oversight

The Port Huron Housing Commission, Port Huron, MI, Did Not Properly Implement Asset Management

Published by the Department of Housing and Urban Development, Office of Inspector General on 2017-01-24.

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

      Port Huron Housing Commission,
               Port Huron, MI
                            Public Housing Program




Office of Audit, Region 5                Audit Report Number: 2017-CH-1001
Chicago, IL                                                January 24, 2017
To:            Douglas C. Gordon, Director of Public Housing Hub, 5FPH

               //signed//
From:          Kelly Anderson, Regional Inspector General for Audit, 5AGA
Subject:       The Port Huron Housing Commission, Port Huron, MI, Did Not Properly
               Implement Asset Management


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of the Port Huron Housing Commission’s public
housing program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 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
(312) 353-7832.
                          Audit Report Number: 2017-CH-1001
                          Date: January 24, 2017

                          The Port Huron Housing Commission, Port Huron, MI, Did Not Properly
                          Implement Asset Management



Highlights

What We Audited and Why
We audited the Port Huron Housing Commission’s public housing program as part of the
activities in our fiscal year 2016 annual audit plan. We selected the Commission based on our
analysis of the risk factors relating to public housing agencies in Region 5’s 1 jurisdiction. Our
objective was to determine whether the Commission administered its program in accordance
with the U.S. Department of Housing and Urban Development’s (HUD) and its own program
requirements.

What We Found
The Commission did not properly implement asset management. Specifically, it inappropriately
allocated more than $1.4 million in expenses incurred by its central office cost center to its asset
management projects. As a result, HUD and the Commission lacked assurance that the costs
allocated to the Commission’s projects were (1) necessary and reasonable and (2) for eligible
program-related activities or services received by the projects.

What We Recommend
We recommend that the Director of the Detroit Office of Public Housing require the Commission
to (1) support that $1.4 million in central office cost center expenses allocated to the public
housing program were eligible, necessary, and reasonable program costs and (2) implement
adequate procedures and controls to address the issue cited in this report.




1
    Region 5 includes the States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Commission Did Not Properly Implement Asset
         Management……………………………………………………………………………. 4

Scope and Methodology ...........................................................................................6

Internal Controls ......................................................................................................7

Appendixes ................................................................................................................8
         A. Schedule of Questioned Costs .................................................................................... 8

         B. Federal Requirements ................................................................................................ 9




                                                                2
Background and Objective
The Port Huron Housing Commission is governed by a five-member board of commissioners
appointed by the city manager of Port Huron, MI, to staggered 5-year terms. The board’s
responsibilities include establishing policies under which the Commission conducts business and
ensuring that the Commission is successful in achieving its mission. The board appoints the
Commission’s executive director. The executive director is responsible for carrying out the policies
established by the commissioners and managing the day-to-day operations of the Commission.
The Commission administers a (1) public housing program consisting of 413 units, (2) Housing
Choice Voucher program with up to 578 vouchers, and (3) Residential Opportunity and Self
Sufficiency grant funded by the U.S. Department of Housing and Urban Development (HUD).
During 2014 and 2015, HUD provided the Commission more than $12.3 million to fund its
programs.
In 2005, HUD required public housing agencies with 250 units or more to adopt an asset
management approach to managing their public housing programs and replace cost allocation
systems with a series of management fees. Under asset management, public housing agencies
must establish a central office cost center to support core administrative operations. The cost
center generates revenue by using a fee-for-service approach. Further, the actual costs of each
project would be billed directly to the projects as frontline expenses, thus allowing the projects to
operate as independent business units.
The objective of the audit was to determine whether the Commission managed its program in
accordance with HUD’s and its own requirements. Specifically, we wanted to determine
whether the Commission properly implemented asset management.




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Results of Audit

Finding: The Commission Did Not Properly Implement Asset
Management
The Commission did not properly implement asset management. Specifically, it inappropriately
allocated more than $1.4 million in expenses incurred by its central office cost center to its asset
management projects. The weakness occurred because the Commission lacked a sufficient
understanding of HUD’s asset management requirements. 2 As a result, HUD and the
Commission lacked assurance that the costs allocated to the Commission’s asset management
projects were (1) necessary and reasonable and (2) for eligible, program-related activities or
services received by the projects.
The Commission Improperly Allocated Its Central Office Cost Center’s Expenses to Its
Projects
The Commission’s central office cost center was not self-sufficient. Specifically, for fiscal years
2014 and 2015, its cost center earned $754,559 ($639,363 in public housing asset management
fees + $115,196 in income 3 from other sources). However, its cost center’s expenses totaled
more than $1.54 million. To account for the shortfall, the Commission reversed the fees that its
cost center had earned from managing its asset management projects and then allocated the
remaining expenses, which totaled more than $1.4 million ($1.54 million - $115,195), to the
projects.
The Commission’s executive director attributed many of the expenses of the cost center to legacy
costs that had been incurred before the Commission had converted to asset management.
According to the executive director, he did not know that the expenses of the Commission’s cost
center could not be allocated to its program projects. Further, he expressed concern regarding
the Commission’s ability to meet its obligations if it could not use public housing program funds.
By allocating expenses incurred by its cost center to its public housing projects, the Commission
may have used public housing funds to support non-program-related costs. Further, the expenses
of its cost center that were allocated to its program projects, would be subject to the necessary
and reasonable standards of the Office of Management and Budget at 2 CFR (Code of Federal
Regulations) 200.2.
Conclusion
The weakness described above occurred because the Commission lacked a sufficient
understanding of HUD’s asset management requirements. As a result, HUD and the



2
  See appendix B for criteria.
3
  Other income included Housing Choice Voucher program management fees, investment income, and receipts from
the sale of equipment.



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Commission lacked assurance that the costs allocated to the Commission’s asset management
projects were (1) necessary and reasonable and (2) for eligible program-related activities or
services received by the projects.
Recommendations
We recommend that the Director of the Detroit Office of Public Housing require the Commission
to

      1A. Support that $1,432,222 in central office cost center expenses allocated to the public
          housing program projects were eligible, necessary, and reasonable costs of the
          program. Costs that cannot be supported, or were unnecessary, unreasonable, or for
          ineligible program costs should be reimbursed to the program from non-Federal
          funds.

      1B. Implement adequate procedures and controls, including but not limited to developing
          a plan to manage its central office cost center expenses and determining an
          appropriate fee structure with HUD’s approval that would allow it to operate its
          program within HUD’s requirements.
      1C. Implement adequate procedures and controls, including but not limited to providing
          training to its staff to ensure that the Commission fully implements asset
          management and operates its program in accordance with HUD’s requirements.




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Scope and Methodology
We performed our onsite audit work between May 17 and June 16, 2016, at the Commission’s
main office at 905 7th Street, Port Huron, MI. The audit covered the period July 1, 2013,
through June 30, 2015, but was expanded as determined necessary.

To accomplish our audit objective, we interviewed HUD program staff and the Commission’s
employees. In addition, we obtained and reviewed the following:

   •   Applicable laws; Federal regulations at 2 CFR Part 200; HUD’s requirements at 24 CFR
       Parts 5, 85, 905, 960, and 990; HUD’s public and Indian housing notices; and HUD
       Handbooks 7475.1 and 7510.1G.

   •   The Commission’s accounting records, annual audited financial statements, bank
       statements, general ledgers, board meeting minutes; and cost allocations.

We reviewed the Commission’s general ledger, management fee calculations and cost
allocations. Specifically, we (1) compared the allowable fees to the cost allocations and
determined the variance and (2) reviewed the Commission’s cost center transactions to determine
whether its expenses exceeded it revenues. We then reviewed the Commission’s projects’
financial records.

To achieve our audit objective, we relied in part on information maintained in the Commission’s
accounting system. Although we did not perform a detailed assessment of the reliability of the
data, we performed a minimal level of testing and found the data to be adequately reliable for our
purposes.

We provided our review results to the Director of HUD’s Detroit Office of Public Housing and
the Commission’s executive director during the audit. We also provided our discussion draft
audit report to HUD’s staff, the Commission’s executive director and board on December 9,
2016. We asked the Commission’s executive director to provide written comments to the draft
report by December 21, 2016. The executive director chose not to comment on the report.

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




                                                6
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 objectives:

•   Effectiveness and efficiency of operations – Policies and procedures that management has
    implemented to reasonably ensure that a program meets its objectives.
•   Reliability of financial reporting – Policies and procedures that management has
    implemented to reasonably ensure that valid and reliable data are obtained, maintained, and
    fairly disclosed in reports.
•   Compliance with applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably ensure that resource use is consistent with laws and
    regulations
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The Commission lacked an adequate understanding of asset management to ensure
    compliance with HUD’s requirements (finding).




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Appendixes

Appendix A


                             Schedule of Questioned Costs
                          Recommendation
                                             Unsupported 1/
                              number
                                  1A              $1,432,222

                                 Total            1,432,222



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




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Appendix B
                                     Federal Requirements

Regulations at 24 CFR 990.260(a) state that public housing agencies that own and operate 250 or
more dwelling rental units under Title I of the Housing Act of 1937, including units managed by
a third-party entity (for example, a resident management corporation) but excluding Section 8
units, are required to operate using an asset management model consistent with this subpart.

Regulations at 24 CFR 990.255(a) state that public housing agencies must manage their
properties according to an asset management model, consistent with the management norms in
the broader multifamily management industry. Public housing agencies must also implement
project-based management, project-based budgeting, and project-based accounting, which are
essential components of asset management. The goals of asset management are to:
               (1) Improve the operational efficiency and effectiveness of managing public
                   housing assets,
               (2) Better preserve and protect each asset,
               (3) Provide appropriate mechanisms for monitoring performance at the property
                   level, and
               (4) Facilitate future investment and reinvestment in public housing by public and
                   private-sector entities.

Paragraph (b) states that HUD recognizes that appropriate changes in its regulatory and
monitoring programs may be needed to support public housing agencies to undertake the goals
identified in paragraph (a) of this section.

Regulations at 24 CFR 990.280(a) state that all public housing agencies covered by this subpart
must develop and maintain a system of budgeting and accounting for each project in a manner
that allows for analysis of the actual revenues and expenses associated with each property.
Project-based budgeting and accounting will be applied to all programs and revenue sources that
support projects under an annual contributions contract (for example, the Public Housing
Operating Fund, the Public Housing Capital Fund, etc.).

Regulations at 24 CFR 990.280(b) state that
       (1) Financial information to be budgeted and accounted for at a project level should
           include all data needed to complete project-based financial statements in accordance
           with accounting principles generally accepted in the United States, including
           revenues, expenses, assets, liabilities, and equity data. The public housing agency
           must also maintain all records to support those financial transactions. At the time of
           conversion to project-based accounting, a public housing agency should apportion its
           assets, liabilities, and equity to its respective projects and HUD-accepted central
           office cost centers.
       (2) If the public housing agency complies with generally accepted accounting principles
           and other associated laws and regulations pertaining to financial management (for




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           example, Office of Management and Budget circulars), it should have the maximum
           amount of responsibility and flexibility in implementing project-based accounting.
       (3) Project-specific operating income should include, but is not limited to, such items as
           project-specific operating subsidy, dwelling and non-dwelling rental income, excess
           utilities income, and other public housing agency or HUD-identified income that is
           project-specific for management purposes.
       (4) Project-specific operating expenses should include, but are not limited to, direct
           administrative costs, utilities costs, maintenance costs, tenant services, protective
           services, general expenses, non-routine or capital expenses, and other public housing
           agency or HUD-identified costs which are project-specific for management purposes.
           Project-specific operating costs also should include a property management fee
           charged to each project, which is used to fund operations of the central office.
           Amounts charged to each project for the property management fee must be
           reasonable. If the public housing agency contracts with a private management
           company to manage a project, the public housing agency may use the difference
           between the property management fee paid to the private management company and
           the fee that is reasonable to fund operations of the central office and other eligible
           purposes.
       (5) If the project has excess cash flow available after meeting all reasonable operating
           needs of the property, the public housing agency may use this excess cash flow for
           the following purposes:
                (i) Fungibility between projects as provided for in section 990.205.
                (ii) Charging each project a reasonable asset management fee that may also be
                     used to fund operations of the central office. However, this asset management
                     fee may be charged only if the public housing agency performs all asset
                     management activities described in this subpart (including project-based
                     management, budgeting, and accounting). Asset management fees are
                     considered a direct expense.
                (iii) Other eligible purposes.

Regulations at 24 CFR 990.280(c) state that in addition to project-specific records, public
housing agencies may establish central office cost centers to account for non-project-specific
costs (for example, human resources, executive director’s office, etc.). These costs should be
funded from the property management fees received from each property and from the asset
management fees to the extent that these are available.

Regulations at 24 CFR 990.280(d) state that if a public housing agency chooses to centralize
functions that directly support a project (for example, central maintenance), it must charge each
project using a fee-for-service approach. Each project should be charged for the actual services
received and only to the extent that such amounts are reasonable.

The Supplement to HUD Handbook 7475.1, section 7.2, states that for public housing agencies
that convert to asset management (required of public housing agencies with 250 or more units),
any internal fee-for-service charges to asset management projects or programs (property
management fees, asset management fees, etc.) are used to reimburse the public housing agency



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for its claim of the overhead costs related to these programs. (These overhead costs are
previously claimed through the cost allocation process under Office of Management and Budget
Circular A-87.) The fee-for-service amounts are considered non-program income for purposes
of A-87 and 24 CFR Part 85; however, other State and local restrictions may still apply. Only
the fee-for-service amounts are considered nonprogram income and not other program funds.
Regulations at 24 CFR 85.1(a) state that Federal awards with State, local and Indian tribal
governments are subject to the uniform administrative requirements, cost principles and audit
requirements for Federal awards at 2 CFR Part 200.

Regulations at 2 CFR 200.404 state that a cost is reasonable if, in its nature and amount, it does
not exceed that which would be incurred by a prudent person under the circumstances prevailing
at the time the decision was made to incur the cost.

Regulations at 2 CFR 200.405(c) state that any cost allocable to a particular Federal award under
the principles provided for in this part may not be charged to other Federal awards to overcome
fund deficiencies to avoid restrictions imposed by Federal statutes, regulations, or terms and
conditions of the Federal awards or for other reasons.

Regulations at 2 CFR 200.408 state that the Federal award may be subject to statutory
requirements that limit the allowability of costs. When the maximum amount allowable under a
limitation is less than the total amount determined in accordance with the principles in this part,
the amount not recoverable under the Federal award may not be charged to the Federal award.




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