Issue Date
January 17, 1996
Audit Case Number
96-PH-214-1005
TO: Edward J. Palombizio, Director, Multifamily Division,
Pittsburgh Area Office, 3EHM
FROM: Edward F. Momorella, District Inspector General for
Audit, 3AGA
SUBJECT: Allegheny Housing Rehabilitation Corporation
Management Agent Operations
Pittsburgh, Pennsylvania
We audited the management agent operations of the Allegheny Housing Rehabilitation
Corporation (AHRCO) to determine whether its management activities were administered in
accordance with HUD requirements.
The report's five findings identifies that AHRCO: improperly paid employees from project funds;
incurred ineligible and unsupported costs; mismanaged various aspects of the Flexable Subsidy
Program; did not allocate computer costs to all entities managed and requires improvement in
administering Section 8 occupany requirements.
Report issuance was delayed because of Federal government shut downs.
Within 60 days please give us, for each recommendation in this report, a status report on: (1) the
corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why action is considered unnecessary. Also, please furnish us copies of any correspondence or
directives issued because of the audit.
Should you or your staff have any questions, please contact Irving I. Guss, Assistant District
Inspector General for Audit at (215) 656-3401.
Management Memorandum
96-PH-214-1005 Page ii
Executive Summary
The purpose of the audit was to assess whether AHRCO complied with HUD requirements in
managing its portfolio of HUD insured and subsidized projects.
AHRCO generally managed HUD insured projects as required, and projects inspected were
properly maintained. Issues identified in the report indicate that AHRCO's oversight of financial
and certain program areas requires improvement. From a monetary standpoint these conditions
resulted in ineligible and unsupported costs of $455,034 and $73,486 respectively.
AHRCO used funds from eleven HUD-insured projects to
AHRCO employees
pay salaries of employees which should have been paid
salaries paid by projects
from the management fee. AHRCO's unfamiliarity with
HUD requirements resulted in the ineligible expenditure of
project funds totalling $315,596.
Between January 1993 and April 1995, AHRCO inflated
AHRCO inflated the cost
the cost of materials, labor and delivery fees which were
of operations charged to
charged to HUD insured projects and tenants contrary to
projects
requirements. As a result, AHRCO received $86,096 of
ineligible project funds, unsupported project funds of
$50,753, and unsupported tenant funds of $674.
Under the Flexible Subsidy Program, salaries for three
Flexible Subsidy Program
employees were paid from both the flexible subsidy account
overcharged and
and the project operating accounts. Also, applicable
contracting questionable
procurement procedures were not followed. As a result, the
projects overpaid $41,050 for salaries and fringe benefits
and there is no assurance the rehabilitation work was
performed by the lowest bidder as required.
AHRCO did not properly prorate expenses for computer
Computer expenses
equipment and service contracts among all projects and
improperly allocated
identity-of-interest companies which utilized the equipment
as required. As a result, unsupported costs totaling $22,059
were charged to HUD-insured projects.
Page iii 96-PH-214-1005
Executive Summary
AHRCO's noncompliance with HUD occupancy
Non compliance with
requirements included: failure to house tenants in
various aspects of
appropriate sized units; inadequate verification of income,
occupancy requirements
assets and allowances to income; incorrect total tenant
payment calculations; and failure to place tenants in order
from the waiting list. Because tenants remained overhoused
and were not required to pay market rent, $12,292 in excess
Housing Assistance Payments (HAP) were made.
We recommend AHRCO: (1) repay ineligible costs to the
projects and excess HAP to HUD; (2) justify the eligibility
of unsupported costs; and (3) comply with requirements
governing management activities, procurement, and
occupancy.
During our audit, the finding issues were discussed with
AHRCO and where appropriate, AHRCO's comments are
summarized in the findings. The draft findings were
provided to AHRCO and responses received were
considered in our report. AHRCO's written response and
appropriate exhibits are included as Appendix B.
An exit conference was held with AHRCO on September
29, 1995.
96-PH-214-1005 Page iv
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1 Employees Salaries Improperly Paid From
Project Funds 3
2 Ineligible And Unsupported Costs Paid From
HUD-Insured Project Funds 5
3 AHRCO Needs To Improve Its Administration Of
The Flexible Subsidy Program 11
4 AHRCO Did Not Properly Prorate Computer
Expenses 17
5 AHRCO Needs To Improve Compliance With
Occupancy Requirements 21
Internal Controls 31
Follow Up On Prior Audits 33
Page v 96-PH-214-1005
Table of Contents
Appendices
A Schedule Of Ineligible And Unsupported Costs 35
B Auditee Comments 37
C Distribution 51
Abbreviations
AHRCO Allegheny Housing Rehabilitation Corporation
CFR Code of Federal Regulations
HAP Housing Assistance Payments
HUD U.S. Department of Housing and Urban Development
MIOP Management Improvement and Operating Plan
OIG Office of Inspector General
TTP Total Tenant Payment
96-PH-214-1005 Page vi
Introduction
Allegheny Housing Rehabilitation Corporation is a management agent located in Pittsburgh,
Pennsylvania. An identity-of-interest exists between AHRCO, the projects managed, and
companies doing business with the projects. Milton A. Washington is the Owner and a General
Partner of AHRCO. Mr. Washington and AHRCO are the owners of the projects. Mr.
Washington is also the President of Temple Maintenance Company and Beacon Construction
Company, entities providing services for AHRCO.
AHRCO manages 12 projects which have HUD insured mortgages and/one non-insured project.
These projects have 1,293 units of which 1,197 units receive HUD Section 8 subsidy payments.
Project records are maintained at the projects and at AHRCO's office at 5604 Baum Boulevard,
Pittsburgh, Pennsylvania.
The objective of the audit was to determine whether
Audit Objective
AHRCO managed the projects in accordance with HUD
requirements. Based on survey results, the audit focused on
management and other fees charged to the projects, Section
8 occupancy, procurement activities for work under the
Flexible Subsidy Program, distribution of payroll expenses,
and inventory costs.
We reviewed pertinent Pittsburgh Area Office and AHRCO
Audit Scope and
records, and independent auditor reports. We interviewed
Methodology
Pittsburgh Area Office and AHRCO staff, contractors, and
other persons as necessary. We performed physical
inspections and tenant file reviews at four projects using a
random number generator to select ten percent of the
occupied units.
Audit work was performed between February 1995 and
Audit Period
September 1995 and covered the period from January 1,
1994 through February 25, 1995. When appropriate, the
review was extended to include other periods.
We conducted the audit in accordance with generally
accepted government auditing standards.
Page 1 96-PH-214-1005
Finding 1
Employees Salaries Improperly Paid From
Project Funds
AHRCO used funds from eleven HUD-insured projects to pay salaries of employees which
should have been paid from the management fee. AHRCO's unfamiliarity with HUD
requirements resulted in the expenditure of ineligible project funds totalling $315,596.
HUD Handbook 4381.5 REV-1, Change 3, Chapter 2,
Paragraph 2-14.B. states:
"Supervisory personnel are paid from the management fee
whether or not they perform supervisory or front-line tasks
(e.g. if agent or agent's staff fills in for manager, agent
cannot charge project for time....)"
HUD Handbook 4370.2 REV-1 for Account 6310, Office
Salaries, states:
"....Front-line responsibilities include for example, taking
applications, verifying income and processing maintenance
requests. The account does not include salaries paid to
occupancy, maintenance and regional supervisors who
carry out the agent's responsibility for overseeing for
supervising project operations and personnel. These
salaries are paid from the management fee."
Between January 4, 1992 and June 2, 1995, AHRCO
Two management
charged portions of the salaries for the Vice-President and
officials salaries charged
the Management Development Officer to the operating
to projects
accounts of eleven projects.
The Vice-President's duties included supervision of the
maintenance staff and management offices as well as
functioning for the manager during vacations. In addition,
the Vice-President, stated housing management is a very
small part of what AHRCO does. In our opinion, the
functions performed by the Vice-President are supervisory
and agent related and his salary is AHRCO's responsibility.
Page 3 96-PH-214-1005
Finding 1
The Management Development Officer's duties included
handling insurance for the agent, implementing safety
procedures, and reviewing legal and tax matters for real
estate. The duties listed are not "front-line responsibilities",
they are agent responsibilities compensated by the
management fee.
AHRCO staff was unfamiliar with HUD handbook
requirements. The Controller said the Vice-President's
salary was charged to the projects because the Vice-
President fills in for the project managers when they are
out. The Controller also thought the duties of the
Management Development Officer qualified as "front-line"
and would be eligible as project expenses.
Because the projects were charged with salaries of AHRCO
personnel, eleven projects expended $315,596 of project
funds that are ineligible.
Auditee Comments AHRCO believed "the auditors did not consider job
function and responsibility" and instead focused on job
titles in this finding. AHRCO again stated the duties of the
Management Development Officer were front-line duties
and not supervisory.
OIG Evaluation of Comparison of the employee duties with the requirements
Auditee Comments of the cited HUD handbooks was the basis of classifying
the salaries as ineligible. The duties of the Management
Development Officer and Vice-President were not front-
line.
AHRCO's comments did not address the handbook
requirements, and the ineligible costs as stated in the
finding, remain in tact.
Recommendations We recommend AHRCO:
1A. Repay the eleven projects the $315,596 of ineligible
costs cited through June 2, 1995 and any ineligible
salaries incurred thereafter. Refrain from charging
96-PH-214-1005 Page 4
Finding 1
the projects the salaries of personnel who do not
perform front-line tasks.
1B. Implement the requirements of HUD Handbook
4381.5 REV-1 and 4370.2 REV-1.
Page 5 96-PH-214-1005
Finding 2
Ineligible And Unsupported Costs Paid From
HUD-Insured Project Funds
Between January 1993 and April 1995, AHRCO inflated the cost of materials, labor and delivery
fees which were charged to the HUD-insured projects and tenants. The costs were inflated
contrary to HUD requirements. AHRCO staff said the additional charges covered the cost of
maintaining a central warehouse; overhead relating to the maintenance operation; and, disruption
of the maintenance schedules. As a result, AHRCO received ineligible project funds totalling
$86,096; unsupported project funds totalling $50,753; and unsupported tenant funds totalling
$674.
Paragraph 12(b) of the Regulatory Agreement states:
"Payment for services, supplies, or materials, shall not
exceed the amount ordinarily paid for such services,
supplies or materials furnished."
HUD Handbook 4381.5 REV-1, CHG 3, Chapter 2,
Paragraph 2-15.A.2) states:
"If the staff work is performed out of the agent's office for
several properties; ... Agents may not impose surcharges
or administrative fees on top of the actual costs."
Paragraph 4b of the Management Certification requires
AHRCO to:
"Exert reasonable effort to maximize project income and to
take advantage of discounts and credit the project with all
discounts, rebates or commissions (including any sales or
property tax relief granted by the State or local
government) received with respect to purchases, service
contracts and other transactions made on behalf of the
project."
A. Inflated material costs
AHRCO purchased materials needed for project
Material purchases billed
maintenance and stored them in a central warehouse.
20 percent above cost
Page 5 96-PH-214-1005
Finding 2
When the materials were used by a project or a tenant, AHRCO billed the project or the
tenant the purchase price plus 20 percent. For example, AHRCO paid $56.45 for a kitchen
faucet but billed the HUD-insured projects $71.13 for the same faucet. In another example,
a tenant was billed $233.37 for materials which cost AHRCO $186.14.
AHRCO also purchased two sets of kitchen cabinets and
related accessories at a discounted price of $1,570.
Although these cabinets and accessories were shipped
directly to the project, eliminating the use of the warehouse,
the project account was charged $2,709. The difference of
$1,139 equals a mark-up of approximately 73 percent.
According to AHRCO's Vice-President and Controller, the
20 percent mark
20 percent mark-up on materials was used to cover the costs
up on materials covers
AHRCO incurred in maintaining a central warehouse, i.e.
AHRCO's overhead
utilities, tools, security, and salaries of warehouse staff. The
Controller said the mark-up also covered AHRCO's cost of
billing and recordkeeping.
Both the Vice-President and the Controller said charging
Application of mark up is
the 20 percent warehouse fee resulted in a greater cost
unsupported
savings than charging the projects and tenants for the actual
costs involved in maintaining the warehouse. However, the
Controller admitted no analysis of the actual costs of
maintaining the warehouse versus the 20 percent markup
had been done. Without such documentation, there is no
basis to support the validity of its 20 percent fee.
According to AHRCO's Controller, it is common practice to
charge projects the original cost for large items and not pass
along vendor discounts. After further discussions, the
Controller said AHRCO discontinued charging both the
projects and the tenants the 20 percent mark-up for
materials as of June 1, 1995. Actual costs based on an
approved allocation method will be charged instead.
As a result of the unjustified mark-up, and contrary to HUD
requirements, the HUD-insured projects paid $47,762 in
excessive materials costs and the tenants paid $674 in
excessive materials costs. Of the total $48,436, $47,297 is
unsupported while the remaining $1,139 is ineligible.
96-PH-214-1005 Page 6
Finding 2
B. Inflated labor costs
Between January 1993 and December 1994, AHRCO
Excessive labor rates not
charged the HUD-insured projects labor rates of $21.50 per
justified
hour without regard for the actual rate paid the employee or
whether the employee's salary was charged to another
HUD-insured project. For example, on work order 16950,
AHRCO charged the Bethesda/Wilkinsburg project $21.50
per hour for two employees. The hourly rate, including
benefits, of the one employee was only $11.06 and the
salary of the second employee was routinely charged to the
Bethome project. In addition, AHRCO did not use the
funds received from Bethesda/Wilkinsburg to reimburse
Bethome. In a few instances, the work orders did not
document the maintenance person assigned to the job.
According to AHRCO's Controller, the $21.50 per hour
labor rate along with the 20 percent material mark-up were
to cover AHRCO's overhead costs relating to the
maintenance operation. Subsequently, the Controller said
AHRCO's future plans are to charge the projects only the
actual rate of the non-project employees who assist with
project maintenance.
Contrary to the Regulatory Agreement, AHRCO has not
justified overhead costs for its maintenance operation labor
fees received from the HUD-insured projects. As a result
$81,476 charged for labor is ineligible.
C. Inflated delivery fees
Between January 1993 and December 1994, AHRCO
Delivery costs exceed
charged the HUD-insured projects a delivery fee of $25 per
industry standards
appliance for ranges and refrigerators. This fee was
assessed whether AHRCO purchased the appliance from a
vendor or moved a used one from the warehouse.
Discussions with the vendors and a review of vendor
invoices disclosed an average per appliance delivery cost of
$14. Also, some work orders did not adequately document
the point of origin or the condition (new or used) of the
appliances.
Regarding the delivery charge for new appliances, the
Controller stated, the delivery fee of $25 per appliance is
Page 7 96-PH-214-1005
Finding 2
being charged since the deliveries are being made on an
emergency basis. This disrupts the maintenance personnel
work schedules; therefore the need for a higher billing rate.
As for the delivery charges for the used appliance, the
Controller was not aware this occurred.
AHRCO's Management Plan describes the duties and
responsibilities of maintenance personnel as "performing
maintenance service in response to resident generated work
requests, scheduled preventative maintenance service and
repairs originated as a result of inspection reports." The
delivery and removal of appliances could reasonably be
considered to be included in these duties and
responsibilities.
While the Controller cited a need for the higher costs
because the appliances were delivered on an emergency
basis, a unit without a working range or refrigerator would
fail housing quality standards. Therefore, it is the
responsibility of the owner to replace the unit, at cost, no
matter how disruptive it is for their work schedules.
Because AHRCO's delivery cost exceeded those of the
vendor and AHRCO charged for delivery of used
appliances, contrary to the Regulatory Agreement, the
projects were charged ineligible costs of $3,481. Failure to
document the origin and condition of the appliances
resulted in unsupported charges of $4,130.
Auditee Comments AHRCO submitted figures which listed warehouse expense
and maintenance overhead costs totalling $201,682 from
January 1993 through April 1995. AHRCO then subtracted
the unsupported and ineligible costs of $137,523 which
were reported in the finding and requested the remaining
$64,159 be reimbursed to AHRCO. AHRCO also
submitted figures showing wholesale costs of eight items
and the alleged savings by not buying the items wholesale.
OIG Evaluation of AHRCO's response did not adequately address the
Auditee Comments recommendation which required appropriate documentation
that the mark-up did not exceed the overhead necessary for
96-PH-214-1005 Page 8
Finding 2
the services. For example, AHRCO did not show what the actual mark-up would equal if
the amounts AHRCO is requesting are added to the materials and labor costs. Therefore
AHRCO has not shown their mark-up to be less than purchasing the items wholesale. Also,
the eligibility of some of the items AHRCO is including in their expense and overhead
calculations, such as rent, interest on inventory, incentives paid to maintenance employees
and payroll taxes on these incentives are questionable.
The actual expense and maintenance costs alleged by
AHRCO have not been verified through audit.
The unsupported and ineligible costs cited in the finding
remain as presented.
Recommendations We recommend AHRCO:
2A. Repay the HUD-insured projects the $1,139 of
ineligible costs. Justify to HUD with appropriate
documentation that the mark-up is cost beneficial to
the projects and tenants, and does not exceed the
overhead costs necessary for services provided.
Repay the projects and tenants any portion of the
$47,297, and any mark-up charged since April 30,
1995, which cannot be justified.
2B. Repay the HUD-insured projects ineligible labor
costs of $81,476 and delivery fees of $3,481 and
any excess labor costs or delivery fees received
since December 31, 1994. Charge the projects only
the actual delivery fees and the actual salaries of the
non-project maintenance employees who perform
work on the projects. Repay any portion of the
$4,130 of delivery fees not adequately supported.
Page 9 96-PH-214-1005
Finding 3
AHRCO Needs To Improve Its Administration
Of The Flexible Subsidy Program
The following deficiencies occurred during AHRCO's administration of the Flexible Subsidy
Program:
• Salaries for three employees were paid from both the flexible subsidy account and the
project operating account.
• AHRCO did not follow the procurement procedures applicable to the Flexible Subsidy
Program.
AHRCO staff said the deficiencies were caused by miscommunication, oversight and
unfamiliarity with program requirements. As a result, AHRCO overcharged four projects
$41,050 for salaries and fringe benefits and there is no assurance work was performed by the
lowest bidder, as required.
A. Employee salaries
HUD Handbook 4370.2 REV-1, Chapter 2, Paragraph 2-
6.B. states:
"All disbursements from the Regular
Operating Account ... must be supported by
approved invoices/bills or other supporting
documentation."
AHRCO charged the project operating accounts the salaries
Salaries improperly
of three employees who worked on the Flexible Subsidy
charged to projects
Program. For example, an employee whose salary is
normally charged to two projects, worked 40 hours per
week for 43 weeks on the Flexible Subsidy Program.
AHRCO charged each project $10,424 for the employee's
salary and fringe benefits, although such costs were payable
from the Flexible Subsidy Program.
Page 11 96-PH-214-1005
Finding 3
AHRCO's Controller said miscommunication caused the
projects to be charged with the salaries of the employees.
As a result, the projects were overcharged as follows:
B. Procurement procedures
AHRCO did not properly procure work to be performed
under the Flexible Subsidy Program. AHRCO's
noncompliance included the following:
• All work exceeding $5,000 was not properly bid.
• AHRCO provided verbal work specifications and
changed solicited bids through verbal negotiations.
• Work was awarded to contractors AHRCO felt were not
capable of doing the entire job.
AHRCO staff cited unfamiliarity with the requirements, and
the desire to give work to minority contractors as reasons
for the deficiencies. As a result, there is no assurance the
work was procured at the lowest price; the work will be
performed satisfactorily; and favoritism was not a factor in
awarding contracts.
1. Work not bid
Section 10 of the Financial Assistance Contract states:
"The Housing Owner shall solicit written cost estimates (i.e.
bids) from at least three contractors or suppliers for any
work item which the Housing Owner and the Commissioner
estimate will cost $5,000 or more."
AHRCO did not solicit bids for the following:
96-PH-214-1005 Page 12
Finding 3
Work Item Amount
The demolition work was added to the contract between
Identity of interest
AHRCO and Beacon Construction Company. Beacon
companies received
Construction Company has an identity-of-interest with
benefit of non-bid work
AHRCO. The flue relining and register replacement were
added to the contract between Beacon Construction
Company and Temple Maintenance Company. Temple
Maintenance also has an identity-of-interest with AHRCO.
According to the Management Development Officer, not
bidding the demolition work was an oversight. However,
AHRCO did the demolition so the other rehabilitation work
could be done. The additional flue work was not added to
the bid because AHRCO did not think of it. The register
replacement was not bid because the money became
available after the original work was bid. Since Temple
Maintenance was already putting in the furnaces, the
register replacement work was just added to their contract.
2. Verbal changes to specifications and bids
The Specifications for Alterations to Mon View Heights,
Information for Bidders, Paragraph 9 states:
"No interpretation of the meaning of the plans,
specifications or other pre-bid documents will be made to
any bidder orally.
"Any and all such interpretations and any supplemental
instructions will be in the form of written addenda to the
specifications ..."
Although the lead based paint abatement was included in
the Management Improvement and Operating Plan (MIOP)
Page 13 96-PH-214-1005
Finding 3
submitted to HUD, the item was not included in the detailed
specifications. The Construction Manager for Beacon
Construction explained to each bidder what was needed for
the lead based paint encapsulement work.
AHRCO received the following bids for lead based paint
encapsulement work:
Through verbal negotiations with Contractor A, AHRCO
Verbal contract changes
added a second coat of paint and the use of a more
caused cost to exceed low
expensive encapsulement for lead based paint to the
bid
contractor's bid. These changes made the bid price of
Contractor A equal to the bid price of Contractor B.
AHRCO then split the work between the two contractors.
When writing the contracts, AHRCO increased the scope of
work to include additional cleaning and interior painting.
Exterior painting was also added but at no specified cost.
These changes brought the base contract amount to
$399,350. This exceeded the $374,900 bid of Contractor C
which included the cleaning that was added to the other
contracts.
AHRCO's Management Development Officer was not
familiar with the requirements of the Addenda and
Interpretations stated in the specifications, and resulted in
the improper splitting and increased cost of the work.
3. Responsible bidders
Section 10 of the Financial Assistance Contract states:
"The Housing Owner agrees to accept the bid which
represents the lowest price taking into consideration the
bidder's reputation for quality or workmanship or
materials, timely performance ..."
96-PH-214-1005 Page 14
Finding 3
AHRCO split the work described in the previous subsection
of the finding between Contractor A and Contractor B
because they did not feel either was capable of doing the
work for all of the units involved.
AHRCO said the contractors were small and they liked to
give work to minority contractors. Contractor A was a
minority contractor.
By not bidding all work exceeding $5,000 and awarding the
work which was bid to responsible bidders, AHRCO cannot
assure the work was procured at the lowest price and that
favoritism was not a factor in selecting the contractors.
* * * *
AHRCO charged both the flexible subsidy account and the
project operating accounts for employees who performed
work under the Flexible Subsidy Program, and did not
follow the procurement procedures applicable to the
Flexible Subsidy Program. Miscommunication, oversight
and unfamiliarity with program requirements led to these
deficiencies according to AHRCO staff. As a result,
AHRCO overcharged four projects $41,050 for salaries and
fringe benefits and there is no assurance work was
performed by the lowest responsible bidder, as required.
Auditee Comments AHRCO agreed to repay the four projects $40,450 for
payroll distribution due to an administrative error
conditioned upon the OIG agreeing the amount be offset
against the amount AHRCO states they are due from
Finding 2. AHRCO subtracted $600 for an employee
which AHRCO said did not work the week of December
31, 1994.
AHRCO agreed with the two remaining recommendations
for this finding.
OIG Evaluation of The amount cited in this finding did not include any amount
Auditee Comments for the cited employee for the week ending December 31,
Page 15 96-PH-214-1005
Finding 3
1994. Further, the ineligible $41,050 is not impacted by Finding 2 and repayment to the
projects is necessary.
Recommendations We recommend AHRCO:
3A. Repay the four projects the $41,050 and any
duplicate employee salaries paid after the payroll
ending June 2, 1995.
We recommend your staff verify AHRCO:
3B. Solicit's bids from at least three independent
contractors to ensure costs charged by the
identity-of-interest firms under part B1 were the
lowest. Repay the flexible subsidy account any
amount which exceeds the lowest solicited bid.
3C. Assure staff is aware of and follows applicable
bidding and contract requirements.
96-PH-214-1005 Page 16
Finding 4
AHRCO Did Not Properly Prorate Computer
Expenses
AHRCO did not properly prorate expenses for computer equipment and service contracts among
all projects and identity-of-interest companies which utilized the equipment as required.
According to AHRCO's Controller the costs were allocated to the HUD-insured projects because
they generate most of the computer work. As a result, unsupported costs totaling $22,059 were
charged to HUD-insured projects.
According to HUD Handbook 4381.5 REV-1, CHG 3,
Chapter 2, Section II, Paragraph 2-15.A.2a:
"If the staff work is performed out of the
agent's office for several properties; a.
prorate the associated costs among the
projects served in proportion to actual use:
... actual office expenses, fees and contract
costs directly attributed to the front-line
duties."
Section II, Figure 2-4 illustrates as an example of funds
paid from the project account:
"... costs allowed by HUD for prorated
share of centralized, computer accounting
systems ..."
AHRCO charged all costs related to a purchase of computer
Computer costs not
equipment and maintenance service contracts to the HUD-
allocated to all projects
insured projects only. These costs were allocated to the
and companies
HUD-insured projects on a straight line method even
though the number of units in the HUD-insured projects
ranged from 38 to 326. Two identity-of-interest companies
and a 115-unit project which received HUD Section 8
subsidy but was not HUD-insured, utilized the equipment,
but were not allocated any of the costs.
According to the AHRCO's Vice-President, tenant
certifications/recertifications, vacancy and damage reports
Page 17 96-PH-214-1005
Finding 4
for the non HUD-insured project are computerized. The
Controller stated the costs were charged to the HUD-
insured projects only because they generate most of the
computer workload. The straight line basis was used
because it was easy to calculate. The Controller stated the
computers are utilized by data entry staff responsible for
entering information relating to the HUD projects.
By not following HUD requirements for allocating project
expenses, AHRCO improperly allocated costs totalling
$22,059, for computer equipment and maintenance
contracts; to the HUD-insured projects.
The draft finding included unsupported costs of $130,986
for administrative/computer fees. Based on AHRCO's
written response and information provided by the Pittsburgh
Area Office, this portion of the draft finding was removed
from the final report.
Auditee Comments AHRCO did "not concur with the guideline provided by ...
Handbook 4381.5 REV-2." saying the Handbook is
"designed to serve as a reference for ... Management
Agents." AHRCO said the Handbook "provides basic
guidance regarding ... agent responsibilities and HUD
procedures and is not regulation." AHRCO agreed a
portion of the computer costs should have been allocated to
all users of the equipment but proposed "no prior allocation
be made". AHRCO said, while they disagreed with the per-
unit cost allocation, they would accept either the per-unit or
straight line allocation method for future use.
OIG Evaluation of AHRCO's comments failed to recognize the requirement of
Auditee Comments Paragraph 2.a. of the Management Certification which
states they agree to comply with the project's "Regulatory
Agreement, Mortgage and Mortgage Note, any Subsidy
Contract or Workout/Modification Agreement, and any
applicable HUD Handbooks, notices or other policy
directives that relate to the management of the project."
Therefore, reallocation of the computer costs based on the
per-unit method is necessary.
96-PH-214-1005 Page 18
Finding 4
Recommendation We recommend AHRCO:
4A. Provide HUD the cost allocation to prorate the
$22,059 of unsupported computer costs to all
managed projects and entities. Repay the HUD-
insured projects for improper assessments covering
the period January 1992 to date.
Page 19 96-PH-214-1005
Finding 5
AHRCO Needs To Improve Compliance With
Occupancy Requirements
A sample of thirty-six tenant files at four projects disclosed non-compliance with HUD
requirements in the following areas:
• Tenants were housed in inappropriately sized units.
• Income and assets were not adequately verified.
• Allowances to gross income were not verified.
• Total tenant payment calculations were incorrect.
• Tenants were not selected from waiting lists.
AHRCO's noncompliance with requirements resulted in a lack of assurance the Total Tenant
Payment (TTP) and Housing Assistance Payments were correct and that all applicants were
treated fairly. Because tenants remained overhoused and were not required to pay market rent,
$12,292 in excess Housing Assistance Payments were made.
A. Unit size inappropriate
AHRCO's Resident Selection Criteria states under unit size
standards:
"In order to avoid overcrowding and make
the best use of available space and subsidy,
(AHRCO) has designated unit size
standards that conform with state and local
laws as follows:
Efficiency 1 Occupant
1 Bedroom Apartment 1 to 2 Occupants
2 Bedroom Apartment 2 to 4 Occupants
3 Bedroom Apartment 3 to 6 Occupants
Those properties with 4, 5 or 6 bedrooms will increase the
number of occupants accordingly."
Page 21 96-PH-214-1005
Finding 5
According to number five of AHRCO's eligibility criteria:
"... When an appropriate size unit becomes
available, a transfer can be required with
proper notice."
The Residential Lease between AHRCO and tenants under
Section 19 - Size of Dwelling states:
"The Tenant understands that HUD
requires the Landlord to assign units
according to the household and the age and
sex of the household members. If the
Tenant is or becomes eligible for a different
size unit and the required size becomes
available, the Tenant agrees to: a. Move
within thirty (30) days after the Landlord
notifies him/her that a unit of the required
size is available within the project; or b.
Remain in the same unit and pay the HUD
approved market rent.
24 CFR Section 886:325(c) states:
"If the owner fails to offer the family a unit
appropriate for the size of the family when
such unit becomes vacant and ready for
occupancy, HUD may abate housing
assistance payments to the owner for the
unit occupied by the family...."
In addition to the 36 files selected for review, a tenant
Sample identified five
recertification provided by the Pittsburgh Area Office was
tenants overhoused
included in the review for this area. Five of the 37 tenants
reviewed resided in units which were too large based on
family size.
For example, the tenant file showed one person living in a
four bedroom unit from at least June 1, 1987 through the
recertification effective June 1, 1994. In a letter dated
October 25, 1990, the Pittsburgh Area Office instructed
AHRCO to move the tenant into "an appropriate sized unit
or adjust the contract rent to an amount comparable to a
96-PH-214-1005 Page 22
Finding 5
one-bedroom unit". AHRCO wrote a letter to the tenant
dated February 8, 1991 requiring a transfer to a one-
bedroom unit or demanding market rent effective April 1,
1991. According to the most recent recertification effective
June 1, 1994, the tenant remained in the four-bedroom unit
and did not pay market rent.
Although only five of the 37 tenants from our sample were
overhoused, the MIOP showed 63 families at one project
were not residing in units matching their household needs.
Two project managers believed tenants were no longer
transferred because of the expense of preparing two units
instead of one but deferred to the Vice-President for an
explanation. The Vice-President provided several reasons
tenants may not be transferred. These were:
• AHRCO had been unsuccessful in enforcing the
lease which requires the tenant to pay market rent if
they do not transfer when requested. Because of
their past experience of losing before the magistrate,
the matter of transferring tenants has not been
pursued. The Vice-President provided no evidence
to support tenants were ever taken before a
magistrate or judge.
• It is not realistic to require tenants to move to
smaller sized units after they have lived in the same
unit for many years.
• It is AHRCO's policy not to transfer tenants who are
delinquent because the tenant would receive a 30-
day notice to vacate. It would not make sense to
transfer a tenant you were trying to evict.
• An agreement with the Pittsburgh Area Office
allowed AHRCO to keep tenants at one project in
their units in order to keep the project integrated.
The Pittsburgh Area Office stated it would be a Fair
Housing & Equal Opportunity violation if tenants
were allowed to live in units of a certain size to
achieve a racial mix at the project.
Page 23 96-PH-214-1005
Finding 5
While the Vice-President stated a tenant who was
delinquent would not be transferred because AHRCO
would try to evict them, the file review showed the history
of delinquent rent and 30-day notices could continue for
years. In the case cited above, the tenant received seven
30-day notices dating back to at least April 25, 1988. As of
the recertification effective June 1, 1994, the tenant had not
been evicted. By using delinquency of rent as a criteria for
not transferring tenants, AHRCO is, in effect, rewarding
overhoused tenants for being delinquent by not transferring
them into smaller, appropriately sized units.
AHRCO agreed in the MIOP to transfer tenants at the
project receiving flexible subsidy funds. The MIOP does
not exclude transferring tenants with delinquent rent or 30-
day notices. This gives the appearance AHRCO will only
transfer tenants when additional HUD funding is dependent
upon such transfers.
By not requiring tenants to move into the proper size units
or pay market rent, HUD paid assistance for five tenants of
at least $12,292 which was excessive. In addition, HUD
subsidy was not efficiently used because AHRCO did not
house as many families as it could.
B. Income and asset verification
HUD Handbook 4350.3 CHG-1, Chapter 3 states:
Section 1, Paragraph 3-1.b.(1): "Net family
assets DO include cash in savings and
checking accounts ...".
Section 3, Paragraph 3-17.a.: "Owners
must verify all income, expenses, assets,
household characteristics and
circumstances that affect eligibility or
tenant rent."
Section 3, paragraph 3-19.a.(3): "When written
verification is not possible, the next most acceptable form
is direct contact with the source, in person or by telephone.
The owner must document the conversation in the
applicant's file including all information that would have
been included in a written verification."
96-PH-214-1005 Page 24
Finding 5
AHRCO either did not verify or did not adequately verify
Inadequate verification of
income and assets for five tenants. For example, a
five tenants income and
telephone verification included in a tenant file had only the
assets
monthly assistance payment. It did not include the date and
time the information was verified; the name of the AHRCO
employee who placed the call, or the name of the person at
the Department of Public Assistance who verified the
information. In addition, AHRCO did not verify income for
an adult member of the household. Project managers
attributed these deficiencies to staff oversight, delays in
obtaining information from public assistance agencies, and
failure of a tenant to provide documentation.
Without proper verification, there is no assurance the proper
assistance has been calculated.
C. Allowances to income
HUD Handbook 4350.3 CHG-1, Chapter 3, Section 3,
Paragraph 3-17.a. states:
"Owners must verify all income, expenses,
assets, household characteristics and
circumstances that affect eligibility or
tenant rent."
HUD Handbook 4350.3 CHG-5, Chapter 3, Exhibit 3-2,
Paragraph T.2. states:
"For handicapped head or spouse --
evidence of receipt of Supplemental
Security Income for the disabled,
handicapped or blind or Social Security
disability benefits. If none of these benefits
is received, a physician's certificate is
required."
HUD Handbook 4350.3 CHG-4, Chapter 3, Exhibit 3-2,
Paragraph P.2.states:
"Verifications must specify the hours and
days during which the care is provided, the
names of the children cared for, and the
frequency and amount of compensation
received...."
Page 25 96-PH-214-1005
Finding 5
AHRCO did not verify allowances adjusting gross income
Income allowances for
for four tenants. One tenant was allowed a
four tenants inadequately
handicapped/disability allowance of $400 annually when
verified
the handicap/disability was not verified. For two other
tenants, expenses for child care were not adequately
verified because the hours and days the care was provided
were not specified on the verifications. For the remaining
tenant, AHRCO's written response to the report stated three
children were living in the unit. The tenant did not receive
an allowance for dependent children as required.
An assistant project manager thought the disability pension
from the Veteran's Administration was sufficient to verify
the handicap/disability. The Vice-President said HUD
Handbook 4350.3, Chg. 24, Chapter 2, Paragraph 2-26d
prevented AHRCO from asking the tenant about their
handicap. This paragraph, however refers to applicants--not
in-place tenants. The Vice-President provided written
comments saying "Verification of disability has been
requested from the Veteran's Administration. Because
AHRCO's response did not include verifying
handicap/disability status as required, the potential exists
for ineligible tenants to be placed in housing and to
improperly receive handicap/disability allowances.
A project manager was unaware of the HUD Handbook
requirements for verifying child care expenses. Without
adequate verification for allowances, there is no assurance
the proper assistance for the cited tenants was paid.
D. Incorrect total tenant payment
HUD Handbook 4350.3, CHG-1, Exhibit 3-1 Part A,
Paragraphs 2.a. and 2.b. state annual income includes:
"The gross amount (before deductions for
medicare, etc.) of periodic social security
payments...."
"Annuities, insurance policies, retirement
funds, pensions, disability or death benefits
and other similar types of periodic
receipts."
96-PH-214-1005 Page 26
Finding 5
Paragraphs 3-6. regarding alimony and child support states:
"Count the amount specified in a divorce
settlement or separation agreement unless
the applicant: a. certifies the income is not
being provided; and b. has made
reasonable efforts to collect the amount
due, including filing with courts or agencies
responsible for enforcing payments."
AHRCO did not properly calculate rent for five tenants at
Improper rent
three projects. Rents were not based on the total income for
calculations
these tenants. For example, a verification showed a tenant
received public assistance of $403 per month and court-
ordered child support of $50 per month. When determining
TTP, AHRCO did not include the child support amount. As
a result, the HAP was overstated by $15 per month.
AHRCO staff said some amounts were not included in the
TTP calculations because they were not certain the tenants
received the income. Other errors in HAP calculations were
attributed to oversight.
As a result, the HAP for cited tenants was overstated.
AHRCO provided revised recertifications for two tenants
retroactively correcting the HAP.
E. Tenant admissions
AHRCO's Resident Selection Criteria, Applications and
Screening-Procedures states:
"... If the applicant appears to meet the
criteria for eligibility in (this) community,
the application will be placed on a waiting
list in the order of the date and time
received, according to unit size and
program requirements."
HUD Handbook 4350.3 CHG-24, Chapter 2, Paragraph 2-
29.b. states:
Page 27 96-PH-214-1005
Finding 5
"The owner's records should indicate the
date and time the applicant is placed on the
waiting list."
A review of 23 tenants at three projects disclosed 15 placed
Improper use and control
into units were not on the waiting list. A review was not
of waiting lists
performed at the fourth project because no prior waiting list
was available. In addition, the time of day the applications
were submitted was not included on the lists.
AHRCO stated some were prior tenants and household
members of existing tenant households which were
transferred to other units. No explanation was provided for
tenants who were placed but did not fit into either preceding
category. Also, AHRCO provided no explanation for not
including time of application on the waiting list but said the
time will be included in the future.
Because AHRCO placed applicants who were not on the
waiting list into units, there is no assurance all applicants
were considered fairly when housing tenants.
In summary, AHRCO's noncompliance with requirements
resulted in a lack of assurance the Total Tenant Payment
and Housing Assistance Payments were correct and that all
applicants were treated fairly. Because tenants remained
overhoused and were not required to pay market rent,
$12,292 in excess Housing Assistance Payments were
made.
Details for the deficiencies cited in the finding's five
sections were provided to AHRCO.
Auditee Comments AHRCO did not concur with the finding and felt
appropriate investigation by the auditors would have
eliminated the need for most of the comments.
Regarding the example used for inappropriate unit size,
AHRCO said the tenant received a court order granting the
tenant custody of her grandchildren in April 1994. AHRCO
also submitted documentation showing the tenant received
monthly income for foster care of the grandchildren.
96-PH-214-1005 Page 28
Finding 5
AHRCO stated the comments made by the Vice-President
regarding transferring tenants were either not made or were
taken out of context. AHRCO stated they "routinely
transferred residents that met the transfer requirements" and
stated 115 transfers had been made since 1990.
Regarding verifying income, assets and allowances to
income, AHRCO stated the staff had been instructed to
follow proper procedures or was given additional training
on the proper procedures.
AHRCO said some applicants may have been left off of the
updated waiting lists in error. However, "the management
staff has been instructed to insure that all applicants appear
on the waiting list until they are housed." AHRCO also
stated tenants may not appear on the waiting list because
they occasionally provide housing for families in various
witness protection programs.
OIG Evaluation of
Auditee Comments On several occasions AHRCO was asked to provide
documentation of the items cited in the findings. AHRCO
failed to provide the information. For instance, at no time
during the audit was documentation provided to show more
than one person residing in the four-bedroom unit. The
recertifications in the file show only one tenant and do not
include the income received for the children. The
recertifications also do not give the tenant an allowance for
dependent children. In addition, the waiting list provided
with the documentation was not the waiting list provided
during the audit. Documentation provided to support the
auditee comments only proved to support the need for
better verification procedures and resulted in an increase in
the number of cases where: (1) income and assets were not
properly verified; (2) allowances to income were not
properly verified; and, (3) Total Tenant Payment was not
properly calculated.
Although AHRCO stated a tenant received custody of their
grandchildren in April 1994, documents submitted by
AHRCO show the tenant received custody of one
grandchild in February 1994. Therefore, the excessive
Page 29 96-PH-214-1005
Finding 5
subsidy paid for the tenant from February 1994 through
June 1995 was deleted from the total excessive Housing
Assistance Payments. This reduced the ineligible amount
from $16,406 to $12,292.
All comments in the report which were attributed to
AHRCO staff were made by AHRCO staff and were
presented in context.
Analysis of the documents submitted by AHRCO showed
only 89 transfers completed since 1990. Of the 89
completed transfers, only 21 appear to have been completed
in order to correct over-or under-housing conditions. The
remaining 68 transfers were same-size unit transfers (one-
bedroom to one-bedroom, two-bedroom to two-bedroom,
etc.) and/or were completed at Mon View Heights where
transfers were required by the Flexible Subsidy Contract.
At no time during the audit did AHRCO state a tenant was
placed into a unit as a result of a witness protection
program.
Recommendations We recommend AHRCO:
5A. Repay HUD $12,292 for excess HAP received for
the overhoused tenants.
5B. Transfer all over and underhoused tenants according
to HUD requirements and the residential lease.
Verify all income and allowances adjusting income
for tenants cited and adjust rent as necessary from
the most recent certification or recertification.
Recertify tenants, if necessary, and adjust HAP
retroactively for the most recent certifications as
cited.
5C. Establish a system to ensure waiting lists are
maintained in order of date and time of application
and applicants are properly selected from the list.
Maintain documentation to support applicants are
properly selected.
96-PH-214-1005 Page 30
Finding 5
We recommend your staff:
5D. Abate rents for the cited overhoused tenants and any
additional tenants which remain over or
underhoused due to AHRCO's failure to transfer
them when the correct unit size becomes available.
Page 31 96-PH-214-1005
Internal Controls
In planning and performing our audit, we considered internal control systems of the management
of the Allegheny Housing Rehabilitation Corporation to determine our auditing procedures and
not to provide assurance on internal controls. Internal control is the process by which an entity
obtains reasonable assurance as to achievement of specific objectives. Internal control consists
of interrelated components, including integrity, ethical values, competence, and the control
environment which includes establishing objectives, risk assessment, information systems,
control procedures, communication, managing change, and monitoring.
We determined the following internal control categories
Internal controls assessed
were relevant to our audit objectives:
• Management fees
• Occupancy requirements
• Payroll distribution
• Procurement activities
• Project maintenance costs
We evaluated all of the relevant control categories
identified above, by determining the risk exposure and
assessing control design and implementation.
A significant weakness exists if internal control does not
Significant weaknesses
give reasonable assurance that the entity's goals and
found
objectives are met; that resource use is consistent with
laws, regulations, and policies; that resources are
safeguarded against waste, loss and misuse; and that
reliable data are obtained, maintained and fairly
disclosed in reports. Based on our review, we believe
the following items are significant weaknesses in
AHRCO's operations:
• Occupancy requirements
• Payroll distribution
• Procurement activities
• Project maintenance costs
Page 31 96-PH-214-1005
Internal Controls
These weaknesses are detailed in the findings in this
report.
96-PH-214-1005 Page 32
Follow Up On Prior Audits
All prior audit findings have been resolved.
Page 33 96-PH-214-1005
Follow Up On Prior Audits
Appendix A
Schedule Of Ineligible And
Unsupported Costs
Finding
Number Ineligible 1/ Unsuported 2/
1 $315,596 $51,427
2 86,096
3 41,050
4 22,059
5 12,292
$455,034 $73,486
1/ Ineligible costs are not allowed by law, contract, HUD or local agency policies or regulations.
2/ Unsupported costs are not clearly eligible or ineligible but warrant being contested because
of the lack of documentation supporting the need to incur such costs.
Page 35 96-PH-214-1005
Appendix B
Auditee Comments
Please note that AHRCO's response is in draft finding order. Report finding presentation has
been changed as follows:
Draft Finding Report Finding
1 4
2 5
3 1
4 2
5 3
Page 37 96-PH-214-1005
Appendix B
Appendix C
Distribution
Director, Multifamily Division, Pittsburgh Area Office, 3EHM
Regional comptroller, 3AF
Director, Housing Division, 3AH
Director, Field Accounting Division, 3AFF
Manager, Pittsburgh Area Office, 3ES
Assistant Secretary for Field Management, SC (Room 7106)
Comptroller/ALO (Room 5131)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Participation & Compliance Division, HSLP (Room 6274)
Director, Division of Housing Finance Analysis, TEF (Room 6274)
Chief Financial Officer, F (Room 10166)
Deputy Chief Financial Officer for Operations,
F (Room 10166)
Assistant Director in Charge, US GAO, 820 1st St. NE Union
Plaza, Bldg. 2, Suite 150, Washington, DC 20002
Attn: Mr. Cliff Fowler
Page 51 96-PH-214-1005
Allegheny Housing Rehab. Corp., Pittsburgh, PA
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-01-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)