?19 g? a DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 1% II ll Midwest Regional Of?ce, Region ?a goat Ralph Metcaife Federal Building ?it 77 West Jackson Bivd Chicago, 0., 60604650? OFFICE OF THE REGIONAL ADMINISTRATOR January 12,2018 Ms. Sarah Freishtat 495 N. Commons Aurora, Illinois 60504 Dear Ms. Freishtat, SUBJECT: Freedom of Information Act Request FOIA Control Number: This letter is in response to your Freedom of Information Act request submitted to the Chicago Regional Office of the United States Department of Housing and Urban Development dated December 27, 2017. You seek the following Information: 1. A c0py of the HUD report issued in May 2017 ?nding that the Aurora Housing Authority in Aurora, II was ?troubled.? 2. A copy of the Aurora Housing Authority?s appeal of ?troubled" ?nding. 3. If not included above, a copy of ruling on the Aurora Housing Authority's appeal mentioned in point 2. 4. If not included above, a copy of HUD's initial 2016 assessment ?nding the Aurora Housing Authority was ?troubled.? (Date Range for Record Search: From 01/01/2016 To 12/30/2017) The FOIA provides a right of access to federal agency records that exist and can be located in federal agency files. The FOIA authorizes federal agencies to exempt from disclosure certain information pursuant to statutory test that is often referred to as the FOIA Exemptions. 5 U.S.C. 552(b). Depending on the content at issue, an agency may elect to redact the content in the record or withhold the record entirely. Your request for responsive agency records has been granted. If you are not satisfied with the response to this request, you may administratively appeal this determination. You may appeal by writing to the following address: US. Department of Housing and Urban Development, Attention: FOIA appeals, Office of Ethics and Appeals Division, ELD, 451 7th Street, SW, Room 2130, Washington, DC 20410. Or you may submit your appeal online at Your appeal must be postmarked or electronically transmitted within 90 days of the date of the response to your request. Your appeal should include copies of your original request and this response, as well as a discussion of the 312-353-6236 espanol.hud.gov reason(s) supporting your appeal. The enveIOpe should be plainly marked to indicate that it contains a Freedom of Information Act appeal. Additionally, you may contact the Office of Government Information Services (OGIS) at the National Archives and Records Administration to inquire about the FOIA mediation services they offer. The OGIS was created to offer mediation services to resolve disputes between FOIA requesters and Federal agencies as a non?exclusive alternative to litigation. The contact information for OGIS is as follows: Office of Government Information Services, National Archives and Records Administration, 8601 Adelphi College Park, Maryland 20740- 6001, e?mail at ogis@nara. gov; telephone at 202-741?5770; toll free at 1-877?684-6448; or facsimile at 202-741-5769. Using OGIS services does not affect your right to pursue litigation. For your information, your FOIA request, including your identity and any information made available, is releasable to the public under subsequent FOIA requests. In responding to these requests, the Department does not release personal privacy information, such as home address, telephone number, or social security number, all of which are protected from disclosures under FOIA Exemption 6. Thank you for contacting HUD. You may also contact me as the FOIA Liaison for any further assistance and to discuss any aspect of your request. I may be contacted by telephone at (312) 913-8696, by e?mail at larry.anderson@hud.gov or by writing to US. Department of Housing and Urban Development, Larry Anderson, FOIA Liaison, 77 West Jackson - Room 2608, Chicago, Illinois 60604. Please reference the FOIA Identification number above in any communication on this matter. Larry Anderson FOIA Liaison Sincerely, 312-353-5236 espanol.hud.gov Khan, Zille A From: phas@hud.gov Sent: Wednesday, May 03, 2017 12:32 PM To: keith.l.gregory@aurorahaorg Cc: Ladies, Eieny; Khan, Zille Laviano, Kevin; Cano, Patrick; Macon, Towanda DiPietro, Steven Subject: Troubled Performer Notification - H.090 03/31 2016 Attachments: PHAScoreReport.PDF Follow Up Flag: Follow up Flag Status: Flagged Dear Executive Director: This letter is to advise you that the Public Housing Assessment System (PHAS) score and designation for your public housing agency has beenissued for the fiscal year end stated in the above subject line. For your convenience a score report is attached. You are encouraged to login to Secure Systems for the most recent scoring information; to review the Assessment Status Report; and to monitor the status of your assessments. if you believe that an objectively, verifiable, and material error occurred in the scoring and that correcting it will change the PHAS designation, you may submit an appeal request pursuant to 24 CFR 902.69. For prompt delivery and assurance it is received within the prescribed timeline, it is suggested that you submit the appeal through the request tab in Secure Systems. If you prefer you may submit the appeal to: Mr. Donald J. Lavoy Deputy Assistant Secretary U.S. Department of Housing and Urban Development Real Estate Assessment Center 550 12th Street S.W. Suite 100 Washington, DC 20410 Please refrain from sending the request through more than one method. Should you have any questions, please email us at PHAS@hud.gov or contact the Technical Assistance Center (TAG) at 1? 888?245-4860, Monday through Friday from 7:00am to 8:30pm Eastern Time. DEEANN WALKER PROGRAM MANAGER, ASSESSMENT US. Department of Housing and Urban OFFICE OF PUBLIC AND INDIAN HOUSING REAL ESTATE ASSESSMENT CENTER Public Housing Assessment System (PHAS) Score Report for Interim Rule Report Date: 05/03/2017. . Physical 27 40 Financial 4 25 Management 20 25 Capital Fund Late Penalty Points PHAS Total Score 58 100 Designation Status: Troubled Pubiished 05/03i2017 Initial pub ished 10/260016 1. FASS Score before deductions 8.21 2. Audit Penalties -3.82 Total Financial Score Unrounded (PASS Score - Audit Penatties) 4.39 Timeliness of Fund Obligation: 1. Timeliness of Fund Obligation 90.00 2. Timeliness of Fund Obligation Points 5 5 Occupancy Rate: 3. Occupancy Rate 93.43 4. Occupancy Rate Points 5 Total Capital Fund Score (Fund Obligation Occupancy Rate): 10 Notes: 1. The scores in this Report are the of?cial PHAS scores of record for your PHA. PHAS scores in other systems are not to be relied upon and are not being used by the Department. 2. Due to rounding, the sum of the PHAS indicator scores may not equal the overall PHAS score. 3. FASS Score indicates a iate presumptive failure. See 902.60 and 902.92 of the interim PHAS rule. 4. Total Capital Fund Score is due to score of for Timeliness of Fund Obligation. See the Capital Fund 5. PHAS Interim Rule website Khan, Zille A From: Sent: To: Cc: Subject: Dear Executive Director: phas@hud.gov Wednesday, May 17, 2017 11:08 AM keith.l.gregory@auroraha.org Ladies, Eieny; Khan, Zille Layiano, Kevin; Cano, Patrick; Macon, Towanda DiPietro, Steven FASS Appeal Request Received: Aurora Housing Authority ofthe City of Aurora - ELOQO 2016 The Real Estate Assessment Center (REAC) has received the Public Housing Assessment System (PHAS) appeal request from the Aurora Housing Authority ofthe City of Aurora submitted on The Housing Authority is appealing the (FASS) indicator score for the fiscai year end (03/31/2016). Once REAC has completed its review, in accordance with 24CFR902.69, a response will be sent to the HA. Should you need any assistance regarding this matter, please send an email to PHASQhudgoy or contact the REAC Technical Assistance Center (TAC) either by phone at 1-888-245-4860 from 7:00am to 8:30pm Eastern Daylight Time (EDT), Monday through Friday or anytime via emaii at Sincerely, DEEANN WALKER PROGRAM MANAGER, INTEGRATED ASSESSMENT Aurora Housing Authority 1449 Jericho Circle, Aurora, IL 60506 Phone (630) 701~9977 May 16, 2017 Mr. Donald Lavoy Deputy Assistant Secretary U.S. Department of Housing and Urban Development Real Estate Assessment Center 550 12th Street SW. Suite 100 Washington, DC 20410 Mr. Lavoy, On May 3, 2017, the Aurora Housing Authority (IL090) received notification of a preliminary public housing assessment system (PHAS) designation of troubled, for the fiscal year ended March 31, 2016. Please accept this correspondence as notification ofthe Aurora Housing Authority?s desire to appeal the scoring, specifically the auditor?s findings of non-compliance and the auditor?s qualified opinion. Material Weakness Findings Item 2016-001: Allocation of Expenditures and Allocated Overhead Reasonableness Per the audited financial report from Hawkins Ash CPAs, they report that: ?The Housing Authority did not place enough time and effort into developing an allocation plan for their indirect costs between federal The Aurora Housing Authority (AHA) disagrees with the premise supporting this finding. Allocations can only be based on the historical spending patterns observed by a PHA. In this case, the AHA utilized the allocation formula that had been utilized from the previous year (Attachment A). The AHA did, in fact, review its allocation plan at the beginning of the fiscal year and determined that it had not significantly changed its spending patterns and therefore, a new allocation formula was not warranted based upon the information the AHA observed. Hawkins Ash CPAs alleges that the AHA did not ?place enough time and e?ort? into the development of our allocation plan but they do not, nor are they qualified to, ascertain what the ?appropriate? amount of time and effort for an allocation is. Hawkins Ash CPAs does not provide any documentation to support their finding aside from their opinion that the AHA did not adequately review the allocation based on their subjective determination of the appropriate amount of time and effort necessary to determine an acceptable allocation. Based on these facts the AHA requests that finding 2016-001 be removed from consideration for material weaknesses (64200-110) and internal control deficiency (63000-250 and (53000?270). item 2018-003: Payroll Budget Rule Violation Per the audited financial report from Hawkins Ash CPAs, they report that: Aurora Housing Authority 1449 Jericho Circle, Aurora, IL 60506 Phone (630) 701-9977 ?Three of the Housing Authority?s employees which are paid to be full?time basis employees of the Housing Authority are working for another entity during the Housing Authority work week. Furthermore there are not suf?cient time records being kept to track these employees time between the Housing Authority and the other entity nor the di??erent Federal The Aurora Housing Authority (AHA) strongly disagrees with the premise supporting this finding. Per PIH Notice 2007-15, Section iilB) (Attachment B): will be considered, for the purposes of the public housing program, to be the And further describes and instrumentality to be an entity that is: ?directed or managed by the some persons who constitute the Board of Directors or governing body of the PHA or who are employees ofthe (Pli-l Notice 2007-15, Section page 5). The notice also states, in defining whether or not a closely held entity is an instrumentality, that an entity is an instrumentality if: "The organization is a component unit of a primary government using the suggested criteria and tests included in the GovernmentAccounting Standards Board Statement 14.? Notice 2007-15, Section ?(Blld), page 5). Per section iI(B)(a) and Section of PIH Notice 2007-15, the Northern Lights Development Corporation is, in fact, an instrumentality of the Aurora Housing Authority. A fact that the auditors clearly supported through their inclusion of the Northern Lights Development Corporation in the audited financial statements and F05 submission of the Aurora Housing Authority. Per Section paragraph 1 of Pll-l Notice 2007-15, the Northern Lights Development Corporation, by the nature of it being an instrumentality of the Aurora Housing Authority, is considered "for the purposes of the public housing program, to be the PH Therefore the first premise of finding 2016-003, that three employees of the Aurora Housing Authority are ?working for another entity during the Housing Authority work is factually incorrect. Furthermore, the finding states that insufficient time records are being kept to ?track these employees time between the Housing Authority and the other entity nor the dijj?erent Federal The premise supporting this claim is also false. The fact that the Northern Lights Development Corporation is an instrumentallty of the Aurora Housing Authority implies that there is no material difference between the two entities. The Northern Lights Development Corporation is considered ?for the purposes of the public housing program, to be the Thus, there are no records beyond the standard payroll records maintained by the Aurora Housing Authority that would be necessary to support the hours worked by the three individuals in question. Based on these facts the AHA requests that finding 2016?003 be removed from consideration for material weaknesses (64200-110) and internal control deficiency (63000-250 and 63000-270). Item 2016-003: Contracts - Procurement Aurora Housing Authority 1449 Jericho Circle, Aurora, IL 60506 Phone (630) 701-9977 Per the audited financial report from Hawkins Ash CPAs, they report that: ?The Housing Authority engaged in the procurement process and awarded two contracts to an entity in which an employee of the Housing Authority has a direct interest in.? The Aurora Housing Authority (AHA) strongly disagrees with the premise supporting this finding. Per Notice 2007-15, Section litB) (Attachment B): will be considered, for the purposes of the public housing program, to be the And further describes and instrumentality to be an entity that is: ?directed or managed by the some persons who constitute the Board of Directors of governing body of the PHA or who are employees of the (PIH Notice 2007-15, Section page 5). The notice also states, in defining whether or not a closely held entity is an instrumentality, that an entity is an instrumentality if: ?The organization is a component unit of a primary government using the suggested criteria and tests included in the Government Accounting Standards Board Statement 14.? Notice 2007-15, Section page Per section and Section Ii(B)(d) of Notice 2007-15, the Northern Lights Development Corporation is, in fact, an instrumentality of the Aurora Housing Authority. in addition, per Section of Pll-i Notice 2007-15: ?Participation by a representative of the PHA board member, employee, officer) in the instrum en tality is not, per se, a As the Northern Lights Development Corporation is, in fact, an instrumentality of the Aurora Housing Authority, and because no employee of the Aurora Housing Authority has an ownership interest in the Northern Lights Development Corporation, no conflict of interest exists. Furthermore Pll-l Notice 2007-15 states, in Section page 9 that: ?There is no conflict of interest where an agent of the PHA, Affiliate, or instrumentality receives a normal and customary compensation package for employment by the PHA or the Based on the statements made in Pil-l Notice 2007?15 in Section MA) and Section no conflict of interest exists for any employee of the AHA who may also serve on and/or receive a customary compensation package from the Northern Lights Development Corporation. In addition to these facts, the Aurora Housing Authority was under no obligation to perform a full public bid process to award contracts to the Northern Lights Development Corporation. As the Northern Lights Development Corporation is an instrumentality of the Aurora Housing Authority, it is not subject to 24 CFR Part 85. Per the PIH Notice 2007-15 Section com Aurora Housing Authority 1449 Jericho Circle, Aurora, IL 60506 Phone (630) 701?9977 selection of an for development is not subject to 24 CFR Part 85. The Instrumentality is essentially the PHA under the public housing program and is controlled by the PHA. Therefore the PHA need not procure an Based upon the information in PlH?Notice 2007?15, the Aurora Housing Authority did not violate its procurement policy nor did it violate 24 CFR Part 85 with regards to the selection of its Instrumentality for the purpose of carrying out Pi-lA business. The AHA requests that finding 2016-008 be removed from consideration for material weaknesses (64200-110) and internal control deficiency (63000-250 and 3000-270). item 2016-009: Excessive Spending/Unallowable Costs Per the audited financial report from Hawkins Ash CPAs, they report that: ?The Housing Authority approved payment of expenses which were unallowoble per the Uniform Guidance or were determined to be excessive.? The Aurora Housing Authority (AHA) disagrees with the premise supporting this finding. Hawkins Ash CPAs reports that the questioned costs under this finding total $74,585, which is inclusive of ail of the costs related to the event(s) that Hawkins Ash CPAs aileges were excessive or unallowable. The Aurora Housing Authority however, reported $18,651 in previously existing non?federal funds and raised an additional $13,300 in non-federal funds to cover the costs of federally unallowable events and/or spending. Therefore the amount ofquestioned costs should be $42,634 as there are no restrictions on the use of funds raised from non-federal sources. Therefore the amount of questioned costs is inaccurate. Additionally Hawkins Ash CPAs made audit adjusting entries prior to submitting the financial data schedule (FDS) that reallocated expenses related to any events that were determined to be unailowabie from the public housing program into the Northern Lights Development Corporation, which has sufficient non?federal revenues to cover the expenses in question (Attachment C, Items #12, #13, A receivable balance was properly placed on the public housing program and a corresponding liability/payable was placed on the Northern Lights Development Corporation. (Combining Statement of Cash Flows - Attachment D). This action taken by Hawkins Ash CPAs both removes the expense from the public housing program and also ties it to a component unit which does have non?federal income with which to pay for the expenses. As a result, the condition presented as the cause for the finding does not exist, and thus no finding should be given. The AHA requests that, based on the fact that the questioned costs are inaccurate and the condition stated by Hawkins Ash CPAs does not exist, that finding 2016?009 be removed from consideration for material weaknesses (64200?110) and internal control deficiency (63000-250 and 63000?270). Significant Deficiency Findings Aurora Housing Authority 1449 Jericho Circle, Aurora, IL 60506 Phone (630) 70 i -9977 Item 2016-002: Personal Use of Vehicle - Fringe Benefit Per the audited financial report from Hawkins Ash CPAs, they report that: couple of employees of the Housing Authority have been using vehicles for personal use as a fringe bene?t? The Aurora Housing Authority (AHA) disagrees with the premise supporting this finding. Per 24 CFR (Attachment E) and Section 9 of the United States Housing Act of 1937(e)(1), page 3 subsection A respectively: administrative fees may only be used to cover costs incurred to perform HA administrative responsibility for the program in accordance with HUD regulations and requirements.? ?The Secretary shall establish an Operating Fund for the purpose of making assistance available to public housing agencies for the operation and management of public housing, including (A) Procedures and systems to maintain and ensure the efficient management and operation of public housing? Fringe benefits, however structured, are a ?costs incurred to perform HA administrative responsibilities? and are also ?systems to maintain and ensure the ef?cient management and operation of public housing? which is therefore allowable under 24 CFR and The Housing Act of 1937(e)(1)(A). Furthermore, the amount of personal use by certain employees is not paid for with Federal funds. The AHA charges employees a fee for their personal use of the vehicles based on projected usage and the total operational cost ofthe vehicles. This usage was monitored through reporting received by the AHA showing fuel usage, mileage driven and other relevant metrics provided by both the fleet service manager as well as the fuel service provider selected by the Authority. Per the Uniform Grant Guidance (section 200.431 Compensation Fringe Benefits subparagraph (Attachment F): ?That portion of automobile costs furnished by the entity that relates to personal use by employees (including transportation to and from work) is unallowable as fringe The guidance is clear that personal use is not allowable under the portion of costs related to personal use. However in this case personal use is not being furnished by the AHA. Because the AHA charges employees a fee for personal use of the vehicles, that use is not being ?furnished by the entity? and is instead being furnished by the employee with non?federal funds. The premise stated by Hawkins Ash CPAs is flawed in that it does not consider the portion of the cost ofthe vehicles that was furnished by employees, and thus not furnished by the entity or federal funds. Based on these facts the AHA requests that finding 2016-002 be removed from consideration for significant deficiencies (64200-100). Aurora Housing Authority 1449 Jericho Circle, Aurora, IL 60506 Phone (630) 701-9977 Qualified Opinion The Aurora Housing Authority strongly disagrees with the basis used to support the quali?ed opinion provided by Hawkins Ash CPAs. Perthe American Institute of definition of a qualified opinion Section 705.08 (Attachment G), ?The auditor should express a qualified opinion when a. the auditor, having obtained suf?cient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements or b. the auditor is unable to obtain suf?cient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.? Per the audited financial report presented by Hawkins Ash CPAs, the Basis for Qualified Opinion (Attachment H) is that the Au rora Housing Authority did not ?comply with requirements regarding CFDA 14.871 Section 8 Housing and 14.850 Public and Indian Housing?. While the Aurora Housing Authority disputes that it failed to com piy with CFDA 14.871 or 14.850, Hawkins Ash CPAs does not show any evidence that the Aurora Housing Authority?s financial statements are ?misstated, individually or in the in any way. Furthermore Hawkins Ash CPAs does not state in their basis for qualified opinion that they, as the auditor ?concluded that the possible effects on the financial statement of undetected misstatements, if any, could be material but not pervasive. Beyond the Aurora Housing Authority?s dispute to the accuracy and appropriateness of finding 2016-001, 2016?02, 2016-003, 2016-008 and 2016-009, none of the findings presented by Hawkins Ash CPAs are stated to have any material or immaterial impact on the financial statements and their presentation. Per the AICPA guidance, in order for a qualified opinion to be given, a material financial statement impact should be observed ?individually or in the aggregate? or the auditor concludes that the possible effects on the fine nciai statements of ?undetected misstatements, if any, could be material but not pervasive.? Neither of these situations is presented or described in the Basis for Qualified Opinion portion of the report by Hawkins Ash CPAs. According to the report, the basis for qualified opinion is supported by the auditor?s opinion that program compliance is necessary ?for the Housing Authority to comply with the requirements applicable to that program.? which is not a condition that meets the AICPA requirements for a qualified opinion. Based on these facts, the Aurora Housing Authority respectfully requests that the qualified audit opinion be removed from consideration for Fund Opinion Tier 2 Deductions (63000-210 and 64200-050} impact of Appeal on AHA Scoring and Status The AHA currently is has a combined weighted score of 58 out of 100 possible points. This score was derived as foiiows: Category Score Physical 27 Financial 4 Aurora Housing Authority 1449 Jericho Circle, Aurora, 60506 Phone (630) 701?9977 Management 20 Capital Fund 7 PHAS Total Score 58 With the addition ofthe points requested in this appeal, the overall score would increase from 58 to 61 points, thereby making the AHA substandard financial and not troubled. The scoring would be as follows: Category Score Physical 27 Financial 7 Management 20 Capital Fund ?7 Late Penalty Points 0 PHAS Total Score 61 Request for Approval of Appeal of Audit Findings and Quali?ed Opinion and Designation Change from Troubled to Substandard Financial The Aurora Housing Authority, as per 24 CFR 902.69lb), respectfully requests the audit finding and qualified opinion point deduction be reviewed with specific consideration given to the items noted in the above correspondence as weil as the attachments to this correspondence. The AHA also respectfully requests, according to 24 CFR a review of the overail PHAS designation of the Aurora Housing Authority (IL090). It is our beliefthat based on the circumstances surrounding the review of our Financial Data Schedule (FDS) submissions, that the designation for the AHA should be changed to substandard financial performer. The changes requested by the AHA will result in a significant change in the designation of the AHA, from troubled to substandard financial. if you have any questions or desire any additional supporting information please do not hesitate to contact the office of the Executive Director at (630) 701-9977. The Executive Director can also be contacted via email at keith.l.eregorv@auroraha.org. The Aurora Housing Authority is committed to continuing to provide high quality affordable housing for the residents of the City of Aurora. We appreciate the opportunity to operate housing programs on behalf of the US. Department of Housing and Urban Development and thank the Department for the support that it provides to the AHA. Thank you, we; Keith L. Gregory Executive Director Attachment A Aurora Housing Authority Cost Allocation Plan FY 2016 The Aurora Housing Authority (AHA) cost allocation plan is compliant with OMB and is based on asset management rules and requirements for a pubiic housing authority of our size. The costs ofthe central office are allocated across the program administered rather than the programs paying the central office cost center a management and bookkeeping fee. AHA reviews and updates our cost aiiocation plan annually for consistency with the overall unit mix and complexity in nature of the programs its administers so that central office costs are allocated in a manner that most appropriately aligns time, effort and cost with the programs receiving oversight. The AHA cost allocation process starts with the unit count mix by program and is then updated based on estimated time allocation for planned activities that require one program to receive more or less cost as appropriate. The FY 2016 cost allocation plan is: Housing Choice Voucher Program24% Attachment 53?? .- till? Massey U.S. Department of Housing and Urban DeveIOpment Of?ce of Public and Indian Housing NOTICE: PIH-2007- 15 (HA) Special Attention of: Public Housing Directors; Issued: June 20, 2007 Public Housing Agencies; Expired: June 30, 2008 Subject: Applicability of Public Housing Development Requirements to Transactions between Public Housing Agencies and their Related Af?liates and Instrumentalities I. Introduction A. Purpose. The US. Department of Housing and Urban Development (Department) has encouraged the formation of new and innovative public and private partnerships to ensure long-term sustainability of public housing developments and the leveraging of public and private resources to transform communities. Public Housing Agencies (PHAS) continue to form and expand their relationships with private partners, including partnerships with entities related to the PHA. The Office of Inspector General (01G) in report No. has alleged violations of the Annual Contributions Contract (ACC) and regulations in agreements regarding development activities and PHA relationships with af?liated housing development entities and non-pro?t organizations. This notice intends to reaffirm the requirements of Public and Indian Housing Programs including the United States Housing Act of 1937 (Act), the ACC, and regulations (collectively, public housing requirements) that apply to public housing activities, including mixed- ?nance development activities. This notice will also assist PHAs in avoiding violations of existing requirements in development transactions with their partners. The Department intends to use this notice to focus on existing development related requirements applicable to administrative fees and development cost allocation; prohibition of con?icts of interest; the procurement of related entities; and disposition and encumbrance of public housing property. Moreover, this Notice will focus on these requirements as they pertain to Affiliates and Instrumentalities, entities through which PHAs are conducting development activities. Page 1 of 24 Additionally, this notice will provide guidance to the Department?s Headquarters and ?eld of?ce staff on identifying transactions that have not been approved by the Department and addressing the issues that arise in the transactions. B. Applicability. This notice applies to public housing development activities pursuant to 24 CFR Part 941. This notice does not apply to development or management of non?public housing programs that are not funded with public housing funds, even if carried out by entities related to the PHA. This notice also does not apply to PHA instrumentalities, af?liates, consortia or joint ventures providing administrative management, supportive or social services pursuant to Section 13 of the Act and its implementing regulations at 24 CFR Part 943. Notwithstanding any provision of this notice, Moving to Work (MTW) participants may continue to operate in accordance with their MTW Agreements with the Department. C. The Department?s policy. The Department encourages PHAs to take innovative approaches to implementation of public housing programs including the creation of partnerships to increase the capacity and experience of the PHA. PHAs have diverse experience and skills and must evaluate what is in the interest of the PHA and its clients prior to utilizing an Af?liate or Instrumentality for development andior the operation of public housing programs.1 If the PHA determines that the use of an Affiliate or Instrumentality to assist in the development of public housing and to administer and manage PHA programs is in the best interest of the PHA, the Department encourages PHAs to use Affiliates and Instrumentalities, so long as the implementation of the public housing program is consistent with the applicable public housing requirements. D. Program requirements. Similar to PHAs themselves, Affiliates and are created under state laws, so their basic powers and functions are governed by state and local law and further defined in their organizational documents, rather than being defined by federal statutes and regulations. The Department?s regulatory authority over PHAs and their Af?liates and Instrumentalities derives from the requirements of the Department?s programs that are administered by the PHA, Af?liate or Instrumtmtality. Thus, when an Af?liate or Instrumentality participates in a public housing development program it becomes subject to existing requirements. E. Terms. While the Department?s regulations permit the PHA to develop public housing through a variety of ownership structures, the following are types of entities that are used in the practice of public housing development: This notice only covers development activities and activities related thereto. Page 2 of 24 1. An ?Affiliate/Affiliated entity? is an entity, other than an Instrumentality, formed by the PHA under state law in which a PHA has a ?nancial or ownership interest or participates in their governance. The FHA as an institution has some measure of control over the assets, operations, or management of the Affiliate, but such control does not rise to the level of control to qualify the entity as an Instiumentality. In addition, for the purpose of this notice, the de?nition of Af?liates includes only those entities that use public housing funds to carry out public housing development functions of the PHA. Except as speci?ed in this notice, an Affiliate is treated like an unrelated third party contractor. An ?Instrumentaiity? is an entity related to the PHA whose assets, operations, and management are legally and effectively controlled by the PHA, through which PHAfunctions or policies are implemented and that utilize public housing funds or public housing assets for the purpose of carrying out public housing development functions of the PHA. For the Department?s purposes, an Instrumentality assumes the role of the PHA and is the PHA under the public housing requirements for purposes of implementing public housing deveIOpment activities and programs. See 24 CFR 5.10, de?nition of a PHA. Instrumentalities must be authorized to act for and to assume Such responsibilities. in addition, an instrumentality must abide by the public housing requirements that would be applicable to the PHA. F. De?nitions. For the purpose of this notice the following terms and phrases apply: 1. ?Public housing assets? means public housing property, including real and personal property, tangible and intangible; and, tenant rents, used in connection with public housing that has been developed, acquired, or assisted with public housing ?mds. ?Public housing units? is the same term used in 24 CFR Part 941 and includes homeownership units developed with public housing funds prior to the transfer of title to the homebuyer. ?Public housing funds? means funds appropriated to implement programs authorized under the Act, including funds appropriated under Section 9 and 24 of the Act, excluding funds appropriated under Section 8 of the Act. Page 3 of 24 4. ?Public housing requirements? means all requirements applicable to public housing, including without limitation, requirements pertaining to public housing under the Act, the Department?s implementing regulations and the ACC. II. Formation of Instrumentalities and Af?liates This section provides guidance on the ?duciary and organizational linkages between Af?liates, Instrumentalities and PHAs. It describes the extent to which public housing funds can be used to form Af?liates and Instrumentalities. The second part of this section speci?cally focuses on the relationship between PHAs and Instrumentalities that were formed with public housing funds. Under the existing public housing structure there is usually one PHA in a jurisdiction. Therefore, any entity that does business with the PHA is presumed to be a contractor. An entity will be treated as a contractor unless it is made clear by the PHA that it should be treated differently, e. as an Instrumentality. The PHA may obtain a private legal opinion, an opinion from the local government, or guidance from the Department that the entity is an Instrumentality under HUD regulations and has the requisite powers and delegated authority to carry out the responsibilities of the PHA for development purposes under the applicable public housing requirements. If no such opinion is obtained, the PHA should look to the indicia of control over the entity as the basis for the PHA treating the entity as an Instrumentality (see Section 13.] below). Otherwise, the entity will be treated as a contractor. A. Use of Federal funds to form Af?liates and Instrumentalities. Public housing funds may be used for administrative expenses incurred in the formation of an Af?liate or Instrumentality created to develop and operate a public housing development programs. 1. Public housing funds may be used for costs related to forming an Af?liate or Instrumentality. If an Af?liate or Instrumentality is formed with public housing funds solely for developing a mixed- income and/or mixed-use development, the developmentmust contain public housing units. although it may contain Low Income Housing Tax Credit (LIHTC) units, other affordable units, market rate housing, and commercial development. (See section 9 of the Act). Subject to the requirements discussed in Setion Ill, the PHA may also use public housing funds for the costs of preparing and submitting a tax credit application, where it is developing public housing units in a mixed-income project, a mixed-use project, or a project that consists solely of public housing units, some of which are also LIHTC units. Page 4 of 24 Public housing funds may not be used to pay the cost of forming an Af?liate/histrumentality created for the sole purpose of developing LIHTC or market rate developments that do not include any public housing units. In this event, the organizational costs must be paid with non-public housing funds, which includes de?federalized fees paid to the Central Of?ce Cost Center. Where multiple projects are contemplated, the ?rst project must contain some public housing units. Public housing funds can be used, subject to the requirements discussed in Section to establish an Af?liate or Instrumentality that intends to develop multiple projects, some of which may not include public housing units as long as the ?rst project includes public housing units. However, public housing funds appropriated under the Act must not be used to ?nance or develop the projects or phases that do not include any public housing units. Indicia of control necessary to determine an Instrumentality. Instrumentalities will be considered, for purposes of the public housing program, to be the PHA. As such, the must have the authority to carry out proposed activities of the PHA. Generally, the requirements are assumed to be met where the Instrumentality is created as a division within the existing structure of the PHA. The following factors should be considered in the formation and operation of an of the PHA which is a separate legal entity from the PHA. a. The Instruinentality is directed or managed by the same persons who constitute the board of directors or governing body of the PHA or who are employees of the PHA. Board positions on the Instrumentality may be associated with an employment position at the PHA or appointed by such persons. in the event of a PHA staff change, the FHA would appoint another employee to the board of the Instrumentality. The organizational documents of the Instrumentality contain provisions that in the event of a change in the controlling interest of the Instrumentality, all public housing assets of the Instrumentality are returned to the PHA or are otherwise protected. The organization is a component unit of a primary government using the suggested criteria and tests included Page 5 of 24 in the Government Accounting Standards Board Statement 14. 2. An Instrumentality must abide by the public housing requirements that would be applicable to the PHA. HI. Allocation and Source of Funds for the Cost of Shared Resources This section includes allocation of formation costs discussed in Section II of this notice, and provides guidance on ?scal management and cost allocation when public housing funds are involved in a development activity. As a general rule, public housing funds may only be used for the development, administration, or management of a project that contains public housing units subject to the authority bywhich the funds were apprOpriated. The costs to carry out the administrative, management, or development functions for a project containing no public housing units shall be paid for with funds other than public housing funds. The FHA has the option of using the cost allocation system as outlined in this section or a fee based approach in lieu of cost allocation as outlined in Section B. A. Basic cost allocation requirements. Where staff, facilities, equipment, or other resources are shared between a PHA and an Af?liate/histrumentality, or between the public housing program and non- public housing programs, the costs must be equitably allocated to each entity or program. This is the cost allocation principle that is the norm for both public and private business practices, and it applies to the development of public housing. The same cost allocation requirements apply where a employee performs work for an Af?liate as a consultant or other type of contractor. In the case of mixed??nance development the number of public housing units must be approximately proportionate to the contribution compared to the number of non- public housing units and the contribution from other sources. (See section 35 of the Act). OMB Circular Cost Principles for State and Local Governments (2 CFR part 225) contains several provisions on this subject, including the following: 0 Attachment A, See. C.3.a. cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received.? 0 Attachment A, See. D. l. ?The total cost of Federal awards is comprised of the allowable direct cost of the program, plus its allocable portion of allowable indirect costs, less applicable credits.? 0 Attachment B. Sec. ?Where employees work on multiple activities or cost objectives, a distribution of their salaries or wages will be supported by personnel activity reports or equivalent unless a statistical sampling or other Page 6 of 24 substitute system has been approved by the cognizant Federal agency.? Fee based structure. PHAs may use a fee based structure in lieu of cost allocation systems. Where the PHA earns certain fees, as detailed in the Financial Mangement Handbook, it may use the fees as the PHA wishes, including to pay Af?liate or Instrumentality costs. Thisstructure is permitted under Section of Attachment A of A-87 as an alternative to reduce the administrative burden regarding the establishment of overhead rates. 1. Reasonable fee amount. This section is applicable to mixed- ?nance development activities approved under 24 CFR 941 Subpart that include the use of Capital Funds, HOPE VI funds, or other public housing capital assistance eligible to be used for development. When using public housing funds, a reasonable administrative fee is 3% of the total project budget. The administrative fee may be paid with public housing funds and covers the administrative cost for the mixed-fmance development activities. (See the Department?s Cost Control and Safe Harbor Standards for Rental Mixed-Finance Development, Revised April 9, 2003.) The total project budget includes all hard and soft development costs paid with both public and private financing. The total project budget should exclude Community and Supportive Services (CSS) costs for the purpose of calculating the administrative fee. If the administrative fee is at or below the 3% safe harbor standard, no further review is required. Alternatively, the FHA may charge up to a 6% administrative fee provided the PHA demonstrates to the Department, in writing, that the fee is appropriate for the scope of work, Speci?c circumstances of the project, and local or national market for the services provided. 2. Treatment offees. Under OMB Circular a PHA that receives federal and non?federal funds must assure that it is not diSproportionately allocating overhead to federal programs. In the case where the PHA is charging within the approved amount for administrative fees for mixed-?nance development, this concern is assumed to be satisfied. a. or PHAs undertaking development, any administrative fee that the PHA charges for mixed-?nance development programs is considered non-program income for purposes of and 24 CFR Part 85, provided that the fees charged are reasonable under the criteria established by the Department; however, other state and local restrictions may Page 7 of 24 still apply. Consequently, any reasonable fees earned by the PHA will be treated as local revenue subject only to the controls and limitations imposed by the management, board or other authorized governing body. The FHA is not required to document or demonstrate actual costs to earn the administrative fee. Additionally, the PHA is not required to distinguish or separately account for the expenses or costs associated with the administrative fee earned ?om its public housing development programs. b. A PHA may use the administrative fee for any purpose appropriate for local revenue, including FHA, Instrumentality, or Af?liate costs, such as to pay the Central Office Cost Center or to hire external consultants including a program manager, deveIOpment advisers, or relocation specialists. The administrative fees or costs incun'ed must be within the administrative fee limits. 0. PHA fees and or assets derived from non-public housing funds and non-public housing assetsare not subject to the provisions of this notice. C. Accounting and reporting requirements. PHAs and Instrumentalities must comply with Generally Accepted Accounting Principles (GAAP) reporting requirements (24 CFR 5.801). This includes the Instrumentality providing the PHA and the Department with audited ?nancial statements and ?nancial performance reviews. If an Affiliate is included as a component unit or, to the extent that these accounting and reporting requirements apply to unrelated third party contractors, then Af?liates must also comply. (See PHA GAAP Flyer, Vol. 1, Issue 3, July 1999). IV. Con?icts of Interest PHAs are bound by conflict of interest provisions found in both the ACC and in HUD regulations at 24 CFR Part 85. Instrumentalities and Af?liates are also bound by these requirements. Con?ict?of?interest questions can arise in transactions by PHAs, their Af?liates and Instrumentalities. This section highlights contractual and regulatory provisions that address con?icts of interest. We discuss below the overarching standards for Part 85 and the ACC, respectively. As a practical matter, the Department is most concerned with con?icts of interest resulting in an actual or perceived personal ?nancial bene?t to agents of the PHA, Instrumentality and Af?liate involving public housing funds. Such instances create, at a minimum, a perception of abuse of authority and self-dealing in a federal program. In such instances the Department will closely scrutinize the transactions and will consider all available remedies for resolving these con?icts. Page 8 of 24 The following provides an overview of con?ict-of?interest concepts generally and provides excerpts from the ACC and other Department regulations. A. Con?ict of Interest. PHAS and Instrumentalities are to avoid situations in which agents of those entities participate in contracting related decision making that results in a bene?t received by that agent or person linked to that agent. In addition, the Instrumentalities and Af?liates may not contract with a third party in which certain PHA of?cials, their immediate family and certain local officials have an interest. Participation by a representative of the PHA board member, employee, of?cer) in the Instrumentality is not, per se, a conflict; nor is a representative?s participation in an Affiliate, so long as the representative and certain persons related to that representative do not have an interest in the Af?liate. Under the Departments regulations, the PHA, and therefore its Instrumentality, must develop standards for determining whether someone has a con?ict of interest in a matter involving the PHA and any other party. l. Prohibited individuals. The con?ict-of-interest provision applies to an individual that is a member of the prohibited class as listed in Section 19 of the ACC or 24 CFR section a PHA employee, of?cer or agent, any member of his or her immediate family, his or her business partner, or an organization which employs or is about to employ any of the above). Personal ?nancial interests of an individual not specifically enumerated as covered, or individuals speci?cally exempted tenant commissioners, under the ACC) do not constitute a con?ict of interest under either the ACC or Part 85. 2. Decision making capacia). Under Part 85, a con?ict of interest exists if an agent of the PHA/Instrurnentality will participate in the award or administration of the contract supported by federal funds, and the decision, in?uence, award, or administration results in a bene?t, actual or percieved, to theprohibited individual. However, the ACC strictly prohibits, without a waiver, contracting with an entity in which a prohibited individual has any ?nancial interest regardless of the individual?s decision making capacity. 3. Appficabiligi to Employment Sharing Arrangements There is no con?ict of interest where an agent of the PHA, Af?liate, or Instrumentality receives a normal and customary compensation package for employment by the PHA or the Af?liate/Instrumentality, including compensation provided to the employee by the PHA or the Af?liate/Insdumentality. For Page 9 of 24 example, a bonus provided by the PHA to the development director or payrolled employee for their service to the Instrumentality/Affiliate would not be considered a ?nancial interest, if consistent with the customary compensation package. Where the PHA permits its staff to provide services to an Af?liate or Instrumentality the allocation of the salary expenses between these entities do not create a con?ict of interest for the individual employee. B. Consolidated Annual Contributions Contract (ACC) Section 19. Af?liates/Instrumentalities are not exempt from the conflict-of-interest prohibition that applies to public housing in general. As discussed in Section LE, an Instrumentality is construed as the PHA and an Af?liate is considered a contractor. The prohibition of con?icts of interest is stated in Section 19 Part A of the ACC, Form HUD-53012A In addition to any other applicable con?ict-of?interest requirements, neither the PHA nor any of its contractors or their subcontractors may enter into any contract, subcontract, or arrangement in connection with a project under this ACC in which any of the following classes of peeple has an interest, direct or indirect, during his or her tenure or for one year thereafter.? 1. Any present or former member or of?cer of the governing body of the HA [housing authority] or any member of the of?cer?s immediate family. There shall be excepted from this prohibition any present or former tenant commissioner who does not serve on the governing body of a resident corporation, and who otherwise does not occupy a policymaking position with the resident corporation, the HA or a business entity.? 2. Any employee of the HA who formulates policy or who in?uences decisions with respect to the proj ect(s), or any member of the employee?s immediate family, or the employee?s partner.? 3. Any public official, member of the local governing body, or State or local legislator, or any member of such individuals? immediate family, who exercises functions 0r responsibilities with respect to the project(s) or the 2 PHAs should examine their ACCs as some PHAs may still be operating under older versions of the ACC and those terms will apply. Page 10 of 24 C. The Department?s Regulations: 24 CFR Part 85 The Department?s regulations that apply to procurement by a PHA or its subgrantees, 24 CFR Part 85, contain a similar prohibition against real or apparent con?ict of interest. The prohibition of con?icts of interest is stated in 24 CFR ?Grantees and subgrantees will maintain a written code of standards of conduct governing the performance of their employees engaged in the award and administration of contracts. No employee, of?cer or agent of the grantee or subgrantee shall participate in selection, or in the award or administration of a contract supported by Federal funds if a con?ict of interest, real or apparent, would be involved. Such a con?ict would arise when: The employee, officer or agent, (ii) Any member of his immediate family, His or her partner, or (iv) An organization which employs, or is about to employ, any of the above, has a ?nancial or other interest in the ?rm selected for award. The grantee's or subgrantee's officers, employees or agents will neither solicit nor accept gratuities, favors or anything of monetary value from contractors, potential contractors, or parties to subagreements. Grantee and subgrantees may set minimum rules where the ?nancial interest is not substantial or the gift is an unsolicited item of nominal intrinsic value. To the extent permitted by State or local law or regulations, such standards or conduct will provide for penalties, sanctions, or other disciplinary actions for violations of such standards by the grantee's and subgrantee's of?cers, employees, or agents, or by contractors or their agents. The awarding agency may in regulation provide additional prohibitions relative to real, apparent, or potential con?icts of interest.? D. Waiver. If the Department determines there is good cause, the may obtain from the Department a written waiver of Section 19 of the ACC and an exception to the con?ict-of interest provisions in 24 CFR Part E. Applicability to Instrumentalities. An Instrumentality isconstrued as the PHA in conjunction with public housing development activities. As such, there is no inherent con?ict of interest regarding transactions between a PHA and its within the sphere of activity. An Instrumentality is required to follow the ACC and Part 85 con?ict-of- interest provisions in its contracting with third parties, as though it were the FHA. Page 11 of 24 V. PHA Selection of Entities and Procurement by Those Entities. In all cases, when a FHA or its Instrumentality expends public housing funds as part of a development activity, procurement of development partners is governed by 24 CFR Part 85 and 24 CFR 602(d)(1). This section provides an overview of how the procurement requirements apply to Af?liates/Instrumentalities and mixed-?nance owner entities engaged in development activities with the PHA. A. Instrum entality 1. B. Af?liate 1. Selecting the Instrumentaltgz. A selection of an Instrumentality for development is not subject to 24 CF Part 85. The Instrumentality is essentially the PHA under the public housing program and is controlled by the PHA. Therefore, the PHA need not procure an Procurement by the Instrumentality. An Instrumentality of the PHA that is created or selected to complete a public housing deveIOpment activity is subject to 24 CFR Part 85 in selection of its partners and subcontractors. An Instrumentality must procure third party members of its operational or development team, architects, consultants, contractors, attorneys, etc. because the is subject to the same procurement requirements as the PHA (see 24 CFR Part 85 and 24 CFR Part 941). Procurement of the A?itiaz?e. PHA procurement of a PHA Af?liate is subject to the applicable provisions of 24 CFR Part 85 and 24 CFR Part 941. The FHA may choose to implement any of the methods of procurement outlined in 24 CFR 85.36, including procurement by noncompetitive proposals, as long as the preconditions to the use of that method are met. For purposes of mixed-?nance development the af?liate may be procured in accordance with 24 CFR 85.36 as modi?ed by 24 CFR Selections by the A?itiate. An Af?liate that has been procured by the PHA in accordance with Part 85 is not subject to Part 85 when the Affiliate contracts for goods or services, including services of the other members of its operational or development team, architects, consultants, contractors, and attorneys. C. Selection by an owner entity. 24 CFR 941 .602(d)(2) refers to the exercise of ?signi?cant functions? within the owner entity by the PHA or Page 12 of 24 an Instrumentality in order to determine whether the procurement of subcontractors is subject to 24 CFR Part 85.3 In a mixed-?nance transaction, the procured developer typically forms the owner entity and assumes a role in the partnership. The following are examples of PHA or Affiliate/histrumentality involvement in the owner entity. 1. If the PHA or its Instrumentality (by virtue of having been selected and not procured by the PHA) is a general partner or managing member of the owner entity or occupies a position that allows either the PHA or the Instrumentality to exercise signi?cant functions as to the management of the development, then selections by the owner entity are subject to the provisions of 24 CFR Part 85. 2. If an Af?liate or any other entity (by virtue of having been procured by the PHA or Instrumentality) is the general partner or managing member of the owner entity (even if the Affiliate is occupying a position that allows it to exercise significant functions as to the management of the development), then the owner entity is not subject to the provisions of 24 CFR Part 85. 3. A PHA, Instrumentality, or Affiliate that has limited rights as a limited partner or minority member, including a purchase option 0r right of first refusal, does not qualify as exercising significant functions within the owner entity. VI. Section 30, Capital Fund Financing and Public Housing Development The following is a summary of the key program requirements affecting PHAs and their Af?liates/Instrumentalities participating in the development of public housing. A. Section 30 of the 1937 Act: Public housing mortgages and security interests. Private development firms, PHAs, Af?liates and Instrumentalities providing development functions for public housing development and/or mixed??nance housing development projects must conform to the requirements of section 30 (42 U.S.C. 14372-2) to the extent they mortgage or grant a security interest in any public housing asset. In general, entities may not mortgage or otherwise grant a security interest in any public housing project, asset, or other property of the PHA without the prior written approval of the Assistant Secretary for Public and Indian Housing or the Deputy Assistant Secretary for the Of?ce of Public Housing Investments (OPHI). With the exception of security interests in 3 The Procurement Process chapter of the Mixed-Finance Guidebook provides additional detail on this topic. Page 13 of 24 public housing appurtenances such as administration buildings, the Declaration of Trust (pursuant to section 8 of the ACC and section 9 of the Act) must be recorded before any mortgage or security interest on a public housing project. Capital Fund Financing Program. PHAs may participate in the ?nancing element of the Capital Fund under the Capital Fund Financing Program (CFFP). A PHA may borrow private capital to make improvements and pledge, subject to the availability of appropriations, a pertion of its future year annual Capital Funds to make debt service payments for either a bond or conventional bank loan transaction. The loans or bonds are obligations of the PHA. The Department does not guarantee or insure these loans or bonds. No action taken under CFFP or section 30 shall result in any liability to HUD. The PHA obligation is subject to the availability of appropriations by Congress and compliance with statutory and regulatory requirements. A PHA must obtain written approval from the Department prior to executing any document that would encumber or pledge as collateral any public housing asset. This includes both physical assets and future public housing funding, such as Operating Funds or Capital Funds. In order to receive approval from the Department, a PHA must submit a ?nancing proposal that includes a term sheet, financial documents, and a justification for the use of Capital Funds for ?nancing. Public housing and mixed-finance development. A PHA may use any generally accepted method of development outlined in 24 CFR Part 941. The purpose of the development program is to allow the PHA to develop public housing units that serve the needs of the public housing residents over the long term. The following is a summary of the public housing requirements applicable to the development of public housing units. 1. Mixed-?nance development. Private development ?rms and/or Af?liates and Instrumentalities undertaking mixed-?nance development of public housing units must conform to applicable public housing requirements. Speci?cally, the entity must follow the requirements of 24 CFR Part 941, Subpart - Public/Private Partnerships for Mixed?Finance DeveIOpment of Public Housing Units, and the guidance and procedures established by the OPHI, including but not limited to the Mixed-Finance Guidebook (1998). The OPHI must approve the obligation of any public housing funds prior to the expenditure of these funds. 2. Other development methods. Private development ?rms, Af?liates or conducting development activities under 24 CFlPart 941, Subparts A, B, C, D, and must conform to the requirements of the apprOpriate Subpart. The Page 14 of 24 PHA must ensure in its contractual arrangements that the partners will comply with all applicable public housing requirements. The Department?s field of?ces will provide technical assistance, with respect to approvals, monitoring, and reviews. The Program Centers must approve the transaction before the obligation of any public housing funds. Environmental requirements. Note that the references to 24 CFR Part 50 in 24 CFR 941.208 and are outdated. The federal environmental review will be performed by a local or state Responsible Entity pursuant to 24 CFR Part 58, unless the Department chooses to perform the review itself under Part 50. Participants in the development process, including public or private for-pro?t or non?pro?t entities and their contractors, may not commit any public or privat?unds to activities that would have an adverse environmental impact or limit the choice of reasonable alternatives unless one of the following conditions has been met: (1) The Department has received a certi?cation and request for release of funds and has approved the request for release of funds; or (2) The Department has done an environmental review and approved the activity or project. VII. DiSposition and Encumbrance of Public Housing Property Development transactions between PHAs and other parties, including Af?liates/Instrumentalities, frequently involve the disposition or the encumbrance of public housing property. The following provisions are reiterated to emphasize important restrictions and remind PHAS of their obligations associated with the receipt of public housing funds, which still apply where Instrumentalities and Affiliates are involved, and to speci?cally discuss the applicability of these provisions to Instrumentalities. A. Consolidated Annual Contributions Contract, Part A (ACC) Form HUD-53012A The following are selected provisions of the ACC with particular application to transactions involving PHAs, Af?liates and 1. Section 7 Covenant Against Disposition and Encumbrances. This section states: ?The HA shall not demolish or dispose of any project, or portion thereof, other than in accordance with the terms of this ACC and applicable HUD requirements. the HA shall not in any way encumber such project, or portion thereof, without the prior approval of HUD. In addition, the HA shall not pledge as collateral for a loan the assets of any project covered under this Page 15 of 24 Sectbn 8 Declaration of Trust. This section states: upon acquisition of the site of any project, the HA shall execute and deliver an instrument (which may be in the form of a declaration of trust, a trust indenture, or such other document as may be approved by HUD) continuing and further evidencing, among other things, the covenant of the HA not to convey or encumber the project except as expressly authorized in this Section 9 Depository Agreement and General Fund. This section states: All monies and investment securities received by or held for the account of the HA in connection with the development, operation and improvement of projects in accordance with an ACC with HUD shall constitute the ?General Fund?. . The HA shall maintain records that identify the source and application of funds in such a manner as to allow HUD to determine that all funds are and have been expended in accordance with each specific program regulation and requirement. The HA may withdraw funds from the General Fund only for: (1) the payment of the costs of development and operation of the projects under the ACC with (2) the purchase of investment securities as approved by and (3) such other purposes as may be Speci?cally approved by HUD. Program funds are not fungible; withdrawals shall not be made for a speci?c program in excess of the funds available on deposit for that program. . ..These covenants apply to all public housing assets as defined in including not only real estate, but also money, investment assets, future receipts from rents, operating subsidy and other sources, and any other type of tangible or intangible personal property that is a part of a public housing project? (ACC, Sec. 2, De?nitions ?Project?). PHAs, Affiliates, and Instrumentalities may not dispose of or encumber public housing property without the Department?s approval either under 24 CFR Part 970 or Part 941, or section 30 of the Act, as applicable. Examples. The following is a nonexclusive list of examples of general types of encumbrances that are prohibited by the ACC covenant without the prior aI b. written approval of HUD: A mortgage or other lien on project real estate; Pledge or other encumbrance of public housing project funds, including tenant rents, and money on hand or future revenues; Page 16 of 24 c. Use of project equipment, vehicles, or other tangible assets as collateral; (1. Creation of a claim against project assets, under a guaranty or indemnity agreement; and e. Grant of a leasehold interest other than dwelling leases with eligible families in the project. Exception: Disposition through mixed-?nance development. Transfer by deed or ground lease of public housing property to an Instrumentality, Af?liate or mixed-fmance owner entity for the purpose of developing public housing through the mixed-?nance method does not require written approval from the Department through 24 CFR Part 970. The FHA will provide a certi?cation stating that the disposition is in compliance with the provisions of Section 18 of the Act. The Department will approve the transfer, sale or ground lease of public housing property as a component of the mixed-?nance approval process. Reimbursement of Public Housing Funds This section outlines the reimbursement provisions for PHAs that improperly use public housing funds for expenses associated with the development of projects that do not contain public housing units. Additionally, the section outlines corrective actions that PHAs must take where a PHA creates mortgages or grants a security interest in public housing property without the prior written approval of the Department. The Department may pursue enforcement actions in the event that the FHA is found to have violated the terms of the existing public housing requirements. At its option, the Department may pursue enforcement actions for violations of ACC, statutory, or regulatory requirements and/or allow PHAs to implement the cures described below. A. Reimbursement for improper use of public housing funds for deveIOpment. PHAs that have used public housing funds, itself or through a private partner or an Affiliate/bistrumentality, to develop a project that contained no public housing units must reimburse or cause the reimbursement of such funds by the private partner or Af?liate/Instrumentality, as appropriate. Any development costs paid with public housing funds for the improvement of the non-public housing units or for the improvement of a site developed with no public housing units must be reimbursed to the PHA, unless otherwise directed by the Department. Reimbursement improper use of public housing funds for development for development of mixed-finance communities. PHAs that have used public housing funds, without prior written ?'om the Page 17 of 24 Department, that resulted in the development of mixed-?nance projects that include some public housing units must reimburse or cause the reimbursement of such funds to the PHA under the following circumstance: In the case where a PHA did not previously obtain the Department?s approval for the mixed-finance development, the PHA must reimburse all improper costs related to the improvement of the non-public housing units (both hard and soft costs) and! or for the improvement of the site. The Department may use a pro rata share test to ensure that public housing funds were not expended in a greater ratio than the amount of public housing units in the development. For example, if 25 percent of the units in the development are public housing units, the entity must reimburse any public housing funds spent over and above 25 percent of the development costs, excluding costs such as administration, demolition, relocation and supportive services. C. Failure to obtain approval from the Department for section 30. PHAs are to scrutinize any ?nancial guarantees, loan agreements, indemnifications or security agreements entered into by the PHA, an Af?liate or Instrumentality to ensure that mortgages or other such documents that grant a security interest in any public housing project, public housing property or other public housing asset have been previously approved in writing by the Department. At the discretion of the Department, agreements entered without prior approval from the Department that potentially give third parties a claim on PHA assets in violation of public housing regulations must be terminated or restructured. The PHA must submit documentation to the Department, including all transactional documents, evidencing that such unapproved encumbrances or security interests have been terminated or restructured in a manner to satisfactorily remedy any violations of the public housing requirements. IX. Monitoring and Reporting in the PHA Plan Currently, the OPHI reviews and approves mixed-?nance transactions that involve PHAs and their Af?liates/Instrumentalities and owner entities. The purpose of this section is to assist with the identification of those transactions that the Department has not approved. Because the pertinent requirements are not peculiar to transactions involving Affiliates/Instrumentalities, the general approach described should create neither a heightened nor diminished level of scrutiny merely based upon the existence of an Af?liate or The purpose of this notice is not to impose new or different requirements upon PHAs or the Department, but to assist in the interpretation of existing requirements in complex situations involving the use of Af?liates or Instrumentalities. Page 18 of 24 A. Audit Findings: A-133 Compliance Supplement 1. PHAs are required to disclose activities with Affiliates/Instrumentalities in audited ?nancial statements. The information provided should include cost allocations and ?nancial and accounting transactions between PHAs and their Instrumentalities and Affiliates. The annual audit should include a review of the use of public housing funds in agreements with Af?liates or Instrumentalities in accordance with OMB Circular A-133 Compliance Supplement. 2. The audit may also disclose the existence of encumbrances that have not been previously approved by the Department. To assist with this part of the review, paragraph 3 below provides a non-comprehensive list of types of transactions that the Depaitment has approved for the use of public housing funds where encumbrances may arise. The identi?cation of any of these types of transactions, without the Department?s approval, may indicate non? compliance with existing ACC and public housing requirements as outlined in this notice. 3. The types of transactions include: project syndications, limited liability corporations/partnerships and/or partnership agreements, contractual relationships, and associated accounting between PHAs, Af?liates, Instrumentalities, and other entities involved with projects utilizing public housing funds and/or assets, bank loans, pledges or guarantees of repayment. 4. Any findings from the audit that are related to the encumbrance of public housing assets or formation and cost allocation activities of will be resolved by the ?eld of?ce, in conjunction with the OPHI. Such ?ndings could trigger a joint review by OPHI and the field of?ce. A checklist that will be used to assist with that review is attached to this Notice as Appendix 1. B. Development Activity Reporting: PHA Plan 1. In accordance with 24 CFR 903, the PHA is required to report disposition of public housing property and any public housing development activities to be entered into with and other private development entities in the PHA Plan. The ?eld office in the region where the PHA is located approves the PHA Plan. If the ?eld of?ce identi?es any problematic disclosures in the PHA Plan, they will work with OPHI to review them as necessary. 2. The PHA Plan includes submission of the Annual Statement for HOPE VI, Mixed?Finance and Capital Fund Program in Part HI. The FHA Plan also includes Implementation Schedules for each active grant that details the eligible activities, including development activities conducted with Affiliates Page 19 of 24 and Instrumentalities, to be funded and the budget of estimated sources and uses. 3. In accordance with the HOPE V1 Notice of Funding Availability and 24 CFR 903, the PHA is required to report development activities in the PHA Plan. Additionally, the Department must separately approve all development transactions with Af?liates/Instrumentalities and private development entities that utilize public housing funds for the development. (See 24 CFR Part 941, Subparts sections 941.302, 941.501, 941.612, 941.614). 4. The approval referred to above is only for development transactions with Af?liates/Instrumentalities and private development entities that involve the use of public housing funds and assets. Non?public housing development activity is not subject to review and approval by the Department, and thus is not included in the PHA plan. C. Procurement Review Should a review be triggered, part of the process may include a review of procurement which should include an evaluation of compliance with the conflict-of-interest provisions that are included in the HUD Procurement Handbook, 24 CFR 85.36 and the ACC and reiterated in this notice. D. Checklist The Department?s staff and PHAs may use the attached checklist (Appendix 1) as guidance for assessing compliance with the requirements discussed in this notice. Signed: Orlando J. Cabrera, Assistant Secretary for Public and Indian Housing Page 20 of 24 Reference Sheet Bet mine 1 - Does the PHA have any l'nstrumentalities (related -PHA Plan (See Notice Section I and H) entities that are effectively and legally controlled by 'Annual audit the PHA), including but not limited to a Housing -Entity's organizational Development Corporation, nonpro?t or for-pro?t documents entities? Does the PHA have any Af?liates (related entities -Procurement records (See Notice Section I and II) that do not meet the de?nition of Instrurnentality, but -Board resolutions nevertheless the PHA has some measure of control -Entity's organizational over the entity in terms of organization, documents administration, or program activities)? Have public housing funds been used and have public -Deve10prnent contract PHAs may work with housing development activities been conducted via -PHA ?nancial records Af?liates/Instrumentalities on non~public the Af?liate or Instrumentality? -Invoices housing projects without public housing assistance without a rcval or review. Does the PHA have an approval from the Department ~Approval letter The approval, ACC Amendment and PHA fox~ the public housing deveIOpment activities 'Executed ACC Plan should indicate that the PHA was conducted by the Amendment working with the Af?liate/Instrumentality. -Annual PHA Plan Page 21 of 24 exist, ascertain the basic facts about its organization, administration and activities. If one or more of the types of identi?ed above -Entity's organlzatlonal documents -Bylaws 'Board resolutions -Articles of Incorporation The revrewer should become familiar with the organizational structure and relationship to the PHA. Did the PHA use publlc housrng funds for the formation of an Af?liate or Instrumentality that has not performed public housing activities? -PHA financ1a1 records -Entity invoices The reviewer may review to determine if public housing funds were used to pay for ineligible expenses. (Section ILA) If the PHA is cost allocation for shared staff, facilities, equipment, or other resources, do the allocations generally comply with OMB Circular 87 (2 CFR Part 225)? -F1nan01al records -Acc0unting records -Invoices Contracts The rev1ewer should determme 1f the FHA 18 allocating costs appropriately in accordance with Circular (Section ILLA) If the PHA is utilizing a fee based structure, are the fees for administration charged to the development below 3% of the total project costs or otherwise approved by the Department? -Approval letter -Development proposal Development budgets -Payroll records -Accounting records The budgets should indicate fees within the safe harbor or approval for charging a greater fee. (Section To the extent required, are the entities complying with Generally Accepted Accounting Principles? -Annual audits financial reviews The Audit should be free from ?ndings. Affiliates need only comply with GAAP to the extent that they are required through contracts with the PHA, they are included as a component unit, or an unrelated third party would be required. (Section Page 22 of 24 To what extent is there common membership on the -Organizational documents The reviewer should identify any parties that governing boards prohibited individuals in the Af?liate/Instrumentality? Af?liate/Instrumentality transactions. (Section IV.A.1) *Board records Is there a personal ?nancial bene?t to any of the -PHA payroll records The reviewer should identify any parties with prohibited individuals as determined in accordance 00ther payroll records for a personal ?nancial bene?t other than normal with the guidance provided in Section IV of the the prohibited individuals and customary compensation. (Section Notice? IV.A.2, B, C, and D) If there is a personal ?nancial bene?t to a prohibited The reviewer should ensure that the waiver individual, has the Department issued a waiver of the correspondence records and exceptions requirements have been met. ACC provisions and related to con?ict of - Organizational (IV.B and C) interest? documents of the Af?liate/Instrumentality Is there reason for a Departmental rev1ew or investigation of the procurement or contracting transactions with its Af?liate/Instrumentality? Is the PHA In compliance With the procurement -Procurement Handbook See Section Generally regulation? Have all Af?liates or other deveIOpment -Procurement records partners been appropriately procured? Does the PHA have an. as de?ned in -PHA Plan Sections LE2, 11.8 the Notice? -Annual audit -Entity's organizational documents Has the Instrumentality followed Part 85 procurement Contractual agreements Section practices in the selection of members of its -Procurernent protocols for Deve10pment Team? the Instrumentality. Page 23 of 24 all developments that contain public housmg, which are or have been developed, managed or operated by an entity other than the PHA, including Af?liates/Instrumentalities and private partners. -PIC -PHA Plan -Dec1arations of Trust or Restrictive Covenants This information should be included in the PHA Plan (See Sections VI and IX.B) With respect to those developments, has the PHA or the entered into agreements or commitments that encumber, pledge, or otherwise restrict public housing property or assets? -Loan agreements Guarantees ~Documents recorded upon the deed relating to the property. Section VI. The reviewer should look for any unapproved transactions affecting Public Housing property. With respect to those agreements, has the department previously reviewed and approved the transaction through a Mixed Finance approval, CFFP approval, Section 30 approval or otherwise? -Mixed-finance approval. -CFFP approval -Section 30 approval Section VLB. These transactions are allowed with the Department?s approval required under Part 941. Is there suf?cient indication of an. unapproved prohibited encumbrance to justify an audit or separate review? Does the PHA have an approval under the Authority under 24 CFR 970 for the disposition of property? -HUD disposition approval Section VILA. Does the disposition. fall under the Mixed Finance exception. and have an approval of a mixed ?nance development under 24 CFR 941 -HUD mixed??nance approval Section VILB. Page 24 of 24 Attachment Client: Aurora Housing Authority Engagement: Aurora Housing Authority Period Ending: 3/31/2016 Workpaper: Aojr'usring Journai Entries Report Account Description WIP Ref Debit Credit Adjusting Journai Entries .35 6 1405 To record the accounts receivable and grant revenue for CFP. 45?4614?112500 NR HUD 47.48400 46-4614-112500 NR HUD 14,184.00 4543614802966 Capital Fund Revenue 47,484.00 46-46114-2302966 Capital Fund Revenue 14,184.00 Tota! 61,668.00 61,668.00 Adjusting Journai Entries JE 11 7409 To adjust the insurance proceeds to deferred revenue since PHA did not repair the damage until FY 2017. Recorded 33-0000-410000 Expense Allocation 3,982.00 45-0000-410000 Expense AEiocation 9,101.00 46-0000-410000 Expense Atlocation 5,877.00 33-0000?215000 insurance recovery 3,982.00 45-0000-215000 Insurance Recovery 9,101.00 46-0000-215000 Insurance Recovery 5.877.00 Total 18,960.00 18,960.00 Client: Aurora Housing Authority Engagement: Aurora Housing Authority Period Ending: 3/31/2016 Workpaper: Aojiusting Journal Entries Report Account Description Ref Debit Credit Adjusting Journai Entries JE 12 7501 To adjust expenses, revenue, and interiund from business activities to NLDC for Scholarship event. 98-0000-112930 Interfund 4,049.00 98?0000-450001 General Exp Gala 25,000.00 99-0000-369000 Other Income 10,151.00 99-0000-992000 Operating Transfer Out 18,898.00 98-0000?390001 Other Rev Gala 10,151.00 98-0000-991000 Operating Transfer In 18,898.00 99-0000-112930 Accts Rec lntercompany 4,049.00 99-0000-422000 Ten Serv Recreation. Publication. 25,000.00 Total 68,098.00 58,098.00 Adjusting Journal Entries JE 13 750': To adjust the donations from Public Housing to NLDC. 45?0000-112930 Accts Rec - lntercompany 5,000.00 46-0000?112930 Accts Rec - Intercompany 5,000.00 98-0000-450002 General Exp Donations 10,000.00 45-0000-422000 Ten Serv Recreation. Publication. 5,000.00 46-0000-422000 Ten Serv Recreation. Publication. 5,000.00 98?0000-112930 lnterfund 10,000.00 Total 20,000.00 20,000.00 Adjusting Journal Entries JE 14 7601 To adjust the Gala expenses from Public Housing to NLDO. 45?0000-112930 Accts Rec lntercompany 21,279.00 46-0000-112930 Accts Rec - lntercompany 21,274.00 98-0000-450001 General Exp Gala 42,553.00 45?0000-422000 Ten Serv Recreation, Publication, 1,510.00 45-0000-422000 Ten Serv Recreation. Publication. 19,769.00 46-0000-422000 Ten Serv Recreation. Publication. 1,510.00 46-0000-422000 Ten Serv Recreation. Publication, 19,764.00 98?0000-112930 interfund 42,553.00 Totat 85,106.00 85,106.00 Client: Engagement: Period Ending: Workpaper: Account Aurora Housing Authority Aurora Housing Authority 3/31/20?! 6 Adr?ustr'ng Journal Entries Report Description Ref Debit Credit Adjusting Journal Entries .15 15 5402.1 To record PY entry for REAC adjustment - to adjust cash and equity due to previous year allocations and adjustment 33-0000-116210 45-0000?116210 45-0000-299800 46-0000-116210 46-0000-299800 33-0000-299800 45-0000-116210 45-0000-299800 46?0000-1 16210 46-0000-299800 Total Investment - Unrestricted Investment - Unrestricted Net Assets Investment Unrestricted Net Assets Undesignated Fund Beanie. Investment - Unrestricted Net Assets investment - Unrestricted Net Assets 92,968.00 120,000.00 191,583.00 98,615.00 120,000.00 623,166.00 92,968.00 191,583.00 120,000.00 120,000.00 98,615.00 623,166.00 Attachment AURORA HOUSING AUTHORITY Aurora, Illinois COMBINING STATEMENT OF CASH FLOWS - Continued YEAR ENDED MARCH 31 2016 NORTHERN SECTION 8 LIGHTS cmm. CHOICE BUSINESS DEVELOPMENT ELIMNATING AMP 1 AMPZ COCO ROSS FUNDS VOUCHERS CORPORATION ENTRY TOTAL RECONCILIATION OF CASH AND CASH EQUIVALENTS PER STATEMENT OF CASH FLOWS TO THE STATEMENT OF NET POSITION Cash and cash equivalents 217,922 37,614 - - (8,454) - 52,442 - 299,524 Cash and cash equivalents restricted 42,854 40,277 - - 223,631 - - 306,762 CASH AND CASH EQUIVALENTS PER STATEMENT OF NET POSITION 260,776 77,891 - - - 5 215.177 5 52,442 - 5 505.235 RECONCILIATION OF LOSS INCOME FROM OPERATIONS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES Operating (less) income $0,449,374) $(852,554) 3 - - 830,990 $(264.178) - (93,699) - $0,828,825) Adjustments to reconcile operating (loss) income to net cash (used in) provided by Operating activities Depreciation 608,956 383,826 - - 8,247 - 3,938 - 1,004,967 Changes in assets and liabilities Proceeds from debt (Increase) decrease in assets Accounts receivable 565 13,231 - 41,120 54,916 Due from other governments - - 27,090 41,081 2,464 - - - 70,635 Due from other programs - (79,962) - - (8,454) - - Inventory 9,843 2,940 - - - - 12,783 Interest receivable ((3) Prepaid expenses (45,403) (26,166) - - (14,955) - - - (86,524) Increase (decrease) in liabilities Accounts payable (19,512) (16,01 1) - (41,081 (343) - - (76,947) Accrued payroll (17,607) (5,454) - - - - (23,061) Compensated absences (34,590) (4,378) - - 24,530 - - (14,438) Due to other governments - - (8,540) - - (8,540) Uneamed revenue (5,959) (9,255) - - - 3,982 - (3,046) - (14,278) Due to other programs 67,002 - - (27,090) - - - 43,504 (88,416) Tenants' FSS escrow - - 709 - - 709 Tenants' security deposits 2,275 1,226 - - - - 3,501 Other accrued (435) 2.453 957 - 2.950 NET CASH (USED IN) PROVIDED BY OPERATING ES to co as I 0? (8344298) ?590.097? - 5 - 830.990 ?256534) - (2,215) 5 - (902,155) -25- us. GOVERNMENT GPO Attachment - Part 1 Asst. Secry., for Public and indion Housing, HUD For competitive funding under a NOFA, the application must be sub? mitted by a FHA in accordance with the requirements of the NOFA. The application must include all information required by HUD. HUD re? quirements may be stated in the required form of application, the NOFA, or other HUD instructions. (Approved by the Office of Management and Budget under control number [60 FR 34695. July 3. 1995, as amended at 66 FR 45661. Sept. 1, 1995; 63 FR 23859, Apr. 36, 1996. Redesignated at 64 FR 56667, Oct. 21, 1999] ?982.104 HUD review of application. Competitive funding under NOFA. For competitive funding under a NOFA, HUD must evaluate an applica- tion on the basis of the selection cri- teria stated in the NOFA, and must consider the capacity and capa- bility to administer the program. Approval or disapproval of PHA funding application. (1) HUD must no- tify the PHA of its approval or dis- approval of the FHA. funding applica- tion. (2) When HUD approves an applica- tion, HUD must notify the PHA of the amount of approved funding. (3) For budget authority that is dis- tributed to PHAs by competitive proc- ess, documentation of the basis for pro- vision or denial of assistance is avail- able for public inSpection in accord- ance with 24 CFR PHA disqualification. HUD will not approve any PI-IA funding application (including an application for competi- tive funding under a NOFA) if HUD de- termines that the PHA is disbarred or otherwise disqualified from providing assistance under the program. [60 FR 34695, July 3, 1995, as amended at 64 FR 26642, May 14, 1999. Redesignated at 64 FR 56887, Oct. 21, 1999] Subpori D?Annuol Contributions Contract and PHA Administra- tion of Program Bounce: 60 FR 34695, July 3, 1995, unless otherwise noted. ?982.152 ?982.151 Annual contributions con- tract. Nature of A00. (1) An annual con- tributions contract (A00) is a written contract between HUD and a PHA. Under the ACC. HUD agrees to make payments to the PHA, over a Specified term, for housing assistance payments to owners and for the PHA administra- tive fee. The ACC specifies the max- imum payment over the ACC term. The PHA agrees to administer the program in accordance with HUD regulations and requirements. (2) commitment to make pay- ments for each funding increment in the FHA program constitutes a sepa- rate ACC, However, commitments for all the funding increments in a FHA program are Iisted in one consolidated contractual document called the con- solidated annual contributions con? tract (consolidated AGO). A single con- solidated AGO covers funding for the PHA tenant-based assistance program. Budget authority. (1) Budget au- thority is the maximum amount that may be paid by HUD to a PHA over the ACC term of a funding increment. Be- fore adding a funding increment to the consolidated A00 for a PHA program, HUD reserves budget authority from amounts authorized and appropriated by the Congress for the program. (2) For each funding increment, the ACG specifies the term over which HUD will make payments for the PHA pro- gram, and the amount of available budget authority for each funding in- crement. The amount to be paid to the PHA during each PHA fiscal year (in- cluding payment from the ACC reserve account described in ?932.15