oversight

The Stark Metropolitan Housing Authority, Canton, OH Did Not Follow HUD's Requirements and Its Own Policies Regarding the Administration of Its Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-07-15.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




           Stark Metropolitan Housing Authority
                       Canton, OH

                  Public Housing Program




2013-CH-1003                                  JULY 15, 2013
                                                        Issue Date: July 15, 2013

                                                        Audit Report Number: 2013-CH-1003




TO:    Shawn Sweet, Director of Public Housing Hub, 5DPH
        Craig T. Clemmensen, Director of Departmental Enforcement Center, CACB


FROM: Kelly Anderson, Regional Inspector General for Audit, 5AGA

SUBJECT: The Stark Metropolitan Housing Authority, Canton, OH, Did Not Follow HUD’s
Requirements and Its Own Policies Regarding the Administration of Its Program


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final audit report of our audit of the Stark Metropolitan Housing
Authority’s public housing program.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
(312) 913-7832.




                                                  
                                           July 15, 2013
                                           The Stark Metropolitan Housing Authority, Canton, OH, Did
                                           Not Follow HUD’s Requirements and Its Own Policies
                                           Regarding the Administration of Its Program



Highlights
Audit Report 2013-CH-1003


 What We Audited and Why                    What We Found

We audited the Stark Metropolitan        The Authority, under the direction of its former
Housing Authority’s public housing       executive directors, inappropriately used more than
program as part of the activities in our $6.3 million in public housing operating and capital
fiscal year 2012 annual audit plan. We   funds to pay ineligible expenses for its commercial
selected the Authority based upon our    development, Metropolitan Centre, and two nonprofit
previous audit of the Authority and an   developments, Ruthe and Isadore Freed Housing
anonymous complaint received by the      Corporation and Stark Metropolitan Federal Credit
Office of Inspector General’s hotline.   Union. Further, it did not (1) provide documentation
Our objective was to determine whether   to support that nearly $4.2 million in public housing
the Authority followed the U.S.          operating and capital funds used to pay expenses such
Department of Housing and Urban          as salaries, utilities, and maintenance costs for its
Development’s (HUD) requirements         developments was from fees earned by its cost center
and its own policies regarding the       for managing its projects or engaging in business
administration of its program.           activities, (2) charge and collect more than $263,000 in
                                         appropriate market rent from its developments, and (3)
  What We Recommend                      ensure that it obligated more than $57,000 in capital
                                         funds for eligible expenditures. As a result, HUD and
                                         the Authority lacked assurance that more than $10.5
We recommend that the Director of        million in public housing operating and capital funds
HUD’s Cleveland Office of Public         was used to benefit low- and moderate-income
Housing require the Authority to (1)     residents and more than $320,000 was available for
reimburse its operating and capital fund eligible public housing purposes.
more than $6.3 million from non-
Federal funds, (2) provide support or    Additionally, the Authority inappropriately executed
reimburse its operating and capital fund an oil and gas lease with Chesapeake Exploration that
nearly $4.2 million from non-Federal     encumbered project assets without HUD’s approval. It
funds, (3) charge and collect more than received more than $356,000 in proceeds from the
$263,000 in appropriate market rent, (4) agreement. As a result, HUD lacked assurance that its
deobligate more than $57,000 in capital interests in the Authority’s project assets were
funds, and (5) provide support that more protected.
than $356,000 in proceeds was not
derived from the encumbrance of public
housing property. We also recommend
that HUD considers a declaration of
substantial default based on the issues
cited in this audit report.


                                                  
                           TABLE OF CONTENTS

Background and Objective                                                           3

Results of Audit

      Finding 1: The Authority Inappropriately Used Public Housing Operating and    5
                 Capital Funds To Support Its Developments and Homeownership
                 Program

      Finding 2: The Authority Inappropriately Entered Into an Oil and Gas Lease   13

Scope and Methodology                                                              15

Internal Controls                                                                  17

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use               19
B.    Federal and Authority Requirements                                           20




                                             2
                      BACKGROUND AND OBJECTIVE

The Canton Metropolitan Housing Authority was created in 1939 in accordance with the
provisions of the Ohio Revised Code. Its name was changed to the Stark Metropolitan Housing
Authority in 1970. It is a public nonprofit organization, chartered by the State of Ohio, funded in
part through the U.S. Department of Housing and Urban Development (HUD). The Authority
was established to provide eligible residents of Stark County with quality affordable housing in
decent, safe, and nourishing neighborhoods. The Authority administers 2,546 public housing
units, and 1,639 units under its Section 8 program.

The Authority is operated by a five-member board of commissioners. These members are
appointed to a 5-year term and are not compensated for their services. The mayor of Canton,
OH, the largest city in Stark County, appoints two members. The Stark County commissioners,
the Stark County Court of Common Pleas, and the Stark County Court of Common Pleas Probate
Division each appoint one member.

The Authority’s former executive director retired on December 31, 2012. The board selected a
new executive director, effective February 25, 2013. The Authority’s former deputy director
became the controller under the current executive director.

The Authority receives public housing operating funds to operate public housing units under its
annual contributions contract with HUD. It also receives Public Housing Capital Fund grants
from HUD for capital and management activities, including the modernization and development
of its public housing. The grant can be used for financing activities, such as payments of debt
service and customary financing costs in standard public housing agency developments and
mixed-finance developments.

In 2005, HUD required public housing agencies with 250 or more units to convert to asset
management and establish a central office cost center. The cost center generates revenue by
using a fee-for-service approach and engaging in business activities. In April 2007, the
Authority established its cost center.

Further in May 2005, HUD amended the Authority’s annual contributions contract to include the
Canton Senior Center under its Cherrie Turner Tower project. The Center was established to
provide services such as computer training; cleanup, and litter pickup; library books for the
children; facilitating meetings with other agencies for the residents; meeting space for the
neighboring communities; community activities; maintenance space; and training.

In addition to managing its public housing and Section 8 programs, the Authority operates two
nonprofit developments, Ruthe and Isadore Freed Housing Corporation and Stark Metropolitan
Federal Credit Union. Ruthe and Isadore Freed Housing Corporation was formed on December
5, 1996, and is a legally separate, nonprofit organization, served by a board composed of local
officials and community representatives. Freed Housing is responsible for advancing,
encouraging, and promoting housing and related services to low- and moderate-income persons

                                                3
in the Stark County area. Freed Housing does not develop, administer, or manage projects that
contain public housing.

Stark Metropolitan Federal Credit Union is a nonprofit, legally separate entity regulated by the
National Credit Union Administration. The credit union is a Federal credit union chartered on
May 5, 2000, under the laws of the United States. The purpose of the credit union is to provide
public housing and Section 8 housing authority residents, credit union employees, and Authority
employees and their families sound and affordable financial services and products. The credit
union does not develop, administer, or manage projects that contain public housing.

Our objective was to determine whether the Authority followed HUD’s requirements and its own
policies regarding the administration of its program funds. Specifically, we wanted to determine
whether the Authority appropriately (1) used operating funds, (2) drew down and disbursed
capital funds, (3) obligated capital funds, and (4) obtained HUD approval before encumbering
project assets.




                                               4


                                                 
                                RESULTS OF AUDIT


Finding 1: The Authority Inappropriately Used Public Housing
Operating and Capital Funds To Support Its Developments and Home
Ownership Program
The Authority inappropriately used nearly $2.8 million in public housing operating and $3.6
million in capital funds to support the operations of its developments and homeownership
program, which were not self-sufficient. Further, it failed to provide documentation to support
that more than $4 million in operating funds and $162,000 in capital funds were not used to
support its developments. The Authority also did not (1) ensure that it obligated more than
$57,000 in capital funds for eligible expenditures and (2) charge and collect more than $263,000
in appropriate market rent from its developments. The weaknesses occurred because the
Authority lacked adequate procedures and controls to ensure that it appropriately managed its
operating and capital funds and the previous executive director believed the funds were being
spent appropriately. As a result, HUD and the Authority lacked assurance that more than $10.5
million in operating and capital funds was used to benefit low- and moderate-income residents
and more than $320,000 was available for eligible public housing purposes.


 The Authority’s Developments
 Were Not Self-Sufficient

              From April 1, 2010, through September 30, 2012, the Authority’s cost center
              earned more than $4 million in management and accounting fees. However, in
              reviewing the Authority’s accounting records, we determined that cost center’s
              expenses totaled more than $5 million, $1 million more that it earned. Despite
              this shortfall, the Authority continued to provide financial support to its
              developments and homeownership program, which were not self-sufficient, by
              transferring public housing operating funds to its cost center and drawing down
              capital funds.

              The Authority’s Metropolitan Centre

              In 2007, the Authority reestablished the Canton Senior Center and changed its
              name to the Metropolitan Centre. The Centre is a nonresidential commercial
              development property that contains a medical center, conference rooms, business
              offices, a jazz club, and a renovated grand ballroom for weddings and other
              events. Although this property contains commercial businesses, the revenue
              generated from leasing office space was not enough to maintain its operations,
              including the property. Since this property was under its contract with HUD, the
              Authority included the Centre in its annual plans to receive operating and capital
                                                 5


                                                 
                 funding. However, the Authority failed to notify HUD that the Centre was not a
                 senior center and did not provide services for low- and moderate-income
                 households. Further, the Authority operated a homeownership program using one
                 of the office spaces in the Centre. The program was established in 2001 to
                 provide HUD-certified housing counseling services for the community, not just
                 low- and moderate-income households. The Authority’s employees managed the
                 operations of this program. However, the program did not generate sufficient
                 income to support its own operations.

                 The Authority’s Nonprofit Developments

                 In 1996 and 2000, respectively, the Authority created two nonprofit
                 developments, Ruthe and Isadore Freed Housing Corporation and Stark
                 Metropolitan Federal Credit Union. These two developments were not self-
                 sufficient and relied on funds earned by the Authority’s cost center to maintain
                 their operations. However as previously mentioned, the Authority’s cost center
                 did not maintain sufficient funds to support the operations of the developments.

    The Developments’ Expenses
    Were Ineligible


                 Contrary to HUD regulations,1 the Authority inappropriately encumbered
                 program assets when it made 55 transfers totaling more than $2.5 million in
                 operating funds to its Centre and expended more than $3.5 million in capital funds
                 (a total of 111 check payments) to pay the Centre’s and credit union’s expenses.
                 The ineligible expenditures included annual contributions to its credit union as
                 well as expenses for the Centre, including but not limited to the following:

                                  Debt service payments for the nonprogram loans,
                                  Renovations (including general construction; heating, ventilation,
                                   and air conditioning; plumbing; electrical; and fire protection),
                                  Architect and engineering fees,
                                  Salary expenses for the contracted manager,
                                  Advertising and marketing,
                                  Utilities, and
                                  Maintenance supplies.

                 Further, the Authority’s cost center paid salaries and benefits for the credit union
                 employees. However, the Authority’s cost center did not have funds available to
                 make these payments. Therefore, the Authority inappropriately allocated


1
 United States Housing Act of 1937, as amended, sections 9(d)(1) and 9(e)(1); further sections 7 and 9(c) of the
Authority’s contract with HUD
                                                         6


                                                           
                   $190,547 in salaries and benefits for the credit union’s employees to its asset
                   management projects.

                   In 2000, the Authority purchased a non-interest-bearing certificate of deposit for
                   $100,000 from the credit union. However according to the Authority’s general
                   depository agreement, all funds deposited by the Authority with the depository
                   must be credited to the Authority in a separate interest-bearing deposit or interest-
                   bearing account. On May 2, 2009, the Authority reduced its deposit to $50,000.
                   We reviewed other market rate certificates of deposit held by the Authority and
                   determined the annual fair market rate for certificates of deposit for the period
                   July 8, 2005, through December 31, 2012. Had the Authority purchased interest-
                   bearing certificates of deposit at market rate, it would have earned $15,754 in
                   interest income as of December 31, 2012.

    The Developments’ and
    Homeownership Program’s
    Expenditures Were
    Unsupported

                   The Authority failed to provide sufficient documentation in accordance with
                   HUD’s requirements2 to support that more than $4 million in operating funds and
                   $162,000 in capital funds were not used to support its developments and
                   homeownership program. The expenditures included $3.6 million in salaries and
                   benefits for the employees of its developments and homeownership program as
                   well as time allocated to each development’s business activities by the
                   Authority’s

                           Executive staff,
                           In-house legal counsel,
                           Accounting staff,
                           Security guards,
                           Maintenance personal, and
                           Information technology staff.

                   The unsupported expenditures also included (1) $111,856 for lawn maintenance
                   and snow removal, (2) $39,189 for utility expenses, (3) $227,500 in annual
                   contributions, and (4) $14,472 for the credit union’s manager to attend a 3-year
                   training program at the Community Development Credit Union Institute. The
                   following table shows the total amount of unsupported expenses incurred by the
                   Authority’s developments and homeownership program.


2
    Section 9(c) of the Authority’s contract with HUD

                                                        7


                                                         
                         Freed        Credit       Homeownership
         Expenses       Housing       union          program         Centre       Totals
   Salaries and
   benefits            $2,039,044   $1,170,364        $246,081      $155,177   $3,610,666
   Annual
   contributions            -          227,500           -             -          227,500
   Operating                -            -               -           162,156      162,156
   Lawn and
   maintenance              -           18,423           -            93,433      111,856
   Utility                  6,919       32,270           -             -           39,189
   Training program         -           14,472           -             -           14,472
   Totals              $2,045,963   $1,463,029        $246,081      $410,766   $4,165,839

           Further, the Authority inappropriately obligated $57,410 in capital funds for the
           Centre’s expenses; however, these funds had not been drawn down.

The Authority Failed To
Charge and Collect Market
Rate Rents From Its
Developments

           From January 1, 2001, through December 31, 2012, the Authority leased its
           maintenance and management office building, Gage Gardens, to the credit union,
           along with an adjoining parking lot, for $1 dollar per year for a total of $12. We
           contacted a local realtor and determined that the average fair market rent for the
           credit union’s building would have been approximately $10 per square foot per
           year. However in determining a reasonable fair market value for the office, we
           conservatively used $8 per square foot per year instead of $10. Therefore, we
           estimated the fair market rent for a 2,306-square-foot building to be $1,537 per
           month. We determined that the Authority could have earned $225,939 ($1,537 *
           147 months) in rental income as of December 31, 2012, if it had charged its credit
           union fair market rent.

           Freed Housing leased office space at the Authority’s central office. From April 1,
           2010, through December 31, 2012, the Authority charged Freed Housing a total of
           $11,269 in fees for the office space, utilities, and staffs’ salaries that were
           allocated to Freed Housing’s business activities. However, the Authority was
           unable to provide documentation to support that Freed Housing paid the fees. We
           contacted a local realtor and determined that the average fair market rent for the
           space occupied by Freed Housing would have been $10 per square foot per year.
           However in determining a reasonable fair market value for the space, we
           conservatively used $8 per square foot per year instead of $10. From January 1,
           2005, through December 31, 2009, Freed Housing occupied 240 square feet for an
           annual rent of $1,920 (240*8). From January 1, 2010, to December 31, 2012,

                                               8


                                                
           Freed Housing occupied 1,148 square feet for an annual rent of $9,184 (1,148*8).
           Therefore, had the Authority charged Freed Housing fair market rent, it could
           have earned $37,152 (($9,184*3) + ($1,920*5)) in rental income as of December
           31, 2012.

HUD Identified Similar
Deficiencies

           On September 20, 2012, HUD issued a letter to the Authority regarding its
           independent auditor report for its fiscal year ending March 31, 2011. The letter to
           the Authority stated that public housing operating and capital funds are not
           fungible. In the event that a program cannot cover its bills, public housing funds
           are not to be used to cover that expense. HUD also stated that the movement of
           Federal money between programs is a violation of part a, section 10(c), of the
           Authority’s contract with HUD and that the Authority must immediately cease
           such transactions.

           Additionally, the letter stated that the Authority had violated HUD’s regulations
           by using public housing operating funds to pay debt services associated with the
           Centre. HUD said that these funds must be repaid from non-Federal funds.

           Further, the letter stated that the Authority was using operating funds to pay the
           credit union employees’ salaries and this was not an eligible program expense.
           The letter also stated that the Authority must immediately reimburse its public
           housing program and charge the credit union for its salaries. Operating funds are
           to be used only to pay for necessary and reasonable low-income housing
           expenses, not to assist other programs if they are unable to operate.

           Although HUD’s letter stated that the Authority must immediately cease the
           transactions and repay its program, the Authority continued to (1) distribute
           Federal funds among programs for the Centre and (2) support its credit union and
           Freed Housing. As of December 31, 2012, the Authority had failed to repay its
           program.

The Authority’s Procedures
and Controls Had
Weaknesses

           The weaknesses described above occurred because the Authority lacked adequate
           procedures and controls to ensure that it appropriately managed its operating and
           capital funds. In addition to supporting its developments and homeownership
           program, the Authority’s previous executive directors made written commitments
           to the credit union stating that the Authority would (1) pay the credit union
           employees’ salaries and benefits, (2) provide annual financial assistance and pay
                                            9


                                              
             all of the utilities and maintenance costs associated with the credit union’s
             building, (3) lease a building and adjoining parking lot to the credit union for $1
             per year, and (4) purchase a certificate of deposit that would earn interest below
             the market rate.

             The Authority’s controller said the original intent for the developments was to
             provide the Authority with an additional source of revenue outside HUD’s
             operating subsidy. However, the developments had not been able to operate
             without the Authority’s support.

             The controller said he was aware that the Authority was using operating and
             capital funds for ineligible activities. However, the former executive director
             made the final decisions on how the funds should be used, and he believed the
             funds were being used appropriately and the funded activities were eligible
             expenditures. The Authority’s accounting supervisor said the previous executive
             director believed anything that might benefit public housing residents in any way
             was considered an eligible use of funds. The accounting supervisor also said that
             the Authority’s employees believed the board of directors knew that Federal funds
             were being used to support the Centre. Our review of the monthly board meeting
             minutes confirmed that the board approved the expenditures for the Centre.

Conclusion

             The Authority lacked adequate procedures and controls to ensure that it
             appropriately managed its operating and capital funds. As a result of the
             weaknesses discussed above, HUD and the Authority lacked assurance that more
             than $10.5 million in operating and capital funds was used to benefit low- and
             moderate-income residents and more than $320,000 was available for eligible
             public housing purposes.


Recommendations

             We recommend that the Director of HUD’s Cleveland Office of Public Housing
             require the Authority to

              1A. Reimburse its capital fund $3,569,942 ($3,319,942 + $250,000) from non-
                  Federal funds for the ineligible drawdowns and disbursements cited in this
                  finding.

              1B. Reimburse its operating reserve fund $2,773,976 ($2,583,429 + $190,547)
                  from non-Federal funds for the inappropriate transfers to its cost center
                  and salary and benefit payments cited in this finding.

                                              10


                                                
 1C. Reimburse its operating reserve fund $15,754 from non-Federal funds for
     the ineligible deposit of funds in a non-interest-bearing account.

 1D. Provide supporting documentation or reimburse its operating reserve fund
     $4,003,683 ($3,610,666 + $227,500 + $111,856 + $39,189 + $14,472)
     from non-Federal funds for the unsupported salary and benefit payments;
     operating contribution payments; and lawn maintenance, snow removal,
     utility, and training costs for the developments and program cited in this
     finding.

 1E. Provide supporting documentation or reimburse its capital fund $162,156
     from non-Federal funds for the Centre’s operating expenses cited in this
     finding.

 1F. Deobligate the $57,410 in capital funds cited in this finding and ensure
     that the Authority uses the funds for eligible purposes.

 1G. Charge and collect market rate rents on its buildings and facility spaces to
     ensure that $263,091 ($225,939+$37,152) is available for other eligible
     public housing purposes.

 1H. Develop and implement adequate procedures and controls to ensure that
     all operating funds received and capital funds drawn and disbursed are
     expended for eligible activities and follow HUD’s requirements.

 1I.   Discontinue the use of operating and capital funds for ineligible activities.

We recommend that the Director of HUD’s Cleveland Office of Public Housing

 1J.   Determine whether additional operating and capital funds were used to
       inappropriately support the Centre, credit union, Freed Housing, and the
       homeownership program after December 31, 2012. Funds determined to
       be inappropriately used should be reimbursed by the Authority to its
       operating or capital fund as appropriate.

 1K. Inform the Deputy Assistant Secretary for Field Operations of the
     Authority’s actions that led to encumbrances of program funds and project
     assets, and in accordance with section 17 of its contract recommend
     considering a declaration of substantial default (see findings 1 and 2).

 1L. Identify the funding year of the Capital Fund grants used for the ineligible
     and unsupported expenditures to determine whether the reimbursement, if
     appropriate, should be to HUD or the program.



                                11


                                   
We recommend that the Director of HUD’s Cleveland Office of Public Housing
in conjunction with HUD’s Departmental Enforcement Center

 1M. Pursue appropriate administrative sanctions against the former executive
     directors for failing to comply with HUD’s requirements.




                              12


                                
Finding 2: The Authority Inappropriately Entered Into an Oil and Gas
Lease
The Authority inappropriately executed an oil and gas lease with Chesapeake Exploration, which
encumbered project assets without HUD’s approval. The weakness occurred because the
Authority’s previous executive director and board lacked a sufficient understanding of HUD’s
requirements. As a result, HUD and the Authority lacked assurance that (1) the lease did not
inappropriately encumber Program assets and (2) HUD’s interests were protected. Further, HUD
and the Authority lacked assurance that more than $356,000 in proceeds was used appropriately.


    Program Assets Were
    Encumbered Without HUD
    Approval

                   On January 20, 2012, the Authority executed an oil and gas lease with
                   Chesapeake Exploration for a minimum of 10 years, which encumbered its
                   projects without HUD’s approval.3 It received $356,295 from Chesapeake
                   Exploration for 158.36 net acres of its properties’ mineral interests. The lease
                   included properties under its contract with HUD.

                   On December 20, 2012, the Authority purchased a First Merit Bank certificate of
                   deposit using the funds received from its leasing agreement. It had a maturity
                   date of April 1, 2013. The Authority allocated the funds to its public housing
                   asset management projects. After the certificate of deposit matured, the Authority
                   purchased another First Merit Bank certificate of deposit for $356,393 ($356,295+
                   $98 in interest earned on the previous certificate of deposit).

    The Authority Lacked
    Sufficient Understanding of
    HUD’s Requirements

                   The weakness described above occurred because the previous executive directors
                   and the board of commissioners lacked a sufficient understanding of HUD’s
                   requirements regarding the encumbrance of program assets to ensure compliance
                   with the Authority’s contract. The Authority’s board adopted a resolution
                   authorizing the previous executive director to negotiate a price per acre and terms
                   for the oil and gas lease on the Authority’s properties with Chesapeake
                   Exploration and authorized the previous executive director to sign all of the
                   necessary documents to execute the lease. Further, according to the Authority, it

3
    Section 7 of the Authority’s contract with HUD
                                                     13


                                                       
                    believed that the funds received under the leasing agreement should be recorded
                    as a non-Federal source of revenue since the funds were received from a private
                    entity, not HUD. However, the Authority failed to seek guidance from HUD.

    Conclusion

                    As a result of the weaknesses discussed above, HUD and the Authority lacked
                    assurance that the Authority’s lease with Chesapeake Exploration did not
                    inappropriately encumber program assets and HUD’s interests were protected.
                    Further, HUD and the Authority lacked assurance that more than $356,000 in
                    proceeds was used appropriately. In addition, HUD lacked assurance that its
                    interests in the Authority’s project assets were protected.4

    Recommendations

                    We recommend that the Director of HUD’s Cleveland Office of Public Housing
                    require the Authority to

                      2A. Provide documentation to support that the $356,393 ($356,295+$98) in
                          proceeds from the lease was not derived from the encumbrance of public
                          housing property under its contract with HUD or ensure that the funds are
                          used in accordance with HUD’s regulations for program revenue.

                      2B. Implement procedures and controls to ensure that the Authority complies
                          with HUD’s requirements when entering into leasing and other
                          agreements involving properties under its contract.

                      2C. Implement procedures and controls to ensure that the Authority follows
                          HUD’s requirements regarding the use of revenue generated from its
                          public housing program.

                    We recommend that the Director of HUD’s Cleveland Office of Public Housing

                      2D. Obtain and review the Authority’s Chesapeake Exploration oil and gas
                          lease to determine whether the agreement violates its contract with HUD
                          and if so, pursue corrective actions as appropriate.

                      2E. Determine whether the Authority’s other leasing and similar arrangements
                          encumber program assets under its contract and if so, pursue corrective
                          actions as appropriate.

4
    Further, the Ohio Revised Code states that the oil and gas lease has priority over claims and other encumbrances
    on the leased property.

                                                           14


                                                             
                         SCOPE AND METHODOLOGY

We performed our onsite audit work at the Authority’s office at 400 East Tuscarawas Street,
Canton, OH, between October 23, 2012, and March 27, 2013, and HUD’s Cleveland field office.
The audit covered the period September 1, 2010, through August 31, 2012, but was expanded as
determined necessary.

To accomplish our objectives, we reviewed

               Applicable laws; regulations; HUD program requirements at 24 CFR (Code of
                Federal Regulations) Parts 85, 905, 941, and 970; Public and Indian Housing
                Notices 2007-9, 2007-9 Supplement, 2007-15, and 2007-28; HUD Guidebook
                7485.3G; HUD Handbooks 7460.8, 7475.1, and 7510.1G; The United States
                Housing Act of 1937 as amended; 42 U.S.C. (United States Code), chapter 8,
                subchapter I, 1437g; the Ohio Revised Code, section 1509; and Office of
                Management and Budget Circulars A-87, A-102, and A-110.

               The Authority’s accounting records, bank statements, 5-year annual plan, annual
                statement performance and evaluation reports for fiscal years 2005 to 2012,
                declaration of trust, public housing annual contributions contract with HUD,
                employee earning history register, computerized databases, policies and
                procedures, organizational chart, general depository agreement, lease agreement
                with Chesapeake Exploration, and main office rent and utility costs.

               The Authority’s board meeting minutes pertinent to the program, the credit
                union’s board meeting minutes, and Freed Housing’s board meeting minutes.

               Independent auditors’ reports on the Authority for fiscal years 2009, 2010, 2011,
                and 2012.

               HUD’s files for the Authority.

We also interviewed the Authority’s employees, HUD staff, and a local realtor.

Finding 1

We reviewed the Authority’s disbursement of operating funds to determine whether the costs
were necessary and reasonable low-income housing expenses and whether the funds were used
to provide and operate cost-effective, decent, safe, and affordable dwellings for lower income
families. We also reviewed the disbursement of capital funds to determine whether the funds
were used for capital and management activities, including the modernization and development
of public housing. Further, we reviewed the Authority’s cost center transactions to determine


                                                 15


                                                   
whether its expenses exceeded its revenues before accounting for costs associated with its
developments and homeownership program.

We reviewed the Authority’s 5-year public housing agency plans and annual statement of
performance and evaluation reports for the years 2005 through 2012 to identify the Centre’s
expenses. Next, we reviewed the Authority’s draws and disbursements of capital funds related to
its Centre as of December 31, 2012. Lastly, we reviewed the Centre’s (1) debt service payments,
(2) accounts payable, and (3) disbursements related to the architect and engineering fees and
renovation of tenant space within the Centre.

We reviewed the Authority’s homeownership program, snow removal, and lawn maintenance
expenses for the Centre. We also reviewed the Authority’s employee salaries and benefits
allocated to Centre’s business activities by the Authority’s executive staff, security guards,
accounting department, legal department, and maintenance staff.

We reviewed the Authority’s disbursements of operating and capital funds for the credit union
and Freed Housing as of December 31, 2012. We also reviewed (1) the Authority’s salary and
benefit files and files pertaining to the credit union and Freed Housing, (2) contributions made by
the Authority to the credit union and certificates of deposit held at the credit union, (3) lawn
maintenance and snow removal costs associated with the credit union, and (4) rental leases and
utility costs for the credit union and Freed Housing for the use of office space.

We provided our review results and supporting schedules to the Director of HUD’s Cleveland
Office of Public Housing and the Authority’s executive director during the audit.

Finding 2

We reviewed the Authority’s (1) oil and gas lease with Chesapeake Exploration, (2) certificate of
deposit with First Merit Bank, and (3) general ledger allocating lease proceeds to its public
housing asset management projects.

We provided our review results and supporting schedules to the Director of HUD’s Cleveland
Office of Public Housing and the Authority’s executive director during the audit. We also
provided our discussion draft audit report to the Authority and HUD’s staff during the audit. We
held an exit conference with the Authority on June 26, 2013.

We asked the Authority’s executive director to provide written comments on our discussion draft
audit report by July 2, 2013. The executive director chose not to comment on the report.

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective(s).

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                              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:

                     Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

                     Reliability of financial reporting – Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

                     Compliance with applicable laws and regulations – Policies and
                      procedures that management has implemented to reasonably ensure that
                      resource use is consistent with laws and regulations.

               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.


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Significant Deficiencies

             Based on our review, we believe that the following items are significant deficiencies:

                   The Authority lacked adequate procedures and controls to ensure compliance
                    with Federal and its own requirements regarding (1) the expenditure of its
                    operating funds, (2) the drawing and disbursing of its capital funds, and (3)
                    ensuring that capital funds are obligated for eligible expenditures (see
                    finding 1).

                   The Authority lacked a sufficient understanding of HUD’s requirements
                    regarding the encumbrance of program assets (see finding 2).




                                              18


                                                 
                                   APPENDIXES

Appendix A

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

        Recommendation                               Unsupported     Funds to be put
                                Ineligible 1/                         to better use 3/
            number                                       2/
              1A                $3,569,942
              1B                 2,773,976
              1C                   15,754
              1D                                     $4,003,683
              1E                                      162,156
              1F                                                             $57,410
              1G                                                             263,091
              2A                                      356,393
             Total              $6,359,672           $4,522,232            $320,501


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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified.




                                                19


                                                  
Appendix B

            FEDERAL AND AUTHORITY REQUIREMENTS

Finding 1
The United States Housing Act of 1937, as amended, section 9(d)(1), states: “The [HUD]
Secretary should establish a Capital Fund for the purpose of making assistance available to
public housing agencies to carry out capital and management activities, including:

   (A) The development, financing, and modernization of public housing projects;
   (B) Vacancy reduction;
   (C) Addressing deferred maintenance needs and the replacement of obsolete utility systems
       and dwelling equipment;
   (D) Planned code compliance;
   (E) Management improvements;
   (F) Demolition and replacement;
   (G) Resident relocation;
   (H) Capital expenditures to facilitate programs to improve the empowerment and economic
       self-sufficiency of public housing residents and to improve resident participation;
   (I) Capital expenditures to improve the security and safety of resident; and
   (J) Homeownership activities, including programs under section 32.”

Section 9(e)(1) of the Act states: “The Secretary should establish an operating fund for the
purpose of making assistance available to public housing agencies for the operation and
management of public housing, including:

   (A) Procedures and systems to maintain and ensure the efficient management and operation
       of public housing units;
   (B) Activities to ensure a program of routine preventative maintenance;
   (C) Anticrime and antidrug activities, including the costs of providing adequate security for
       public housing residents;
   (D) Activities related to the provision of services, including service coordinators for elderly
       persons or persons with disabilities;
   (E) Activities to provide for management and participation in the management and policy
       making of public housing by public housing residents;
   (F) The cost of insurance;
   (G) The energy costs associated with public housing units, with an emphasis on energy
       conservation;
   (H) The costs of administering a public housing work program under section 12, including
       the costs of any related insurance needs;



                                                20


                                                  
   (I) The costs of repaying, together with rent contributions, debt incurred to finance the
       rehabilitation and development of public housing units, which must be subject to such
       reasonable requirements as the Secretary may establish; and
   (J) The costs associated with the operation and management of mixed finance projects, to the
       extent appropriate.”

HUD Handbook 7475.1, chapter 1, section 5, states that public housing agencies are responsible
for operating their public housing projects in compliance with the contract and applicable
regulations and procedural requirements. The contract, among other things, requires public
housing agencies to operate their housing projects solely for the purpose of providing decent,
safe, and sanitary housing within the financial reach of lower income families and in such a
manner as to promote serviceability, efficiency, economy and stability. Among the specific
responsibilities of public housing agencies are the following:

       a. Properly managing Federal funds without waste, fraud, or mismanagement;
       b. Operating projects for the benefit of lower income families;
       d. Maintaining the accounting books and records in accordance with HUD requirements
           and submitting required six month/year-end financial statements (see Chapter 6);
       e. Operating projects with maximum efficiency and economy; and
       f. Submitting an annual operating budget and all related, supporting documents in
           accordance with the annual contributions contract (see Chapter 2).

The Supplement to HUD Handbook 7475.1, section 6.3, states that the following uses of excess
cash are not permitted: the central office cost center may not be loaned or transferred excess
cash except through asset management fees, and proceeds from asset disposals of an asset
management project are considered to be assets of the asset management project and not the
central office cost center. With HUD approval, certain proceeds may be transferred to the
central office cost center but may still be governed by other restrictions.

HUD Guidebook 7485.3(G), paragraph 12-11(A)(5), states that if the public housing agency uses
funds for ineligible purposes, the field office may use an order to require the public housing
agency to repay HUD from nonprogram funds. If such repayment is not forthcoming, the field
office may recommend withholding a portion of the public housing agency’s next year’s grant.

HUD’s Public and Indian Housing Low Rent Technical Accounting Guidebook 7510.G, chapter
2, section 2, states that the books and accounts must be complete and accurate. The books of
original entry must be kept current at all times, and postings must be made at least monthly to
ledger accounts. All records and files must be stored appropriately, and all supporting
documentation must be maintained in a safe and accessible location.

HUD’s Public and Indian Housing Low Rent Technical Accounting Guidebook 7510.G, chapter
2, section 6, states that the public housing agency must maintain source documents and files that
support the financial transactions recorded in the book of accounts and that provide an adequate
audit trail. This includes such items as documents identifying the source of cash receipts,
canceled checks, paid bills, payrolls, time and attendance records, tenant rent rolls, housing
                                               21


                                                  
assistance payment registers, investment registers, insurance policies, inventory records,
contracts, grant award documents, and the approved program budgets and revisions.

HUD’s Public and Indian Housing Low Rent Technical Accounting Guidebook 7510.1G,
chapter 2, section 7, states that funds provided by HUD are to be used by the public housing
agency only for the purposes for which the funds are authorized. Program funds are not
fungible, and withdrawals should not be made for a specific program in excess of the funds
available on deposit for that program. A public housing agency does not “commingle” funds by
pooling funds or by making expenditures for various programs from a single account used to
pool funds. Unless there is a specific legal requirement to maintain separate bank account for a
specific purpose, the prohibition against “commingling of funds” does not mean that the public
housing agency is required to physically segregate program funds in multiple bank accounts.

HUD’s regulations at 24 CFR 941.205(a) state that to be considered as eligible project expenses,
all development-related contracts entered into by the public housing authority must provide for
compliance with the provisions of the annual contributions contract.

Section 9(A) of the Authority’s contract states that the Authority must deposit and invest all
funds and investment securities received by or held for the account of the Authority in
connection with the development, operation, and improvement of the projects under an annual
contributions contract with HUD in accordance with the terms of the general depository
agreement(s). The general depository agreement must be in the form prescribed by HUD and
must be executed by the Authority and its depository.

Section 9(C) of the Authority’s contract states that the housing authority must maintain records
that identify the source and application of funds in such a manner as to allow HUD to determine
that all funds are and have been expended in accordance with each specific program regulation
and requirement. The housing authority may withdraw funds from the general funds only for (1)
the payment of the cost of development and operations of the project under annual contributions
contract with HUD, (2) the purchase of investment securities as approved by HUD, and (3) such
other purposes as may be specifically approved by HUD. Program funds are not fungible;
withdrawals should not be made for a specific program in excess of the funds available on
deposit for that program.

Section 10(C) of the Authority’s contract states that the housing authority must not withdraw
from any of the funds or accounts authorized under this section amounts for the projects under
annual contributions contract or for the other projects or enterprises in excess of the amount then
on deposit in respect thereto.




Finding 2



                                                22


                                                  
HUD’s regulations at 24 CFR 970.5 state that disposition means the conveyance or other transfer
by the public housing agency, by sale or other transaction, of any interest in the real estate of a
public housing development, subject to exceptions.

The Authority’s annual contributions contract with HUD, section 7, states that the Authority
must not “demolish or dispose of any project or portion thereof, other than in accordance with
the terms of this annual contributions contract and applicable HUD requirements. With the
exception of entering into dwelling leases with eligible families for dwelling units in the projects
covered by this annual contributions contract and normal uses associated with the operations of
the project, the Authority must not in any way encumber any such project or portion thereof
without the prior approval of HUD.”

Section 8 of the Authority’s contract states that the Authority should execute and deliver an
instrument (which may be in the form of a declaration of trust, a trust indenture, or such other
document as may be approved by HUD), confirming and further evidencing, among other things,
the covenant of the Authority not to convey or encumber the project except as expressly
authorized in the annual contributions contract.

The Authority’s declaration of trust states that the government requires the Authority to remain
“seized of the title to the property and to refrain from transferring, conveying, assigning, leasing,
mortgaging, pledging, or otherwise encumbering or permitting or suffering any transfer,
conveyance, assignment, leasing, mortgage, pledge or other encumbrance of the property or any
part thereof appurtenances, thereto, or any rent, revenues, income, or receipts therefrom or in
connection therewith, or any of the benefits or contributions granted to it by or pursuant to the
annual contributions contract.”

Ohio Revised Code 1509.31(d) states that “if a mortgaged property that is being foreclosed is
subject to an oil or gas lease, pipeline agreement, or other instrument related to the production or
sale of oil or natural gas and the lease, agreement, or other instrument was recorded subsequent
to the mortgage and if the lease, agreement, or other instrument is not in default, the oil or gas
lease, pipeline agreement, or other instrument, as applicable, has priority over all other liens,
claims, or encumbrances on the property so that the oil or gas lease, pipeline agreement, or other
instrument is not terminated or extinguished upon the foreclosure sale of the mortgaged property.
If the owner of the mortgaged property was entitled to oil and gas royalties before the foreclosure
sale, the oil or gas royalties should be paid to the purchaser of the foreclosed property.”

The Authority’s lease with Chesapeake Exploration states that “Chesapeake Exploration will
also pay royalties and additional funds for the equal to 1/8 of the net revenue realized for all oil
and gas produced and marketed from the lease.” The lease also states that “if Chesapeake
Exploration receives evidence that the Authority does not have all title to all or any part of the
rights in the lease, it may withhold payments until the adverse claim is fully resolved. In the
event that the leased land is encumbered then Chesapeake should have the right to suspend the
payment of royalties due until the claim is fully resolved.” The lease also states that there should
be leasehold forfeiture, termination, expiration, or cancellation for failure to comply with
covenants. The covenants should not be subject to termination, forfeiture of rights, or damages
                                                 23


                                                   
due for failure to comply with the obligations if compliance is effectively prevented by Federal;
State; or local law, regulation, decree, or third parties over whom Chesapeake Exploration has no
control.




                                               24