oversight

Glen Cove Housing Authority, Glen Cove, NY, Did Not Always Use Property Disposition Proceeds in Accordance With Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-01-19.

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

          Glen Cove Housing Authority,
                Glen Cove, NY
          Public and Indian Housing Program Property
                      Disposition Proceeds




Office of Audit, Region 2        Audit Report Number: 2018-NY-1002
New York, NY                                       January 19, 2018
To:            Luigi D’Ancona, Director, Office of Public and Indian Housing, New York Field
               Office, 2APH

               //SIGNED//
From:          Kimberly S. Dahl, Regional Inspector General for Audit, 2AGA
Subject:       Glen Cove Housing Authority, Glen Cove, NY, Did Not Always Use Property
               Disposition Proceeds in Accordance With 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 Glen Cove Housing Authority’s administration
of its property disposition proceeds.
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: 2018-NY-1002
                    Date: January 19, 2018

                    Glen Cove Housing Authority, Glen Cove, NY, Did Not Always Use Property
                    Disposition Proceeds in Accordance With Requirements




Highlights

What We Audited and Why
We audited the Glen Cove Housing Authority’s administration of the disposition proceeds it
received from selling properties. We selected the Authority for review because the U.S.
Department of Housing and Urban Development’s (HUD) New York Office of Public and Indian
Housing ranked it as the third highest risk performer among 67 public housing providers in New
York and because the audited financial statements and property disposition records showed that
the Authority may have loaned a portion of its property disposition proceeds to its nonprofit
entity. The objective of the audit was to determine whether the Authority used property
disposition proceeds in accordance with applicable requirements, including its HUD-approved
disposition application.

What We Found
The Authority did not always use proceeds generated from the sale of 19 properties in
accordance with requirements. Specifically, it loaned more than $900,000 to its nonprofit entity
for activities that did not benefit its residents and disbursed $169,975 in proceeds and $10,804 in
other Federal funds for costs that were not eligible or supported, such as Rental Assistance
Demonstration conversion costs that require prior HUD approval. Further, it did not ensure that
the disposition application and related documentation were maintained, and that it submitted
required reports to HUD. We attributed these deficiencies to the Authority’s desire to increase
revenue and weaknesses in its controls. As a result, HUD and the Authority did not have
assurance that proceeds were used and available for use as intended to benefit the Authority’s
residents, and HUD could not fully monitor the Authority’s use of the proceeds.

What We Recommend
We recommend that HUD require the Authority to (1) obtain retroactive approval from HUD for
the outstanding unauthorized loans and proceeds used for Rental Assistance Demonstration
conversion costs or repay any amount for which it does not obtain approval, (2) provide
documentation to show that proceeds were used for approved activities or repay any amount not
supported, (3) repay proceeds and other Federal funds spent on ineligible activities, and (4)
strengthen its controls to ensure that $1 million in remaining proceeds and any funds to be repaid
are put to better use to benefit the Authority’s residents.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Authority Did Not Always Use Property Disposition Proceeds in
         Accordance With HUD Requirements ............................................................................ 4

Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................10

Appendixes ..............................................................................................................11
         A. Schedule of Questioned Costs and Funds To Be Put To Better Use .................... 11

         B. Auditee Comments and OIG’s Evaluation ............................................................. 12




                                                            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. HUD provides operating and capital funds to local housing
agencies that manage housing for low-income residents at rents they can afford. Operating funds
help cover the operating and maintenance expenses of low-income housing units, and capital
funds can be used for the development, financing, and modernization of public housing
developments and management improvements.

The Glen Cove Housing Authority was established in 1955 as a nonprofit public benefit
corporation to provide affordable housing for low-income families. The Authority is under the
jurisdiction of HUD’s New York Office of Public and Indian Housing and is governed by a five-
member board of commissioners that appoints an executive director to supervise the Authority’s
day-to-day operations. The Authority owns and operates 212 affordable housing units known as
the Daly and Kennedy Heights Home. Between 2011 and 2016, the Authority received $4.26
million in public housing funds, including $2.86 million in operating funds and $1.4 million in
capital funds.

Between 2011 and 2013, the Authority sold 19 two-family properties for $3 million. Section 18
of the Housing Act of 1937 and regulations at 24 CFR (Code of Federal Regulations) Part 970
contain the requirements for the disposition of public housing units, including the requirement
that HUD approve an application in which public housing agencies detail the planned use of the
disposition proceeds. Before the sale of the 19 properties, HUD approved the Authority’s
disposition application and three modifications on December 19, 2006, April 28, 2010, May 24,
2010, and August 19, 2011. The Authority modified the application to change the method of
sale, developer selected, sales price, and number of units to be sold. The approved uses of the
property disposition proceeds included unit upgrades, construction of a childcare center and an
indoor playground, and other uses that would benefit the Authority’s residents in accordance
with the Housing Act and regulations at 24 CFR 970.19(e).

Our objective was to determine whether the Authority used property disposition proceeds in
accordance with applicable requirements, including its HUD-approved disposition application.




                                                3
Results of Audit

Finding: The Authority Did Not Always Use Property Disposition
Proceeds in Accordance With HUD Requirements
The Authority did not always use property disposition proceeds generated from the sale of 19
properties in accordance with applicable requirements, including its approved disposition
application. Specifically, it loaned more than $900,000 to its nonprofit entity for activities that
did not benefit its residents and disbursed $169,975 in property disposition proceeds and $10,804
in other Federal funds for costs that were not eligible or supported. Further, it did not ensure that
the disposition application and related documentation were maintained, and that it submitted
required reports to HUD. We attributed these deficiencies to the Authority’s desire to increase
revenue and weaknesses in its controls. As a result, HUD and the Authority did not have
assurance that the property disposition proceeds were used and available for use as intended to
benefit the Authority’s residents, and HUD could not fully monitor the Authority’s use of the
proceeds.
Proceeds Were Used To Make Unauthorized Loans
Contrary to requirements, the Authority loaned more than $900,000 of the $3 million in property
disposition proceeds received to its nonprofit entity. According to the disposition application
and modifications, the HUD-approved uses included unit upgrades, construction of a childcare
center and an indoor playground, and other uses that would benefit the Authority’s residents in
accordance with the Housing Act and regulations at 24 CFR 970.19(e). However, the Authority
loaned the funds to its nonprofit entity to use for the purchase and operating expenses of four
properties located outside of the Authority’s jurisdiction, which was not one of the HUD-
approved uses. Three of the four properties were located nearly 100 miles from the Authority in
New Jersey, and the fourth property was located approximately 11 miles from the Authority.
Further, the Authority did not properly record the loans in its books and records and did not have
an agreement in place to ensure that the nonprofit would repay the funds. This condition
occurred because the Authority wanted to increase revenue through the purchase and
development of the four properties, and because it did not have adequate controls in place to
ensure that proceeds were used for eligible costs and that the loans were properly recorded. As a
result, HUD and the Authority did not have assurance that the funds would be repaid and
available to be used as intended. While the nonprofit repaid a portion of the loans in 2014 after
selling one of the properties in New Jersey, it still owed $815,398. According to the Authority’s
audited financial statements, the nonprofit entity operated at a loss during 2013, 2015, and 2016.
Therefore, there could be an increased risk that the funds would not be repaid and the Authority
would continue to loan proceeds without intervention.




                                                  4
Proceeds Were Not Always Used for Eligible and Supported Costs
Contrary to requirements, the Authority disbursed $169,9751 in property disposition proceeds
and $10,804 in other Federal funds for costs that were not eligible or supported. The Authority
used more than $1 million of the $3 million in property disposition proceeds received in
accordance with its HUD-approved disposition application and modifications. The proceeds
were used for unit upgrades, an outdoor2 playground, and other uses that would benefit the
Authority’s residents in accordance with the Housing Act and regulations at 24 CFR 970.19(e).
However, a detailed review of its records showed that the Authority could not provide a
breakdown of the proceeds used for each item or all source documentation and used some funds
for ineligible costs. Specifically, the Authority (1) could not account for $108,061 in property
disposition proceeds disbursed; (2) could not show that it had obtained HUD approval for the use
of $61,545 in property disposition proceeds for Rental Assistance Demonstration conversion
costs; and (3) used $11,173 in Federal funds, including $369 in property disposition funds and
$10,804 in tenant participation funds that were combined with non-Federal funds, for ineligible
costs,3 such as charitable donations, holiday parties, nonprofit work, and a summer camp.

These issues occurred because the Authority did not have adequate controls in place, such as
controls to ensure that proceeds were used for eligible costs and that accounting records and
source documentation were properly maintained as required by 24 CFR 85.20(b)(2) (5) and (6).
Its accounting records did not always clearly identify the sources and uses of funds, combined
property disposition proceeds with other sources of funds, and did not include complete and
organized bank records and supporting documentation. As a result, HUD and the Authority did
not have assurance that $169,606 in property disposition proceeds was used in accordance with
requirements to benefit the Authority’s residents, and that $11,173 in property disposition
proceeds and other Federal funds was available for its intended use.

The Disposition Application and Related Documentation Were Not Maintained
Contrary to its certification of compliance, the Authority did not maintain the original disposition
application, modifications, and other relevant information, such as documentation related to
consultations with residents, the value of the properties, the advertisement, request for proposals,
and evaluation criteria scoring sheet related to the disposition of properties. The certification of
compliance form indicated that such documentation was required to be available at all times at
the Authority’s primary place of business. However, the Authority stated that it had destroyed
the documentation in accordance with its 7-year record retention policy. As a result, the
Authority was not able to show the full history of the disposition activities, and HUD could not
fully monitor the Authority’s use of property disposition proceeds.




1
    This includes the $108,601 in disposition proceeds not accounted for, $61,545 used for unauthorized Rental
    Assistance Demonstration conversion costs, and $369 used for ineligible costs.
2
    While the Authority’s approved application discussed only the construction of an indoor playground, the
    construction of an outdoor playground was eligible because it would benefit the Authority’s residents in
    accordance with the Housing Act and regulations at 24 CFR 970.19(e).
3
    In addition to these costs not being eligible uses of property disposition proceeds, they were not eligible uses of
    tenant participation funds according to Office of Public and Indian Housing Notice 2001-3.



                                                            5
Required Reports Were Not Provided to HUD
Contrary to regulations at 24 CFR 970.35, the Authority did not provide HUD with required
financial reports and records on its use of the property disposition proceeds. Regulations at 24
CFR 970.35(a)(3) and (4) required the Authority to provide HUD with financial reports showing
how the property disposition proceeds were used by item and dollar amount, including closing
costs for each property sold. This condition occurred because the Authority did not have
adequate financial controls, including controls over the maintenance of accounting records
needed to provide HUD with reports as required by 24 CFR 85.20(b)(2). As a result, HUD could
not fully monitor the Authority’s use of property disposition proceeds.

Conclusion
The Authority did not always use property disposition proceeds in accordance with applicable
requirements, including its approved disposition application. Further, it did not ensure that the
disposition application and related documentation were maintained and it submitted required
reports to HUD. We attributed these deficiencies to the Authority’s desire to increase revenue
and weaknesses in its controls. As a result, HUD and the Authority did not have assurance that
funds were used and available for use as intended to benefit the Authority’s residents, and HUD
could not fully monitor the Authority’s use of the proceeds. If the Authority improves its
controls, it will ensure that more than $1 million in remaining property disposition proceeds and
any outstanding loans and funds to be repaid will be put to its intended use to benefit the
Authority’s residents.

Recommendations
We recommend that the Director of HUD’s New York Office of Public and Indian Housing
require the Authority to

       1A.     Obtain retroactive approval from HUD for the $815,398 in outstanding
               unauthorized loans made to its nonprofit entity or reimburse its Public Housing
               Operating Fund from non-Federal funds for any amount for which it does not
               obtain approval. If approval is obtained, HUD should also require the Authority
               to execute a loan agreement with the nonprofit entity and properly record the
               loans in its books and records.

       1B.     Provide documentation to show that $108,061 in property disposition proceeds
               was used for the activities outlined in its HUD-approved disposition application
               and modifications or reimburse its Operating Fund from non-Federal funds for
               any amount not supported.

       1C.     Obtain retroactive approval from HUD for the $61,545 in property disposition
               proceeds used for Rental Assistance Demonstration conversion costs or reimburse
               its Operating Fund from non-Federal funds for any amount for which it does not
               obtain approval.




                                                6
         1D.      Reimburse its Operating Fund from non-Federal funds for $11,173 spent on
                  ineligible activities funded by $369 in property disposition proceeds and $10,804
                  in tenant participation funds.

         1E.      Strengthen its controls to ensure that $1,074,9794 in remaining property
                  disposition proceeds and any outstanding loans and other funds to be repaid will
                  be put to better use as intended to benefit the Authority’s residents. These
                  controls include controls to ensure that proceeds are used in accordance with the
                  HUD-approved disposition application, adequate supporting documentation is
                  maintained, and the source and use of funds is properly recorded in the
                  Authority’s books and records and reported to HUD.




4
    The $1,074,979 in remaining disposition proceeds is comprised of proceeds not yet used and loan funds that
    have been repaid. If the Authority improves its controls, these funds will be put to better use as intended for the
    Authority’s residents. Further, if the Authority or its nonprofit repay disposition proceeds in connection with
    recommendations 1A through 1D, it can put these funds to better use by ensuring that they are used in
    accordance with applicable requirements such as the HUD-approved disposition application.



                                                            7
Scope and Methodology
We conducted the audit from March through October 2017 at the Authority’s office located at
140 Glen Cove Avenue, Glen Cove, NY. The review generally covered the period January 2011
through December 2016 and was expanded as necessary to include documents related to the
Authority’s disposition application and modifications as discussed below.

To accomplish our audit objective, we interviewed HUD staff and the Authority’s staff, fee
accountant, and attorney regarding the use of property disposition proceeds. We also reviewed
        Relevant background information.
        Applicable laws, regulations, notices, other HUD guidance, and Authority policies and
         procedures.
        The Authority’s annual contributions contract with HUD.
        The Authority’s audited financial statement.
        The original disposition application approved by HUD in December 2006 and subsequent
         modifications approved by HUD, along with other correspondence between the Authority
         and HUD regarding the use of property disposition proceeds.
        Records related to the receipt and use of property disposition proceeds, including board
         meeting minutes and resolutions, independent appraisal reports, notices of sale, requests
         for proposals, bids received, memorandums of contracts of sale, closing statements, bank
         statements, invoices, contracts, general ledgers, balance sheets, and trial balances.
        Records related to the nonprofit entity’s use of loaned proceeds for the purchase and
         operating expenses of four properties located outside the Authority’s jurisdiction as well
         as its rental income and operating expenses.

The Authority received more than $3 million in proceeds from the sale of 19 properties. The
Authority reported that it used approximately $1.95 million in proceeds. We found that the
Authority had used $2.04 million but had received $85,000 back from the nonprofit entity to
which it loaned funds, so the net amount used was $1.95 million. We requested and reviewed
documentation for 100 percent of the $2.04 million in gross proceeds used.

We relied in part on computer-processed data from HUD’s Financial Assessment of Public
Housing Agencies5 and Public and Indian Housing Information Center6 systems and data from
the Authority’s general ledgers and journal entry lists. We used these data for background


5
    HUD’s Financial Assessment of Public Housing Agencies maintains reviews of the annual financial statements
    submitted by more than 4,000 public housing agencies.
6
    HUD’s Public and Indian Housing Information Center system maintains data on public housing agencies, such
    as data on the developments and number of units.



                                                        8
information and to identify property disposition proceeds received and disbursed by the
Authority. 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 involved comparing the data in these systems and records to HUD and Authority records,
including source documentation received from the Authority for all property disposition
proceeds received and disbursed. We based our conclusions on the 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 findings
and conclusions based on our audit objective.




                                                9
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:
   Programs operations – Policies and procedures that management has implemented to
    reasonably ensure that a program meets its objectives.
   Compliance with laws and regulations - Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
   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 controls to ensure that it used property disposition
    proceeds in accordance with applicable requirements, including the HUD-approved
    disposition application, and controls over the maintenance of accounting records and source
    documentation.


                                                  10
Appendixes

Appendix A


          Schedule of Questioned Costs and Funds To Be Put To Better Use
         Recommendation                                    Funds to be put
                            Ineligible 1/ Unsupported 2/
             number                                        to better use 3/
                 1A                                  $815,398
                 1B                                   108,061
                 1C                                    61,545
                 1D               $11,173
                 1E                                                     $1,074,979

               Totals              11,173             985,004            1,074,979


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.
3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this case, if the Authority strengthens its controls, it
     will ensure that the $1,074,979 in remaining property disposition proceeds and any
     outstanding loans and other funds to be repaid will be put to better use as intended to
     benefit the Authority’s residents. These controls include controls to ensure that proceeds
     are used in accordance with the HUD-approved disposition application, adequate
     supporting documentation is maintained, and the source and use of funds are properly
     recorded in the Authority’s books and records and reported to HUD.


                                               11
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               12
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation


Comment 2




                               13
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority provided background information related to changes in its planned
            uses of the property disposition proceeds. While it noted that it discussed the
            changes with HUD in person, it did not provide evidence of these meetings during
            our audit and acknowledged that it did not revise the uses of proceeds on its
            amended application or forward the correct forms to its local HUD field office or
            the Special Applications Center. We agree that the Authority did not properly
            request changes in the use of its property disposition proceeds. As discussed with
            the Authority, changes in the use of proceeds require written approval from
            HUD’s Special Applications Center.

Comment 2   The Authority agreed with the audit recommendations and noted how it planned
            to resolve each one. Specifically, the Authority planned to request retroactive
            approval for the $815,398 in outstanding unauthorized loans and the $61,545 in
            property disposition proceeds used for Rental Assistance Demonstration
            conversion costs. In addition, the Authority planned to provide documentation to
            support the use of $108,061 in property disposition proceeds discussed in
            recommendation 1B, reimburse $369 for property disposition proceeds used for
            ineligible costs discussed in recommendation 1D, and obtain a waiver for the
            remaining ineligible costs discussed in recommendation 1D or reimburse the
            funds. Lastly, the Authority planned to strengthen its controls to ensure that it
            keeps adequate records for the use of $1,074,979 in remaining property
            disposition proceeds. The Authority’s planned actions are responsive to our
            recommendations. As part of the normal audit resolution process, HUD will need
            to assess any documentation the Authority provides to resolve the
            recommendations.




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