oversight

Breakthrough Living Program Did Not Administer Its Program in Accordance With HUD Rules and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-03-05.

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

          Breakthrough Living Program,
                   Topeka, KS
                  Section 202 Direct Loan Program




Office of Audit, Region 7          Audit Report Number: 2015-KC-1001
Kansas City, KS                                         March 5, 2015
To:            Kelly Haines, Director, Southwest Region Multifamily Housing Hub, 6AHML
               Craig Clemmensen, Director, Departmental Enforcement Center, CACB
               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       Breakthrough Living Program Did Not Administer Its Program in Accordance
               With HUD Rules and Regulations




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Breakthrough Living Program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 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
913-551-5870.
                    Audit Report Number: 2015-KC-1001
                    Date: March 5, 2015

                    Breakthrough Living Program Did Not Administer Its Program in
                    Accordance With HUD Rules and Regulations




Highlights

What We Audited and Why
We audited Breakthrough Living Program based on an audit memorandum referral received from
the Director of the U.S. Department of Housing and Urban Development’s (HUD) Southwest
Region, Office of Multifamily Housing Programs. The referral cited several concerns, including
the property’s unilateral withdrawal of funds from the reserve for replacement account. Our
audit objective was to determine whether Breakthrough Living (1) properly transferred funds
from its reserve for replacement account, (2) properly charged its Section 8 tenants additional
rental fees with the required approval, and (3) improperly paid overhead costs for its
management agent.

What We Found
Breakthrough Living violated its regulatory agreement with HUD by improperly transferring
funds from its reserve for replacement account and paying overhead expenses for its
management agent. In addition, it improperly charged its Section 8 tenants $69,000 in program
fees.

What We Recommend
We recommend that HUD require Breakthrough Living to (1) repay the $47,690 that it
transferred from its reserve for replacement account, (2) repay $5,642 that it used for its
management agent’s overhead expenses, (3) repay the $69,577 that it improperly collected from
its tenants, (4) ensure that its board hires a new HUD-approved independent management agent,
and (5) ensure that its board receives adequate training regarding the financial operations of a
HUD property.
We also recommend that HUD take appropriate administrative actions, up to and including
debarment, against Breakthrough Living’s former executive director for her part in repeatedly
violating the property’s regulatory agreement.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: Breakthrough Living Violated Its Regulatory Agreement with HUD ..... 4

         Finding 2: Breakthrough Living Improperly Charged Its Section 8 Tenants
         $69,000 in Program Fees .................................................................................................. 7

Scope and Methodology ...........................................................................................9

Internal Controls ....................................................................................................11

Appendixes ..............................................................................................................12
         A. Schedule of Questioned Costs .................................................................................. 12

         B. Auditee Comments and OIG’s Evaluation ............................................................. 13

         C. Criteria ....................................................................................................................... 17




                                                                     2
Background and Objective
Breakthrough Living Program, Inc., a Kansas nonprofit corporation governed by a board of
directors, was formed in 1984. It owns 15 Section 8-subsidized units located in Topeka, KS. Its
mission is to empower individuals with mental illness to function more independently in their
social living and working environments by providing the individuals with secure, decent, safe,
and affordable housing. The U.S. Department of Housing and Urban Development (HUD)
funded the construction of the units under Section 202 of the Housing Act of 1959. In July 1984,
Breakthrough Living’s board of directors entered into a regulatory agreement with HUD in the
amount of $508,000. The agreement provides for regulation by HUD of rental charges and
operating methods.

The Section 202 program provides for Federal direct loans to private, nonprofit corporations and
consumer cooperatives in the development of new or substantially rehabilitated housing and
related facilities to serve the elderly and the handicapped. This program helps expand the supply
of affordable housing with supportive services for the elderly or the handicapped. With the
consolidation of the application requirements of the Section 202 and Section 8 programs in 24
CFR (Code of Federal Regulations) Part 885, projects which met the requirements of the Section
202 program are deemed to have met the requirements for housing assistance payments as
provided in the U. S. Housing Act of 1937. Breakthrough Living is authorized to receive Section
8 rental subsidies for its 15 units. As of July 31, 2014, only 14 of the 15 units were occupied. It
received $299,791 in Section 8 funding from January 2012 to October 2014.

Breakthrough Living employed an identity-of-interest management agent, Breakthrough House,
Inc., to oversee its day-to-day operations and long-term planning. The management agent’s
board of directors and executive director was the same as the Breakthrough Living board and
executive director. Breakthrough Living’s executive director provided oversight of the project’s
daily operations. The use of a designated management agent did not relieve the board of its
responsibility to ensure that the program operated in accordance with its regulatory agreement
and applicable HUD handbooks.

Our audit objective was to determine whether Breakthrough Living (1) properly transferred
funds from its reserve for replacement account, (2) properly charged its Section 8 tenants
additional rental fees with the required approval, and (3) improperly paid overhead costs for its
management agent.




                                                 3
Results of Audit

Finding 1: Breakthrough Living Violated Its Regulatory Agreement
with HUD
Breakthrough Living violated its regulatory agreement with HUD by improperly transferring
funds from its reserve for replacement account and paying overhead expenses for its
management agent. This condition occurred because the board did not provide adequate
oversight over the activities and operations of the Breakthrough Living’s management agent to
ensure the regulatory agreement was followed. As a result, the appropriate level of funding was
not always available in the reserve for replacement account and the operating account if needed
to finance capital improvements and operating expenses.
Breakthrough Living Improperly Transferred Funds
Breakthrough Living’s executive director transferred $247,444 from its reserve for replacement
account without the required HUD approval. HUD Handbook 4350.1, REV-1, section 4-2,
requires Breakthrough Living to receive approval before disbursing funds from its reserve for
replacement account.

Between January 2012 and July 2014, Breakthrough Living’s executive director transferred
$44,959 from its reserve for replacement account to its operating account. It paid back $24,254,
and the unpaid balance was $20,705 as of July 31, 2014. The executive director did not obtain
the required HUD approval before disbursing funds from its reserve for replacement account.
She also transferred $202,485 from the account to its management agent’s operating account,
which is considered an unauthorized loan from project funds. The management agent paid back
$175,500, and the unpaid balance was $26,985 as of July 31, 2014. Funding in the reserve for
replacement account covers capital repairs such as roof replacements, kitchen upgrades,
bathroom remodeling, and other extensive needs the project may need as it ages.

Overhead Expenses Paid for the Management Agent
Breakthrough Living improperly paid $5,642 in overhead expenses for its management agent
from the project’s operating account. HUD Handbook 4381.5, section 6-38, does not permit
overhead costs chargeable to a management agent to be paid from the property’s operating
account. The handbook states that overhead costs, including rent, phones, and office supplies,
must be paid from the management fee.

During our audit period, Breakthrough Living paid overhead expenses, including office
relocation costs as well as office rent, utilities, and equipment by paying a portion of its
management agent’s bills from the project’s operating account. The table below provides details
of the office overhead type and expense amount for which Breakthrough Living paid overhead
costs for its management agent from January 1, 2012, through July 31, 2014.




                                                4
                          Office overhead type      Expense amount

                                Relocation                         $91
                                   Rent                          4,178
                                  Utilities                      1,365
                                Equipment                            8

                                  Totals                       $5,642


The Board Did Not Provide Oversight
Breakthrough Living’s board did not provide adequate oversight by not actively overseeing the
activities and operations of the management agent that oversaw the operations of Breakthrough
Living Program. Two members of the board told us they did not know much about the
operations of Breakthrough Living and did not review the financial reports for the property. In
addition, the management agent ignored repeated warning from HUD and the Departmental
Enforcement Center that transferring money from the replacement account without HUD
approval was a violation of the regulatory agreement. As of July 2014, the management agent
continued to transfer funds from the reserve for replacement account after HUD denied the
request to transfer funds.
Funding Was Not Always Available
As a result of the issues discussed above, the appropriate level of funding was not always
available in the reserve for replacement account and the operating account to finance capital
improvements and operating expenses. As of July 31, 2014, the required balance of $83,679 in
the reserve for replacement account was reduced by unauthorized loans of $47,690. In addition,
the required balance of $6,979 in the operating account was reduced by ineligible expenses of
$5,642. Reducing the reserves in violation of the regulatory agreement could jeopardize the
project’s ability to make necessary repairs when they occur.
Conclusion
The appropriate level of funding was not always available in the reserve for replacement account
and the operating account because of inadequate board oversight to ensure the regulatory
agreement was followed. In September 2014, the Breakthrough Living executive director
resigned from her position, and the board was hiring a replacement. As of December 2014, the
Breakthrough Living board was contracting with a new HUD-approved management agent to
oversee the operations of the Breakthrough Living units.




                                                5
Recommendations
We recommend that the Director of the Southwest Region, Office of Multifamily Housing
Programs
       1A.    Require Breakthrough Living to repay from non-Federal sources the unpaid
              balance of $47,690 that it transferred from its reserve for replacement account to
              its operating account and management agent.
       1B.    Require Breakthrough Living to repay from non-Federal sources the $5,642 that it
              used to pay for its management agent’s overhead expenses.
       1C.    Ensure that Breakthrough Living’s board hires a new HUD-approved independent
              management agent.
       1D.    Ensure that Breakthrough Living’s board receives adequate training regarding the
              financial operations of Breakthrough Living so it can ensure that its new
              management agent fully complies with the requirements.
We also recommend that the Director of HUD’s Departmental Enforcement Center
       1E.    Take appropriate administrative actions, up to and including debarment, against
              Breakthrough Living’s former executive director for her part in repeatedly
              violating the property’s regulatory agreement.




                                                6
Finding 2: Breakthrough Living Improperly Charged Its Section 8
Tenants $69,000 in Program Fees
Breakthrough Living improperly charged its Section 8 tenants $69,000 in program fees. This
condition occurred because its board did not provide adequate oversight over the activities and
operations of the Breakthrough Living management agent to ensure it followed the regulatory
agreement. As a result, the tenants were not protected from the unreasonable fees.
Section 8 Tenants Were Charged Program Fees
Breakthrough Living improperly charged its Section 8 tenants $69,000 in program fees without
the required HUD approval. HUD Handbook 4350.3, paragraph 6-25(f), does not permit
property owners to charge other fees to their Section 8 tenants without HUD approval.

During our audit period, we found 25 separate instances in which Breakthrough Living charged
its Section 8 tenants program fees ranging from $18 to $300 per month. It charged 11 tenants
$300 per month, 13 tenants $60 per month, and 1 tenant $18 per month. Breakthrough Living
stated that it used the program fees to help defray the costs of providing nontraditional services,
such as water and trash, electric, gas, cable, Internet, snow removal, lawn mowing, in-home
wellness visits, laundry, and membership to the Young Men’s Christian Association (YMCA), to
the tenants as part of the Supportive Housing Program. Breakthrough Living received $69,000
in program fees from its Section 8 tenants between January 2012 and October 2014.

The Board Did Not Provide Adequate Oversight
Breakthrough Living’s board did not provide adequate oversight over the activities and
operations of the Breakthrough Living management agent to ensure it followed the requirements.
Two members of the board told us they did not know much about the operations of Breakthrough
Living and did not review the financial reports for the property. In 2009 and 2010, the
management agent ignored repeated warnings from its Section 8 coordinator that charging
program fees to the Breakthrough Living Section 8 tenants was a violation of HUD Handbook
4350.3 requirements.

Tenants Were Not Protected From Unreasonable Fees
As a result of the issues discussed above, the tenants were not protected from the unreasonable
fees. The Section 8 tenants were charged program fees in addition to rent and they received
services similar to those of the non-HUD-subsidized market rate renters. All other tenants who
did not receive Section 8 housing assistance did not pay the program fees.
Conclusion
The tenants were not protected from the unreasonable fees because of inadequate board oversight
and management’s disregard of the requirements. As a result of our review, Breakthrough
Living stopped charging program fees to its Section 8 tenants in October 2014. As of December
2014, its board was contracting with a new HUD-approved management agent to oversee the
operations of the Breakthrough Living units.




                                                 7
Recommendations
We recommend that the Director of the Southwest Region, Office of Multifamily Housing
Programs
       2A.    Require Breakthrough Living to repay the $69,577 that it collected from its
              Section 8 tenants. For any tenant who left the Section 8 program and cannot be
              located, HUD should require Breakthrough Living to send his or her refund to the
              Kansas State treasurer so the treasurer can get the refund to the tenant or a family
              member.
       2B.    Ensure Breakthrough Living’s board receives adequate training regarding the
              operations of Breakthrough Living to ensure its new management agent fully
              complies with the requirements.




                                                8
Scope and Methodology
Our review generally covered the period January 1, 2012, through July 31, 2014; however, we
expanded the scope to October 1, 2014, to address program fee charges noted during the audit.
We conducted our fieldwork from August through December 2014 at the Breakthrough Living
administrative offices located at 525 Topeka Boulevard, Topeka, KS.

To achieve our objective, we interviewed
      HUD’s multifamily staff located in Kansas City, KS,
      Breakthrough Living’s and its management agent’s board members and staff,
      Breakthrough Living’s Section 8 tenants, and
      Depository financial institution staff members who maintain Breakthrough Living bank
       accounts.

We also reviewed
      Federal regulations and HUD requirements;
      Breakthrough Living’s regulatory agreement;
      Breakthrough Living’s internal accounting procedures;
      Integrated Real Estate Management System and Tenant Recertification Assistance
       Certification System data;
      Breakthrough Living’s audited financial statements and other accounting records;
      Breakthrough Living’s payroll and accounting records;
      Breakthrough Living’s bank statements, checks, and other associated records; and
      Management agent bank statements, checks, and other associated records subpoenaed
       from financial institutions.

We selected for review 100 percent of Breakthrough Living’s monthly bank statements for the
reserve for replacement account, tenant security deposit account, residual receipts account, and
operating account for January 2012 through July 2014. We tested whether all withdrawals from
these accounts were properly authorized and the balances in the accounts were accurate.
Because we found instances in which funds were transferred to the management agent’s
operating account, we tested the management agent’s operating account to determine whether the
funds transferred into the account were properly spent.

We visited the 14 Breakthrough Living Section 8 tenants in the program as of July 31, 2014, and
reviewed 100 percent of the 14 Section 8 tenant files and lease agreements. The lease agreement
includes the monthly required total tenant payment and the housing assistance subsidy for each


                                               9
tenant. We matched the required total tenant payment and housing assistance subsidy in the
agreements to the form HUD-50059 (Owner’s Certification of Compliance with HUD’s Tenant
Eligibility and Rent Procedures). We also verified that Breakthrough Living required its Section
8 tenants to pay program fees in addition to rent.

In addition, we obtained data from the Integrated Real Estate Management System and Tenant
Rental Assistance Certification System. We relied on these systems for background information
only and determined that Breakthrough Living received $299,791 in Section 8 funding from
January 2012 to October 2014.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                10
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 over the withdrawal of reserve for replacement funds.
   Controls over charging additional rental fees to Section 8 tenants.
   Controls over the payment of overhead expenses for Breakthrough Living’s management agent.

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

   Breakthrough Living’s board did not provide adequate oversight of the Breakthrough Living
    management agent to ensure it followed the regulatory agreement and HUD Handbook
    4350.3 requirements (findings 1 and 2).




                                                  11
Appendixes

Appendix A


                             Schedule of Questioned Costs
                            Recommendation
                                               Ineligible 1/
                                number
                                    1A                 $47,690
                                    1B                    5,642
                                    2A                  69,577

                                  Totals              $122,209



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.




                                             12
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG                          Auditee Comments
Evaluation




                               13
Ref to OIG
Evaluation        Auditee Comments




Comment 1




             14
Ref to OIG
Evaluation        Auditee Comments




Comment 1




             15
                        OIG Evaluation of Auditee Comments


Comment 1   Breakthrough Living acknowledged the finding and provided steps it’s taking to
            prevent further occurrence of the violations. HUD needs to coordinate with
            Breakthrough Living on the timeframe for implementing the recommendations
            and verify the recommendations are implemented.




                                            16
Appendix C
                                             Criteria


Breakthrough Living Program Regulatory Agreement
Paragraph 5 states that “disbursements from such fund, whether for the purpose of effecting
replacement of structural elements, and mechanical equipment of the project or for any other
purpose, may be made only after the consent in writing of HUD.”
Paragraph 11(c) states that “neither Mortgagor nor its agents shall make any payment for
services, supplies, or materials unless such services are actually rendered for the project or such
supplies or materials are delivered to the project and are reasonably necessary for its operation.”
Paragraph 11(j) states that “the mortgagor shall not collect from tenants or prospective tenants or
occupants of the project any admission fee, founder’s fee, life care fee, or similar payment
pursuant to any agreement, oral or written, whereby the mortgagor agrees to furnish
accommodations or services in the project to persons making such payments.”
HUD Handbook 4350.1, REV-1
HUD Handbook 4350.1, REV-1, section 4-1, provides for the establishment of a reserve fund for
replacements for most projects with HUD-insured, formerly coinsured, and HUD-held
mortgages, including Section 202 direct loan projects. Section 4-2 states that “disbursements
from such fund, whether for the purpose of effecting replacement of structural elements and
mechanical equipment of the project, for the cure of mortgage defaults, or for any other purpose,
may be made only after receiving the consent in writing of the Commissioner. In the case of
Section 202, 162, 801, or 811 projects, where HUD serves as the mortgagee [lender], the project
owner escrows the funds but may not withdraw them from the Reserve for Replacements
Account without the Asset Management Branch Chief’s written permission.”

HUD Handbook 4350.3
HUD Handbook 4350.3 does not permit property owners to charge other fees to their Section 8
tenants without HUD’s or the contract administrator’s approval. Paragraph 6-25(f) states that
“owners may require tenants to pay other charges; (1) if HUD or the contract administrator has
approved the charges.”
HUD Handbook 4381.5
HUD Handbook 4381.5, section 6-38, provides basic guidance on management costs charged to
the project’s operating account. It does not permit overhead costs chargeable to a management
agent to be paid from the project’s operating account. Section 6-2 requires that overhead costs,
including rent, phones, and office supplies, be paid for from the management fee.




                                                 17