oversight

HUD Could Not Support the Reasonableness of the Operating and Capital Fund Programs' Fees and Did Not Adequately Monitor Central Office Cost Centers

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-06-30.

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

OFFICE OF AUDIT
REGION 9
 o ANGELES, CA
LOS




               Office of Public and Indian Housing
                         Washington, DC

       Public Housing Operating and Capital Fund
        Program Central Office Cost Center Fees




2014-LA-0004                                     JUNE 30, 2014
                                                        Issue Date: June 30, 2014

                                                        Audit Report Number: 2014-LA-0004




TO:            Milan Ozdinec, Deputy Assistant Secretary for Public Housing and Voucher
               Programs, PE

               D. J. Lavoy, Deputy Assistant Secretary for Real Estate Assessment Center, PX

               Lindsey Reames, Acting Deputy Assistant Secretary for Field Operations, PQ

               //SIGNED//
FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Los Angeles Region,
               9DGA


SUBJECT:       HUD Could Not Support the Reasonableness of the Operating and Capital Fund
               Programs’ Fees and Did Not Adequately Monitor Central Office Cost Centers


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG), final results of our review of HUD’s Public Housing Operating and
Capital Fund program asset management safe harbor fees and HUD’s monitoring of central
office cost centers.

    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
213-534-2471.
                                            June 30, 2014
                                            HUD Could Not Support the Reasonableness of the
                                            Operating and Capital Fund Programs’ Fees and Did Not
                                            Adequately Monitor Central Office Cost Centers



Highlights
Audit Report 2014-LA-0004


 What We Audited and Why                     What We Found

We audited the U.S. Department of           HUD could not adequately support the reasonableness
Housing and Urban Development’s             of the Operating Fund management, bookkeeping, and
(HUD) methodology and monitoring            asset management fees and Capital Fund management
regarding the Office of Public              fee limits. In addition, HUD lacked adequate
Housing’s asset management fees and         justification for allowing housing authorities to charge
central office cost centers due to our      an asset management fee, resulting in more than $81
concerns over potential misspending by      million in operating funds being unnecessarily
public housing authorities and the lack     defederalized annually. HUD also did not adequately
of restrictions in the use of such funds.   monitor housing authorities’ central office cost center
Our objective was to determine how          fee charges. Among five housing authorities reviewed,
HUD arrived at the asset management         four inappropriately overcharged or transferred $2.3
fee limits in its Public Housing            million in excessive operating program funds from
Operating and Capital Fund programs         their asset management projects to their central office
and whether its methodology for setting     cost centers. Two of the housing authorities were
these limits and its monitoring of these    unable to support $6.7 million in management,
fees were reasonable.                       bookkeeping, and asset management fees charged.
                                            Since central office cost center funds are considered
 What We Recommend                          non-Federal funds and no longer subject to HUD
                                            requirements, there is a greater potential for fraud,
                                            waste, and abuse. Consequently, two housing
We recommend that HUD (1) revise its        authorities used approximately $4.3 million in central
asset management fee policy to              office cost center fee revenue for questionable costs.
refederalize the Operating and Capital
Fund programs’ fee revenue, (2)
eliminate the asset management fee, (3)
require the San Francisco Housing
Authority to support or repay $6.1
million in fees, (4) require the City of
Los Angeles and Southern Nevada
Regional Housing Authorities to repay
$751,860 in excessive fee charges, and
(5) establish and implement policies and
procedures for the assessment and
monitoring of the fees.
                            TABLE OF CONTENTS

Background and Objective                                                            3

Results of Audit
      Finding: HUD Could Not Support the Reasonableness of Its Operating and
               Capital Fund Programs’ Fees and Did Not Adequately Monitor Central
               Office Cost Centers                                                  5

Scope and Methodology                                                               16

Internal Controls                                                                   18

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use                20
B.    Auditee Comments and OIG’s Evaluation                                         22
C.    Criteria                                                                      34




                                            2
                      BACKGROUND AND OBJECTIVE

The U.S. Department of Housing and Urban Development (HUD) published the final rule on the
Public Housing Operating Fund program, 24 CFR (Code of Federal Regulations) Part 990, which
included two major provisions: to provide a new formula for determining operating subsidies to
public housing agencies and to establish requirements for housing authorities to convert to a new
business model, called asset management, which was implemented in calendar year 2007. HUD
issued a supplement to address the changes in financial management and reporting for housing
authorities. The supplement established that housing agencies must be required to replace cost
allocation systems with a series of fees for the Public Housing Operating and Capital Fund
programs.

Under the Operating Fund rule, housing authorities with 250 or more units must convert to asset
management, while housing authorities with fewer than 250 units may voluntarily convert to
asset management. The change to asset management was to give greater attention to the
performance of each public housing project. A public housing authority can demonstrate
successful conversion to the asset management model by implementing five major elements: (1)
project-based funding, (2) project-based budgeting, (3) project-based accounting, (4) project-
based management, and (5) project-based performance assessment. The public housing authority
has the option of contracting with a private management company to manage its projects or it can
manage its projects itself. By providing management services to the projects, a public housing
authority will pay the private management company or pay itself a fee, which is collected by its
central office cost center, the business unit within the housing authority that earns income from
fees or revenue from other business activity and charged to its projects.

HUD established the types and amount of fees that housing authorities may charge to their asset
management projects.

   (1) Housing authorities could charge each project a reasonable management fee to fund the
       operation of their central office cost centers. HUD published an annual management fee
       schedule, which represented the 80th percentile of management fees paid in HUD’s
       multifamily housing programs based on the most recently filed annual financial
       statements. HUD allowed housing authorities to use the amounts from this schedule to
       establish the “reasonable” fee charged to each project.

   (2) In addition, housing authorities were permitted to charge a bookkeeping fee for the
       project accounting functions, which was determined to be $7.50 per unit month.

   (3) HUD also allowed housing authorities to charge an asset management fee at a rate of $10
       per unit month based on all units under the annual contributions contract as long as the
       project had excess cash in an amount sufficient to cover 1 month of operating expenses in
       the prior year.

   (4) Housing authorities could charge up to a maximum of 10 percent of their annual Capital
       Fund grant as a management fee.


                                               3
Although HUD limits the fees charged, housing authorities may depart from the guidance as long
as they consult with HUD and obtain its view on the reasonableness of the fees intended to be
charged.

According to Supplement to HUD Handbook 7475.1, REV, CHG-1, Financial Management
Handbook, these fees are considered nonprogram income for purposes of 2 CFR Part 225 and 24
CFR Part 85; however, State and local restrictions may still apply. Consequently, any reasonable
fees earned by the central office cost center will be treated as local revenue, and the housing
authority may use such fees in accordance with its mission, subject only to any local, but not
Federal, restrictions.

Our objective was to determine how HUD arrived at the asset management fee limits in its
Public Housing Operating and Capital Fund programs and whether its methodology for setting
these limits and its monitoring of these fees was reasonable.




                                               4
                                 RESULTS OF AUDIT


Finding: HUD Could Not Support the Reasonableness of Its Operating
         and Capital Fund Programs’ Fees and Did Not Adequately
         Monitor Central Office Cost Centers
HUD could not adequately support the reasonableness of its Operating Fund program’s
management, bookkeeping, and asset management fees and Capital Fund management fee limits,
and it did not adequately justify the need for the asset management fee. In addition, HUD
generally did not adequately monitor the housing authorities’ central office cost center fee
charges. This condition occurred because HUD did not retain the complete working documents
used to determine the reasonableness or the basis of the fees of the central office cost centers, nor
had it reassessed the reasonableness of the rates since their inception. It also did not monitor
charges to its housing authorities’ central office cost center because those fees were considered
defederalized and no longer subject to HUD’s requirements. Therefore, approximately $353
million in public housing operating funds was defederalized annually as management,
bookkeeping, and asset management fees between January 2009 and December 2011, without
assurance that the amounts being charged were reasonable. Of this amount, approximately $81.6
million in asset management fees was unnecessarily charged to the public housing agencies’
asset management projects, annually. Among five housing authorities reviewed, four
inappropriately overcharged or transferred $2.3 million in excessive operating program funds
from their asset management projects to their central office cost centers. Two of the housing
authorities were unable to support $6.7 million in management, bookkeeping, and asset
management fees charged. Since central office cost center funds are considered non-Federal
funds and no longer subject to HUD requirements, there is a greater potential for fraud, waste,
and abuse. Consequently, two housing authorities used approximately $4.3 million in central
office cost center fee revenue for questionable charges.



 HUD Did Not Retain a Basis for
 Central Office Cost Center Fees


               HUD could not adequately support the reasonableness of its Operating Fund
               program’s fee limits. HUD did not retain the complete working documents used
               to determine the reasonableness of the central office cost center fee rates, nor had
               it reassessed the reasonableness of the rates since their inception.

               Management Fees
               HUD provided the data set and methodology it used to derive the 2013
               management fees that were published in the annual management fee schedules.
               However, it could not adequately support the basis for taking the 80th percentile of
               the management fees paid in HUD’s multifamily housing programs. HUD stated


                                                 5
                 that the 80th percentile was determined by a panel that discussed what was
                 reasonable to set as management fees. This percentage had not been reevaluated
                 since its inception. Some working documents were retained and provided by
                 HUD, but they were incomplete and did not adequately explain the basis for the
                 management fees. As of 2013, HUD still used the data from the multifamily
                 housing program to establish the fees, although it had about 6 years of historical
                 data from housing authorities. HUD stated that it had discussed and considered
                 using housing authority rather than multifamily housing program data; however, a
                 decision had not been made to transition to that approach. On average,
                 approximately $205.3 million in management fees were defederalized annually by
                 public housing authorities nationwide. 1

                 Bookkeeping Fees
                 HUD provided a working document regarding the bookkeeping fees, but a review
                 of the document did not adequately justify the reason for setting the bookkeeping
                 fee rate at $7.50. HUD stated that at the time the bookkeeping fee rate of $7.50
                 was set, the average bookkeeping fee rate for multifamily housing was about
                 $3.50 per unit month. The higher bookkeeping fee for housing authorities
                 reflected higher centralized information technology and human resources costs in
                 public housing. However, there was no support for the analysis to show how
                 HUD determined that the $4.00 difference was reasonable. HUD had not
                 considered increasing the fee for public housing. HUD stated that it had not
                 reassessed this rate because housing authorities could exceed the rate as long as
                 they consulted with HUD on fees that might depart from established guidance
                 before charging the fees. On average, approximately $66.2 million in
                 bookkeeping fees were defederalized annually by public housing authorities
                 nationwide.

                 Asset Management Fees
                 HUD had not provided an explanation or methodology in describing how it
                 arrived at its asset management fee rate of $10 and the basis for allowing the fee.
                 This rate had not been reassessed since its inception. According to HUD, asset
                 management fees are similar in nature to distributions allowed under the
                 multifamily program, since a housing authority may not take an asset
                 management fee unless the project has excess cash. HUD explained that these
                 fees were an “incentive” to the housing authority to both operate its public
                 housing projects and its central offices in a financially prudent manner. However,
                 based on HUD Handbook 4370.2, chapter 2-8 (C), the multifamily program
                 generally did not permit nonprofit entity owners distributions or cash
                 withdrawals, other than for the payment of reasonable expenses necessary to the
                 operation and maintenance of the project, from surplus cash. Surplus cash must
                 be deposited into the residual receipts account and may be released only with
                 prior written approval from HUD (see appendix C).


1
 Capital fund management fees were included in the overall management fees reported in the Subsystem and cannot
be separated unless a review is conducted at each housing authority.


                                                      6
            HUD denied that asset management fees represented a profit for the housing
            authorities. However, this fee did not cover additional charges necessary for the
            operation and maintenance of the projects. As a result, asset management fees did
            not serve any purpose other than to allow a housing authority to defederalize
            additional funds from its projects to retain as profit in its central office cost center.
            Housing authorities are not profit-motivated entities and should always operate in
            a financially prudent manner. Therefore, we believe that asset management fees
            should be disallowed in future assessments of central office cost center fees. On
            average, approximately $81.6 million in asset management fees were
            defederalized annually by public housing authorities nationwide.

            Capital Fund Management Fees
            HUD stated that the 10 percent management fee was statutory and derived from
            section 9(d) of the U.S. Housing Act of 1937, which allows a housing authority to
            charge up to 10 percent of the Capital Fund grant for “administration.” These
            administrative costs must be specifically apportioned and documented. Under a
            fee-for-service system, the housing authority may charge a management fee of 10
            percent, regardless of actual cost. HUD explained that the fee rate had not
            changed but the treatment of the fee income changed under the asset management
            model, as it is now considered non-Federal funds. The HUD handbook stated that
            HUD would periodically review the Capital Fund program management fee
            amounts to determine whether adjustments were warranted (see appendix C). The
            10 percent rate had not been revised since its inception. HUD did not provide its
            basis for allowing the housing authorities to charge the entire 10 percent of their
            Capital Fund grant as a management fee or show that this rate was reasonable.

HUD Did Not Adequately
Monitor Central Office Cost
Center Accounts

            HUD headquarters did not have a policy in place to monitor its housing
            authorities’ central office cost center accounts unless they were deemed to be
            troubled, standard, or high-moderate risk or if the housing authorities’ asset
            management projects were having cash flow problems or some other ad hoc event
            that occurred to raise a question regarding the central office cost center accounts.
            Because HUD was concerned with the performance of the developments under an
            asset management model, it would not look at a housing authority’s central office
            cost center account unless the housing authority was experiencing financial issues
            or one or more of its asset management projects had limited cash flow. HUD
            relied on the housing authorities’ compliance with the Office of Management and
            Budget Circular A-133 Compliance Supplement as determined by audited
            financial statements and notification edits of the housing authorities’ electronic
            submissions to the Financial Assessment Subsystem for Public Housing




                                               7
                 (Subsystem) 2 conducted by the Real Estate Assessment Center (Center). Further,
                 HUD stated that the independent public auditor should review the fee structure
                 and if the audit identified a problem, HUD would take appropriate action.

                 The Los Angeles, San Francisco, Cleveland, and Hartford public housing field
                 offices did not review the central office cost center accounts of their respective
                 housing authorities because they considered those funds as non-Federal and not
                 subject to the public housing rules. They generally stated that their monitoring of
                 housing authorities was triggered by a fee alert letter from the Center, a review of
                 information in the electronic submissions and the independent public audit
                 reports, or a request from HUD headquarters. They would monitor the fees that
                 were charged to the asset management projects to ensure that they were calculated
                 correctly; however, they would not monitor how the fee revenue was used and
                 expensed from the central office cost center.

                 The Center implemented the fee alert letters to identify potential noncompliance
                 with HUD-established limits to its public housing authorities’ central office cost
                 center fees in January of 2013. The fee alert letters were designed to assist
                 HUD’s field offices and the program office in their monitoring activities. When a
                 public housing authority entered its annual financial information into the
                 Subsystem, it would check for anomalies with the fees charged to the projects.
                 An anomaly would generate a fee alert letter, which would be sent to the HUD
                 field office responsible for the particular public housing authority. This letter
                 would prompt the field office to check into the particular issue identified.
                 Although the asset management model took effect in 2007, the fee alert letters
                 were not implemented until early 2013 due to HUD’s resource limitations. In
                 addition, the computation logic to test the asset management fees malfunctioned.
                 As a result, the Center inactivated the letters 3 to correct the problem. The
                 Center’s program manager did not know when the errors were identified. The
                 computation logic was corrected, and the letters were reactivated in December
                 2013. However, local field offices notified the Center that the logic was still
                 incorrect. The Center inactivated the letters a second time and planned to
                 reactivate them but HUD local field offices will not receive fee alert notices for
                 asset management until May 2014.

    Housing Authorities Had
    Excessive and Unsupported
    Charges

                 We found indications that the housing authorities in our review (1) charged fees
                 in excess of HUD’s established limits, (2) lacked supporting documentation when
                 defederalizing fees, (3) transferred public housing operating funds to the central

2
  The Real Estate Assessment Center receives and analyzes the annual financial statements of the nation’s public
housing authorities from their submissions to the Financial Assessment Subsystem for Public Housing.
3
  The letters for management and bookkeeping fees remained active.


                                                         8
                 office cost centers in excess of what they earned to cover fund deficits, (4)
                 overcharged projects for cost center type charges with or without supporting
                 documentation, and (5) transferred funds between projects without excess cash in
                 the previous fiscal year. We performed our analysis at the San Francisco, City of
                 Los Angeles, and Nevada housing authorities. We also included the results of
                 Bridgeport and Stark housing authorities, which we audited separately.

                 San Francisco Housing Authority
                 According to a Center report, issued on August 16, 2011, the San Francisco
                 Housing Authority failed to demonstrate full compliance with the “stop loss” 4
                 criteria. Specifically, the Center cited that San Francisco’s management fee of
                 $78 per unit month was higher than the 2010 management fee table published rate
                 of $65, which was $13 per unit month higher than HUD deemed reasonable and,
                 therefore, an overcharge of almost $900,000. We attempted to validate whether
                 San Francisco had corrected the use of this rate by reviewing its fiscal year 2010
                 general ledger and management and bookkeeping fee calculations. However, San
                 Francisco did not provide the necessary supporting documents. Since San
                 Francisco was unable to provide support for its general ledger entries for both
                 management and bookkeeping fees, we determined the $5.8 million 5 to be
                 unsupported for fiscal year 2010.

                 We compared San Francisco’s internal records with the electronic submission to
                 the Subsystem and noted a disparity of $332,246. The internal records showed an
                 asset management fee calculation of $418,320, while the electronic submission
                 showed $750,566 for fiscal year 2009. We asked San Francisco for the fiscal year
                 2009 general ledger and an explanation of the variance; however, San Francisco
                 did not provide the general ledger or explain the variance. Based on our analysis,
                 San Francisco should have charged only $418,320 to its asset management
                 projects. Therefore, asset management fees charged in excess of $418,320 would
                 not be eligible. Since we could not verify whether the $332,246 was an asset
                 management fee or another fee that was categorized incorrectly, we determined
                 this amount to be unsupported.

                 San Francisco was designated troubled by HUD, based on the Public Housing
                 Assessment System score for the fiscal yearend September 30, 2011. Coupled
                 with the Center report, San Francisco executed a stop loss corrective action plan
                 with HUD in July 2013, which required demonstration of compliance with the
                 stop loss criteria as outlined in a Center report within 180 days of plan execution.
                 San Francisco received conditional approval for stop loss funding in fiscal year
                 2013. Also, the HUD San Francisco field office performed a stop loss onsite
                 review in January 2014 and determined that San Francisco had demonstrated
                 successful conversion to asset management. As part of the review, the HUD San

4
  Under the new operating rule, public housing authorities that will experience a decline in funding can have their
losses “stopped” by demonstrating a successful conversion to asset management.
5
  Management ($5,398,225) and bookkeeping ($460,850) fees identified in San Francisco’s fiscal year 2010 audited
financial statements


                                                         9
Francisco field office used San Francisco’s responses and supporting documents
as outlined in its stop loss corrective action plan agreement, which included
reviewing the management and asset management fees. Given the issues
identified above, we requested that HUD and the San Francisco field office
provide documentation used to lift the corrective action plan or input related to
the management and asset management fees, but we received nothing.

Housing Authority of the City of Los Angeles
The City of Los Angeles inappropriately overcharged its asset management
projects $714,000 in asset management fees in fiscal years 2009 and 2010
because it misapplied HUD’s 3-year implementation criteria, which sets
guidelines that would allow a housing authority to charge asset management fees.
The City of Los Angeles should not have charged an asset management fee for
four asset management projects in fiscal year 2009 and 11 projects in fiscal year
2010.

The July 2007 criteria, Table of Fees Under Asset Management, was posted on
the HUD Office of Public Housing’s Web site as a supplement to HUD Handbook
7475.1, REV, CHG-1, Financial Management Handbook (see appendix C).
Although the criteria were not published in a public and Indian housing notice or
incorporated into a handbook, HUD confirmed the criteria to be official and
effective. The criteria apply only to the first 3 years of asset management
implementation.

HUD clarified that for the second and third year of implementation, the prior
year’s financial information should be reviewed to determine eligibility for an
asset management fee. The City of Los Angeles commented that the criteria did
not specifically state that prior-year data should be reviewed and the only mention
of looking at excess cash from the prior year applied in the fourth year of asset
management implementation and onward. We agree that the criteria could be
easily misinterpreted, which raised the concern that other housing authorities may
have also misapplied the criteria.

During the HUD Los Angeles field office limited financial management review
conducted between December 2011 and February 2012, the field office concluded
that the asset management fee calculation, based on review of the Center’s
financial data schedules from 2009 and 2010, proved to be reasonable under
HUD-published limits. This review was in draft form and had not been issued by
the field office. Although the report stated, “HUD Financial Analysts reviewed
fee-for-service expenses from HCV [the Housing Choice Voucher program] and
PH [public housing] to ensure these programs were not overcharged,” HUD stated
that the field office did not verify the excess cash computations but was limited to
verifying that the City of Los Angeles used the correct number of units to
calculate the asset management fee rates and that the per unit rates were
reasonable. To demonstrate that asset management fees were not overcharged in
fiscal years 2009 and 2010, the field office should have tested whether the asset



                                 10
           management project met the 3-year implementation criteria, and its failure to do
           so left the overcharges undetected.

           Southern Nevada Regional Housing Authority
           The Nevada housing authority inappropriately charged asset management fees of
           $37,860 to three asset management properties in fiscal year 2011, although those
           properties reported cash deficiencies in the prior year. The Nevada housing
           authority stated that excess cash was low in this fiscal year because it was the first
           year of their agency’s regionalization. The financial analyst responsible for
           monitoring this agency did not receive a fee alert letter from the Center; therefore,
           the issue was not identified. Because this issue occurred before the
           implementation of the asset management fee letters in January 2013, the HUD
           field office would not have caught the inappropriate charges unless it actively
           monitored the Nevada housing authority’s asset management fee calculations.

           Bridgeport Housing Authority
           The Bridgeport Housing Authority (OIG audit report number 2014-BO-1001,
           issued January 23, 2014) overcharged its projects $281,611, including
           management ($108,193), bookkeeping ($14,538), and asset management
           ($158,880) fees, between October 2009 and April 2013. In addition, Bridgeport
           paid $297,083 in charges with its asset management projects that should have
           been charged directly to its central office cost center. It also improperly
           transferred $225,000 in funds between asset management projects in fiscal year
           2012 when the projects did not have the required excess cash. Finally, Bridgeport
           did not provide adequate documentation to support charges of $584,119 and as a
           result, may have overcharged its asset management projects and undercharged its
           central office cost center.

           Stark Metropolitan Housing Authority
           Stark Metropolitan Housing Authority (OIG audit report number 2013-CH-1003,
           issued July 15, 2013) made ineligible transfers of $773,049 in public housing
           operating funds from its asset management projects to its central office cost center
           in excess of what it earned.

Charges From Central Office
Cost Centers Were
Questionable

           Fees earned by and transferred into the central office cost center are defederalized
           and no longer subject to HUD requirements. Therefore, the charges paid from the
           central office cost center are not transparent to the public, and housing authorities
           cannot be held accountable to HUD for inappropriate uses of central office cost
           center funds. Since there is no Federal oversight with respect to the use of these
           funds, there is a much greater potential for fraud, waste, and abuse. Because
           HUD was unable to demonstrate the reasonableness of the fees, public housing
           agencies nationwide may have defederalized excessive amounts of taxpayer


                                             11
                 dollars for use on questionable expenses that did not agree with HUD’s mission
                 and goals.

                 To illustrate our concerns with HUD’s policy of defederalizing fees, we
                 performed a limited review of our sample housing authorities’ central office cost
                 centers and identified more than $4.3 million 6 in expenses from the City of Los
                 Angeles’ and San Francisco Housing Authority’s central office cost centers that
                 would appear excessive or questionable if charged to restricted HUD program
                 funds (see chart below). For instance, the former executive director of the City of
                 Los Angeles earned a six-figure salary, benefits, and generous “perks,” including
                 a bonus, housing allowance, and surveillance system installed at his home. Media
                 reports of his salary contributed to HUD implementing a $155,500 limit 7 on
                 executive salaries. He also negotiated and received a seven-figure severance
                 package for a wrongful termination settlement with the City of Los Angeles. The
                 funds used to pay for these expenses came from the central office cost center.
                 They were primarily funded by defederalized HUD fees and were, therefore,
                 beyond HUD’s control. In another instance, the former executive director of the
                 San Francisco Housing Authority was on medical leave from January 29 to March
                 29, 2013, yet his six-figure salary in excess of the $155,500 limit HUD instituted,
                 was paid out of the central office cost center with de-federalized HUD fees.
                 Media reports indicated that he led the San Francisco Housing Authority to the
                 brink of financial ruin as a result of ongoing deficits in the past three or four
                 years, while receiving a paycheck even though he was on medical leave for two
                 months. Another media article stated that while the former executive director was
                 on medical leave, he was setting up a restaurant in Berkeley, which was slated to
                 open on May 1, 2013. These matters were covered extensively in the local media,
                 portraying both housing authorities primarily funded by HUD in a negative light.




6
  The $4.3 million in questionable expenses for the City of Los Angeles and San Francisco Housing Authorities
($3,911,651 and $456,601, respectively) were spent with defederalized funds and therefore, were not included in our
questioned costs and funds to be put to better use totals.
7
  Public and Indian Housing Notice 2012-14 limits the salary a housing authority is allowed to charge to the fiscal
yearend 2012 Section 8 and Section 9 funds for a chief executive office or other officials to $155,500 (see appendix
C).



                                                        12
                                 Housing Authority of the City of Los Angeles
         Expense type              Amount                                Description
Security camera system            $36,926    Installed at former executive director’s home.
Jordan Downs project –
property with extensive soil                       Represents predevelopment type costs and is only a portion of
contaminants purchased               $51,559       what OIG was able to identify. There may have been more
without proper environmental                       expenses hidden within the central office cost center.
studies
                                                   Questionable travel charges paid from individually held “P-cards”
Travel                               $64,056       that were identified by the Los Angeles city controller’s office.
                                                   OIG did not validate the results of the controller’s office.
                                                   This amount represents the former executive director’s housing
                                                   allowance between January 2009 and October 2012. Of the total
Former executive director’s
                                     $294,126      amount, $96,789 represents his housing allowance for the period
housing allowance
                                                   May 2011 to October 2012, and this amount was negotiated in the
                                                   former executive director’s severance package.
                                                   Bonuses awarded to staff and senior management between fiscal
Bonuses                              $403,848      years 2009 and 2010. The former executive director was awarded
                                                   a bonus of $46,887 in 2010.
                                                   Represents senior manager salaries earned between fiscal years
Senior manager salaries              $522,453
                                                   2009 and 2011 over the salary cap if it was in place before 2012.
                                                   Settlement payment, attorney fees, insurance, severance, Public
Former executive director’s                        Employees’ Retirement System service credit purchase payoff,
settlement-severance package         $1,102,719    final payoff. This amount does not include the housing allowance
                                                   portion of his severance package.
                                                   Eleven cases were settled and paid from the central office cost
Legal settlements                                  center between January 2007 and October 2013. This does not
                                     $1,435,965
                                                   include cases that were tried before the court.
   Subtotal - Los Angeles
                                     $3,911,651

                                         San Francisco Housing Authority
             Expense type                      Amount                               Description
Former executive director’s severance
                                                $112,636        Payout and severance package to executive director.
package
                                                                Represents former executive director’s salary earned
Former executive director’s salary              $165,000        between fiscal years 2010 and 2012 over the salary
                                                                cap if it was in place before 2012.
                                                                Settlement payments between fiscal years 2010 and
Legal settlements                               $178,965
                                                                2013.
         Subtotal - San Francisco               $456,601



Defederalization and Reduced
Oversight Increased Risk to
Program

                HUD stated that part of the reason for the transition to this defederalized fee
                approach was to reduce administrative requirements for Federal oversight



                                                           13
             agencies. HUD benefited from housing authorities adopting this management fee
             approach because HUD’s monitoring responsibilities were greatly reduced. HUD
             did not need to evaluate whether a housing authority’s allocation system was
             reasonable nor did it need to monitor the spending of fee income that was charged
             to the asset management projects. However, this hands off policy conflicts with
             OMB Circular A-123, which states that “proper stewardship of Federal resources
             is a fundamental responsibility of agency managers and staff. Federal employees
             must ensure that government resources are used efficiently and effectively to
             achieve intended program results. Resources must be used consistent with agency
             mission, in compliance with law and regulation, and with minimal potential for
             waste, fraud, and mismanagement.” Although adopting this fee approach reduced
             HUD’s administrative requirements, it has been detrimental to HUD’s program
             and overall mission and created further opportunity for fraud, waste, and abuse of
             taxpayer dollars.

Conclusion

             HUD could not support the reasonableness of its Operating Fund program’s
             management, bookkeeping, and asset management fees and its Capital Fund
             program’s management fees because it did not retain the necessary
             documentation. HUD also did not adequately justify the need for an asset
             management fee. In addition, it generally did not adequately monitor the housing
             authorities’ central office cost center expenses because the fees were
             defederalized and no longer subject to HUD’s requirements. Consequently, about
             $353 million in public housing operating funds was defederalized annually as fees
             between January 2009 and December 2011, without adequate assurance that the
             fees were reasonable or justified. Of this amount, about $81.7 million in asset
             management fees nationwide could be put to better use for the purpose of
             achieving HUD’s mission if procedures are implemented to ensure that the fees
             are reasonable and justified. Based on our analyses, the asset management fee is
             not justified and should be discontinued. Prior to implementing this fee structure
             and defederalizing these funds, excess operating and capital funds could only be
             used for their respective programs. By not ensuring the fees charged are
             appropriate, excess funds can now be moved out of and no longer benefit the
             program. Four of the five housing authorities reviewed inappropriately
             defederalized $2.3 million in excessive Operating Fund program funds by either
             overcharging or transferring funds of their asset management projects to their
             central office cost centers. Further, the housing authorities were unable to support
             $6.7 million in management, bookkeeping, and asset management fees. The lack
             of HUD monitoring increased the potential for fraud, waste, and abuse with the
             use of central office cost center funds. We identified approximately $4.3 million
             in central office cost center funds that were used for excessive and questionable
             charges.




                                              14
Recommendations

          We recommend that the Deputy Assistant Secretary for Public Housing and
          Voucher Programs

          1A.     Revise HUD’s asset management fee policy to refederalize the Operating
                  Fund program’s management and bookkeeping fees and the Capital Fund
                  program’s management fees.

          1B.     HUD should remove the provision that allows public housing authorities
                  to charge asset management fees, which would ensure that at least $81.6
                  million in operating funds could be put to better use in meeting HUD
                  program objectives.

          1C.     Establish and implement procedures to reassess the management and
                  bookkeeping fees periodically to ensure that they are reasonable. HUD
                  should retain the documentation justifying the calculation of the rates.

          1D.     Require the San Francisco Housing Authority to support or repay from
                  non-Federal funds management fees of $5,398,225, bookkeeping fees of
                  $460,850, and asset management fees of $332,246 charged to its projects
                  for fiscal years 2009 and 2010.

          1E.     Recapture excessive asset management fee charges of $714,000 from the
                  Housing Authority of the City of Los Angeles or require it to repay this
                  amount from non-Federal funds.

          1F.     Recapture excessive asset management charges of $37,860 from the
                  Southern Nevada Regional Housing Authority or require it to repay this
                  amount from non-Federal funds.

          We recommend that the Deputy Assistant Secretary for Real Estate Assessment
          Center

          1G.     Develop and implement automated controls in the Subsystem to ensure
                  that housing agencies nationwide do not charge excessive asset
                  management fees.

          We recommend that the Acting Deputy Assistant Secretary for Field Operations

          1H.     Develop, document, and implement written procedures to ensure that fees
                  charged to the asset management projects and Capital Fund program and
                  expenses from the central office cost center are used to support HUD’s
                  mission.




                                           15
                         SCOPE AND METHODOLOGY

We conducted our onsite work from September 2013 to March 2014 at the Nevada, City of Los
Angeles, and San Francisco housing authorities. Our audit generally covered the period March
2009 to November 2013. We expanded our scope as necessary.

To accomplish our objective, we

       •   Interviewed HUD headquarters, HUD field office, Housing Authority of the City of
           Los Angeles, Southern Nevada Regional Housing Authority, and San Francisco
           Housing Authority staff.

       •   Interviewed Columbus and Boston OIG auditors and reviewed their work papers for
           information on their audits of the Stark and Bridgeport authorities.

       •   Reviewed applicable HUD requirements, including Supplement to HUD Handbook
           7475.1, Financial Management Handbook; 24 CFR Part 990; and Office of
           Management and Budget Circular A-87.

       •   Analyzed and sorted the audit universe provided by the Center from the Subsystem.
           We relied on the information in HUD’s Subsystem since the data submitted was from
           an audited source. We also verified that the information submitted to the Subsystem
           by the City of Los Angeles and the Nevada Housing Authorities were supported by
           their general ledgers. We analyzed the information from housing authorities with
           audited financial statements for the period January 1, 2009, to December 31, 2011,
           which represents the first three full years of information submitted into the
           Subsystem, and isolated the housing authorities that reported management,
           bookkeeping, and asset management fees. We did not include subsequent periods’
           data because the housing authority submissions to the Subsystem were incomplete.
           Based on that, we averaged the management and bookkeeping fees of $271.5 million
           ($205.3 and 66.2 million, respectively) and asset management fees of $81.6 million
           for each housing authority recognized nationwide.

           Fiscal Year     Management fee     Bookkeeping fee Asset management
                                                                     fee
           2009            $   192,708,551    $   64,118,800 $      80,857,266
           2010            $   211,745,300    $   65,763,631 $      83,264,833
           2011            $   211,532,527    $   68,864,575 $      80,718,914
           Total           $   615,986,378    $ 198,747,006 $      244,841,013
           Average         $   205,328,793 $       66,249,002 $        81,613,671

       •   Reviewed City of Los Angeles, Nevada, and San Francisco authorities’ electronic
           submissions to the Subsystem between fiscal years 2008 and 2012.


                                              16
       •   Reviewed City of Los Angeles, Nevada, and San Francisco authorities’ internally
           maintained calculations and records of their management, bookkeeping, asset
           management, and Capital Fund management fees. We also reviewed their unit data
           and excess cash analysis based on the financial audited statement submitted to the
           Center.

       •   Reviewed City of Los Angeles, Nevada, and San Francisco authorities’ central office
           cost center accounts to identify substantial or questionable charges.

       •   Reviewed HUD field offices’ monitoring reports on their housing authorities.

We selected the City of Los Angeles, San Francisco, and Nevada housing authorities for review
from a population of housing authorities managed by the local HUD field offices of Honolulu,
Los Angeles, Phoenix, San Francisco, and Sacramento. The information was obtained from the
Inventory Management System, Public and Indian Housing Information Center. We sorted the
listing based on the largest public housing units. We opted to not perform a review at the Hawaii
Public Housing Authority due to the excessive cost of travel. We were unable to select a sample
on a statistical basis from a nationwide population because the Center did not provide the data in
a timely fashion.

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.




                                               17
                              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:

               •   Controls to ensure that HUD assesses or reassess fee rates periodically to
                   ensure that they are reasonable.

               •   Policies and procedures designed to ensure that HUD monitors central office
                   cost center fees for excessive charges and to ensure that funds are spent
                   according to HUD requirements.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency

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




                                                 18
•   HUD could not support the reasonableness of its Operating Fund program’s
    fee limits, nor did it monitor the fees expensed from the central office cost
    centers (see finding 1).




                                 19
                                   APPENDIXES

Appendix A

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

         Recommendation          Ineligible 1/    Unsupported 2/     Funds to be put
             number                                                  to better use 3/


              1B                                                        $81,613,671
              1D                                   $6,191,321
              1E                    $714,000
              1F                     $37,860

             Total                  $751,860       $6,191,321           $81,613,671

    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. The ineligible amount represents asset
            management fees charged in excess of HUD’s requirement for the Housing
            Authority of the City of Los Angeles ($714,000) and the Southern Nevada
            Regional Housing Authority ($37,860). We did not include $1,576,743 in
            ineligible charges since those amounts were already included in the Bridgeport
            ($803,694) and Stark ($773,049) audit reports (OIG audit report number 2014-
            BO-1001, issued January 23, 2014 and 2013-CH-1003, issued July 15, 2013)

    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. The
            unsupported amount represents $5,398,225 in management fees, $460,850 in
            bookkeeping fees, and $332,246 in asset management fees at the San Francisco
            Housing Authority. We did not include $584,119 in unsupported charges since
            that amount was already included in the Bridgeport audit report (OIG audit report
            number 2014-BO-1001, issued January 23, 2014)

    3/      Recommendations that funds be put to better use are estimates of amounts that
            could be used more efficiently if an 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


                                            20
savings that are specifically identified. In this instance, by HUD not allowing
PHAs to collect unneeded asset management fees, we estimate, over the next
year, it would have available approximately $81.6 million more for use by asset
management projects (see Scope and Methodology section).




                                21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         22
Comment 1




Comment 2




Comment 2




            23
Comment 3




Comment 4



Comment 5




Comment 6




Comment 7




Comment 8




            24
Comment 8




Comment 9




Comment 10




Comment 10




Comment 5




             25
Comment 11




Comment 11




Comment 12




Comment 13



Comment 5




             26
Comment 14




Comment 15




Comment 16




Comment 16




             27
Comment 17




             28
                         OIG Evaluation of Auditee Comments

Comment 1   Our audit report identified weaknesses and vulnerabilities in the asset
            management fee for service model that could add risk to the program and shed
            negative light on HUD and its program. The purpose of the recommendation was
            to mitigate that risk, not to undermine HUD’s accomplishment. We did not
            review HUD’s plans for moving to a single platform with Multifamily, as this was
            not presented as a justification for a fee for service model during the course of the
            audit. Therefore, we cannot comment on the appropriateness of such a merger.
            However, given the issues we identified in our audit report, HUD may want to
            reconsider whether it is prudent to merge HUD’s Public and Indian Housing
            program with the Multifamily program.

Comment 2   We cannot address comments regarding the HOPE VI or Project Based Rental
            Assistance programs since we did not audit those programs. Our scope was
            limited to the Low Rent program. Therefore, we do not know what HUD’s
            methodology was in determining what a “reasonable” fee was with respect to
            those programs. However, we did note that OIG performed a separate review of
            the Section 8 Housing Choice Voucher program (OIG audit report number 2012-
            LA-0001), of which a public housing authority’s project based vouchers are a
            component. That report concluded that HUD did not adequately support or
            reassess the reasonableness of the fee-for service amounts or monitor the amounts
            charged.

            We also did not perform an audit of a public housing authority’s developer’s fees
            and the low-income housing tax credits program. To our understanding, tax
            credits are awarded to developers of qualified projects. The developers then sell
            these credits to investors to raise capital for their projects. The program is
            dissimilar to the fee for service model; therefore, there is no comparison between
            the two.

Comment 3   We are asking HUD to re-evaluate the fee for service model to ensure that it is
            cost effective and to refederalize the funds to mitigate risks to the program. HUD
            could not provide its analysis for determining the “reasonableness” of the fees,
            which is of particular importance when government resources are scarce. HUD
            has provided no information to support that it is spending less by implementing
            this model. Without being able to explain how it came to its reasonability
            standard, HUD is not performing its due diligence in safeguarding tax dollars by
            failing to monitor how those funds are spent.

            We agree that the May 2004 OMB Circular A-87 includes language that
            encourages Federal agencies to work with States or localities for alternative
            means of administering Federal programs. However, HUD is not required to
            implement a fee for service system and had the option of incorporating other
            methodologies to administer its programs. Furthermore, in the recently published



                                             29
            Omnibus, published December 26, 2013, the specific language HUD quoted was
            removed. This may indicate the movement away from the fee for service model.

Comment 4   We agree that OMB encourages Federal agencies to use the fee for service
            system; however, if HUD cannot demonstrate the fees are cost effective, it would
            be contrary to OMB’s intent. Because several years have passed since the initial
            implementation, HUD should gather information to gauge whether this model is
            actually increasing the overall efficiency and effectiveness of administering the
            program. As noted in the finding, HUD has not re-evaluated its fees since
            inception. The fees may not be saving the government money and may not be
            “reasonable.”

Comment 5   We disagree with HUD’s statement that OIG concurred with the Federal Register
            Notices that supported the asset management fee structure. We did not comment
            on the notices, which is different from specifically concurring, and OIG may not
            have had enough information at the time to strictly oppose the defederalization of
            funds. OIG does not concur on HUD policy to maintain objectivity. We offer
            comments and non-concur if we have strong indications that risks are excessive or
            for known issues related to the policy. However, our having no comment does
            not indicate we guarantee the policy will be sufficient or, in practice, will not
            reveal risks not foreseen. Therefore, HUD cannot expect we will not issue audit
            reports on any program areas where policy has gone through clearance. In
            addition, receiving authority from OMB to implement the changes does not imply
            the implementation will be acceptable or safe harbors are at the appropriate
            amount. The purpose of this audit was to review asset management fees and the
            defederalization of funds in the Central Office Cost Centers.

Comment 6   We agree that the current criteria states that the fee income earned by a public
            housing authority from its asset management projects are considered local
            revenue. However, HUD was not required to utilize asset management or
            establish the fees as non-program income. Based on the fact that HUD could not
            support how it arrived at its “reasonability” threshold and the use by the public
            housing authorities of these funds in our sample, we recommend the current
            criteria be adjusted to refederalize those fees so that they remain under HUD’s
            purview.

Comment 7   We did not perform a review of the Multifamily program; therefore, we cannot
            comment on that program. In general, however, an Assisted Project Based
            Multifamily property is privately owned, while the public housing stock are
            publicly owned and operated. Owners of a Multifamily property are provided
            with a variety of incentives and financial assistance in exchange for an agreement
            to rent to low- and moderate-income people. Conversely, a public housing
            authority does not have a vested interest in its asset management projects because
            it does not run those projects for profit. The projects are a means of servicing the
            public. Therefore, it is not reasonable to compare the Multifamily program with
            the Public and Indian Housing program since both are fundamentally dissimilar.



                                             30
              We disagree with HUD’s contention that the example public housing authorities
              demonstrate that a system of local control can be effective. Although both
              Executive Directors at the housing authorities of the cities of Los Angeles and
              San Francisco were replaced, the funding to pay for their excessive salaries and
              perks were not reimbursed. In fact, because the funds are “defederalized” and no
              longer under HUD’s control, the housing authorities will continually go to that
              source of funding to pay for its questionable expenditures. Case in point, while
              the audit team was at the City of Los Angeles housing authority, and had inquired
              about the source of funds to pay for settlement cases, the authority determined
              that two settlement cases were inappropriately paid with program/restricted funds.
              As a result, the Chief Finance Officer had reclassified the payments from the
              “restricted” funds to the “unrestricted” funds from the central office cost center.
              By allowing these fees to maintain its “unrestricted” status and failing to monitor
              the use of the funds under the guise that they are “local revenues,” HUD is openly
              allowing public housing authorities to use taxpayer monies without any
              restrictions or sanctions.

Comment 8     HUD may want to reconsider whether the current asset management structure is
              feasible. Recall that in OMB A-123:

              The proper stewardship of Federal resources is an essential responsibility of
              agency managers and staff. Federal employees must ensure that Federal programs
              operate and Federal resources are used efficiently and effectively to achieve
              desired objectives. Programs must operate and resources must be used consistent
              with agency missions, in compliance with laws and regulations, and with minimal
              potential for waste, fraud, and mismanagement.

              We do not agree that allowing taxpayer monies to be defederalized should be
              necessary to incentivize a public housing authority to adjust its systems. In
              addition, if the fees were refederalized any amounts collected over actual would
              be subject to HUD monitoring, per recommendation 1H.

Comment 9     We are not necessarily asking HUD to return its previous cost allocation structure.
              We are asking HUD to re-evaluate the structure they currently have in order to
              further improve upon and mitigate potential risks and vulnerabilities. Doing so
              would involve re-federalizing fees so that the funds maintain their Federal identity
              and control.

Comment 10 We did not audit the Multifamily program and therefore cannot speak about the
           structure it operates under. We can only speak of the work we conducted within
           the scope of our review.

Comment 11 According to HUD criteria, a public housing authority may only receive an asset
           management fee if its individual asset management projects had excess cash in the
           prior year. The elimination of the asset management fee would not have the



                                               31
              effect HUD is stating because public housing agencies without excess cash in the
              prior year still must make do without the additional “distribution.” In such
              instances, public housing agencies still need to perform asset management
              functions, without receiving a fee, regardless of whether or not there is an actual
              distinction between property management and asset management functions.

Comment 12 HUD has not provided any information concerning the amounts the CHA was
           paying its contractors to perform the property management function. As a result,
           there is no information to suggest the management fees CHA was collecting from
           HUD were insufficient to cover the contractor costs and the other tasks listed, thus
           requiring additional taxpayer monies to be defederalized.

Comment 13 HUD could not explain how it determined the $10 per unit month asset
           management fee was reasonable. According to 24 CFR 990.190 (f), each PHA
           with at least 250 units shall receive a $4 per unit month asset management fee
           while PHAs with fewer than 250 units that elect to transition into asset
           management shall receive an asset management fee of $2 per unit month. HUD
           could not explain the $6 - $8 difference.

Comment 14 Although HUD’s Multifamily Office periodically reviews and adjusts the
           management fee, HUD has not provided documentation to show how the 80
           percent rate was determined. As a result, it remains unclear if this rate was
           reasonable and we cannot close the recommendation without support that fees are
           reassessed and that procedures are developed to ensure reasonableness and
           updated often.

Comment 15 HUD has not provided documentation to show how it determined the
           bookkeeping fee rate. As a result, it is unclear if this rate was reasonable and
           future assessments will evaluate the fee for reasonableness.

Comment 16 According to HUD Records Disposition Schedules Handbook 2225.6, Section
           1(A)(2), Internal Files, which include copies of proposed and final rules as sent
           through internal clearance process; clearance records; significant working papers,
           studies, reports, and other materials; internal HUD comments on the proposed and
           final rules; and notes from internal HUD meetings held to discuss the proposed or
           final rules, are to be destroyed 10 years after close of file. We agree that HUD’s
           Disposition Schedule Handbook states that general notices are destroyed 5 years
           after close of file. However, the final rules, such as 24 CFR 990, new Operating
           Fund final rule, which was published in the Federal Register on September 19,
           2005, should not be destroyed until September 19, 2015. This rule was used to
           establish requirements for housing authorities to convert to the asset management
           business model, which outlined the various fees that each public housing agency
           may charge its asset management projects. Therefore, the working papers,
           studies, and reports that HUD used to arrive at the rates should still be maintained.
           However, HUD did not retain such documentation, contrary to its own record




                                               32
              retention policy. The documentation that HUD provided was incomplete and did
              not show the reasonableness of the various asset management fees.

Comment 17 We disagree. We believe the procedures should be documented and given to the
           field offices nationwide to ensure consistent understanding at each field office of
           its monitoring responsibilities.




                                              33
Appendix C

                                        CRITERIA

24 CFR 990.325, Record retention requirements.
The PHA [public housing agency] shall retain all documents related to all financial management
and activities funded under the Operating Fund for a period of five fiscal years after the fiscal
year in which the funds were received.

24 CFR 990.290, Compliance with asset management requirements.
(a) A PHA is considered in compliance with asset management requirements if it can
demonstrate substantially, as described in paragraph (b) of this section, that it is managing
according to this subpart.
(b) Demonstration of compliance with asset management will be based on an independent
assessment.
         (1) The assessment is to be conducted by a professional familiar with property
         management practices and costs in the region or state in which the PHA is located. This
         professional is to be procured by HUD.
         (2) The professional review and recommendation will then be forwarded to the Assistant
         Secretary for Public and Indian Housing (or designee) for final determination of
         compliance to asset management.
(c) Upon HUD’s determination of successful compliance with asset management, PHAs will
then be funded based on this information pursuant to § 990.165(i).
(d) PHAs must be in compliance with the project-based accounting and budgeting requirements
in this subpart by FY [fiscal year] 2007. PHAs must be in compliance with the remainder of the
components of asset management by FY 2011.

Table of Fees Under Asset Management, Supplement to HUD Handbook 7475.1, dated July
27, 2007
For first year of implementation, no excess cash requirement. For second year, current assets
must exceed current liabilities to earn asset management fee. For third year, current assets must
exceed current liabilities by one month of operating expenses to earn an asset management fee.
Fee may not be accrued by Central Office Cost Center if insufficient excess cash.

5.2 – Capital Fund Program of Management Fee of Supplement to HUD Handbook 7475.1,
REV, CHG-1, Financial Management Handbook
The PHA may charge a management fee of up to 10 percent of the Capital Fund Program
formula grant(s) amount, excluding RHF [Replacement Housing Factor] grants and Emergency
and Disaster grants. The Capital Fund Program management fee is considered part of the Capital
Fund Program Budget Line Item (BLI) 1410, Administration, subject to the regulatory limitation
of 10 percent of the Capital Fund grant. HUD will periodically review the Capital Fund Program
management fee amounts to determine if any adjustments are warranted.




                                               34
The Capital Fund Program management fee is available to be earned (drawn down) upon the
awarding and availability of the Capital Fund Program grant at any time during the grant period
and in any amount up to the 10 percent limit.

6.4 – Excess Cash Defined of Management Fee of Supplement to HUD Handbook 7475.1,
REV, CHG-1, Financial Management Handbook
Excess cash will be calculated using PHA-reported data from the FDS [Financial Data
Schedule]. It represents the sum of certain current asset accounts less the sum of all current
liability accounts, less one month worth of operating expenses for the project. The determination
of one-month operating expenses will be calculated by dividing FDS line 969 (Total Operating
Expenses) by 12. The result of this calculation is defined as the excess cash of the AMP [asset
management project].

6.5 Fungibility – Effective Date of Supplement to HUD Handbook 7475.1, REV, CHG-1,
Financial Management Handbook
The Operating Fund Program regulations (§ 990.205) state that operating subsidy will remain
fully fungible between ACC [annual contributions contract] projects until subsidy is calculated
by HUD at the AMP level. After subsidy is calculated at the AMP level, PHAs are limited in
transferring excess cash between AMPs or to the Central Office Cost Center.

7.2 – Treatment of Fee Income Under Office of Management and Budget Circular A-87
and 24 CFR Part 85 of Supplement to HUD Handbook 7475.1, REV, CHG-1, Financial
Management Handbook
OMB [Office of Management and Budget] Circular A-87, Cost Principles for State, Local, and
Indian Tribal Governments (also at 2 CFR Part 225), as well as 24 CFR part 85, Administrative
Requirements for Grants and Cooperative Agreements to State, Local, and Federally Recognized
Indian Tribal Governments, establish the basic requirements on the use of federal program funds.
For PHAs that convert to asset management (required of PHAs with 250 or more units), any
internal fee-for-service charges to AMPs or programs (property management fees, asset
management fees, etc.) are used to reimburse the PHAs for its claim of the overhead costs related
to these programs (these overhead costs are previously claimed through the cost allocation
process under OMB Circular A-87). The fee-for-service amounts are considered non-program
income for purposes of A-87 and 24 CFR part 85; however, other state and local restrictions may
still apply. Consequently, any reasonable fees earned by the PHA/Central Office Cost Center
will be treated as local revenue subject only to the controls and limitations imposed by the
PHA’s management, Board or other authorized governing body.

7.5 – Property Management Fees of Supplement to HUD Handbook 7475.1, REV, CHG-1,
Financial Management Handbook
Reasonableness. A PHA may charge a reasonable management fee based on any of the
following:
   •   The property management fee schedules established for each HUD Multifamily Field
       Office. Generally, the Office of Multifamily Housing establishes fee ranges for federally
       subsidized properties that reflect 120 percent of the mean property management fee for
       profit-motivated properties that are well managed, in good physical condition, and are
       managed by independent agents with no identity-of interest involvement; or


                                               35
   •   The 80th percentile property management fee paid by all unlimited dividend, limited
       dividend, and non-profit Federal Housing Administration (FHA) properties, by HUD
       Field Office, excluding such programs as cooperatives and nursing homes. These
       amounts are included as Attachment A.

Amount Earned. The property management fee is calculated as a per-unit-month (PUM) fee and
earned for each occupied unit and HUD-approved vacancy, as described under the final rule. In
other words, management fees are to be earned monthly for each occupied unit or approved
vacancy, as per §§ 990.140 and 990.145, respectively. PHAs will not earn a property
management fee on units defined as “limited vacancies” pursuant to § 990.150. New units that
come on line during the PHA’s fiscal year begin to earn the property management fee in the
month the units first become occupied. Once initially leased, new units are also eligible to earn
the property management fee for HUD approved vacancies as described in § 990.145.

Bookkeeping Fee. The property management fee may include a reasonable bookkeeping fee for
the property accounting function. The average bookkeeping fee in HUD’s multifamily housing
programs is about $3.73 per unit monthly (PUM) (2005 data). Generally, HUD will consider
$7.50 PUM to be a reasonable fee. A higher bookkeeping fee for PHAs reflects higher
centralized information technology and human resource costs present in public housing. For
financial reporting purposes, this bookkeeping fee, as is standard business practice, is to be
presented separately from the property management fee on the PHA’s financial statements. The
bookkeeping fee is earned for each occupied unit and HUD-approved vacancy, as described
under § 990.145.

7.6 – Asset Management Fees of Supplement to HUD Handbook 7475.1, REV, CHG-1,
Financial Management Handbook
Reasonableness. The Central Office Cost Center may earn an asset management fee. HUD will
generally consider an asset management fee charged to each project of $10 PUM as reasonable.
Asset management fees shall be based on all units under an ACC. In multifamily housing, the
asset management functions of owners are primarily funded through cash flows. This $10 PUM
asset management fee was determined based on an examination of cash flows in HUD’s
multifamily projects and the consideration that certain asset management activities in public
housing are also recovered through the Capital Fund Program management fee.

Amount Earned. The asset management fee is calculated as a PUM fee and earned for all units
under ACC (including Mixed Finance ACC units), regardless of occupancy status or
ownership/management. In other words, asset management fees are to be earned based on the
total number of units under the ACC for each project. New units that come on line during the
PHA’s fiscal year begin to earn the asset management fee in the month the units first become
occupied. The Central Office Cost Center is eligible to earn the asset management fee on an
ACC unit until the unit becomes vacant after a HUD-approved demolition or disposition plan.

Restrictions. Payment of asset management fees to the Central Office Cost Center can be made
throughout the PHA’s fiscal year, but only up to the amount of excess cash as calculated from
the prior year’s FDS. Asset management fees may not be accrued by the Central Office Cost




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Center if in any fiscal year the AMP lacks sufficient excess cash to pay the fee or is otherwise
noncompliant with the guidelines described in Chapter 6.

7.11 – Method of Payment and Supporting Documentation of Supplement to HUD
Handbook 7475.1, REV, CHG-1, Financial Management Handbook
The preferred method of assessing fees to AMPs and programs is via an invoice. However, the
Central Office Cost Center may use a more informal method of billing. Regardless of the
method the Central Office Cost Center uses for assessing fees to AMPs and programs,
supporting documentation of how each fee was earned must be maintained and available. For
example, to document the property management and bookkeeping fee the PHA must be able to
support the number of leased units as well as HUD-approved vacancies (type of approval, unit
number, category, etc.) that were used to make the calculation. In addition, the PHA will need to
document how it determined that the fee rate was reasonable (i.e., it was based on a local
multifamily management fee letter or the fee schedule provided by PIH [the Office of Public and
Indian Housing]).

Public and Indian Housing Notice 2012-14
This notice provides guidance on implementing the provision in HUD’s FFY [Federal fiscal
year] 2012 Appropriations, P.L. [public law] 112-55, that limits the use of FFY 2012 Section 8
Tenant-Based Rental Assistance and Section 9 appropriations to pay salaries to public housing
agency (PHA) employees. This limitation applies to all PHA employees, including chief
executive officers, other officials, and any other employees.

Beginning on March 17, 2012, and continuing for the duration of the PHA’s FY 2012, no PHA
may use 2012 appropriations funding for Section 8 HCV administrative fees or Section 9 Capital
Fund or Operating Fund to pay any amount of salary to the PHA chief executive officer or other
officials or employees that exceeds $155,500, the current level IV Executive Schedule salary.

Any funds remaining from previous fiscal years (e.g., FY 2011, FY 2010, etc.) are not impacted
by the FY 2012 salary limitation. Carrying over previous years’ funds or using other unrestricted
funds to support salaries will remain at the PHA’s discretion, according to appropriate eligibility
restrictions and other applicable requirements.

Under this Notice and the Act, “salary” does not include bonuses and overtime nor does it
include benefits such as retirement, life insurance, medical insurance, or the use of a PHA
vehicle. The term salary includes payments to all covered individuals who are paid on an annual
basis. It also includes, for example, situations where multiple PHAs collectively hire one person
for an annual amount under a single agreement.

HUD Handbook 4370.2, REV-1, CHG-1, issued January 23, 1996 – Financial Operations
and Accounting Procedures for Insured Multifamily Projects
2-8 Surplus Cash and Residual Receipts
    A. Basically, surplus cash is the cash remaining after all necessary and reasonable expenses
       of the project have been paid or funds have been set aside for such payment.




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   C. On profit-motivated projects, all surplus cash is available for distribution to project
   owners. On most nonprofit projects, on which distributions are not permitted, the regulatory
   agreement requires that all surplus cash available as of the end of an annual fiscal period be
   deposited in the residual receipts account.

   E. Funds may be released from residual receipts funds only with prior written approval by
   HUD.

2-10 Distribution to Owners
A distribution is any withdrawal or taking of cash or any assets of the project other than for the
payment of reasonable expenses necessary to the operation and maintenance of the project. The
term distributions includes, for example, supervisory fees paid to general partners and any
salaries or other fees paid to the sponsor or mortgagor, unless those salaries or fees have been
approved by HUD as essential to the operation of a project (e.g., a management fee approved by
HUD or paid on an Owner-Managed project).

Office of Management and Budget Circular A-123, I, Introduction
Management has a fundamental responsibility to develop and maintain effective internal control. The
proper stewardship of Federal resources is an essential responsibility of agency managers and staff.
Federal employees must ensure that Federal programs operate and Federal resources are used
efficiently and effectively to achieve desired objectives. Programs must operate and resources must
be used consistent with agency missions, in compliance with laws and regulations, and with minimal
potential for waste, fraud, and mismanagement. Management is responsible for developing and
maintaining effective internal control. Effective internal control provides assurance that significant
weaknesses in the design or operation of internal control, that could adversely affect the agency’s
ability to meet its objectives, would be prevented or detected in a timely manner.




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