Issue Date
November 16, 2011
Audit Report Number
2012-LA-0001
TO: Milan Ozdinec, Deputy Assistant Secretary for Public Housing and Voucher
Programs, PE
David Vargas, Deputy Assistant Secretary for Real Estate Assessment Center,
PX
FROM: Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA
SUBJECT: HUD Did Not Adequately Support the Reasonableness of the Fee-for-Service
Amounts or Monitor the Amounts Charged
HIGHLIGHTS
What We Audited and Why
We initiated a review of the U.S. Department of Housing and Urban
Development’s (HUD) oversight of the Housing Choice Voucher program’s fee-
for-service system because it was included in our annual audit plan, prompted by
a prior external audit, during which we noted that a housing agency charged
management and bookkeeping fees far in excess of the applicable overhead
expense while following HUD’s fee-for-service requirements. Our overall audit
objective was to determine how HUD arrived at the fee-for-service management
and bookkeeping fee limits and whether the methodology and monitoring of these
fees appeared reasonable.
What We Found
HUD did not adequately support or reassess the reasonableness of the fee-for-
service amounts or monitor the amounts charged. We reviewed three additional
housing agencies and found no indication that they defederalized administrative
fees in excess of actual costs; however, HUD data suggest that other housing
agencies may have overcharged the Section 8 program by more than $5 million in
management fees and more than $1 million in bookkeeping fees.
What We Recommend
We recommend that the Deputy Assistant Secretary for Public Housing and
Voucher Programs in coordination with the Real Estate Assessment Center
(Center) establish and implement procedures to reassess the safe harbor
percentage and rates periodically to ensure that they are reasonable. HUD should
retain the documentation justifying the calculation of the percentage and rates. In
addition, HUD should assess the feasibility of requiring the agencies to periodically
justify and retain documentation showing the reasonableness of using the maximum
rates, or lower them as appropriate. We also recommend that the Deputy Assistant
Secretary for Public Housing and Voucher programs and the Center (1) develop
and implement automated controls to the Subsystem to check that housing
agencies nationwide do not charge excessive management and bookkeeping fees.
We also recommend that HUD (2) follow up on the largest discrepancies identified
and reassign excessive defederalized funds to the program if the housing agencies
cannot provide HUD with a reasonable explanation for the discrepancies.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-4.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided a draft report to HUD on October 13, 2011, and held an exit
conference with HUD on October 24, 2011. HUD provided written comments on
November 14, 2011. HUD generally agreed with our report recommendations.
The complete text of the auditee’s response, along with our evaluation of that
response, can be found in appendix A of this report.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding 1: HUD Could Not Support the Reasonableness of the Housing Choice 5
Voucher Program’s Fee Limits
Finding 2: HUD Failed To Properly Monitor the Fees Charged to the Housing 9
Choice Voucher Program
Scope and Methodology 11
Internal Controls 13
Appendix
A. Auditee Comments and OIG’s Evaluation 15
3
BACKGROUND AND OBJECTIVES
The U.S. Department of Housing and Urban Development (HUD) published the revision to the
Operating Fund program at part 990.280, which provided a new formula for distributing
operating subsidies to public housing agencies and established requirements to convert to asset
management. HUD issued a supplement to provide guidance to address the changes in financial
management and reporting for public housing agencies. The supplement also established that
housing agencies would be required to replace cost allocation systems with a series of fees for
the Public Housing Operating Fund and Public Housing Capital Fund programs. In addition, it
developed guidelines for the fee-for-service allocation system for the Housing Choice Voucher
program to assist public housing agencies in determining whether fees are reasonable if an
agency chooses to adopt fees voluntarily in lieu of overhead cost allocations.
Under the Operating Fund program, housing agencies with 250 or more units must use a
management fee in lieu of allocations for the Operating Fund and Capital Fund programs.
However, the change to a management fee approach for the reimbursement of overhead in the
Section 8 Housing Choice Voucher program is voluntary.
HUD established the types of fees and limits the amount of fees that public housing agencies
may charge to their Housing Choice Voucher programs under the fee-for-service allocation
system. The supplement to HUD Handbook 7475.1, REV, CHG-1, Financial Management
Handbook, states that “for PHAs1 that elect to use a fee-for-service methodology for its HCV2
Program for overhead/indirect costs, HUD will consider a management fee of up to 20 percent of
the administrative fee or up to $12 PUM3 per voucher leased, whichever is higher, as meeting the
requirements for the appropriations act.” The supplement also allows public housing agencies to
charge a $7.50 bookkeeping fee that can be earned for each occupied unit and HUD-approved
vacancy.
Audit Objective
Our overall audit objective was to determine how HUD arrived at the fee-for-service
management and bookkeeping fee limits and whether the methodology and monitoring of these
fees appeared reasonable.
1
PHA stands for public housing agency.
2
HCV stands for Housing Choice Voucher.
3
PUM stands for per unit monthly.
4
RESULTS OF AUDIT
Finding 1: HUD Could Not Support the Reasonableness of the Housing
Choice Voucher Program’s Fee Limits
Although HUD provided a partial report justifying the 20 percent safe harbor management fee
rate, it was not sufficient to show whether that rate was reasonable. In addition, HUD did not
provide adequate justification for the reasonableness of the bookkeeping fee of $7.50 and
management fee of $12. This condition occurred because HUD either did not adequately support
or reassess the Housing Choice Voucher program’s fee limits under the fee-for-service allocation
methodology or did not believe it was necessary to maintain the justification. Consequently, we
identified one housing agency that used the percentage that HUD deemed reasonable and
defederalized significant administrative fees and reserves despite having costs far below the
reasonable percentage. Although we found no indication that the three Region 94 public housing
authorities in our nonstatistical sample defederalized administrative fees in excess of actual
costs, HUD may have allowed other housing agencies to defederalize significant amounts of
administrative fees in excess of actual costs.
HUD Lacked Sufficient Support To
Justify the Fee Limits and Did Not
Require Agencies To Retain
Records To Justify the Use of Such
Fees
HUD did not retain the justification for the fee rates. It provided a contractor’s
report justifying the management fee of 20 percent of the administrative fee. The
report stated that the 20 percent was based on limited research of caps placed on
indirect administration in other Federal programs. It also stated that an amount on
the higher end of the range would be used due to the unknown in the Housing
Choice Voucher program with regard to actual direct versus indirect program
administration costs. We were unable to validate the basis for the 20 percent or
determine the range that was used since HUD could not produce the limited
research or the appendix with the compiled data of the report during our
fieldwork.
Moreover, HUD did not provide adequate support to justify the $12 per unit
month per voucher leased management and $7.50 bookkeeping fee rates. HUD
provided Final Consolidated Financial Management and Accounting Handbook,
SOW No: 8.1.2.4 and 8.3.3.4, to justify the $7.50 bookkeeping fee rates, but it
only stated “the $7.50 amount is based on the average bookkeeping fee in HUD’s
multifamily housing programs of about $3.50 PUM (2004 data).” HUD did not
4
Region 9 is composed of the following states: California, Nevada, Arizona, and Hawaii.
5
have additional information to show how the multifamily average bookkeeping
fee rate of $3.50 is applicable to the Housing Choice Voucher program rate of
$7.50 or why the bookkeeping fee rate of $3.50 almost doubled. Further, HUD
did not have support to justify the $12 per unit month per voucher leased
management fee rate. Therefore, we could not determine the reasonableness of
these rates.
HUD does not require public housing agencies to retain indirect cost allocation
records after they have switched to the fee-for-service allocation system and does
not require them to justify the reasonableness of fees charged within the
established limits. As a result, public housing agencies would not necessarily be
able to justify the fee rates charged to the Housing Choice Voucher program or
how the amounts were determined. However, based on the housing agencies we
reviewed, it appears many public housing agencies maintain indirect cost
allocations for their other state or local programs and do have this information
available.
The Housing Authority of the
County of Los Angeles Charged
Excessive Fees to the Section 8
Program
During our audit (audit report # 2009-LA-1009, issued April 24, 2009) of the
Housing Authority of the County of Los Angeles, we found that $5.3 million in
management and bookkeeping fees was charged in fiscal year 2008, when total
indirect costs allocated to the Section 8 program were only $1.7 million5. As a
result, the County accrued significant defederalized funds from its administrative
fees, while its administrative fee reserves dropped from $8 million at the end of
fiscal year 2006 to $2 million in 2008. The established thresholds appeared to be
too high in this instance, allowing the County to defederalize its administrative
fees and reserves in excess of actual costs.
5
Even after the County switched to the fee-for-service allocation system, it maintained an internal record for
tracking its indirect costs for the Housing Choice Voucher program as well as its other Federal and non-Federal
programs. Based on that record, its actual allocated costs was $1.7 million; however, $5.3 million in management
and bookkeeping fees was charged to the Section 8 program. Therefore, the fees were $4 million in excess of actual
cost.
6
There Was No Indication of
Defederalized Excess Funds at
Three Agencies Sampled
We found no indication that the three public housing agencies in our sample had
defederalized significant amounts of administrative fees in excess of actual costs
under the fee-for-service allocation system.
Housing Agency of the City of Los Angeles - After it switched to fee-for-
service, the City’s combined management and bookkeeping fees for fiscal
year 2008 were lower than its prior year’s indirect cost allocation.
Although the fee amounts increased in the following 2 years, the increases
were not significant.
County of Sacramento Housing Agency - Sacramento determined its
management fees based on budget estimates rather than its actual total
administrative fees or unit months leased. Although it could not provide
us with documentation to show how these estimates were derived, its fees
were within HUD’s fee limits, and it charged fees that were significantly
less than its total indirect cost immediately before the switch to the fee-
for-service allocation methodology.
Phoenix Housing Department - Due to its failure to retain historical
records to support its units’ months leased, Phoenix was unable to
accurately demonstrate how it derived the management and bookkeeping
fees that it reported in HUD’s Financial Assessment Subsystem.
However, after Phoenix switched to fee-for-service, its combined
management and bookkeeping fees for fiscal year 2008 were lower than
prior years’ indirect cost allocations. Although the amounts later
increased, they were not significant.
Conclusion
HUD was not able to completely justify its management and bookkeeping fee rates
because it did not support or reassess the rates. Although the three public housing
agencies sampled had not charged fees significantly higher than their prior
indirect cost allocations, indicating the rates appear reasonable for some housing
authorities, our prior audit of the County shows this was not always the case. As
a result, HUD may have also allowed other public housing agencies nationwide to
defederalize significant amounts of Housing Choice Voucher funds in excess of
actual expenses. We therefore recommend that HUD establish and implement
procedures to evaluate the safe harbor percentages and rates periodically to ensure
7
that they are reasonable and applicable to all public housing agencies. Further, since
our testing showed housing agencies are still internally tracking indirect costs, HUD
should also assess the feasibility of requiring the agencies to periodically justify and
retain documentation showing the reasonableness of using the maximum rates, or
lower them as appropriate.
Recommendation
We recommend that the Deputy Assistant Secretary for Public Housing and
Voucher programs in coordination with the Center:
1A. Establish and implement procedures to reassess the safe harbor percentage
and rates periodically to ensure that they are reasonable. HUD should
retain the documentation justifying the calculation of those percentages
and rates. In addition, HUD should assess the feasibility of requiring the
agencies to periodically justify and retain documentation showing the
reasonableness of using the maximum rates, or lower them as appropriate.
8
Finding 2: HUD Failed To Properly Monitor the Fees Charged to the
Housing Choice Voucher Program
HUD did not monitor the management and bookkeeping fees charged to the Housing Choice
Voucher program. This condition occurred because HUD did not develop or implement
procedures to check for the charging of excessive management and bookkeeping fees.
Consequently, there is a risk of public housing agencies’ potentially overcharging management
and bookkeeping fees and, therefore, defederalizing funds that should be used for the Section 8
program. Public housing agencies nationwide may have charged more than $5 million in
management and more than $1 million in bookkeeping fees in excess of HUD’s established
limitations.
HUD Did Not Monitor
Management and Bookkeeping
Fees
Contrary to guidebook requirements, HUD did not monitor public housing agencies’
management and bookkeeping fees. HUD Guidebook 7460.7 states that “HUD
monitors compliance with requirements through remote monitoring and/or on-site
reviews. HUD’s objective is to identify situations where funds are endangered and
through problem diagnosis/analysis assist PHAs in correcting deficiencies.”
However, various local HUD field offices told us that they did not actively monitor
the management and bookkeeping fees because they believed that the Center was
responsible for that function. The Center agreed that it was its responsibility to
monitor the management and bookkeeping fees; however, it did not perform the
monitoring to identify fee overages, although it had intended to do so when it
switched system platforms in 2008. The Center stated that the new platform showed
significant developmental issues. Because HUD did not allocate sufficient funds to
the Center to correct these issues, it was unable to automate the check functions as
was originally planned. The Center also did not have enough staff to manually
monitor all the public housing agencies; and therefore, it had not monitored the fees.
Housing Agencies Nationwide
May Have Charged Excessive
Fees
Our review of data from HUD’s Subsystem indicated some public housing
agencies may have charged fees to their Housing Choice Voucher programs in
excess of the established limits. Based on data from HUD’s Subsystem, there
9
are 467 public housing agencies participating in the fee-for-service system. Of
the 467 agencies, 24 entities may have overcharged their management fees and 81
entities may have overcharged their bookkeeping fees. Overall, between fiscal
year end 2008 and 2010, public housing agencies nationwide appeared to have
charged over $5 million in management and over $1 million in bookkeeping fees
in excess of HUD’s established limitations6. Although we have validated data for
our 3 survey sample agencies, we did not validate the information submitted to
the Subsystem for the agencies that appeared to have overcharged, or contact the
respective public housing agencies. As a result, we cannot conclude whether
there were other reasonable explanations as to the cause of these deficiencies. At
the time of our field work, HUD had not identified or followed up on these
potential deficiencies.
Conclusion
HUD has not been monitoring its public housing agencies management and
bookkeeping fee charges in Subsystem. This occurred because HUD did not have or
implement automated controls to the Subsystem to check for overcharging.
Consequently, other public housing agencies nationwide may have overcharged the
Section 8 program by more than $5 million in management and more than $1
million in bookkeeping fees.
Recommendations
We recommend that the Deputy Assistant Secretary for Public Housing and
Voucher programs in coordination with the Center:
2A. Develop and implement automated controls to the Subsystem to check that
housing agencies nationwide are not overcharging excessive management
and bookkeeping fees.
2B. Follow up on the largest potential overcharge discrepancies identified in
this report and recapture excessive de-federalized funds to the program if
the housing agencies cannot provide HUD with a reasonable explanation
for the discrepancies.
6
We provided HUD with the list of public housing agencies that may have overcharged more than $5 million in
management and more than $1 million in bookkeeping fees.
10
SCOPE AND METHODOLOGY
We performed our on-site audit work from June to July 2011, at the City, Sacramento, and
Department’s facilities located in Los Angeles, CA, Sacramento, CA, and Phoenix, AZ,
respectively. The audit generally covered the period from June 30, 2007 to December 30, 2010.
We expanded our audit period as necessary.
To accomplish our audit objective, we
Interviewed HUD headquarters, HUD field offices, the City, Sacramento, and Phoenix
staff;
Reviewed applicable HUD requirements including Public and Indian Housing Notice
2006 – 33, HUD Handbook 7475.1, Financial Management Handbook Supplement, and
Office of Management and Budget A-123.
Analyzed and sorted the audit universe from the Subsystem with ACL. We relied on the
information in HUD’s Subsystem. Although we did not perform a detailed evaluation of
the data, we performed testing with respect to the three housing agencies in our sample
and found the data to be adequately reliable for our purposes. Based on the audit
universe, we isolated the agencies that have switched over to the fee- for-service system
and had charged either management or bookkeeping fees. We then determined the total
management fee threshold amount by taking the highest of 20 percent of administrative
fees or $12 per unit monthly per voucher leased. We also calculated the bookkeeping fee
threshold by determining $7.50 per unit monthly per voucher leased. Finally, we
compared the management and bookkeeping fees charged to the threshold amounts to
arrive at the potential overages.
Reviewed the 2008, 2009, and 2010 administrative plans for the City and Sacramento.
Reviewed the 2009 and 2010 administrative plans for Phoenix.
Reviewed the City’s, Sacramento’s, and Phoenix’s electronic submissions to the
Financial Assessment Subsystem between fiscal years 2008 and 2010.
Reviewed the City’s and Phoenix’s internally maintained records of their management
and bookkeeping fees. Reviewed Sacramento’s internally maintained records of their
management fees.
Reviewed the disbursement listings of administrative fee revenues maintained by the
Financial Management Center.
Verified the units’ months leased that were reported in the voucher management system.
11
Compared the fee-for-service allocation expenditures with cost allocation expenditures
from before the switch to the fee-for-service allocation methodology.
We nonstatistically selected one public housing agency from three of the four Region 9 hubs or
program centers. We selected the largest agency from each hub or program center (based on
total Section 8 units) that had switched to the fee-for-service allocation methodology and was not
a part of the Moving to Work program.
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 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 control was relevant to our audit
objective:
Controls to ensure that HUD assesses or reassesses fee rates periodically to
ensure that they are reasonable.
Policies and procedures designed to ensure that HUD monitors management
and bookkeeping fees for excessive charges.
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 informantion, 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 on the effectiveness of the internal
control structure as a whole. Accordingly, we do not express an opinion on the
effectiveness of HUD’s internal control.
13
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:
HUD could not support the reasonableness of fee limits (see finding 1).
HUD lacked monitoring procedures to adequately assess whether public
housing agencies nationwide charged the correct fees (see finding 2).
14
APPENDIXES
Appendix A
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
15
OIG Evaluation of Auditee Comments
Comment 1 We understand that safe harbor percentages were established to reduce the
administrative burden on public housing agencies and to maintain costs controls
at the federal level. We agree that if HUD is able to analyze and show the
reasonableness of these fees as they apply to each public housing agency, then
public housing agencies should be allowed to use the established threshold.
However, as an added control, HUD should also determine whether the public
housing agencies should periodically show the reasonableness of using the
maximum rates. As we saw during our review at HACoLA, even though it was
charging rates at the maximum amounts that were established and approved by
HUD, it was collecting fees significantly more than actual cost. This additional
step, if feasible, would help ensure that Housing Choice Voucher funds are not
being unnecessarily defederalized.
16
HUD Did Not Adequately Support the Reasonableness of the Fee-for-Service Amounts or Monitor the Amounts Charged
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-11-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)