oversight

The New Brunswick Housing Authority, NJ, Did Not Always Administer Its Operating and Capital Funds in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2017-09-28.

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

    New Brunswick Housing Authority,
          New Brunswick, NJ
      Public Housing Operating Fund and Capital Fund
                        Programs




Office of Audit, Region 2      Audit Report Number: 2017-NY-1013
New York – New Jersey                          September 28, 2017
To:            Theresa Arce, Director, Office of Public Housing, Newark Field Office, 2FPH

               //SIGNED//
From:          Kimberly S. Dahl, Regional Inspector General for Audit, 2AGA
Subject:       The New Brunswick Housing Authority, NJ, Did Not Always Administer Its
               Operating and Capital Funds in Accordance With HUD Requirements


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 New Brunswick Housing Authority’s
administration of operating and capital funds.
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 website. 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.
                    Audit Report Number: 2017-NY-1013
                    Date: September 28, 2017

                    The New Brunswick Housing Authority, NJ, Did Not Always Administer Its
                    Operating and Capital Funds in Accordance With HUD Requirements




Highlights

What We Audited and Why
We audited the New Brunswick Housing Authority because it was classified as a troubled public
housing agency and based on our risk analysis of public housing agencies located in the State of
New Jersey. The objective of the audit was to determine whether the Authority administered its
operating and capital funds in accordance with U.S. Department of Housing and Urban
Development (HUD) requirements.

What We Found
The Authority did not always administer its operating and capital funds in accordance with HUD
requirements. Specifically, it (1) did not properly procure goods and services totaling more than
$1 million; (2) did not support more than $187,000 in capital fund obligations; (3) did not meet
obligation deadlines for more than $704,000 in replacement housing factor funds and disbursed
more than $139,000 after the expenditure deadline; (4) charged its project more than $87,000 in
excessive management fees; and (5) did not ensure that its budget, financial reports, and
accounting data were accurate and up to date. This condition occurred because the Authority did
not fully understand HUD’s requirements and did not have adequate controls to ensure
compliance with all requirements. As a result, HUD did not have assurance that the prices paid
for capital improvements and professional services were reasonable, capital funds were used for
eligible activities in a timely manner, operating funds were available for the operations of the
Authority’s project, and it had accurate information for evaluating the Authority.

What We Recommend
We recommend that HUD require the Authority to (1) provide documentation to show that more
than $1 million paid for goods and services was reasonable; (2) provide procurement training to
its staff; (3) provide documentation to support more than $187,000 in 2013 and 2014 capital fund
obligations; (4) reimburse HUD $139,423 in replacement housing factor funds disbursed after
the expenditure deadline; (5) improve its controls to ensure that funds are obligated and spent in
a timely manner; (6) reimburse its project more than $87,000 for excessive management fees; (7)
submit a request to revise its budget to reflect expenditures; and (8) improve its controls to
ensure that its budget, financial reports, and accounting data are accurate and up to date. Further,
we recommend that HUD reduce the Authority’s future capital funds as a penalty for obligating
its replacement housing factor funds after the deadline.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Authority Did Not Always Administer Its Operating and Capital
         Funds in Accordance With HUD Requirements ............................................................ 4

Scope and Methodology .........................................................................................10

Internal Controls ....................................................................................................12

Appendixes ..............................................................................................................13
         A. Schedule of Questioned Costs .................................................................................. 13

         B. Auditee Comments and OIG’s Evaluation ............................................................. 14




                                                             2
Background and Objective
The U.S. Department of Housing and Urban Development’s (HUD) public housing program was
established to provide decent and safe rental housing for eligible low-income families, the
elderly, and persons with disabilities. Operating funds and capital funds are two major
components of HUD’s public housing program. Operating funds provide annual operating
subsidies to public housing agencies to assist in funding the operating and maintenance expenses
of low-income housing units. Capital funds provide annual formula grants to public housing
agencies for the development, financing, and modernization of public housing developments and
management improvements. Replacement housing factor funds are a special type of capital
funds that are awarded to public housing agencies that have removed units from inventory for the
purpose of developing new public housing units.

The New Brunswick Housing Authority was established in 1947 to manage, build, own, and
operate assisted and affordable housing for eligible families as they move to achieve self-
sufficiency. It is under the supervision of HUD and the New Jersey Department of Community
Affairs and is governed by a seven-member board of commissioners that appoints an executive
director to manage the Authority’s day-to-day operations. The Authority administers 429 low-
income public housing units and 868 housing choice vouchers. Between 2014 and 2016, the
Authority received more than $1.7 million in operating funds and approximately $500,000 in
capital funds annually. During this same period, it disbursed more than $704,000 in replacement
housing factor funds related to 246 demolished units, which it received from 2009 to 2011.

The Authority was designated as a troubled public housing agency by HUD based on a failing
Public Housing Assessment System1 score of 41 out of 100 for the fiscal year ending June 30,
2015. HUD later conducted a public housing agency recovery and sustainability assessment in
August 2016, during which it noted weaknesses in the Authority’s governance, management, and
operations. The Authority entered into a recovery agreement with HUD on February 21, 2017,
which required the Authority to submit to HUD a monthly report for activities and comments
until it had completed all items listed in the action plan, even if HUD had removed the
Authority’s troubled-substandard designation.

Our objective was to determine whether the Authority administered its operating and capital
funds in accordance with HUD requirements.




1
    The Public Housing Assessment System is used by HUD to assess a public housing agency’s performance in
    managing its low-rent public housing programs. The system uses a 100-point scoring system based on 4
    categories of indicators – physical assessment, financial assessment, management assessment, and Public
    Housing Capital Fund programing. Public housing agencies that score below 60 out of 100 points are designated
    as troubled.



                                                        3
Results of Audit

Finding: The Authority Did Not Always Administer Its Operating
and Capital Funds in Accordance With HUD Requirements

The Authority did not always administer its operating and capital funds in accordance with HUD
requirements. Specifically, it (1) did not properly procure goods and services with related
disbursements totaling more than $1 million; (2) did not provide support for more than $187,000
in capital fund obligations; (3) did not meet obligation deadlines for more than $700,000 in
replacement housing factor capital funds and disbursed more than $139,000 of these funds after
an expenditure deadline; (4) charged one of its projects more than $87,000 in excessive
management fees; and (5) did not ensure that its budget, financial reports, and accounting data
were accurate and up to date. This condition occurred because the Authority did not fully
understand HUD requirements and did not have adequate controls to ensure compliance with all
requirements. As a result, HUD did not have assurance that the prices paid for capital
improvements and professional services were reasonable, capital funds were used for eligible
activities in a timely manner, operating funds were available for the operations of the Authority’s
project, and it had accurate information for evaluating the Authority. Further, the Authority may
incur reductions to future capital funds as a penalty for delayed obligations.
Goods and Services Were Not Properly Procured
Contrary to the regulations at 24 CFR (Code of Federal Regulations) 85.36, 2 CFR Part 200, and
HUD Handbook 7460.8, REV-2, the Authority did not properly procure goods and services for
19 of 24 contracts reviewed, with related disbursements totaling more than $1 million.
Specifically, it did not properly use an intergovernmental agreement for 10 capital improvement
contracts, and did not prepare cost estimates and cost analyses for nine professional services
contracts.

An Intergovernmental Agreement Was Not Properly Used
The Authority did not properly use an intergovernmental agreement when procuring 10 capital
improvement contracts with related disbursements totaling $800,439. The Authority awarded
the 10 contracts to 3 vendors approved by the Middlesex Regional Educational Services
Commission,2 a local government purchasing entity that provided public agencies access to its
list of preapproved vendors. Regulations at 24 CFR 85.36(b)(5) and 2 CFR 200.318(e) allowed
public housing agencies to enter into State and local intergovernmental agreements when
appropriate for procurement or use of common goods and services. While HUD Handbook
7460.8, REV-2, section 14.2, further stated that a public housing agency may enter into
intergovernmental or interagency purchasing agreements without competitive procurement if



2
    The Commission changed its name to the Educational Services Commission of New Jersey in 2016.



                                                      4
certain conditions are met, the Authority did not always meet these conditions for 10 contracts
reviewed. Specifically,

   The Agreement Was Used for Uncommon Supplies and Nonroutine Services
    Paragraph 14.2.A.2 of HUD Handbook 7460.8, REV-2, required the agreement to be used
    only for common supplies and services of a routine nature. However, the Authority used the
    agreement for six contracts totaling $702,198 that were not for common or routine purposes.
    For example, the Authority used $274,021 in 2014 to replace a power generator and
    $277,956 in 2015 to replace and repair a roof. These items do not have short lifespans and
    are not considered routine.

   A Cost and Availability Evaluation Was Not Performed
    Paragraph 14.2.A.1 of HUD Handbook 7460.8, REV-2, required the agreement to provide for
    greater economy and efficiency and result in cost savings. Before using an
    intergovernmental agreement for procurement, the Authority needed to compare the cost and
    availability of the supplies or services on the open market with the cost of purchasing them
    through another unit of government to determine whether it was the most economical and
    efficient method. Paragraph 14.2.A.4 further required that the Authority maintain
    documentation showing that cost and availability were evaluated before the agreement was
    executed and that these factors were reviewed and compared at least annually thereafter.
    While the Authority stated that it believed that using the agreement allowed it to obtain better
    deals and time savings, it did not conduct a cost and availability evaluation and document
    that using the agreement would result in cost savings before executing the 10 contracts with
    related disbursements totaling $800,439.

   Procurements Did Not Comply With 24 CFR 85.36
    Paragraph 14.2.A.3 of HUD Handbook 7460.8, REV-2, required the Authority to take steps
    to ensure that procurements complied with 24 CFR 85.36. However, the Authority was not
    able to explain how the Commission selected the vendors and did not obtain or evaluate all of
    the bidding documentation to ensure that it complied with 24 CFR 85.36 before executing the
    10 contracts with related disbursements totaling $800,439. Based on a review of
    documentation obtained from the Commission, we determined that it did not follow
    applicable procurement requirements. For example, the vendor used to replace the power
    generator was the only vendor that bid for electrical services, and neither the Commission
    nor the Authority provided a cost analysis to justify the vendor’s selection as required by 24
    CFR 85.36(f)(1). Further, the vendor used for the Authority’s roof replacement and repair
    project was selected without full and open competition because it was limited to vendors that
    had licenses to work in at least 20 States. This was an unreasonable requirement to be placed
    on firms as defined by 24 CFR 85.36(c)(1) because the work would be performed in only one
    State. Further, for 8 of the 10 contracts reviewed, the Commission did not provide
    documentation to support the reasonableness of prices in its price catalog, which it required
    vendors to bid against. The Authority stated that it relied on the Commission’s claim that it
    complied with the procurement regulations of the State of New Jersey and believed that these
    regulations would satisfy HUD requirements.




                                                 5
These deficiencies occurred because the Authority did not fully understand requirements for the
use of intergovernmental purchasing agreements. As a result, HUD and the Authority did not
have assurance that $800,439 in capital funds spent for capital improvements was reasonable.

Cost Estimates and Cost Analyses Were Not Prepared
The Authority did not prepare independent cost estimates before receiving bids and cost or price
analyses before awarding nine contracts for general legal, fee accounting, management
consulting, and auditing services. Regulations at 24 CFR 85.36(f), 2 CFR 200.323(a), and HUD
Handbook 7460.8, REV-2, sections 3.2 and 10.3, required the Authority to perform independent
cost estimates and perform a cost or price analysis for every procurement to determine whether
the price was reasonable. The Handbook specifically required a cost analysis in cases in which
only one offer was received and a cost analysis or alternative method of determining price
reasonableness in other cases when it did not receive an adequate number of offers. However,
the Authority did not prepare independent cost estimates before receiving bids or proposals or
price or cost analyses before awarding these contracts. Further, the Authority did not prepare a
cost analysis, despite having received only one bid for eight of the contracts and only two bids
for the ninth contract. The only documentation in the Authority’s procurement files related to
establishing price reasonableness was internal emails saying that Authority officials had
discussed the prices from prior contracts with the same vendors it was selecting. For example,
the Authority’s legal services had been contracted to the same firm since 2007, and it only
compared the firm’s prices for the annual contracts against its prior-year prices. This condition
occurred because the Authority did not fully understand HUD requirements for cost estimates
and cost analyses. As a result, HUD and the Authority did not have assurance that $217,403 in
capital funds and operating funds spent for professional services was reasonable.

Obligations of Capital Fund Grants Were Not Adequately Supported
The Authority did not maintain adequate documentation to support more than $187,000 in capital
fund obligations. Regulations at 24 CFR 905.326 required that the Authority maintain complete
records of the history of each Public Housing Capital Fund grant, including records to support
obligations and expenditures. According to 24 CFR 905.108, an obligation is a binding
agreement for work or financing that will result in immediate or future outlays, and all
obligations were required to be incorporated into the Authority’s approved 5-year action plan.
While the Authority had obligated and disbursed more than $1.1 million in capital funds from its
2013 and 2014 grants, its records supported only approximately $900,000 in obligations for
operations, administration, capital fund financing repayments, and contracts. The Authority did
not maintain support for the remaining $94,940 and $92,552 in obligations for 2013 and 2014,
despite having disbursed the funds. This condition occurred because the Authority believed that
obligations were effective once it intended to spend the funds. As a result, HUD did not have
assurance that the capital funds were obligated and used for eligible activities in a timely manner.

Replacement Housing Factor Funds Were Not Obligated and Used in a Timely Manner
The Authority did not obligate more than $704,000 and spend $139,423 in replacement housing
factor grant capital funds received in 2009, 2010, and 2011 in a timely manner. Regulations at
24 CFR 905.306 required it to obligate at least 90 percent of the funds within 24 months from
when the funds became available and spend all funds within 48 months. While HUD extended



                                                 6
the obligation and expenditure deadlines for 12 months due to Hurricane Sandy, the Authority
did not start obligating more than $704,000 in 2009, 2010, and 2011 funds until after the
respective obligation deadlines. The table below shows the obligation deadline approved by
HUD and the dates on which the Authority began obligating funds and completed obligating
them.

                                          Obligation                  Actual              Actual
          Grant          Grant
                                       deadline approved          obligation start    obligation end
          year          amount
                                            by HUD                      date               date
          2009         $139,423            9/14/2012                 8/28/2014          1/28/2015
          2010          309,336            7/14/2013                 1/30/2015          6/30/2015
          2011          255,469             8/2/2014                 8/28/2014           7/8/2015

Further, it did not meet the expenditure deadline for the $139,423 in 2009 funds. The Authority
stated that this condition occurred because it had difficulty finding contractors to do the work
after Hurricane Sandy. However, it did not request additional extensions to its deadlines or
provide documentation supporting this claim. As a result, HUD did not have assurance that
more than $704,000 was obligated and used in a timely manner for necessary development and
acquisition of the Authority’s public housing units.

Excessive Management Fees Were Charged for Units Undergoing Demolition
The Authority improperly charged its project $87,116 for management fees related to units
undergoing demolition. According to an April 2007 supplement to HUD Handbook 7475.1, the
Authority’s central office cost could earn only a portion of the normal management fee from
projects for units undergoing demolition. Specifically, it could earn 75 percent of the normal fee
in the first year, 50 percent in the second year, and 25 percent in the third year. Since 2014 was
the third year of demolition for 60 units, the Authority should have charged its project only
$12,116 of the normal $48,463 fee for these units. However, it charged its project $99,232,
which exceeded the 25 percent limit by $87,116.3 This condition occurred because the Authority
was not familiar with HUD requirements for units undergoing demolition. As a result, these
funds were defederalized and were no longer available for the operations of the Authority’s
project.

Records and Reports Were Not Always Accurate
Contrary to requirements at 24 CFR 85.20(b)(2), HUD’s Capital Fund Guidebook, and a HUD
Real Estate Assessment Center reporting brief, the Authority did not ensure that its budget,
financial reports, and accounting data were accurate and up to date.

The Budget Was Not Accurate
The Authority’s 2014 Capital Fund budget did not match expenditures as required. Chapter 7 of
the Capital Fund Guidebook required the Authority to amend its budget when there was a change
in the amount spent to reflect its actual expenditures. However, the Authority disbursed $31,022
more for operations than it had budgeted and did not revise its budget, and HUD’s Line of Credit

3
    The Authority did not overcharge its project during the first and second years.



                                                           7
Control System4 (LOCCS) still showed that only the original budgeted amount had been
obligated and disbursed for operations. This condition occurred because the Authority did not
have adequate policies and procedures to ensure that funds were spent in accordance with the
budget and the budget was revised in compliance with the HUD requirement. As a result, HUD
was not provided accurate information related to the Authority’s use of capital funds and could
not properly evaluate the Authority’s use of the funds.

Financial Reports Submitted to HUD Were Not Accurate
The Authority did not properly report financial information to HUD. HUD Real Estate
Assessment Center reporting brief 3 required the Authority to report Public Housing Operating
Fund subsidies paid to mixed-finance developers on line 96200 as other general expenses.5
However, the Authority incorrectly reported on its 2014 and 2015 financial data schedules that
approximately $715,000 in Operating Fund subsidies paid to mixed-finance project developers
was for management fees. This condition occurred because the Authority was not familiar with
the financial data reporting requirements and did not have adequate policies and procedures to
ensure compliance with requirements. As a result, HUD was not provided accurate information
related to the Authority’s use of operating funds and could not properly evaluate the Authority’s
operations.

Accounting Records Were Not Accurate
The Authority did not ensure that its general ledger data were accurate for 2013 and 2014 capital
funds. Regulations at 24 CFR 85.20(b)(2) state that grantees and subgrantees must maintain
records, which adequately identify the source and application of funds provided for financially
assisted activities. However, the Authority incorrectly recorded a management fee as revenue,
did not record two capital fund drawdowns in its general ledger, and made multiple errors when
recording reclassification and adjustment entries. This condition occurred because the Authority
did not perform reconciliations between its general ledger and its LOCCS data and did not have
adequate policies and procedures to ensure that data were properly recorded. As a result, there
was an increased risk of inaccurate financial reporting to HUD.

Conclusion
The Authority did not always administer its operating and capital funds in accordance with HUD
requirements. This condition occurred because the Authority did not fully understand HUD
requirements and did not have adequate controls to ensure compliance with all requirements. As
a result, HUD did not have assurance that the prices paid for capital improvements and
professional services were reasonable, capital funds were used for eligible activities in a timely
manner, operating funds were available for the operations of the Authority’s project, and it had
accurate information for evaluating the Authority. Further, the Authority may incur reductions
to future capital funds as a penalty for delayed obligations.


4
    LOCCS is HUD’s primary grant disbursement system and handles disbursements for most HUD programs,
    including its Public Housing Operating Fund and Capital Fund programs.
5
    HUD’s Real Estate Assessment Center issued this brief on January 30, 2009, to clarify the financial reporting
    requirements for mixed-finance transactions where the project is not a component unit of the public housing
    agency.



                                                          8
Recommendations
We recommend that the Director of HUD’s Newark Office of Public Housing to require the
Authority to

    1A. Provide documentation to show that the $800,439 paid for supplies and services
        purchased under the intergovernmental agreement for capital improvement projects was
        reasonable or reimburse its Capital Fund from non-Federal funds for any amount that it
        cannot support or that is not considered reasonable.

    1B. Provide documentation to show that the $217,403 paid for legal, fee accounting,
        management consulting, and auditing services was reasonable or reimburse its Capital
        Fund or Operating Fund from non-Federal funds for any amount that it cannot support
        or that is not considered reasonable.

    1C. Provide training to its staff related to HUD and Federal procurement requirements,
        including the requirements for using intergovernmental agreements and preparing
        independent cost estimates and cost analyses.

    1D. Provide documentation to show that $187,492 in 2013 and 2014 capital fund obligations
        or reimburse HUD from non-Federal funds for any amount that it cannot support.

    1E. Reimburse HUD $139,423 in replacement housing factor funds not disbursed by the
        expenditure deadline from its replacement housing factor funds or reduce its future
        capital funds.

    1F. Improve its policies and procedures to ensure that capital funds, including replacement
        housing factor funds, are obligated and spent for eligible activities in a timely manner.

    1G. Reimburse its project from non-Federal funds for $87,116 in excessive management
        fees charged for units undergoing demolition.

    1H. Submit a request to the HUD field office to revise its budget so that it reflects actual
        expenditures for 2014 capital funds.

    1I. Improve its policies and procedures to ensure that its budget, financial reports, and
        accounting data are accurate and up to date.

We also recommend that the Director of HUD’s Newark Office of Public Housing

    1J. Consider reducing future capital funds as a penalty for the Authority’s obligating its
        2009, 2010, and 2011 replacement housing factor funds after the deadline.




                                                 9
Scope and Methodology
We conducted the audit from January through August 2017 at the Authority’s office located at 7
Van Dyke Avenue, New Brunswick, NJ, and our office located in Newark, NJ. The audit
initially covered the period October 1, 2014, through September 30, 2016, and was expanded as
detailed below.

To accomplish our objective, we reviewed
      relevant background information;
      applicable laws, regulations, HUD guidance, and Authority policies and procedures;
      5-year plans and annual action plans covering our review period;
      audited financial statements covering our review period;
      budgets, financial reports, bank statements, bank reconciliations, check registers,
       invoices, receipts, vouchers, and general ledgers;
      relevant data contained in HUD’s LOCCS, Financial Assessment Subsystem – Public
       Housing System, and Public and Indian Housing Information Center system; and
      contracts, agreements, and related procurement files.
We also interviewed HUD staff located in Newark, NJ, and the Authority’s staff and fee
accountant located in New Brunswick, NJ.

The Authority disbursed 1,718 checks to 177 vendors totaling more than $5.5 million during our
audit period, October 1, 2014, to September 30, 2016. We summarized the data to determine
how much was disbursed to each vendor. To perform our initial procurement testing, we
selected the eight vendors that had received the highest disbursement totals during our audit
period and were associated with contracts (excluding one vendor contract we reviewed as part of
a prior audit). The total amount disbursed to the eight vendors was $1.75 million, or 32 percent
of the $5.5 million paid to vendors during our audit period. In the audit phase, we reviewed
additional contracts awarded between 2013 and 2016 to three of the eight vendors. These three
vendors included a legal services vendor, because the Authority had contracted with it since
2007, and two capital improvement vendors that had additional contracts. We also reviewed
contracts awarded between 2013 and 2016 for the only architecture-engineering and auditing
firms awarded contracts during that period. In total, we reviewed 24 contracts related to 10
vendors to determine whether the Authority procured goods and services in accordance with
applicable regulations. Although this approach did not allow us to make a projection to the
entire population of contracts or the full $5.5 million disbursed for checks, it was sufficient to
accomplish our objective.

Further, to determine whether expenditures for the contracts reviewed were eligible and
adequately supported, we selected the largest checks to the eight vendors in our initial


                                                 10
procurement sample. We also selected two checks for the water department, two checks for
conference reimbursement, and two checks related to staff fringe benefits, including the
executive director’s personal vehicle allowance and eye glass cost reimbursement for employees.
In addition, we reviewed all 14 checks to the Authority’s Easton Ave. Trustee account during our
audit period to determine whether the Authority used HUD funds for this non-HUD
redevelopment activity. In total, we reviewed 28 checks totaling $801,850, or 14.5 percent of the
$5.5 million paid to vendors during our audit period. Although this approach did not allow us to
make a projection to the full $5.5 million disbursed for checks, it was sufficient to accomplish
our objective.

In addition to the above samples, we reviewed the Authority’s capital fund obligations and
expenditures and its calculations for Operating Fund subsidies. For its capital funds, we selected
its 2013 and 2014 grants because they had passed the obligation deadlines and its 2009 through
2011 replacement factor housing grants because they had disbursements during our audit period.
We reviewed the obligations for timeliness and support. We then reviewed the related
expenditures for timeliness. For its operating funds, we reviewed the calculations made for asset
management projects 3 and 4 because they were the Authority’s only mixed-finance projects.

To achieve our objective, we relied in part on computer-processed data from HUD’s Financial
Assessment Subsystem, Public and Indian Housing Information Center system, and LOCCS, as
well as Authority’s check register and general ledger. We used the data as background
information and to select contracts and checks for review. 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 adequate for our purposes. The testing included comparing information
from these systems for the sampled items to the Authority’s records. We based our conclusions
on source documentation obtained from HUD and the Authority.

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 finding
and conclusion based on our audit objective.




                                                 11
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:

   Compliance with laws and regulations - Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.

   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.

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

We assessed the relevant controls identified above.

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

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

   The Authority did not have adequate policies and procedures to ensure that it followed
    applicable requirements.




                                                  12
Appendixes

Appendix A


                          Schedule of Questioned Costs
                 Recommendation
                                  Ineligible 1/   Unsupported 2/
                     number
                        1A                                   $800,439
                        1B                                    217,403
                        1D                                    187,492
                        1E                $139,423
                        1G                  87,116
                       Totals              226,539          1,205,334


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/   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.




                                              13
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               14
Ref to OIG   Auditee Comments
Evaluation




Comment 2




Comment 3




                            15
Ref to OIG   Auditee Comments
Evaluation




Comment 1




Comment 4




                            16
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority indicated that it would provide HUD all required additional support
            and documentation substantiating the questioned costs identified in the report and
            will work with HUD to implement a plan to address the recommendations. The
            Authority’s planned actions are generally responsive to OIG’s recommendations.
            However, as part of the normal audit resolution process, HUD will need to assess
            any documentation provided by the Authority and require the Authority to repay
            any funds that it cannot support or that are otherwise ineligible.
Comment 2   The Authority acknowledged that it exceeded the extended obligation and
            expenditure deadlines granted by HUD for its replacement housing factor funds.
            While it was aware of the deadlines, the Authority explained the hardship that it
            experienced after Superstorm Sandy and stated that the delayed obligation and
            disbursement of $139,423 in 2009 replacement housing factor funds was the
            result of the circumstances outside of the Authority’s control due to the storm.
            We acknowledge that HUD provided a 1-year extension to the Authority’s
            obligation and expenditure deadlines for its 2009, 2010, and 2011 housing
            replacement factor funds due to Superstorm Sandy. However, we disagree with
            the Authority’s assertion that it would have met the 2009 obligation deadline had
            the storm not occurred. We found that the original obligation deadlines for the
            $139,423 in 2009 funds and $309,336 in 2010 funds had already passed when
            Superstorm Sandy hit the area in October 2012. Further, while the Authority
            indicated that it had worked to meet the deadlines provided by HUD, it did not
            provide documentation to show the efforts it made prior to the extended
            deadlines, or to show that it had reached out to HUD once it realized that it would
            not meet the extended deadlines.
            Last, the Authority noted that it had chosen not to disburse the 2009 funds until
            the materials were marked for delivery and requested that it not be required to pay
            back such funds. While we understand the desire not to disburse funds until
            materials are marked for delivery, we believe that the underlying reason that the
            Authority missed its expenditure deadline was that it missed its obligation
            deadline and did not procure the needed goods and services until a few days
            before expenditure deadline. As a result, there was no opportunity for the
            materials to be marked for delivery before the expenditure deadline. Regulations
            at 24 CFR 905.306 specifically require funds be recaptured by HUD if they are
            not disbursed by the deadline, so we maintain our position that the $139,423 in
            replacement housing factor funds should be reimbursed to HUD.
Comment 3   The Authority contended that the $87,116 in excess management fees were
            authorized and issued by HUD in order to allow the Authority to complete all
            demolition and remediation activities, and noted that the management fees were
            necessary to use its central office cost center employees to wind down the
            remaining activities because the site was entirely vacated and site staff were either



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                  reassigned or terminated. However, the management fees limits for units
                  undergoing demolition are not related to which employees perform the work, and
                  the Authority did not provide any documentation to support its assertion that
                  HUD had authorized the excess fees. Further, if the central office cost center staff
                  were performing certain types of work directly on behalf of the project, the
                  Authority could have charged the costs as the project’s front-line6 expenses at a
                  fee-for service basis instead of charging as management fees. Therefore, we
                  maintain our position that the Authority improperly charged its project $87,116 in
                  excessive management fees and should reimburse this amount to its project.
Comment 4         The Authority requested that we remove the recommendation discussing a
                  reduction of future capital funding given the extraordinary circumstances of
                  Superstorm Sandy, indicated that it takes all of the recommendations seriously,
                  and noted that it will ensure that proper protocols are put into place so that future
                  funded will be obligated and expended properly regardless of circumstances in the
                  future. We commend the Authority for its plan to implement controls to ensure
                  that it complies with requirements in the future. However, based on HUD
                  guidance related to obligation deadlines, we maintain our position that HUD
                  should consider reducing future capital funds as a penalty for the Authority’s late
                  obligations.




6
    Front-line expenses are the direct costs of a public housing project such as maintenance, protective services and
    costs related to the relocation of residents that previously lived in the units being demolished.



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