oversight

The Columbus Metropolitan Housing Authority, Columbus, OH, Did Not Always Comply With HUD's Requirements Regarding the Administration of Its Public Housing Operating and Capital Fund Programs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-18.

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

        Columbus Metropolitan Housing
           Authority, Columbus, OH
      Public Housing Operating and Capital Fund Grant
                        Programs




Office of Audit, Region 5                      Audit Report Number: 2018-CH-1006
                                          2
Chicago, IL                                                    September 18, 2018
                            DISCUSSION DRAFT AUDIT REPORT
                            SUBJECT TO REVIEW AND REVISION
                              FOR OFFICIAL COMMENT ONLY
To:            Dominique G. Blom, General Deputy Assistant Secretary for Public Housing, P
               Brian D. Murray, Director of Public Housing Hub, 5DPH

               //signed//
From:          Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA
Subject:       The Columbus Metropolitan Housing Authority, Columbus, OH, Did Not Always
               Comply With HUD’s Requirements Regarding the Administration of Its Public
               Housing Operating and Capital Fund Programs


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 Columbus Metropolitan Housing Authority’s
Public Housing Operating and Capital Fund programs.
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
(312) 913-8499.
                    Audit Report Number: 2018-CH-1006
                    Date: September 18, 2018

                    The Columbus Metropolitan Housing Authority, Columbus, OH, Did Not
                    Always Comply With HUD’s Requirements Regarding the Administration of
                    Its Public Housing Operating and Capital Fund Programs



Highlights

What We Audited and Why
We audited the Columbus Metropolitan Housing Authority’s Public Housing Operating and
Capital Fund programs based on an anonymous complaint to our hotline. Our audit objective
was to determine whether the Authority administered its programs in accordance with the U.S.
Department of Housing and Urban Development’s (HUD) requirements.

What We Found
The Authority invested Federal funds in non-HUD-approved investment accounts and did not
properly record the proceeds from the sale of a public housing property. As a result, HUD and
the Authority lacked assurance that nearly $21 million in Federal funds was protected. Also,
nearly $14 million in sales proceeds may not have been available for the intended purposes.

In addition, the Authority could not support the source of funds for a loan to an affiliated entity.
As a result, HUD and the Authority lacked assurance that $261,990 in Federal funds was
available for program purposes.
The Authority did not comply with HUD’s procurement requirements for one contract. It also
used non-Federal funds to pay Capital Fund expenses and inappropriately used capital funds as
reimbursement. As a result, HUD and the Authority lacked assurance that more than $263,000
in capital funds used to pay for the contract was reasonable and that the Authority did not incur
and pay expenses before the obligation start date of its Capital Fund grants.

What We Recommend
We recommend that the Director of HUD’s Cleveland Office of Public Housing require the
Authority to procure and use HUD-approved investment accounts for Federal funds, ensure that
sales proceeds are maintained in a restricted account, support the source of funds for the loan and
the reasonableness for one contract or reimburse its program from non-Federal funds, and
implement adequate procedures and controls to address the findings cited in this audit report.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: The Authority Did Not Comply With HUD’s Requirements for
         Investing Federal Funds and Recording Sales Proceeds ............................................... 4

         Finding 2: The Authority Could Not Support the Source of Funds for a Loan to
         an Affiliated Entity ........................................................................................................... 8

         Finding 3: The Authority Did Not Comply With HUD’s Procurement
         Requirements and Inappropriately Used Capital Funds ............................................ 10

Scope and Methodology .........................................................................................13

Internal Controls ....................................................................................................15

Appendixes ..............................................................................................................16
         A. Schedule of Questioned Costs .................................................................................. 16

         B. Auditee Comments and OIG’s Evaluation ............................................................. 17

         C. Federal and State Requirements ............................................................................. 22
Background and Objective
The Columbus Metropolitan Housing Authority was created under the laws of the State of Ohio
on May 8, 1934. The Authority is governed by five-member board of commissioners appointed
by the Common Pleas Court, the mayor, the Franklin County Commissioners, and the Probate
Court. The board appoints the executive director. The executive director has general
supervision over the administration of the Authority’s business and affairs, subject to the
direction of the board of commissioners.

The Authority administers the public housing program, funded by the U.S. Department of Housing
and Urban Development (HUD). Public housing was established to provide decent and safe
rental housing for eligible low-income families, the elderly, and persons with disabilities. The
Public Housing Operating Fund provides subsidies to public housing agencies to assist in
funding the operating and maintenance expenses of the developments. The Public Housing
Capital Fund program provides funds to public housing agencies to modernize public housing
developments. As of August 2018, the Authority had 1,049 public housing units and received
nearly $2.8 million in operating subsidies and more than $1.9 million in Capital Fund grants. 

The Authority was selected for review based on an anonymous complaint received by the
Chicago Office of Audit and then routed to the HUD, Office of Inspector General (OIG), hotline.
The complaint alleged that the Authority (1) did not maintain written financial policies and
procedures, (2) did not have internal controls, (3) inappropriately obligated and used Capital
Fund grant funds, (4) reported operating deficits in HUD’s systems when it had a cash surplus,
and (5) contracted out its asset management functions.

The allegations in the complaint were generally not substantiated, with the exception of the
inappropriate obligation and use of the Authority’s Capital Fund grant funds (finding 3). We
also determined that the contracting of the Authority’s asset management functions was
allowable and the Authority needed to improve its internal controls. However, during the audit,
we identified the following issues that were not part of the complaint: the Authority did not (1)
maintain Federal funds in HUD-approved investment accounts, (2) correctly record the proceeds
from the sale of one of its public housing properties in a restricted account, (3) maintain the
source of funds for a loan made to an affiliated entity, (4) maintain documentation to support the
reasonableness of one contract and the associated change order, and (5) appropriately draw down
its Capital Fund program grant funds.

The objective of our audit was to determine whether the Authority managed its Public Housing
Operating and Capital Fund grant programs in accordance with HUD’s and its own requirements.
Specifically, we wanted to determine whether the Authority (1) appropriately invested Federal
funds, (2) appropriately recorded the proceeds for the sale of a public housing property, (3)
maintained documentation to show the source of funds loaned to an affiliated entity, (4)
complied with HUD’s procurement requirements, and (5) complied with HUD’s requirements
when drawing down Capital Fund grant funds from HUD’s Line of Credit Control System.


                                                3
Results of Audit

Finding 1: The Authority Did Not Comply With HUD’s
Requirements for Investing Federal Funds and Recording Sales
Proceeds
The Authority inappropriately invested Federal funds in non-HUD-approved investment
accounts and did not properly record the proceeds from the sale of a public housing property.
The weaknesses occurred because the Authority lacked a sufficient understanding of the Ohio
Revised Code and HUD’s requirements regarding investments. It also lacked a sufficient
understanding of HUD’s requirements regarding proceeds from the sale of a public housing
property. As a result, HUD and the Authority lacked assurance that nearly $21 million of the
Authority’s Federal funds was properly protected and not at risk. In addition, nearly $14 million
in sales proceeds may not have been available for the intended purposes.
The Authority Invested Funds in Non-HUD-Approved Investment Accounts
The Authority maintained more than $20.7 million in Federal funds1 in State Treasury Asset
Reserve of Ohio (STAR Ohio) investment accounts as of May 31, 2018. However, it did not
obtain HUD’s approval to use the accounts to invest Federal funds.2 In addition, the Authority
was unable to provide documentation showing that it had procured the services of STAR Ohio to
manage the invested funds.
Further, the Authority’s 2017 annual audited financial statements showed that the Authority’s
total cash and cash equivalents held with financial institutions, consisting of both active and
interim deposits, were just under $44.3 million. Of this balance, only about $2.5 million was
covered by the Federal Deposit Insurance Corporation, and the remaining $41.8 million was
uncollateralized. HUD’s Office of Public and Indian Housing (PIH) Notice PIH-96-33, appendix
A, number 6, limits the amount of funds invested in a municipal depository fund to no more than
30 percent of a housing agency’s available investment funds. As of December 31, 2017, the
Authority had more than $22 million held in the STAR Ohio investment accounts. Therefore, it
had invested nearly 50 percent3 of its uncollateralized funds4 held in a municipal depository fund.




1
    Federal funds are defined as the funding from the Authority’s various HUD programs.
2
    HUD’s Cleveland field office’s chief counsel issued a legal opinion regarding STAR Ohio’s investment pool.
    The legal opinion determined that investing Federal funds with STAR Ohio was not appropriate unless a waiver
    was obtained from HUD before the funds were invested and the investment account was appropriately procured.
3
    $22,006,889 / $44,294,702 = 49.68 percent
4
    Uncollateralized as defined by the Governmental Accounting Standards Board (covered by collateral pools held
    by third-party trustees under title [1] I, chapter 135.182, of the Ohio Revised Code in collateral pools securing all
    public funds on deposit with specific depository institutions but not in the Authority’s name)



                                                            4
In addition, as of March 26, 2018, STAR Ohio’s investment portfolio composition included a 42
percent investment in commercial paper.5 HUD’s Notice PIH-96-33, attachment A, number 6,
states that public housing agencies may use municipal depository funds or local Government
investment pools established by States, municipalities, units of local government or other
political subdivisions to serve as an investment. However, the securities purchased by a fund
must be on the HUD-approved list of investment securities. Commercial paper is not a HUD-
approved investment.
According to the Authority’s chief financial officer, based on previous discussions with and a
report from HUD’s PIH Quality Assurance Division, the Authority believed that investing
Federal funds in STAR Ohio’s investment account was allowable. However, the Authority’s
staff later determined that HUD’s Quality Assurance Division’s report was related to another
issue. In addition, according to the chief financial officer, he believed that the staff was
following practices that had been in place under the Authority’s previous administration. The
Authority planned to work with HUD’s Cleveland field office to properly procure a new bank to
manage its investments and to move its Federal funds into HUD-approved investment accounts.
The Authority Did Not Properly Record the Proceeds From the Sale of a Public Housing
Property
The Authority sold Bollinger Tower, a public housing property; however, it did not maintain the
proceeds from the sale in a restricted account as required by HUD. On September 30, 2017, the
Authority deposited sales proceeds totaling more than $13.9 million into its central office cost
center (COCC). On October 31, 2017, the Authority created a journal entry moving the funds
from its COCC to another unrestricted account.
On May 16, 2018, the Authority’s controller said that the funds were in a restricted account and
would be used for affordable housing purposes in accordance with its agreement with HUD.
However, the support provided showed that the Authority only changed the name of an account
on its general ledger from unrestricted to restricted, instead of using an appropriately numbered
restricted account and then creating journal entries to reclassify the funds to the restricted
account. HUD agreed and emphasized that the restricted Bollinger Tower funds, which should
be used to develop 300 affordable units, must be kept in a restricted general ledger account in
accordance with generally accepted accounting principles. The Authority’s decision to put the
funds into an account normally used for unrestricted funds was not appropriate. In addition, the
funds should be maintained in the Authority’s own restricted account and clearly marked with
their intended purpose.




5
    The Government Finance Officers Association defines commercial paper (CP) as a short-term, unsecured
    promissory note issued by corporations typically used as a source of working capital, receivables financing, and
    other short-term financing needs. CP has maturities ranging anywhere from 1 to 270 days. Because of the short
    maturity, Federal law exempts CP from registration with the Securities and Exchange Commission. As an
    unsecured debt issued by companies, CP carries default risk for investors as compared to U.S. Treasury or U.S.
    Government agency or instrumentality debt.



                                                          5
According to the Authority’s controller, the Authority did not have policies and procedures
related to changing account designations or names because it would very rarely or almost never
change account names or designations. Therefore, the Authority believed that changing the
name of the account on its general ledger was sufficient to show that the funds were maintained
in a restricted account.
Recording Sales Proceeds in HUD’s Financial Data Schedule System
The Authority recorded the sales proceeds on line item 132 of HUD’s Financial Data Schedule
(FDS) system, which states “investments restricted,” to record the proceeds of the sale.
However, according to the definition for line item 132,6 it is designated for restricted
investments. It represents the fair market value of all investments that can be used, upon
exchange, only for specific, designated purposes. In this case, the cash proceeds from the
investment would be only for the same specified use as the initially invested cash. The
restriction on the use of the funds must have been placed or imposed by the source of the
funding. This account includes investments restricted for modernization and development under
HUD public housing and Capital Fund grant projects.

In addition, slightly more than $10.9 million of the more than $13.9 million in sales proceeds
was reported in FDS as part of the Authority’s restricted COCC funds, and the remaining $3
million was reported as part of its general public housing and Capital Fund program. According
to HUD’s FDS Reporting Brief number 4, when HUD funds are used to acquire program assets,
HUD also controls the use of the sales proceeds for the assets. Therefore, the sales proceeds
should have been recorded in a cash-restricted-modernization and development account, which is
FDS line item 112, unless HUD removes the restriction. Thus, the proceeds from the sale of the
Bollinger Tower property should not have been reported as part of the Authority’s COCC but
rather in the appropriate program category.

The Authority’s controller believed that the proceeds from the sale should be reported on line
132 because the funds were invested in a STAR Ohio investment account. However, according
to the Authority’s controller, although the Authority’s 2017 financial statements had been
audited, the information reported in FDS needed to be revised for accuracy. The Authority has
until September 2018 to submit a finalized FDS report to HUD.
Conclusion
The weaknesses described above occurred because the Authority lacked a sufficient
understanding of HUD’s requirements and the Ohio Revised Code regarding investing Federal
funds. It also lacked a sufficient understanding of HUD’s requirements regarding proceeds from
the sale of public housing property. As a result of the Authority’s inappropriate investment
accounts with STAR Ohio, HUD and the Authority lacked assurance that more than $20.7
million of the Authority’s Federal funds were properly protected and not at risk. In addition,
more than $13.9 million in sales proceeds may not have been available for the intended purposes.



6
    The PIH Real Estate Assessment Center’s Financial Assessment Subsystem – Public Housing’s (FASS-PH) line
    definition guide, updated July 2014, section IV, number 1.



                                                      6
Recommendations
We recommend that the Director of HUD’s Cleveland Office of Public Housing require the
Authority to
    1A. Procure appropriate HUD-approved investment accounts and move all Federal funds
        from the STAR Ohio investment accounts to HUD-approved accounts to ensure that
        $20,706,8627 or the current balance of the STAR Ohio accounts is properly protected.

    1B. Implement adequate procedures and controls to ensure that the Authority complies with
        HUD’s requirements for its investments of Federal funds.

    1C. Ensure that its staff is properly trained and familiar with HUD’s requirements to ensure
        that it properly procures and invests Federal funds in HUD-approved investment
        accounts.

    1D. Ensure that the proceeds from the sale of Bollinger Tower proceeds are moved into a
        separate HUD-approved restricted investment account and appropriately recorded in a
        restricted account in the general ledger.

    1E. Implement adequate policies and procedures to ensure that future proceeds from the
        disposition or sale of public housing are appropriately recorded and reported in the
        Authority’s books of record and annual audited financial statements and HUD’s Financial
        Data Schedule system.

    1F. Ensure that its staff is appropriately trained and familiar with HUD’s requirements to
        ensure that proceeds from future dispositions or sales of public housing property or other
        HUD assets are appropriately recorded and reported.




7
     The questioned costs in recommendation 1A include the questioned cost of $13,970,306 for recommendation
     1D. The two recommendations are separate from each other, and each recommendation requires its own action
     to ensure that the funds are appropriately invested (recommendation 1A) and appropriately accounted for in the
     Authority’s books, HUD’s FDS system, and the annual audited financial statements for the Authority
     (recommendation 1D).



                                                          7
Finding 2: The Authority Could Not Support the Source of Funds
for a Loan to an Affiliated Entity
The Authority could not support the source of funds for a loan to Waggoner Senior Housing
Partnership, an affiliated entity. This weakness occurred because the Authority, under its
previous administration, did not maintain complete records. As a result, HUD and the Authority
lacked assurance that $261,990 in Federal funds was available for program purposes.
The Authority Could Not Provide Support Showing the Source of Funds for a Loan to an
Affiliated Entity
The Authority reported 11 related party loan transactions totaling more than $20.4 million in
note 4 of its 2016 annual audited financial statements. Of the 11 loans, 4 were development
notes providing payments to the Authority from its affiliated entities for development services.
The amounts owed on the notes were recorded on the Authority’s financial statements as current
or long-term notes receivable. Of the remaining seven loans, the Authority was able to provide
documentation to support the source of the funds loaned to its related parties for six. Generally,
the sources of loaned funds for the six loans included (1) Choice Neighborhood Initiative grant,
(2) replacement housing factor, or (3) COCC funds.
For the remaining loan, the Authority could not provide support showing the source of funds.
Specifically, in October 2002, the Authority entered into a promissory note with Waggoner
Senior Housing Limited Partnership for the development of low-income housing totaling
$261,990. The Authority’s staff provided a copy of the wire transfer from First Star Bank but
was unable to provide information regarding the source of funds for the $261,990 loan and
whether the funds were Federal or non-Federal. As of July 2018, the Authority had received no
payments on the loan. However, according to the Authority, when the affiliated entity makes
payments on the loan, the payments should be used for affordable housing purposes. HUD
requires that records and accounts be complete and accurate.8
According to the Authority, the loan was executed in 2002 under the Authority’s previous
administration. The Authority’s current staff was not aware that supporting documentation for
the loan was incomplete and was unsure how to apply the payments when received. However,
the Authority intended to develop procedures to track future loans and payments.
Conclusion
The weakness described above occurred because the Authority, under its previous
administration, did not maintain complete records. As a result, HUD and the Authority lacked
assurance that $261,990 in Federal funds was available for program purposes.
Recommendations
We recommend that the Director of HUD’s Cleveland Office of Public Housing require the
Authority to




8
    HUD Guidebook 7510.1, chapter 2, section II-3



                                                    8
2A. Determine the source of funds for the Waggoner Senior Housing note to ensure that the
    funds were loaned appropriately and that when payments are received, the payments are
    applied to the appropriate account. If the source of funds cannot be determined, the
    Authority should reimburse its program $261,990 from non-Federal funds.

2B. Ensure that the newly developed procedures are sufficient and fully implemented to ensure
    that the source of funds loaned is properly tracked and that payments received are applied
    to the appropriate accounts.




                                               9
Finding 3: The Authority Did Not Comply With HUD’s
Procurement Requirements and Inappropriately Used Capital
Funds
The Authority did not ensure that it prepared an independent cost estimate for a service contract
and performed a cost analysis for the associated change order. It also used non-Federal funds to
pay Capital Fund expenses and then inappropriately used capital funds to reimburse itself. The
weaknesses occurred because the Authority did not comply with HUD’s and its own
procurement policies. In addition, it disregarded HUD’s requirements for spending Capital Fund
grant funds. As a result, HUD and the Authority lacked assurance that more than $263,000 in
Capital Fund expenses were reasonable and that the Authority did not incur and pay expenses
before the obligation start date of its Capital Fund program grants.
The Authority Did Not Ensure That It Prepared an Independent Cost Estimate for One
Contract
We reviewed four of the Authority’s Capital Fund program contracts9 totaling more than $7.2
million for compliance with HUD’s and its own procurement requirements. For one the four
contracts reviewed, the Authority lacked adequate documentation to support that it obtained or
prepared an independent estimate10 to ensure that the cost of work items totaling $258,412 was
reasonable. The Authority received only one bid for the contract, which was for radon
mitigation. In addition, it did not prepare a cost analysis for the associated $4,899 change order
to evaluate the increased cost of additional work as required.11

The Authority’s policies stated that an architect and engineering firm would review the change
order, estimate costs, and provide a document (bulletin) summarizing the information to the
Authority for review. However, there was no documentation to support that this process had
occurred. According to the Authority’s construction manager, during the property’s radon
testing, a contractor estimated that the installation of radon mitigation equipment in each unit
would cost about $2,000 - $2,500. The Authority’s construction manager said that the Authority
had “asked a few other companies” and found the estimate to be accurate. Therefore, the
Authority estimated that the cost of the installation service contract would be $237,500 ($2,500 x
95 units) plus a 10 percent contingency totaling $23,750 ($237,500 x .10) for a total contract cost
of $261,250. However the cost estimate, as described by the Authority, was not supported.
Thus, the Authority did not ensure that it prepared an independent cost estimate before the
contract for radon mitigation services was executed.
Without an independent cost estimate identifying the quantity and cost of materials, labor, or any
other pertinent information, the Authority had no baseline to determine the reasonableness of the
cost of the contract. In addition, although there was no documentation to support its analysis of




9
     See the Scope and Methodology section.
10
     HUD Handbook 7460.8, REV-2, section 3.2
11
     HUD Handbook 7460.8, REV-2, section 10.3



                                                 10
the change order, according to the Authority, the change order had been discussed during a
weekly meeting.
The Authority Used Non-Federal Funds To Pay Capital Fund Expenses
We reviewed all 11 of the Authority’s Capital Fund program grant Line of Credit Control
System (LOCCS)12 voucher requests from November 1, 2015, through October 31, 2017, totaling
more than $3.9 million. The Authority maintained documentation, such as invoices and receipts,
to support 100 percent of its voucher requests. However, it used non-Federal funds to pay for
eligible Capital Fund expenses and then inappropriately reimbursed itself using its Capital Fund
program grants.13
The Authority paid its vendors before drawing down Capital Fund grant funds. Of the 11
vouchers reviewed, 10 vouchers had 143 check requests totaling more than $2.4 million.
However, the dates on which the vendors were paid ranged between 2 and 518 days before the
grant funds were deposited into the Authority’s bank account. The Authority used non-Federal
funds to pay the invoices and then used capital funds to reimburse itself. Additionally, one
voucher had three check requests totaling $10,569, which were paid between 38 and 100 days
after capital funds had been received.14 Therefore, although the Authority would draw down
capital funds for bills that were due and payable, it did not always pay the applicable bills within
3 business days after the capital funds were deposited into the Authority’s bank account.
Additionally, the Authority did not always properly report expenses and disbursements in
LOCCS monthly. Because the Authority used capital funds to reimburse itself, the reported
expenditures in the system would occasionally exceed its disbursements. According to HUD’s
requirements,15 public housing agencies must ensure that reported expenditures do not exceed the
reported disbursements in LOCCS.
The Authority’s controller stated that the Authority used capital funds to reimburse itself because
HUD did not always review voucher requests in a timely manner. Therefore, the Authority
prepaid expenses to avoid the risk of adverse actions by its contractors and projects not moving
forward in a timely manner. We spoke with representatives from HUD’s Cleveland Office of
Public Housing regarding the Authority’s drawdowns. However according to HUD, lengthy
disbursement reviews occurred only when the Authority requested budget modifications or
revisions.
Additionally, according to the Authority’s controller, the Authority’s current staff was following
processes that had been in place under the Authority’s previous administration. The Authority
had been working closely with the Cleveland field office and had been able to request the grant
funds as the invoices were received for direct payment in accordance with HUD’s requirements.




12
     LOCCS is HUD’s primary grant disbursement system that handles disbursements for the majority of HUD
     programs.
13
     HUD’s Capital Fund Guidebook, section 7.9
14
     Ibid.
15
     Ibid.



                                                       11
Conclusion
The weaknesses described above occurred because the Authority did not comply with HUD’s
and its own procurement policies. In addition, it disregarded HUD’s requirements for spending
Capital Fund grant funds. As a result, HUD and the Authority lacked assurance that more than
$263,000 in Capital Fund expenses was reasonable and that the Authority did not incur and pay
expenses before the obligation start date of its Capital Fund program grants.
Recommendations
We recommend that the Director of HUD’s Cleveland Office of Public Housing require the
Authority to
 3A. Support the reasonableness of the $258,412 paid for contract M-1449 or reimburse its
     Capital Fund program from non-Federal funds.

 3B. Support that the contract modification totaling $4,899 for contract number M-1449 was
     reasonable. The amount that cannot be shown to be reasonable should be reimbursed to
     its Capital Fund program from non-Federal funds.

 3C. Implement adequate procedures and controls to ensure that it complies with HUD’s
     procurement requirements.

 3D. Ensure that its staff is properly trained and familiar with HUD’s requirements to ensure
     that documentation necessary to support the reasonableness of contract costs is obtained
     and maintained.

 3E. Implement adequate procedures and controls to ensure that capital funds are drawn down
     and disbursed in accordance with HUD’s requirements.

 3F. Implement adequate procedures and controls to ensure that it properly reports its
     expenditures and disbursements in LOCCS in accordance with HUD’s requirements.




                                               12
Scope and Methodology
We performed our onsite audit work between November 2017 and July 2018 at the Authority’s
main office located at 880 East 11th Avenue, Columbus, OH. The audit covered the period
November 1, 2015, through October 31, 2017, but was expanded as determined necessary as
described below.

To accomplish our audit objective, we interviewed HUD program staff and the Authority’s
employees. In addition, we obtained and reviewed the following:
       Applicable laws; the Ohio Revised Code; Federal regulations at 2 CFR (Code of Federal
        Regulations) Parts 200 and 225; HUD’s Regulations at 24 CFR Parts 85, 905, 970, and
        990; Notices PIH-2007-9, PIH-2007-15, PIH-2016-14, and PIH-2016-21; HUD
        Handbook 7460.7, REV-2; HUD Handbook 7460.8, REV-2; Supplement to HUD
        Handbook 7475.1, REV-1; Capital Fund Guidebook; and Accounting Briefs 14 and 15.

       The Authority’s accounting records; program bank statements; general ledger; policies
        and procedures; board meeting minutes for November 2015 through October 2017;
        organizational chart; independent audit reports for fiscal years 2015 through 2017; loan
        documents for loans made by the Authority to its affiliated entities; and Capital Fund
        grant obligations, contracts, drawdowns, and disbursements.
Finding 1
We reviewed 100 percent of Authority’s STAR Ohio Federally-funded investment accounts from
November 1, 2015, through October 31, 2017. We also obtained the Authority’s recent bank
statements as of May 31, 2018, for its federally funded investments maintained in STAR Ohio
investment accounts. We reviewed 100 percent of the investments because the STAR Ohio
investment structure is not on HUD’s approved list of investments. The results of our review
cannot be projected as the results are applicable to the STAR Ohio investment accounts with
Federal funds only.

We expanded our scope for finding 1 to May 31, 2018, to ensure we reported current information
relevant to the Authority’s investment accounts.
Finding 2
We reviewed all 11 (100 percent) of the loans to the Authority’s affiliates as shown on its 2016
annual audited financial statements. Because we looked at all 11 loans, no projection was
necessary.
Finding 3
During our audit scope, the Authority entered into 10 contracts for Capital Fund grant work
items with three contractors totaling more than $9 million. We selected the highest value
contract from each of the three contractors. Additionally, we randomly selected another contract


                                                13
for review, using the Excel function RANDBETWEEN. We randomly selected the fourth
contract to provide an equal chance for the remaining seven contracts to be selected. As a result,
we selected four contracts representing 78 percent ($7,252,420 / $9,270,403) of the total value of
the 10 contracts. The results of our sample cannot be projected to the universe.

During our audit scope, the Authority submitted 11 Capital Fund voucher requests through
LOCCS. The voucher requests totaled more than $3.9 million. We reviewed all 11 (100
percent) to determine whether the requests were for eligible activities and properly supported.
Because we looked at all 11 voucher requests, no projection is necessary.
Data, Review Results, and Generally Accepted Government Auditing Standards
We relied in part on data maintained by the Authority in its systems. 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 and supporting schedules to the Director of HUD’s Cleveland
Office of Public Housing and the Authority’s president and chief executive officer during the
audit.
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.




                                                 14
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:

   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 Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

   The Authority lacked a sufficient understanding of HUD’s requirements and the Ohio
    Revised Code regarding investing Federal funds (finding 1).
   The Authority lacked a sufficient understanding of HUD’s requirements for recording and
    reporting the proceeds from the sale of its public housing property (finding 2).



                                                  15
Appendixes

Appendix A


                              Schedule of Questioned Costs
                Recommendation
                    number              Ineligible 1/      Unsupported 2/
                      1A                $20,706,862
                       2A                                       $261,990
                       3A                                        258,412
                        3B                                          4,899
                      Total              20,706,862              525,301


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.




                                              16
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2


Comment 2
Comment 2


Comment 2




Comment 2




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 2


Comment 2




Comment 2


Comment 2
Comment 2




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2


Comment 2


Comment 2




                               20
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority stated that it does not dispute the findings and has prepared
            remedial action plans to address the findings and will work with the Cleveland
            Field Office to ensure that the findings are properly closed and that its policy and
            process changes are made to prevent recurrence of the issues cited in this report.
            We appreciate the Authority’s willingness to address the findings and
            recommendations cited in this report.
Comment 2   The Authority agreed with the recommendations associated with findings 1
            through 3 cited in the audit report. We appreciate the Authority’s willingness to
            address the findings and recommendations cited in this report.




                                              21
Appendix C
                                 Federal and State Requirements

Finding 1
Ohio Revised Code, Title [1] I, State Government, chapter 135, section 182, states: “(C) The
public depository shall designate a qualified trustee approved by the treasurer of state and place
with such trustee for safekeeping the eligible securities pledged pursuant to division (B) of this
section. The trustee shall hold the eligible securities in an account indicating the treasurer of
state's security interest in the eligible securities. The treasurer of state shall give written notice of
the trustee to all public depositors for which such securities are pledged. The trustee shall report
to the treasurer of state information relating to the securities pledged to secure such public
deposits in a manner and frequency as determined by the treasurer of state.”
HUD’s Notice PIH-96-33, number 5, states that public housing agencies must require their
depositories to continuously and fully (100 percent) secure all deposits regardless of type that are
in excess of the $100,000 insured amount. This may be accomplished by the pledging or setting
aside collateral of identifiable U.S. Government securities as prescribed by HUD. The public
housing agency has possession of the securities (or will take possession of the securities) or an
independent custodian (or an independent third party) holds the securities on behalf of the public
housing agency as a bailee (evidenced by a safe keeping receipt and a written bailment for a wire
contract), and the securities will be maintained for the full term of the deposit. Such securities
must be owned by the depository, and the manner of collateralization must provide the public
housing agency with a continuing perfected security interest for the full term of the deposit in the
collateral in accordance with applicable laws and Federal regulations. Such collateral should, at
all times, have a market value at least equal to the amount of the deposits so secured.
HUD’s Notice PIH-96-33, attachment A, number 6, states that a municipal depository fund or
local government investment pool, which is established by States, municipalities, units of local
government, or other political subdivisions to serve as an investment fund for public housing
agencies is permitted. The securities purchased by a fund must be on the HUD-approved list of
investment securities. Public housing agencies should have either an undivided or divided
interest in securities comprising the fund. The fund should be under the control of the
Investment Company Act of 1940, and its objective must be clearly stated. The investment
objective of the fund should be to obtain as much income as possible consistent with the
preservation and conservation of capital. The fund should disclose clearly the basis of earnings
and how they are distributed. Public housing agencies should obtain a statement of potential
default and risk and a clear demonstration that withdrawals from the funds will not be so
restricted as to impair a public housing agency’s day-to-day cash management needs. The
management fee should be fixed at a reasonable amount, and management should be passive.
Public housing agencies must limit the amount of funds invested in the fund to no more than 30
percent of their available investment funds. The fund must disclose the relationships of the
investment advisor, manager, trustees, custodian, and transfer agent. Each financial advisory
relationship must be evidenced by a written document executed before, upon, or promptly after
the inception of the financial advisory relationship or promptly after the creation or selection of
the issuer. If the issuer does exist or has not been determined at the time the relationship


                                                    22
commences, that written document should set forth the basis of compensation for the financial
advisory services to be rendered.
HUD’s regulations at 24 CFR 970.19(b) state that a public housing agency may pay the
reasonable costs of disposition and of relocation of displaced tenants allowable under 24 CFR
970.21, from the gross proceeds of the disposition, as approved by HUD.

HUD’s regulations at 24 CFR 970.19(e) state that a public housing agency should use net
proceeds, including any interest earned on the proceeds (after payment of HUD-approved costs
of disposition and relocation under paragraph (a) of this section), subject to HUD approval, as
follows:
    “(1) Unless waived by HUD, for the retirement of outstanding obligations, if any, issued to
        finance original development or modernization of the project; and
    (2) To the extent that any net proceeds remain, after the application of proceeds in
        accordance with paragraph (e)(1) of this section, for:
        (i) The provision of low-income housing or to benefit the residents of the public housing
             agency, through such measures as modernization of lower-income housing or the
             acquisition, development, or rehabilitation of other properties to operate as lower-
             income housing; or
        (ii) Leveraging amounts for securing commercial enterprises, on-site in public housing
             developments of the public housing agency, appropriate to serve the needs of the
             residents.”

HUD’s regulations at 24 CFR 970.19 (f) state that for dispositions for the purpose stated in 24
CFR 970.17(b), a public housing agency must demonstrate to the satisfaction of HUD that the
replacement units are being provided in connection with the disposition of the property. A
public housing agency may use sales proceeds in accordance with paragraph (e) to fund the
replacement units.

The PIH Real Estate Assessment Center’s Financial Assessment Subsystem – Public Housing’s
(FASS-PH) line definition guide, updated July 2014, section IV, number 1, states that line item
112 is designated for restricted cash that is only allowed to be spent for certain, specified
modernization and development activities. The restriction on the use of finds is specified by the
source of the funds, not the Authority. This account includes proceeds from the sale of property
that had been acquired with HUD grants and other development funds, such as proceeds from the
disposal of a public housing project.
The FASS-PH line definition guide, updated July 2014, section IV, number 1, states that line
item 113 is designated for restricted cash purposes. The restriction on the use of funds has been
imposed by the source of the funds.
The FASS-PH line definition guide, updated July 2014, section IV, number 1, states that line
item 132 is designated for restricted investments. It represents the fair market value of all
investments that can be used, upon exchange, only for specific, designated purposes. In this
case, the cash proceeds from the investment would be only for the same specified use as the
initially invested cash. The restriction on the use of the funds must have been placed or imposed


                                                 23
by the source of the funding. This account includes investments restricted for modernization and
development.
Finding 2
HUD Guidebook 7510.1, chapter 2, section II-2, states that the public housing agency must have
records that adequately identify the source and application of funds provided for HUD-assisted
activities. These records must contain information pertaining to program awards and
authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and
income.

HUD Guidebook 7510.1, chapter 2, section II-3, states that the public housing agency may
maintain its own accounting records or it may contract for accounting services. In either case, it
is the responsibility of the public housing agency to maintain financial records, which

      adequately identity the source and application of all program funds and HUD funds,
      provide the basis for budgetary control and monitoring of financial activities and the
       financial position of programs,
      contain the information necessary to determine compliance with budgetary and legal or
       contractual requirements,
      provide supporting documentation for transactions and an adequate audit trail, and
      provide the basis for preparation of required financial reports on a timely basis.

Books and accounts must be complete and accurate. The books of original entry must be kept
current at all times, and postings must be made at least monthly to ledger accounts. All records
and files must be stored appropriately, and all supporting documentation must be maintained in a
safe and accessible location.
Finding 3
Federal Regulations at 2 CFR 200.323(a) state that the non-Federal entity must perform a cost or
price analysis in connection with every procurement action in excess of the simplified
acquisition threshold including contract modifications. The method and degree of analysis is
dependent on the facts surrounding the particular procurement situation, but as a starting point,
the non-Federal entity must make independent estimates before receiving bids or proposals.

HUD’s Procurement Handbook 7460.8, REV-2, section 2A, states that the independent cost
estimate is the public housing agency’s estimate of the costs of the goods or services to be
acquired under a contract or a modification. It serves as the yardstick for evaluating the
reasonableness of the contractor’s proposed costs or prices.

HUD’s Procurement Handbook 7460.8, REV-2, section 2B, states that the independent cost
estimate also helps the contracting officer determine the contracting method to be used. For
example, if the costs can be estimated with a high degree of confidence in their accuracy, sealed
bidding may be possible.
HUD’s Procurement Handbook 7460.8, REV-2, section 2C, states that while the contracting
officer is responsible for the preparation of the independent cost estimate, other personnel (for


                                                  24
example, the end user or budget and finance) are usually involved and may do most of the
preparation. The public housing agency may develop the independent cost estimate using its
own employees, outside parties (for example, consultants), or a combination of the two. If any
outside party (whether compensated or not) assists in developing the independent cost estimate,
the public housing agency must take appropriate steps to ensure that organizational conflicts of
interest are avoided and that the outside party does not obtain any competitive advantage from its
advance knowledge of the public housing agency’s cost estimate.
HUD’s Procurement Handbook 7460.8, REV-2, paragraph 2D.3, states that the contracting
officer should prepare or have prepared an independent cost estimate commensurate with the
purchase requirement. The level of detail will depend upon the dollar value of the proposed
contract and the nature of the goods or services to be acquired. The independent cost estimate
must be prepared before the solicitation of offers. In the requirements for independent cost
estimates for purchases above the public housing agency’s small purchase threshold, the level of
detail will vary but should be commensurate with the size (that is, dollar value), complexity, and
commercial nature of the requirement. Independent cost estimates are normally broken out into
major categories of cost (for example, labor, materials, and other direct costs, such as travel,
overhead, and profit). Commercially available products and services may require less detail, as
the marketplace tends to provide current reliable pricing information for commercially available
products. A public housing agency may also not need to break out components. Noncommercial
type requirements and work designed specifically for the public housing agencies will require a
much more extensive estimation and a detailed independent cost estimate.
HUD’s Procurement Handbook 7460.8, REV-2, section 2E, states that the independent cost
estimate serves as the primary in-house gauge of cost and price reasonableness but it should not
be relied upon to the exclusion of other sources of pricing information. Market conditions may
fluctuate between the time the independent cost estimate is prepared and the receipt of offers.
For example, materials or labor costs may have increased or decreased. If a significant period
has elapsed or the public housing agency knows that certain market conditions have changed, the
contracting officer should request that an updated independent cost estimate be prepared to use in
evaluating offers.
HUD’s Capital Fund Guidebook, section 7.9, states that once funds are disbursed (that is,
transferred from LOCCS to the public housing agency’s bank account), the agency must pay the
applicable bill(s) within 3 business days after the deposit is received. Public housing agencies
cannot spend non-Federal funds first to pay the applicable bills and then use capital funds to
reimburse themselves.
HUD’s Capital Fund Guidebook, section 7.9, states that a public housing agency may submit a
voucher only to disburse funds for bills due and payable for work that has already been
performed or for items received. Public housing agencies cannot spend non-Federal funds first
to pay the applicable bills and then use capital funds to reimburse themselves.
HUD’s Capital Fund Guidebook, section 7.9, states that the public housing agency must ensure
that reported Capital Fund expenditures do not exceed the disbursements made from LOCCS.
This imbalance may be an indication that the agency has paid Capital Fund expenses from
another restricted account, which is prohibited.




                                                25