oversight

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)

                                                                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.




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                           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


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          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.




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