to
            eligible expenses during the project.




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Appendix C
                                          CRITERIA

HUD allows costs for TCAP that are eligible basis costs under section 42 of the IRC. The
Internal Revenue Service does not have specific eligible and ineligible basis costs outlined in the
IRC. The industry starts out with section 42(d)(3) of the IRC, which states that eligible basis
items are a project’s depreciable costs. Specifically, it states that eligible basis is the project’s
adjustable basis as of the close of the first taxable year of the credit period. The Commission
looks to 20-plus years of programmatic knowledge about what items can be included and what
must be excluded from eligible basis. It also refers to the best practices provided by the National
Council of State Housing Agencies, the Low-Income Housing Tax Credit Handbook published
by Novogradac & Company, and specific guidance and letter rulings from the Internal Revenue
Service. From these resources, the Commission derived a budget form that identified eligible
and ineligible basis costs under section 42 of the IRC for low-income housing tax credit. The
Commission’s budget worksheet showed that appraisal fees, permanent loan fees, and legal fees
with respect to organization, syndication, and financing were ineligible. These costs are
recognized by the industry and the Commission as ineligible. Therefore, according to industry
practice and the Commission’s interpretation, these fees are not eligible basis costs of a project
and, thus, are ineligible costs for TCAP.




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Appendix D
         TABLE OF DEFICIENCIES FOR FINDING 1

                Deficiencies                       Project A   Project B      Total
Permanent loan fees                                $ 83,962    $77,800      $161,762
Appraisal fees                                        8,274                    8,274
 Subtotal ineligible fees                            92,236     77,800      170,036
Unsupported legal fees                               17,068                  17,068
Total ineligible fees and unsupported costs    $109,304        $77,800     $187,104




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