oversight

Asset Repositioning Fees for Public Housing Authorities with Units Approved for Demolition or Disposition Were Not Always Accurately Calculated

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-04.

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

OFFICE OF AUDIT
 D
REGION 2
NEW YORK-NEW JERSEY




         U.S. Department of Housing and Urban
                     Development
                    Washington, DC

                Asset Repositioning Fees




2014-NY-0003                               SEPTEMBER 4, 2014
                                                  Issue Date: September 4, 2014

                                                  Audit Report Number: 2014-NY-0003


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

               //SIGNED//
FROM:          Edgar Moore
               Regional Inspector General for Audit, New York-New Jersey Region, 2AGA

SUBJECT:       Asset Repositioning Fees for Public Housing Authorities With Units Approved
               for Demolition or Disposition Were Not Always Accurately Calculated

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final audit report on our review of HUD’s controls over the award of
asset repositioning fees to public housing authorities with units approved for demolition and
disposition.

    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.
                                  September 4, 2014

                                  Asset Repositioning Fees for Public Housing Authorities
                                  With Units Approved for Demolition or Disposition Were
                                  Not Always Accurately Calculated



Highlights
Audit Report 2014-NY-0003


 What We Audited and Why                    What We Found

We audited the U.S. Department of          HUD did not establish adequate controls to ensure that
Housing and Urban Development’s            ARF were correctly calculated. Specifically, ARFs
(HUD) process for awarding asset           awarded to 10 of the 14 PHAs with units approved for
repositioning fees (ARF) to public         demolition or disposition were not always accurately
housing agencies (PHA) with approved       calculated. We attribute this condition to unfamiliarity
demolition and dispostion projects. We     with ARF regulations on the part of both HUD field
initiated this review based upon issues    office staff and PHA officials, the lack of sufficient
disclosed during our review of Public      data, and a primarily manual process used by field
Housing Capital Fund program grants to     office staff to verify PHA ARF funding requests. As a
PHAs with approved demolition and          result, the 10 PHAs were awarded with more than $7.7
dispostion projects. The audit objective   million in inaccurate ARF funding for calendar years
was to determine whether HUD had           2008 through 2013. However, HUD had taken various
established adequate controls to ensure    actions to improve the ARF calculation process, most
that ARFs were correctly calculated.       recently developing a more automated process, which
                                           should assist PHA officials and HUD field office staff
 What We Recommend                         in more accurately and efficiently calculating and
                                           awarding ARF funding.
We recommend that HUD (1) recapture
$6.2 million in ineligible ARF funds
provided to 7 PHAs during the years
2008 through 2013, (2) reimburse $1.5
million in ARFs to 5 PHAs that were
underfunded, (3) ensure that the 2014
ARF funding to the 10 PHAs reviewed
is adjusted for any necessary
corrections, (4) provide training to PHA
officials and HUD field office staff on
the ARF calculation process, and (5)
evaluate and adjust the ARF Tool to
ensure that it will provide greater
assurance that the errors found in this
review will be prevented or detected.
                            TABLE OF CONTENTS

Background and Objective                                                           3

Results of Audit

Finding: Asset Repositioning Fees for PHAs With Units Approved for Demolition or
         Disposition Were Not Always Accurately Calculated                         5

Scope and Methodology                                                              11

Internal Controls                                                                  13

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use               15
B.    Auditee Comments and OIG’s Evaluation                                        16
C.    Schedule of ARF Calculation Errors                                           18
D.    Narrative of ARF Calculation Errors                                          20




                                            2
                           BACKGROUND AND OBJECTIVE

The U.S. Department of Housing and Urban Development (HUD) distributes approximately $4
billion in annual operating subsidy funds to more than 3,000 public housing agencies (PHA) to
operate and maintain more than 1.1 million public housing units. In addition, from 1987 to 2012,
HUD approved 596 PHAs to remove approximately 250,000 distressed public housing units
through demolition or disposition. PHAs with projects approved for demolition or disposition1
may be eligible for an asset repositioning fee (ARF), which is an add-on to the PHA’s annual
operating subsidy. ARFs are intended to supplement the costs associated with the administration
and management of demolition or disposition activities, tenant relocation, and minimum
protection and service associated with such efforts.

The projects approved for demolition and disposition become eligible for an ARF at the
beginning of the quarter 6 months after the date on which the first unit becomes vacant after the
relocation date included in the approved relocation plan. The amount and duration of an ARF
depends upon whether the project is a demolition or disposition. Units approved for demolition
receive 75, 50, and 25 percent of their applicable operating subsidy in the first, second, and third
year, respectively. Units approved for disposition receive 75 and 50 percent of their applicable
operating subsidy in the first and second year, respectively.

As an add-on component, ARFs are calculated along with the operating subsidy. The operating
subsidy and ARF are calculated using form HUD-52723, entitled “Operating Fund, Calculation
of Operating Subsidy, PHA-Owned Rental Housing.” This form is a Microsoft Excel-based tool
used for each project that a PHA has in the Inventory Management System / Public and Indian
Housing Information Center (IMS/PIC). The form is prepopulated with units, unit months, and
other information by HUD headquarters using data that PHAs have previously entered into
various HUD systems, such as IMS/PIC, the Financial Assessment Subsystem, and the prior
year’s HUD-52723. HUD then distributes the form to the PHAs for verification of the
prepopulated fields and completion of fields that were not prepopulated and finalizes the funding
calculation. PHA officials must then submit the form to the HUD field office for approval.
Field office staff reviews the PHA-submitted HUD-52723 and supporting documents, verifies
the calculation, approves the form, and submits it to HUD headquarters.

When HUD headquarters receives the field office-approved operating subsidies, it prorates each
PHA’s funding amount for distribution periodically throughout the year. At yearend,
headquarters adjusts the distribution based on the ratio of total operating funds available for
nationwide distribution to the total amount for which all PHAs are eligible. For instance, HUD
had $4.1 billion available for distribution as operating subsidies for calendar year 2013, while the
total eligible amount was approximately $5.0 billion; therefore, HUD prorated the funding
amount for each project at 81.86 percent. Since ARF is a component of the operating fund, this
ratio applies to the annual ARF funding.


1
  Demolition means the razing, in whole or in part, of one or more permanent buildings of a public housing project.
Disposition means the conveyance or other transfer by the PHA, by sale or other transaction, of any interest in the
real estate of a public housing project.

                                                         3
The audit objective was to determine whether HUD established adequate controls to ensure that
asset repositioning fees were correctly calculated.




                                              4
                                 RESULTS OF AUDIT


Finding: Asset Repositioning Fees for PHAs With Units Approved for
         Demolition or Disposition Were Not Always Accurately
         Calculated
ARFs awarded to PHAs with units approved for demolition or disposition were not always
calculated accurately in accordance with Regulations at 24 CFR (Code of Federal Regulations)
990.190. Specifically, the ARF was incorrect for 10 of the 14 PHAs reviewed. We attribute this
to unfamiliarity with ARF regulations on the part of both HUD field office staff and PHA
officials, a lack of sufficient data, and the primarily manual process used by field office staff to
verify PHA ARF funding requests. As a result, the 10 PHAs were awarded more than $7.7
million in inaccurate ARF funding for calendar years 2008 through 2013. However, HUD had
taken various actions in recent years to improve the ARF calculation process, most recently by
developing a more automated process, which should assist PHA officials and HUD field office
staff to more accurately and efficiently calculate and award ARF funding.


 ARF Funding Was Not Always
 Accurate

               Of the 14 PHAs reviewed, 10 were awarded inaccurate ARF funding for calendar
               years 2008 through 2013 amounting to $7.7 million. This occurred because PHA
               officials made various errors in calculating their ARF funding requests submitted
               to HUD field offices for approval, which HUD field office staff members did not
               detect during their review of the PHAs’ annual operating subsidy funding. Errors
               in calculations resulted from incorrectly identifying units as eligible for ARFs,
               applying the wrong percentage or timeframe for ARFs, and arithmetic errors (see
               appendix C for details). For example, officials at

                  Three PHAs continued to claim the full annual operating subsidies
                   rather than ARFs for units that had become eligible for ARFs.
                   Regulations at 24 CFR (Code of Federal Regulations) 990.190 provide
                   that the ARF begins on the first day of the next quarter 6 months after
                   the first eligible unit becomes vacant due to redevelopment action after
                   the relocation date.

                  Four PHAs claimed ARFs for a longer or shorter timeframe than the
                   eligible time period. HUD regulations at 24 CFR 990.190 provide that
                   units approved for disposition are eligible to receive ARFs for 24
                   months, 36 months in the case of demolition. Two PHAs with
                   disposition projects received ARFs beyond the 24 months; one PHA
                   with a demolition project received funding for 48 months instead of 36

                                                 5
                months, and another PHA with a demolition project received ARFs for
                33 months rather than 36 months.

               Four PHAs had arithmetic errors in their ARF calculation.

            We attribute these inaccuracies to unfamiliarity with the ARF calculation process
            on the part of PHA officials and HUD field office staff, the cumbersome manual
            process, and insufficient data available to field office staff members to enable
            them to more efficiently verify ARF funding requests submitted by PHAs.

PHA Officials and HUD Field
Office Staff Misinterpreted ARF
Regulations

            Some PHA officials submitted funding requests containing ARF calculation
            errors because they were not familiar with HUD regulations regarding the
            application of ARFs, and some field office staffs failed to detect these errors
            while approving PHAs’ funding requests because they also were not familiar with
            ARF regulations. For example, officials at

               One PHA applied the incorrect percentage to calculate ARFs. Regulations at
                24 CFR 990.190 provide that units approved for demolition are eligible to
                receive 75, 50, and 25 percent of their applicable operating subsidies in the
                first, second, and third year, respectively. However, officials at this PHA
                requested ARFs at 100 percent of the applicable operating subsidy, and field
                office staff approved the request because both PHA officials and field office
                staff did not realize that ARFs should be funded at a reduced level over a 3-
                year period.

               Three PHAs claimed ARFs for partial units instead of all eligible units.
                Public and Indian Housing (PIH) Notice 2009-20 provides that units eligible
                for ARFs include all units in a PHA project, rather than individual units,
                unless the PHA obtained from HUD a separate relocation date for each phase
                of a demolition or disposition project by creating a separate application
                number for each phase so that the later phases become eligible for operating
                subsidies as those phases are implemented. None of the three PHA officials
                requested approval from HUD for multiple phases when they applied for
                HUD approval of their projects or obtained from HUD a separate application
                number or relocation date for each phase. Therefore, all of the units in the
                projects should have received ARF funding when the first unit of the project
                became eligible. However, since officials at these three PHAs requested
                ARFs for partial units, they received more annual operating subsidies than
                they were entitled to receive.




                                             6
                         Officials at one PHA with an approved disposition project, which limits ARF
                          funding to 2 years, requested a third year of funding for 100 units. Field
                          office staff members approved the third year of funding because they were not
                          aware that units approved for disposition were eligible for funding for only 2
                          years.

    Insufficient Data and a Manual
    Process Hampered the Ability of
    Field Office Staff To Verify PHA
    ARF Calculations

                     The lack of sufficient data and a primarily manual process lessened the ability of
                     field office staff to efficiently verify PHA ARF requests. The operating fund,
                     including any add-on subsidies such as ARFs, to which a PHA may be entitled for
                     the units approved for demolition or disposition, is calculated via the form HUD-
                     52723 for each project of a PHA. In an effort to reduce the reporting burden on
                     PHAs, HUD prepopulated certain data fields (for example, annual contributions
                     contract unit numbers, unit months, and per unit month project expense level
                     (PEL2)) on the HUD-52723 with data from its various systems (for example,
                     IMS/PIC and the prior year’s HUD-52723s). PHA officials were required to
                     review the prepopulated data and notify the field office staff of any inaccuracies.
                     They ultimately were responsible for completing the HUD-52723, certifying as to
                     its accuracy, and submitting it to the appropriate field office for verification.

                     HUD field office staff was then responsible for verifying that the PHA-submitted
                     HUD-52723 contained correct information before approving a PHA’s operating
                     subsidy, including an add-on subsidy, request. However, verification of PHA-
                     submitted funding requests was primarily a manual process, and HUD field office
                     staff did not have ready access to sufficient data, such as tenant relocation date,
                     date of the first qualified vacancy after the relocation date, and prior funding, to
                     assist them in identifying PHA units that were eligible for an ARF and determine
                     the correct calculation. Therefore, field office staff, to a great extent, had to rely
                     on PHA officials’ input to determine ARF funding, especially for the date of the
                     first tenant vacancy, which occurred after the approved relocation date in the
                     redevelopment plan and is the primary trigger for ARFs.

    Insufficient Data Available for
    the ARF Calculation

                     Acknowledging that verification of PHA funding requests by field office staff was
                     hampered by insufficient data, HUD issued PIH Notice 2011-55 on September 26,
                     2011, which required PHA officials to provide the field office with supporting
                     documentation for their ARF funding request beginning in calendar year 2012.

2
    PEL is the estimate of the cost to operate each project, exclusive of taxes, utilities, and certain add-ons.

                                                               7
            The notice provided that, at a minimum, supporting documentation should include
            a spreadsheet indicating the project number and ARF start date for the projects,
            buildings, and unit months, as well as the percentage of the PEL associated with
            those projects, buildings, and unit months. On June 22, 2012, HUD issued PIH
            Notice 2012-30, which required PHA officials to submit additional
            documentation, such as the specific building and units approved for demolition or
            disposition, the approval and tenant relocation dates, the first qualified vacancy
            date after the relocation date, ARF unit months for the project, PELs, and a
            statement as to whether all units were vacant at the time of the demolition or
            disposition plan approval. This additional information was designed to further
            assist field office staff in identifying units that would be eligible for ARF funding,
            determine the start and end of the transition period, and compute the proper
            amount of operating subsidies for these units.

            However, there were compliance problems and data limitations with these notices.
            PHA officials did not always provide the supporting documentation as required,
            and field office staff did not always pursue obtaining such documentation. For
            example, officials at two PHAs did not provide the requested supporting
            documentation to the field office, field office staff did not follow up to obtain it,
            and field office staff could not explain how the ARFs were calculated. In
            addition, these notices did not prevent PHA officials from claiming annual
            operating subsidies for units that should have received ARF funding because
            these officials did not have to justify why they may not have claimed the ARFs.
            For example, while 245 units approved for disposition at one PHA became
            eligible for ARFs in calendar year 2011, the officials continued to request and
            receive regular annual operating subsidy funding through 2013. When we
            informed the field office staff that these units should have begun receiving ARFs
            on July 1, 2011, they said they were not aware of that requirement and had relied
            on the PHA’s certification when approving the funding.

ARF Relied Upon a Primarily
Manual Process for Calculations

            In addition to not having sufficient data available to assist field office staff in
            verifying PHA ARF funding requests, staff had to rely on a primarily manual
            process to verify a PHA’s eligibility for ARFs. Field office financial analysts had
            to verify ARF-eligible projects by identifying whether any units of each of a
            PHA’s development were approved for demolition or disposition and determining
            the estimated relocation date and first eligible vacancy date for these units. The
            analysts then had to determine whether the identified projects were funded
            correctly by comparing the PHA’s current year funding request to that on
            manually retrieved prior years’ HUD-52723s.

            While this verification was a cumbersome process, field office staff was able to
            identify some incorrectly certified HUD-52723s. For instance, by analyzing the
            PHAs’ 2013 funding request with prior years’ funding records maintained at the

                                              8
           field office, a financial analyst identified that one PHA with units approved for
           demolition no longer had units eligible for operating subsidy funds, since the
           PHA had received ARFs for those units in calendar years 2007 through 2009 and
           the units had been demolished. When contacted by the field office staff, PHA
           officials confirmed that the units were no longer eligible for operating subsidies,
           including ARFs, but said that they were not able to delete the units and the project
           from the prepopulated HUD-52723 for calendar year 2013. While HUD did
           remove the ability of PHA officials to edit the prepopulated data in 2013, PHA
           officials were supposed to notify field office staff of any errors in the
           prepopulated data. However, the financial analyst informed HUD headquarters
           that the units were not eligible for ARF funding and also advised the PHA
           officials to remove the units from their IMS-PIC inventory. If the units were not
           removed from the PHA’s inventory reported in IMS-PIC, the units would
           continue to be prepopulated on the HUD-52723 in later years.

Efforts Were Underway To
Facilitate the ARF Funding
Process

           In addition to the notices discussed above, which required PHA officials to submit
           supporting documentation for their ARF funding requests, HUD had taken other
           actions to strengthen controls over the ARF funding process. Specifically,

              While the HUD-52723 had been prepopulated with unit-month data since
               calendar year 2012 with units eligible for an ARF that PHA officials could
               edit, beginning with 2014 funding calculations, the officials will not be able to
               edit the prepopulated unit months. Rather, they will have to contact field
               office staff to correct any discrepancy between the prepopulated data and the
               PHA data. These control improvements should reduce the need for HUD field
               office staff to rely on manual tracking systems and PHA input of the
               necessary data.

              HUD recently developed a software application called the Asset
               Repositioning Fee Management Tool (ARF Tool) to assist field office staff in
               identifying eligible units and the amount and duration of ARF funding. The
               Tool uses IMC/PIC data (for example, relocation date, unit months) and
               historical operating fund data to determine ARF eligibility and calculate the
               ARF funding amount for each demolition and disposition project. The first
               version was released at the end of 2013 to be used by the field office staff for
               the calendar year 2014 funding process.

           If these functions work as intended, these actions should strengthen controls over
           HUD’s process for calculating asset repositioning fee and operating subsidies for
           PHAs with units approved for demolition or disposition and provide greater
           assurance that these amounts are calculated correctly. For example, the Tool
           showed that one PHA should have been receiving ARFs from July 1, 2011, until

                                             9
             June 30, 2013, for 245 units approved for disposition. Based on this information,
             field office staff found that officials at the PHA had inappropriately requested and
             received regular operating subsidy funds for these units through December 2013
             and notified PHA officials that the 245 units would no longer be funded with
             operating funds in calendar year 2014.

Conclusion

             ARFs for the public housing units approved for demolition or disposition projects
             were not always accurately calculated. This condition existed due to unfamiliarity
             with ARF regulations on the part of both, HUD field office staff and PHA
             officials, a lack of sufficient data, and the primarily manual process used by field
             office staff to verify PHA ARF funding requests. As a result, 10 of 14 PHAs
             reviewed were awarded incorrect ARF funding of more than $7.7 million, with 5
             PHAs receiving more than $2.4 million in operating subsidies to which they were
             not entitled, 3 PHAs receiving $754,928 less than they were entitled to receive,
             and 2 PHAs being overfunded by more than $3.7 million in some years and
             underfunded by $761,954 in other years. However, HUD had taken actions to
             improve its controls over the funding process.

Recommendations

             We recommend that the Director of the Public Housing Financial Management
             Division

             1A.    Recapture the $6,206,924 in operating subsidies that was erroneously
                    awarded to seven PHAs (see appendix C).

             1B.    Reimburse the 5 PHAs that were underfunded $1,516,882 in ARF funding
                    (see appendix C).

             1C.    Ensure that the 2014 ARF funding calculation for the 10 PHAs includes
                    the corrections needed as a result of this finding, thus ensuring that the
                    ARF funding provided will represent funds to be put to better use.

             1D.    Provide training to PHA officials and HUD field office staff on the ARF
                    calculation process for units approved for demolition or disposition to
                    provide greater assurance that both PHA and field office staff will more
                    accurately calculate and verify ARFs.

             1E.    Continue to evaluate the ARF Tool to assess the extent to which it will
                    provide greater assurance that the ARF calculation errors found in this
                    review will be prevented or detected.




                                              10
                        SCOPE AND METHODOLOGY

The audit focused on whether HUD had established adequate controls to ensure that ARFs were
correctly calculated for the units approved for demolition or disposition. We performed the audit
fieldwork from September 2013 to March 2014 at the HUD field office in Newark, NJ.

To accomplish our objective, we

      Reviewed applicable HUD regulations and guidance to obtain an understanding of the
       public housing demolition and disposition projects, including the funding policy for
       operating subsidies and ARFs for these projects.

      Reviewed prior U.S. Government Accountability Office and HUD Office of Inspector
       General (OIG) audit reports for issues related to ARFs.

      Interviewed key personnel from HUD’s Special Application Center in Chicago; Real
       Estate Assessment Center, Financial Management Division, and Office of Field
       Operations in Washington, DC; and field offices in Newark, NJ, Hartford, CT, and New
       York, NY, to gain an understanding of HUD’s process for determining the operating
       subsidies and asset repositioning fees for the approved demolition and disposition
       projects.

      Selected a nonstatistical sample of 14 PHAs with 24 demolition or disposition projects
       approved by the Special Application Center as of December 19, 2012, under the
       supervision of the HUD Newark, New York City, or Hartford field offices. Specifically,
       we selected 9 of 19 PHAs from the Newark field office that had 16 demolition or
       disposition projects, 2 of 5 PHAs from the New York City field office that had 2
       demolition or disposition projects, and 3 of 12 PHAs from the Hartford field office that
       had 6 demolition or disposition projects that were identified as a concern with Public
       Housing Capital Fund program funding in a prior OIG audit. The results of this review
       are applicable only to the three field offices reviewed and cannot be applied to other
       offices.

      Assessed the reliability of prepopulated data on the HUD-52723 used in the calculation
       of the ARFs. Since the data were not always reliable, we verified the data with PHA
       officials and HUD field office staff, as well as with any supporting documentation
       provided. Our assessment of the reliability of the prepopulated data was limited to the
       projects selected in our sample.

      Analyzed the ARF calculation on the HUD-52723 for the projects selected in our sample,
       identified any calculations that did not appear to comply with HUD regulations, and
       discussed and verified any erroneous calculations with both HUD field office staff and
       applicable PHA officials.



                                               11
The audit generally covered the period January 1, 2008, through December 31, 2013, and was
extended as needed to accomplish our objective.

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.




                                               12
                              INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls

               We determined that the following internal 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 laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

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

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

               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.


                                                 13
Significant Deficiency

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

                  HUD did not have adequate controls over program operations when its
                   funding determination process for operating subsidies did not ensure that
                   ARFs were correctly calculated for the units approved for demolition and
                   disposition (see finding).




                                             14
                                    APPENDIXES

Appendix A

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

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


                            1A                    $6,206,924
                            1B                                       $1,516,882

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 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
     case, if HUD awards the $1.5 million that was due the PHAs, it will ensure that the funds
     will be put to better use.




                                             15
      Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION

            Ref to OIG Evaluation        Auditee Comments




Comment 1




Comment 2




                                    16
                     OIG Evaluation of Auditee Comments

Comment 1   HUD officials concurred that the findings relating to recommendations 1A, 1B
            and 1C represent $7.7 million in questioned costs; however, they regard the
            amounts as tentative at this time pending receipt of any supporting documentation
            from the public housing agencies (PHAs) identified in the audit report. The
            questioned costs were verified both with the affected PHAs and the administering
            field office during the audit; however, any adjustments necessary as a result of
            subsequent documentation will be made during the audit resolution process.

Comment 2   While recognizing that accessing data to calculate asset repositioning fees (ARF)
            may be cumbersome, HUD officials disagreed with the portrayal in the report that
            there was a lack of sufficient data available to the PHAs and the field offices to
            calculate the fees. They stated that such information resides in PIC demo/dispo
            applications and HUD Form 50058s. We disagree that the current data in PIC is
            sufficient and note that HUD issued PIH Notices 2011-55 and 2012-30 to provide
            the field offices with more information to assist in calculating the ARF.
            However, PHA officials did not always provide the supporting documentation as
            required, and field office staff did not always pursue obtaining such
            documentation. Further, while relevant data may be available on the HUD Form
            50058, it is unrealistic to expect that field office staff can manually review
            individual unit’s occupancy information from the 50058 data to identify the first
            move-out date after the relocation date for a demolition/disposition project which
            could contain several hundred units. In addition, even though the first move-out
            date can be derived from the 50058 data, the data does not contain the information
            to determine whether the move-out was due to a HUD-approved
            demolition/disposition action. Nevertheless, HUD officials agreed with our
            conclusion that they have taken steps to make the relevant data more readily
            accessible through the ARF tool.




                                            17
             Appendix C

                                                    SCHEDULE OF ARF CALCULATION ERRORS

                                                                              Nature of error




                                   Annual       Annual
                                   operating    operating                                        ARF
                                   subsidies    subsidies   ARF          ARF not    ARF          received               ARF
                                   received     received    started      provided   received     for        Incorrect   received
PHA project                        for          for ARF-    earlier      to all     for longer   shorter    per unit    at          ARF      Arith-    Over-        Under-
and              Eligible          ineligible   eligible    than         eligible   than         than       month       incorrect   inter-   metic    funded       funded3
development      units      None   units        units       eligible     units      eligible     eligible   PEL used    rate        rupted   error      ($)          ($)
PHA 1
        AMP4 1       100                                                 X          X                                                                   312,868       27,810
PHA 2
        AMP 7        284                                                                                                                     X            1,779
PHA 3
                                       X
        AMP 1        162                                    X            X                                  X           X           X        X        2,188,857      734,144
        AMP 2         82                                                            X                                   X                    X          957,000
        AMP 4        136                        X                                                                       X                               269,278
PHA 4
        AMP 5        503    X
        AMP 7        135    X
        AMP 8        134    X
     AMP 19          245               X        X                                                                                                       794,368
PHA 5
        AMP 2         60                                                                                    X                                                          3,595
PHA 6
        AMP 1        140                                                                                                                     X           36,581

             3
               Federal regulations prohibit the use of current year PHA operating funds for prior year underfunding; therefore, reimbursement can not be made to PHAs that
             were previously underfunded.
             4
               AMP refers to Asset Management Project: each public housing project is assigned an asset management project number.
                                                                                           18
                                                                                       Nature of error




                                      Annual       Annual
                                      operating    operating                                                 ARF
                                      subsidies    subsidies       ARF            ARF not    ARF             received               ARF
                                      received     received        started        provided   received        for        Incorrect   received
PHA project                           for          for ARF-        earlier        to all     for longer      shorter    per unit    at          ARF      Arith-    Over-        Under-
and               Eligible            ineligible   eligible        than           eligible   than            than       month       incorrect   inter-   metic    funded       funded3
development       units      None     units        units           eligible       units      eligible        eligible   PEL used    rate        rupted   error      ($)          ($)
PHA 7
         AMP 3        480                                                                                    X                                           X                       730,140
PHA 8
         AMP 2        252    X
PHA 9
         AMP 5        256    X
         AMP 5        102    X
PHA 10
         AMP 10       550    X
PHA 11
         AMP 1         38                          X                                         X                                                                      265,378
PHA 12
                                      X
         AMP 2        294                                                         X                                                                                1,380,815
         AMP 24        95    X
         AMP 25         4    X
         AMP 10       171    X
PHA 13
         AMP 5        124    X
PHA 14
         AMP 1         46    X
         AMP 1         59                                          X                                                                                                              21,193


Total:               4452        12            3               3              2          3               3          1           2          3        1        5    $6,206,924   $1,516,882



                                                                                                    19
Appendix D

            NARRATIVE OF ARF CALCULATION ERRORS
PHA 1, AMP 1
Project type: Disposition
Units affected: 100
Incorrect funding: Calendar year 2011: $27,810 underfunded
                   Calendar year 2012: $101,454 overfunded
                   Calendar year 2013: $211,413 overfunded

Description of Incorrect Funding:

   1. ARFs Received for Partial Units Instead of All ARF-Eligible Units

While the PHA had 100 units approved for disposition that became eligible for ARFs on January
2, 2011, Authority officials requested ARFs for 22 units in 2011 instead of for all 100. The
remaining 78 units were funded with regular operating subsidies. PIH Notices 2009-20 and
2011-18 provide that the eligible units for an ARF must constitute all units in a project, not the
individual units. As a result, the PHA received incorrect operating subsidies for calendar years
2011 through 2013. This condition occurred because PHA officials were not aware that they
should have submitted multiple application numbers to designate a separate relocation date for
each phase of the disposition so that units scheduled for later disposition remained eligible for
regular operating subsidies and HUD field office staff was also not aware of this requirement.

   2. ARFs Received for 12 Months More Than Eligible

After receiving ARFs in 2011 and 2012, Authority officials requested and received ARFs for 22
units at 25 percent of the annual operating subsidy for 2013, or an additional 12 months in excess
of what it was allowed. Regulations at 24 CFR 990.190 provide that units approved for
disposition are eligible to receive ARFs at 75 percent of annual operating subsidy for the first 12
months and at 50 percent for the next 12 months. This condition occurred because PHA officials
believed that their project was a demolition project, although they applied for and HUD
approved it as a disposition project. In addition, HUD field office staff was not aware that units
approved for disposition were eligible for ARFs for only 2 years. After we informed field office
staff members of this requirement, they notified PHA officials that they would not be eligible for
ARFs in calendar year 2014.




                                                20
PHA 2, AMP 7
Project type: HOPE VI demolition
Dwelling units: 284
Operating fund: Calendar year 2008: $1,779 overfunded

Description of Incorrect Funding:

   1. Arithmetic Error

PHA officials correctly calculated ARFs of $1,556,264 for calendar year 2008, but recorded the
number as $1,558,264 on the HUD-52723, a $2,000 difference. However, after the final end-of-
the-year prorated funding at the rate of 88.96 percent of the calculated funding, the PHA
received $1,779 more than it was entitled to receive. This condition occurred due to an
arithmetic error, which was not detected by the field office staff.




                                              21
PHA 3, AMP1
Project type: Demolition
Eligible units: 162
Operating fund: Calendar year 2008:     $310,109 underfunded
                  Calendar year 2009:   $426,547 overfunded
                  Calendar year 2010:   $424,035 underfunded
                  Calendar year 2011:   $799,664 overfunded
                  Calendar year 2012:   $962,646 overfunded

Description of Incorrect Funding:

   1. ARFs Received for Partial Units Instead of All ARF-Eligible Units

The PHA had 162 units approved for demolition on December 21, 2007, with an estimated
relocation date of January 21, 2008. The first vacancy occurred on January 31, 2008;
therefore, the 162 units became eligible for ARFs on October 1, 2008, in accordance with
HUD regulations at 24 CFR 990.190. Contrary to the regulations at 24 CFR 990.190 (h)
(1) and the requirement in Notices PIH 2009-20 and 2011-18, which require that ARF-
eligible units be all units in an approved project, the PHA claimed ARFs for 84 units and
85 of the 162 units for calendar years 2008 and 2009, respectively, instead of all of the
162 units. PHA officials said that the demolition project was divided into two phases and
that they had requested two different relocation dates; however, neither they nor HUD
could provide documents to support that the request was submitted and that a second
relocation date was approved by HUD.

   2. Arithmetic Errors

PHA officials requested and received ARFs of $100,496 per year for both 2008 and 2009.
Neither the Authority officials nor HUD field office staff could determine how the amount
of ARFs for calendar years 2008 and 2009 were calculated

   3. ARFs Started Earlier Than Eligible Date

PHA officials requested and HUD approved ARFs for 12 months in calendar year 2008,
which resulted in the PHA’s receiving ARFs 9 months earlier than it was entitled to
receive them. Regulations at 24 CFR 99.190 provide that an ARF begins on the first day
of the next quarter 6 months after the first eligible unit becomes vacant due to the removal
action after the relocation date. Therefore, the 162 units should have become eligible for
ARFs on October 1, 2008, since the first eligible vacancy happened on January 31, 2008.

   4. ARF Funding Was Interrupted

After receiving ARFs for 2 years, PHA officials did not request operating subsidies or
ARFs in the third year. PIH Notice 2009-20 provides that once a vacancy has triggered
the ARF eligibility period, ARFs must continue uninterrupted. This condition occurred
because HUD did not provide the PHA with a HUD-52723 with prepopulated unit data for

                                                22
the development for the third year, PHA officials did not know that they should have
contacted field offices to report this error, and field office staff did not identify the error in
the prepopulated data.

    5. ARFs Incorrectly Funded at 100 Percent of Annual Operating Fund

HUD regulations at 24 CFR 990.190 provide that ARFs should be funded at the rate of 75,
50, and 25 percent of annual operating subsidies, respectively, for 3 years. However, PHA
officials requested and received ARFs at 100 percent of their annual operating subsidies
for calendar years 2011 and 2012. This condition occurred because PHA officials were
unfamiliar with the regulations.

    6. Incorrect Amount of Per Unit Month PEL Used in ARF Calculation

Since HUD did not prepopulate the per unit month PEL data for this development for
calendar years 2011 and 2012, PHA officials inappropriately used the amount of per unit
month PEL for a different development. This condition occurred because both HUD field
office staff and PHA officials did not know how to calculate per unit month PEL based on
the previous PEL and lacked knowledge of regulations related to ARFs.

    7. Operating Funds Requested for Ineligible Units

The Authority inadequately requested funding for 522 unit months more than the maximum unit
months of 1,944 under the category of “total unit months” including 1,020 (162 units times 12
months) ARF-eligible unit months for calendar year 2009. HUD’s field office did not identify
this error while approving the Authority’s funding request.




                                                   23
PHA 3, AMP2
Project Type: Demolition
Eligible units: 82
Operating fund: Calendar year 2008: $172,755 overfunded
                  Calendar year 2009: $296,459 overfunded
                  Calendar year 2010: $487,785 overfunded

Description of Incorrect Funding:

   1. ARF Funding Received for 12 Months More Than Eligible

The 82 units approved for demolition became eligible for ARFs on January 1, 2007. Therefore,
ARF funding should have ended on December 31, 2009. However, PHA officials incorrectly
requested and received ARFs at 100 percent of annual operating subsidy funding for calendar
year 2010. As a result, the PHA received ARFs for 48 months rather than the 36 months to
which it was entitled. This condition occurred because PHA officials and field office staff did
not realize that they had received ARFs for more than 36 months.

   2. ARFs Received at 100 Percent Rate of Operating Fund

PHA officials requested and received ARF funding at an approximately 94 and 100 percent rate
of their annual operating subsidies instead of at a 50 and 25 percent rate in calendar years 2008
and 2009. In addition, regulations at 24 CFR 990.190 provides that the units approved for
demolition are eligible for ARFs at 75 percent, 50 percent, and 25 percent of the annual
operating subsidies, respectively, for 3 years. PHA officials and field office staff were not aware
that ARFs should be funded on a sliding scale basis. The funding of the ARFs in calendar year
2008 at a 94 percent rate instead of 100 percent might have been due to an arithmetic error
because PHA officials and field office staff had thought the rate was 100 percent.

   3. Arithmetic Error

In calendar year 2008, PHA officials requested and received ARF funding of $172,755 more
than that to which the PHA was entitled. We attribute this condition to an arithmetic error,
which field office staff did not identify.




                                                24
PHA 3, AMP4
Project type: Demolition
Eligible units: 136
Operating fund: Calendar year 2012: $3,546 overfunded
                  Calendar year 2013: $265,732 overfunded

Description of Incorrect Funding:

         1. Annual Operating Subsidy Received Rather Than ARFs

The 136 units became eligible for ARF funding on July 1, 2012, in accordance with HUD
regulations at 24 CFR 990.190. Therefore, the PHA should have been funded with regular
operating subsidies for the first 6 months and ARFs at a 75 percent rate for the remaining 6
months of calendar year 2012. However, PHA officials requested regular operating subsidy
funding for all 12 months in calendar year 2012. PHA officials stated that they did not know that
the ARFs should have started on that date. In addition, there was a lack of readily available data5
to help field office staff identify ARF-eligible units.

         2. ARFs Incorrectly Received at 100 Percent Rate

PHA officials inappropriately requested and received ARFs for 136 units at 100 percent of the
annual operating subsidies in calendar year 2013, while ARF funding should have been at the 75
percent rate for the first 6 months and 50 percent for the last 6 months in calendar year 2013.
Regulations at 24 CFR 990.190 provide that units approved for demolition are eligible for ARFs
at 75 percent for first 12 months, 50 percent for next 12 months, and 25 percent for the last 12
months. However, neither PHA officials nor field office staff knew that ARFs should be funded
on a sliding scale basis.




5
  We noted that PHA officials mistakenly entered into IMS-PIC that they needed 2,010 days to start relocation after
the Special Application Center approved the demolition project, while the relocation started in year 2010 before the
Center’s approval. The Center approved the application without noticing the mistake. Since the ARF Tool, which
was developed to help field office staff calculate ARFs for calendar year 2014, uses the data in IMS-PIC, it
incorrectly disclosed that the ARF starting date would be October 1, 2007. Therefore, it is important for HUD to
take actions to ensure that the data related to demolition and disposition projects in IMS-PIC are accurate.

                                                         25
PHA 4, AMP19
Project type: Disposition
Eligible units: 245
Operating fund: Calendar year 2011: $103,423 overfunded
                  Calendar year 2012: $120,834 overfunded
                  Calendar year 2013: $570,111 overfunded

Description of Incorrect Funding:

   1. Annual Operating Subsidies Received Rather Than ARFs

PHA officials requested and received annual operating subsidies for 245 units for calendar years
2011, 2012, and 2013, which should have received ARFs at the rate of 75, percent of annual
operating subsidy for the period from July 1, 2011 to June 30, 2012 and 50 percent for the period
from July 1, 2012 to June 30, 2013. The PHA received HUD approval to dispose of the 245
units on June 6, 2010, with an estimated relocation date of October 8, 2010. The first vacancy
occurred on November 1, 2010; therefore, the 245 units became eligible for ARFs on July 1,
2011, in accordance with HUD regulations at 24 CFR 990.190. As a result, the units were
funded with full operating subsidies instead of ARFs. This condition occurred because PHA
officials thought that the units were entitled to regular operating subsidies as long as they had not
been disposed of and field office staff was not aware that the units had been approved for
disposition. When we notified PHA officials of the error, they realized that they had
misinterpreted the regulation.

   2. Operating Subsidy Received for Ineligible Units

PHA officials requested and received annual operating subsidies for calendar years 2012 and
2013 for seven non-dwelling units that were included in the PHA’s approved demolition project.
Regulations at 24 CFR 990.125 provide that only dwelling units are eligible for operating
subsidies and any add-on subsidy, such as ARFs. This condition occurred because PHA officials
incorrectly classified the seven non-dwelling units as annual contributions contract units eligible
for operating subsidies and HUD field office staff members did not identify the error when they
approved the Authority’s funding request.




                                                 26
PHA 5, AMP2
Project type: Demolition
Eligible units: 60
Operating fund: Calendar year 2013: $3,595 underfunded

Description of Incorrect Funding:

   1. ARFs Incorrectly Calculated

HUD did not prepopulate per unit month PEL data for this development for its calendar year
2013 operating fund calculation because the 60 units were eligible for ARFs. PHA officials
calculated the ARFs for calendar year 2013 using the calendar year 2012 per unit month PEL
amount ($420.66) instead of the calendar year 2013 per unit month PEL amount ($432.86),
which could be obtained by multiplying calendar year 2012 inflated per unit month PEL
($420.66) and the calendar year 2013 inflation factor (1.029). As a result, the Authority received
$3,595 less than that to which it was entitled.




                                               27
PHA 6, AMP1
Project type: Demolition
Eligible units: 140
Operating fund: Calendar year 2011: $28,553 overfunded
                  Calendar year 2012: $8,028 overfunded

Description of Incorrect Funding:

       1. Arithmetic Error

PHA officials requested ARF funding for calendar years 2010 through 2012 for 140 units
approved for demolition. However, due to arithmetic errors, the Authority requested and
received $28,553 and $8,028 more than it was entitled in calendar years 2011 and 2012,
respectively, and field office staff did not identify and correct these errors.




                                              28
PHA 7, AMP3
Project type: Demolition
Eligible units: 480
Operating fund: Calendar year 2008: $148,525 underfunded
                  Calendar year 2009: $398,140 underfunded
                  Calendar year 2010: $183,475 underfunded

Description of Incorrect Funding:

   1. ARFs Received for 3 Months Less Than Entitled

PHA officials requested and received ARFs for 33 months instead of the 36 months to which the
PHA was entitled for the 480 units. The units became eligible for ARFs on January 1, 2008.
PHA officials thought that the ARF funding start date was October 1, 2007, and that they had
applied for and received ARF funding for the fourth quarter of calendar year 2007; however,
they had not applied. As a result, in their calendar year 2008 funding request, the officials
requested ARF funding for 9 months at 75 percent of their regular operating subsidy and 3
months at 25 percent and ended the ARFs by September 30, 2010, which was 3 months earlier
than the correct ending date.

   2. Arithmetic Error

There was an arithmetic error in the Authority’s computation of its calendar year 2009 ARFs,
which caused approximately $300,000 to be underfunded, and field office staff did not identify
this error.




                                              29
PHA 11, AMP1
Project type: Disposition
Eligible units: 38
Operating fund: Calendar year 2008:         $16,946 overfunded
                  Calendar year 2009:       $65,396 overfunded
                  Calendar year 2010:       $104,722 overfunded
                  Calendar year 2011:       $78,314 overfunded

Description of Incorrect Funding:

    1. Annual Operating Subsidies Received Instead of ARFs

PHA officials erroneously requested and received annual operating subsidies for 38 units in
calendar years 20076 and 2008. The PHA received HUD approval to dispose of 38 units on
December 19, 2006, which was also the estimated relocation date. The first vacancy occurred on
March 1, 2007; therefore, the 38 units became eligible for ARF funding on October 1, 2007, in
accordance with regulations at 24 CFR 990.190. However, the Authority continued to request
annual operating subsidies and did not apply for ARF funding until January 1, 2009. Thus, the
units were funded with full operating subsidy funds instead of ARFs, which were at a 75 percent
and 50 percent rate for the 2 years.

This condition occurred because PHA officials thought that the units were entitled to regular
operating funds as long as they had not been disposed of and that they could claim ARFs at any
time at their convenience, not realizing that delaying ARF application would result in the
overpayment of annual operating subsidies. HUD field office staff was not aware that the PHA
had delayed applying for ARFs.

        2. ARFs Received for 9 Months More Than Eligible

PHA officials requested and received ARF funding for 33 months instead of 24 months for the
38 units approved for disposition. In addition, the additional 9 months of ARFs were calculated
at the 50 percent rate of operating subsidies. HUD field office staff was not aware of this error,
and PHA officials did not realize that they had made the mistake until we informed them during
our audit.




6
  We were not able to determine the incorrect funding for calendar year 2007 because neither HUD nor the PHA
maintained funding calculation data from the HUD-52723 for that year. Therefore, we can only question the
funding for the years from 2008 to 2011.

                                                      30
PHA 12, AMP2
Project type: Demolition
Eligible units: 294
Operating fund: Calendar year 2008: $692,416 overfunded
                  Calendar year 2009: $52,100 overfunded
                  Calendar year 2010: $300,695 overfunded
                  Calendar year 2011: $278,655 overfunded
                  Calendar year 2012: $ 56,949 overfunded

Description of Incorrect Funding:

   1. ARFs Received for Partial Units Instead of All Eligible Units

Since the PHA was approved for one application number with the same relocation date, it should
have requested ARFs for all 294 units in calendar year 2008. However, the PHA requested and
received ARFs for 134 units and operating subsidies for the remaining 161 units for calendar
year 2008 and continued to request ARFs for two different phases from calendar years 2009 to
2012. PHA officials said that they demolished the units in two phases, although they had
submitted one application and HUD had approved one relocation date, and misinterpreted the
requirement of PIH Notices 2009-20 and 2011-18, as well as the regulations at 24 CFR 990.190
(h)(1), that ARF-eligible units be for all of the units in an approved project.

   2. Operating Subsidy Funds Received for Ineligible Unit

On the PHA’s Capital Fund building and unit certification, the PHA certified to 294 annual
contributions contract units and 1 non-annual contributions contract unit for fiscal year 2010.
Further, the PHA requested and received operating subsidies for 294 units in calendar year 2008.
However, it inadequately requested ARFs for 295 instead of 294 annual contributions contract
units for calendar years 2009 to 2011. HUD’s field office did not identify these errors while
approving the PHA’s funding requests.




                                               31
PHA 14, AMP1
Project type: Disposition
Eligible dwelling units: 59
Operating fund: Calendar year 2013: $21,193 underfunded

Description of Incorrect Funding:

   1. ARFs Started at a Date Earlier Than Eligible

Based on regulations at 24 CFR 990.190, unit months eligible for ARFs should have been
531 (59 units x 9 months); however, the Authority requested and HUD approved ARFs for
all 12 months for calendar year 2013. Therefore, the Authority did not receive regular
operating subsidy funds for 3 months and was underfunded.




                                             32