oversight

Authority Officials Did Not Always Follow HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-07-31.

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

OFFICE OF AUDIT
REGION 1
   895
BOSTON, MA




                  The Housing Authority of the
                    City of Bridgeport, CT

           Section 8 and Public Housing Programs




2014-BO-1003                                     JULY 31 2014
                                                       Issue Date: July 31, 2014

                                                       Audit Report Number: 2014-BO-1003




TO:            Jennifer Gottlieb Elazhari,
               Program Center Coordinator, Office of Public and Indian Housing, Hartford Field
               Office, 1EPHP

               //Signed//
FROM:          Edgar Moore,
               Regional Inspector General for Audit, Boston Region, 1AGA

SUBJECT:       Authority Officials Did Not Always Follow HUD Requirements

       Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of the Housing Authority of the City of
Bridgeport, CT, regarding its compliance with HUD’s requirements and ensuring that costs were
reasonable, eligible, and supported.

        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 8M, 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 212-264-4174.
                                            July 31, 2014
                                            Authority Officials Did Not Always Follow HUD
                                            Requirements




Highlights
Audit Report 2014-BO-1003


    What We Audited and Why                  What We Found

We audited the Housing Authority of         Although development staffing costs charged to the
the City of Bridgeport, CT, to address      public housing program were eligible, reasonable, and
complaints and areas that came to our       supported and a complaint regarding consulting
attention during a prior audit. 1 The       services charged to the Section 8 program was not
objective of this audit was to determine    substantiated, former Authority officials did not always
whether expenses charged to Federal         follow HUD requirements. Specifically, (1) flat rents
housing programs were eligible,             were not properly implemented, (2) Federal funds were
reasonable, and supported. Specifically,    improperly used for non-Federal entities, (3)
we determined whether the City              renovation work was not safe and a contractor was
properly (1) charged development staff      underpaid, and (4) conflict-of-interest rules were not
costs, (2) charged Section 8 consulting     always followed. We attributed these conditions to
costs, (3) implemented flat rents, (4)      inadequate controls over flat rents, poor management
loaned Federal funds, (5) performed         decisions, a lack of supervision, and officials’
renovation work at Greene Homes, and        unfamiliarity with and failure to follow conflict-of-
(6) followed conflict of interest rules.    interest rules. As a result, the Authority lost millions
                                            of dollars in rental income, Federal funds were not
                                            used for their intended purpose, renovation work failed
    What We Recommend
                                            to meet standards, a contractor was underpaid, and
                                            conflicts of interest may have eroded public confidence
We recommend that the U.S.
                                            in Federal programs. The Authority’s recently hired
Department of Housing and Urban
                                            officials were receptive to our findings and had started
Development (HUD) require Authority
                                            to take corrective actions.
officials to (1) update flat rents, (2)
repay Federal housing programs more
than $118,000 for the improper use of
Federal funds, (3) correct unsafe
renovations at the Greene Homes
project and pay a contractor $5,000, and
(4) obtain training and follow HUD’s
conflict-of-interest requirements.




1
 Report number 2014-BO-1001, January, 23,
2014
                            TABLE OF CONTENTS

Background and Objective                                               3

Results of Audit
      Finding: Former Authority Officials Did Not Always Follow HUD
               Requirements                                            4

Scope and Methodology                                                  8

Internal Controls                                                      10

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use   12
B.    Auditee Comments and OIG’s Evaluation                            13




                                            2
                          BACKGROUND AND OBJECTIVE

The Housing Authority of the City of Bridgeport, CT, was created under section 8-40 of the
Connecticut General Statutes to provide low-income public housing for qualified individuals.
The Authority has contracted with the Federal Government, acting through the U.S. Department
of Housing and Urban Development (HUD), for financial assistance for low-income housing
under the United States Housing Act of 1937 as amended. The Authority is governed by a five-
member board of commissioners, which appoints an executive director to manage the day-to-day
operations of the Authority. The Authority administered more than 2,800 Section 8 housing
choice vouchers and more than 2,500 public housing low-rent units and expended approximately
$29 million in Federal Section 8 Housing Choice Voucher program funds and $16 million in
public housing funds in fiscal year 2012. 2 The chart below shows expenditures from 2010 to
2012.

                                                     Expenditures (in millions)
                 Program                           2010       2011           2012
    Section 8 Housing Choice Voucher               $28.8      $29.7         $29.6
    Public housing                                 $13.1      $12.5         $16.4


Each year public housing participants choose the method used to determine their rent. They may
choose to pay either a flat rent or income-based rent. For this public housing agency income-
based rent is the higher of 30 percent of adjusted monthly income or 10 percent of monthly
income but not less than the minimum rent of $50. Flat rents are based on the market rent
charged for comparable units in the private, unassisted rental market considering (1) the location,
quality, size, unit type, and age of the unit and (2) any amenities, housing services, maintenance
and utilities provided by the agency. The flat rent is designed to encourage self-sufficiency and
avoid creating disincentives for continued residency by families attempting to become
economically self-sufficient. 3 During a prior audit, we found that flat rents may not have
reflected market rates and may have been undercharged. Therefore, we focused our review on
flat rents.

Our audit objective was to determine whether Authority officials followed HUD’s requirements
and ensured that expenses charged to Federal housing programs were eligible, reasonable, and
supported. Specifically, (1) based on our prior audit work we reviewed flat rents, the use of
Federal funds for non-Federal programs, development salary and benefit costs, and (2) Based on
anonymous complaints we reviewed, renovation work at the Greene Homes housing project,
Section 8 consulting costs, and conflicts of interest.




2
  The Authority’s fiscal year is October 1 through September 30.
3
  24 CFR(Code of Federal Regulations) 960.253
4
  24 CFR 960.253

                                                         3
                                     RESULTS OF AUDIT

Finding: Former Authority Officials Did Not Always Follow HUD
         Requirements
Authority officials did not always follow HUD requirements. Specifically, (1) flat rents were not
properly implemented, (2) Federal funds were improperly used for non-Federal entities, (3)
renovation work and a contractor penalty were not appropriate, and (4) conflict-of-interest rules
were not always followed. We attributed these issues to inadequate controls over flat rents, poor
management decisions, a lack of supervision, and officials’ unfamiliarity with and failure to
follow conflict-of-interest rules. As a result, millions of dollars in rental income had been lost
since 2004, Federal funds were not used for their intended purpose, renovation work did not
meet safety standards, a contractor was underpaid, and the public confidence in Federal
programs may have been eroded.



    Flat Rents Were Not Properly
    Implemented

                  HUD requires housing authorities to update flat rents at least annually to reflect
                  market rates. 4 However, Authority officials had not implemented a flat rent
                  update since 2004. We attributed this condition to inadequate oversight and the
                  Authority’s procedures, which required only periodic review. 5 As a result, the
                  rent charged to 161 tenants who selected the flat rent option was materially below
                  the required amount, and officials failed to collect millions of dollars in rental
                  income that could have been used to operate and maintain Federal housing for
                  families. We estimated the annual loss to be $51,364 per month, or $616,368 per
                  year, in rental income.

                  Recently hired Authority officials agreed with our finding and as a result of our
                  audit, took corrective action, completed a flat rent study, published the study for
                  public comment, and were adjusting the rents. The officials expected that most
                  tenants would be paying the updated flat rent by July 2014.

    Former Officials Improperly
    Used Federal Funds

                  Former Authority officials improperly used $106,935 in Section 8 and public
                  housing program funds to renovate non-Federal housing properties in 1999. The
                  chief financial officer discovered an accounts receivable and repaid $53,935 to the

4
    24 CFR 960.253
5
    Admissions and Continued Occupancy Policy

                                                    4
                 Section 8 program on September 30, 2013. However, $53,000 was not repaid to
                 the public housing program. The officials that used the funds no longer worked
                 for the Authority so we could not determine the root cause for the ineligible use.
                 Therefore, we attributed the Authority’s failure to repay the $53,000 to its failure
                 to record the loan as an account payable. As a result, $106,935 6 had remained
                 unavailable to operate and maintain Federal housing for families for more than 13
                 years, and the non-Federal entities received interest-free loans estimated to be
                 valued at $65,603 in forgone interest payments. 7

    Office Renovations Were
    Mismanaged

                 The Authority’s maintenance staff used public housing operating funds to
                 construct a break room and bathroom that failed to meet fire and safety building
                 codes. Specifically, the walls, doors, and windows were not fire rated; thus, the
                 space could not be used as a break room. However, maintenance workers
                 continued to use the room. Further, other noncompliant conditions may exist;
                 thus, the newly hired director of development agreed to conduct a third-party fire,
                 safety, and building code inspection before using the space and determine whether
                 it is economical to make the necessary changes for occupancy. We attributed the
                 unsafe renovations to inadequate supervision and controls over the maintenance
                 staff.

                 While reviewing a complaint that the Authority may have overpaid to construct
                 office space at its Greene Homes project, we found that the Authority penalized
                 the contractor for delays and underpaid the contractor $5,000. The work was
                 delayed when the contractor was hospitalized. The Authority chose not to hire
                 another contractor and allowed him complete the work. Thus, the contracted
                 completion date was no longer valid, and the Authority failed to issue a change
                 order to establish a new completion date. The Authority also continued to
                 correspond with the contractor, providing him additional time to complete the
                 work with no specified due date. Thus, the $5,000 deducted from the contract for
                 delays was not supported.

    Conflicts of Interest Were Not
    Handled Properly

                 HUD defines certain relationships with family members and political office
                 holders as potential conflicts of interest that require approval. 8 However,
                 Authority officials failed to disclose an apparent conflict of interest when they

6
  $106,935 = $53,000 + $53,935
7
  $65,603 = $33,288 for the public housing funds plus $32,315 for the Section 8 funds using the 1999 Federal prime
mortgage rate, 7.43 percent
8
  Conflicts of interest are defined in the Authority’s consolidated annual contributions contract with HUD, Form
HUD 53012, section 19.

                                                        5
             contracted with a director’s family member to perform work for the Authority’s
             Federal programs. After discussing the issue, the executive director took
             corrective action and terminated the contract.

             The Authority also had a longstanding service contract with an individual who
             later became an elected official and thus had a HUD-defined conflict of interest.
             However, officials did not inform HUD or obtain the required approval. After
             discussing this issue, Authority officials agreed to request the waiver, and HUD
             officials indicated that they were inclined to approve a waiver for this individual
             to run an after-school program.

             We attributed the issues described above to a lack of knowledge of and
             compliance with HUD’s requirements. These conditions are of concern because
             failing to disclose and properly handle conflicts of interest increases the risk of
             damage to Federal programs and erodes public confidence in HUD’s programs.

Conclusion

             Authority officials did not always follow HUD requirements. Specifically, (1)
             flat rents were not properly implemented, (2) Federal funds were improperly used
             for non-Federal entities, (3) renovation work and a contractor penalty were not
             appropriate, and (4) conflict-of-interest rules were not always followed. These
             conditions occurred due to inadequate controls over flat rents, prior officials’ poor
             management decisions and lack of supervision, and officials’ unfamiliarity with
             and failure to follow conflict-of-interest rules. As a result, the Authority lost
             millions of dollars in rental income, Federal funds were not used for their
             intended purpose, renovation work failed to meet standards, a contractor was
             underpaid, and conflicts of interest may have eroded public confidence in Federal
             programs. However, the Authority’s recently hired officials were receptive to our
             findings and had started to take corrective actions, which if properly implemented
             should improve supervision and management decisions.

Recommendations

             We recommend that the Director of HUD’s Hartford Office of Public and Indian
             Housing require Authority officials to

             1A.    Complete the Authority’s update of flat rents and implement procedures to
                    ensure that flat rents are updated at least annually, which we estimate may
                    result in $616,368 in additional revenue each year for the Authority’s
                    Federal housing projects.

             1B.    Repay $86,288 to the restricted public housing reserve account from non-
                    Federal funds for an improper non-Federal use of public housing funds in
                    1999 ($86,288 = $53,000 loaned + $33,288 in forgone interest).

                                               6
1C.   Repay $32,315 to the Section 8 program for interest due for the $53,935
      loan, which accrued between 1999 and September 31, 2013.

1D.   Do not allow access to the Green Homes basement break room and
      bathroom until corrective action is taken to make them safe for occupancy.

1E.   Conduct a fire, safety, and building code inspection of the renovations
      completed by the maintenance staff and bring the project up to code if it is
      economical to correct the deficiencies.

1F.   Support or pay the contractor $5,000 from Federal funds for the amount
      deducted from the Greene Homes office renovation contract for
      construction delays, since the work has been completed.

1G.   Obtain training for the Authority’s board and director-level staff regarding
      HUD’s conflict-of-interest requirements.

1H.   Establish and implement additional controls to ensure that conflicts of
      interest with executed contracts are identified, disclosed, and approved in
      accordance with HUD’s requirements.




                                7
                             SCOPE AND METHODOLOGY

The review focused on our concerns regarding flat rents, the use of Federal funds for non-Federal
programs, development staffing costs, renovation work, consulting costs, and conflicts of
interest. To accomplish our audit objective, we

             •   Reviewed laws, regulations, and HUD guidance related to the objective, including
                 Federal appropriations acts, and the Authority’s annual contributions contracts
                 with HUD.

             •   For flat rents, we reviewed the Authority’s flat rent study completed during our
                 audit, evaluated the rent charged for all 161 tenants who selected the flat rent
                 option, and estimated the loss of income due to the Authority’s failure to update
                 flat rents since 2004.

             •   For development staffing costs, we evaluated procedures for charging the costs to
                 the public housing projects and reviewed the general ledger and supporting
                 documents for fiscal year 2012 to verify whether the charges were eligible and
                 adequately supported.

             •   For the use of Federal funds for non-Federal purposes, we interviewed officials
                 and reviewed board meeting minutes to determine the reason for using the funds
                 in 1999 and reviewed the general ledger and bank statements to determine
                 whether the funds were properly recorded and repaid.

             •   For office renovations at the Greene Homes public housing project during 2012,
                 we interviewed staff, reviewed the contract and payment history, and completed a
                 walkthrough inspection to determine whether Federal funds were misspent.

             •   For Section 8 consulting services identified in the complaint, contracted in 2009
                 and 2011, we reviewed the contract and payment history and supporting
                 documents and interviewed staff to determine whether the contractor was
                 overpaid for the work completed.

             •   For recent hiring’s, we reviewed the Authority’s procedures, interviewed hiring
                 officials, and reviewed personnel files to identify conflicts of interest and material
                 deviations from requirements.

We relied on the Authority’s Visual Homes tenant database to estimate the amount of overpaid
or underpaid flat rents. 9 The data showed that rental income may increase $51,364 per month, or
$616,368 per year, if officials implement the January 2014 flat rent schedule for the 161 tenants

9
 Visual Homes is the commercial software database the Authority uses to manage its public and Section 8 housing
programs. The database contains participants’ income and flat rent data, including the amount of flat rent that is
charged to participants who chose the flat rent option, and rent collected.

                                                         8
who selected the flat rent option. We verified that the flat rent data were incorrect and had not
been updated since 2004. We did not test the reliability of the 161 flat rent participants’ reported
income because we used the income for estimating purposes only. We believe that we can
reasonably rely on the system’s accuracy for our estimate.

To determine the lost revenue, we calculated the difference between (1) the flat rent charged to
participants who selected the flat rent option in February 2014 (based on 2004 rates) and (2) the
updated flat rent amount that should have been charged based on 2014 market rates. 10 We
multiplied the monthly loss by 12 to estimate the yearly loss of income.

We also estimated that the Authority failed to collect “millions” in flat rent revenue. We are
confident in our estimate because Bridgeport’s market rents consistently and incrementally
increased between October 2004 and October 2013. 11 Thus, the amount of flat rent charges
should have increased. However, the exact amount that flat rents should have increased was
unknown because Authority officials did not conduct flat rent studies as required. Also,
identifying all of the tenants who had selected the flat rent option since 2005 and their income
would take considerable resources with little additional value. Therefore, based on the best and
most cost effective information available and the more than $600,000 in current-year
undercharges, we limited our estimate to “millions.”

To calculate the amount of forgone interest for the use of $53,935 in Section 8 funds and
$53,000 in public housing funds, we used the Microsoft Excel cumulative interest formula, the
1999 Federal prime 30-year mortgage rate of 7.43 percent, compounded and repaid monthly over
the period of the loans from December 31, 1999, through September 30, 2013, for the Section 8
loan and from December 31, 1999, through April 30, 2014 for the public housing funds 12.

To meet the audit objective, the audit covered various periods between 1999, when the use of
Federal funds for non-Federal purposes occurred, and January 2014, when the flat rent study was
updated. We performed the audit fieldwork from January to April 2014 at the Authority’s
administrative office located at 150 Highland Avenue, Bridgeport, CT.

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.




10
   If the updated flat rent amount exceeded a participant’s income-based rent, we used the lower amount.
11
   Market rents rose according to HUD’s fair market rent for Bridgeport CT. The fair market rent is the 40th
percentile of gross rents for typical, nonsubstandard rental units occupied by recent movers in a local housing
market. However, flat rents cannot be determined using the fair market rent alone; they must be based on locations
within Bridgeport and other factors that are not identified in the fair market rent.
12
   The Section 8 loan was repaid $53,935 from non-federal funds to the Section 8 HAP control Bank Account on
September 30, 2013. However, as of March 20, 2014 there was no evidence that the loan made from public housing
funds had been repaid.

                                                        9
                              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:

               •      Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

               •      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.

               •      Safeguarding of resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

               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.




                                                 10
Significant Deficiency

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

            •   Authority officials did not have adequate controls to ensure that program
                objectives were met, that they complied with laws and regulations, and that they
                safeguarded resources when they failed to update flat rents, and failed to follow
                HUD’s conflict-of-interest requirements (see finding).




                                             11
                                      APPENDIXES

Appendix A

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

                  Recommendation                            Funds to be put
                                         Ineligible 1/
                      number                                to better use 2/
                              1A                                   $616,368
                              1B                  $86,288
                              1C                  $32,315

                             Totals              $118,603         $616,368

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/   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. In this instance, if Authority officials implement our
     recommendation to update flat rents, they may increase rental revenue by $616,368 per
     year.




                                            12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         13
Ref to OIG Evaluation   Auditee Comments




                         14
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority officials’ planned actions in comments one through five are
            responsive to our recommendations and should be verified by HUD during the
            audit resolution process.

Comment 2   Authority officials requested additional information “on the repayment of the
            Section 8 and LIPH funds for the loans provided to the UIDC entity so they could
            better understand the nature of the transaction…and how there is evidence that
            these funds were not repaid by that entity to the Authority…” This information
            will be provided to the auditee and HUD to assist in the audit resolution period.




                                            15