Monitoring Key Indicators for Commissioners SEMAP and PHAS October 16, :45 to 12:15. Brian L. Nemeroff, CPA - Partner

Monitoring Key Indicators for Commissioners SEMAP and PHAS October 16, 2014 10:45 to 12:15 Brian L. Nemeroff, CPA - Partner

Overview of Learning Objectives Terms and Definitions Budget to Actual Annual Audit Role of the Auditor (external) PHAS (Public Housing Assessment) SEMAP (Section 8 Assessment)

Jokes only and Accountant would find funny What do you call an accountant with an opinion? An auditor. What's the difference between an accountant and a lawyer? The accountant knows he's boring. How many accountants does it take to change a light bulb? We didn t budget to change that particular bulb until next year How many did we budget for? Can we just work in the Dark? What happens to an accountant when they retire? They lose their internal controls.

Acronyms/Terms GAAP - U.S. generally accepted accounting principles. GASB -Gov t Accounting Standards Board AICPA American Institute of CPAs audit standards GAAP Flyers (& accounting briefs, REAC website) AMP - asset management project COCC - Central Office Cost Center UFRS - uniform reporting financial standards FDS - financial data schedule OMB (Office of Management and Budget) Circulars: A-87 Cost Principles for State, Local, and Indian Tribal Governments A-133 Single Audit Act GAO Gov t Accountability Office GAGAS Generally Accepted Gov t Auditing Standards aka - The Yellow Book Gov t Auditing Standards

Acronyms/Terms (Cont.) PHAS - Public Housing Assessment System 4 Subcomponents MASS Management Assessment Subsystem FASS Financial Assessment Subsystem CFP Capital Fund Program PASS - Physical SEMAP Section Eight Management Assessment Program DNA National Association of Dyslexics

GAAP Hierarchy 1. Level 1 pronouncements include the following: GASB Statements GASB Interpretations FASB pronouncements if made applicable by the GASB AICPA pronouncements if made applicable by the GASB 2. Level 2 pronouncements are followed when Level 1 provides no guidance. They include: GASB Technical Bulletins AICPA Audit and Accounting Guides if they apply to state and local governments and have been cleared by the GASB AICPA Statements of Position if they apply to state and local governments and have been cleared by the GASB 3. Level 3 pronouncements are followed when Levels 1 and 2 provide no guidance. Currently there are no Level 3 pronouncements in effect. Future guidance would include the following: GASB Emerging Issues Task Force consensus positions AICPA Practice Bulletins if they apply to state and local governments and have been cleared by the GASB 4. Level 4 guidance applies when Levels 1, 2 and 3 provide no guidance. Level 4 currently includes: GASB Implementation guides, which are generally in a question and answer format Widely recognized and prevalent practices, consistent with GAAP 5. Other accounting literature provides the lowest level of guidance. This includes: GASB Concepts Statements Pronouncements of the FASB that have not been made applicable to state and local governmental accounting by the GASB Accounting textbooks or articles

UFRS The Department continues to take the position that it is not an accounting standard -setting body and, as such, has relinquished its role over establishing standards over financial reporting. However, the Uniform Financial Reporting Standards (UFRS), 24 CFR Part 5, subpart H, mandates that PHAs report financial data in accordance with GAAP for governmental entities as set by the GASB. Under asset management, this situation does not change. The reporting requirements of OMB Circular A-133, Audits of States, Local Governments, and Nonprofit Organization, issued by the Office of Management and Budget, continue to apply. (P. 5 HBP)

Budgeting Utilize prior year funding formulas & other HUD information for best estimates. Focus should be on latest average rents and occupancy expectations. For asset management PHAs, management fees should be based on expected occupancy and leased vouchers.

Budgeting Continued Expenses should be based on the most current facts and figures. Review contract register for inclusion/adjustment. Call local utility companies and utilize web to estimate increases by utility type. Housing assistance payments should be based on latest average unit cost times estimated leased, times the expected pro-ration factor. (revenue & net restricted assets should cover this expense)

Budgeting Continued Expenses should be based on the following: Other housing choice voucher expenses should be limited to administrative revenue & possibly net unrestricted position. Insurance should be based on latest quotes. Employee benefits should be based on historical rates along with health insurance adjustment (generally a significant increase) and latest regulatory percentages along with staffing changes. Salaries should be based on anticipated staffing levels and rates

Budgeting Continued Historical data for other expenses should be reviewed and projected (sundry, collection costs, maintenance cost, etc.). Revenue should cover debt and depreciation to ensure sustainability Capital expenditures should be budgeted as well as the sources of funds to pay for these expenditures All programs need to individually be sustainable excluding items such as interest income and gain/loss on sale of assets (these vary based on economic and other factors and should never be dependent upon)

Auditing Process Items Auditors are Concerned with Financial Report Financial Data Schedule (FDS) Grant Reconciliation Communication with Auditors Understand that the Auditor is External

Audit Consider the Audit in two main sections The Basic FS (the numbers/dollars) Controls and Compliance (Rules and Regs) HUD Government auditing standards A-133 Single Audit Process Auditors obtain reasonable assurance that the basic financial statements are free of material misstatements An audit includes assessing accounting principles used and significant estimates to evaluate the overall financial statement presentation

Financial Statements Balance Sheet (Statement of Net Position) The difference between what the PHA owns (assets) and what the PHA owes (liabilities) & cumulative earnings (equity). Statement of Revenues, Expenses and Changes in Net Position This statement presents how the PHA net position increased or decreased during the current fiscal year. Includes non-cash items such as depreciation, amortization, gain/loss from sale of assets, etc. GAAP basis. Capital Grants positive impact on net position Statement of Cash Flows This statement shows the net change in total cash receipts and cash disbursements of the Authority during the current fiscal year.

Audit Items generally tested for controls and compliance: Procurement files, Disbursements AP, Payroll and HAP Employee files, Housing choice voucher Tenant files, Waitlist, SEMAP Due to and from VMS NRP and UNP (formerly NRA and UNA) Public housing files Other major Programs

Audit Items Auditors are Concerned With: Overstatement of Revenue (and short term assets) Understatement of Expenses (and short term liabilities) Bias in the MDA (Management Discussion and Analysis) Fraud Litigation Subsequent Events FDS Information is by Program/Project Unaudited and Audited version Grant Reconciliation

Auditors They provide a level of Assurance However, They are external, and not part of the normal internal controls They come in after the fact They test on a sample basis, and There is a chance they may not test the areas that are a concern of the Board

2 Key Indicators PHAS General Overview MASS FASS SEMAP SEMAP 101 Indicators Defined and Common Errors

The Real Estate Assessment Center (REAC) The Unaudited Process- PHA Draft HUD - REAC Review Final Score* Approved Rejected Invalidated *If audit is not required 19

The Real Estate Assessment Center (REAC) The Audited process: 20

GAAP Flyers

GAAP Flyer 1

Accounting Briefs

GAAP Accounting Briefs

PHAS Purpose PHAS helps the delivery of services in public housing and enhances trust in public housing system among PHAs, public housing residents, HUD and the general public by providing a management tool for effectively and fairly measuring the performance of a PHA in essential housing operations, including rewards for high performers and consequences for poor performers.

PHAS Background PHAs are not owned by the Federal Government United States Housing Act of 1937 Section 6(j) (1) The Secretary shall develop and publish in the Federal Register indicators to assess the management performance of public housing agencies and resident management corporations. The indicators shall be established under section 553 of title 5, United States Code. Such indicators shall enable the Secretary to evaluate the performance of public housing agencies and resident management corporations in all major areas of management operations.

PHAS Background 1988-1990 - Decontrol Indicators 1992-1998 - Public Housing Management Assessment Program (PHMAP) 24CFR Part 901 1998-Present - Public Housing Assessment System (PHAS) 24CFR Part 902

PHAS Background October 1, 1998 PHAS Final Rule February 10, 2000 PHAS Amendments, Final Rule June 6, 2000 Transition Assistance for Certain PHAs Technical Correction, Final Rule July 24, 2003 Deregulation for Small PHAs, Final Rule

PHAS Background February 23, 2011 Interim PHAS Rule November 25, 2013 Capital Fund Program, Final Rule

PHAS Background

Interim PHAS Data Sources

Scoring Summary of PHAS

PHAS Scoring

Improving PHAS Scores Monitor the status and accuracy of submissions frequently in eloccs, PIC, and Secure Systems. Utilize prior year PHAS score results to set annual goals. Plan ahead: be proactive in determining problem areas and fixing them at least 6 months in advance of PHAS due dates.

Ratios/formulas FASS

FASS 37

FDS Sample PHA: FYED: 3/31/14 Line Item No. Account Description Total AMPS Section 8 Housing Choice Voucher Program 14.871 Cost Center Operating Fund 14.850 Business Activities - Elimination 111 Cash - Unrestricted 1,823,090 67,678 425,462 17,476-2,333,706 112 Cash - Restricted - Modernization and Developm - - - - - - 113 Cash - other restricted 96,655 49,308 - - - 145,963 114 Cash - Tenant Security Deposits 68,856 - - 14,402-83,258 115 Cash - Restricted for payment of current liability - - - - - - 100 Total Cash 10,354 1,988,601 116,986 425,462 31,878-2,562,927 121 Accounts Receivable - PHA Projects - - - - - - 122 Accounts Receivable - HUD 18,445 - - - - 18,445 Accounts Receivable - other 124 government 164,282-4,769 127,831-296,882 125 Accounts Receivable - Miscellaneous - 10 977 18,100-19,087 126 Accounts Receivable - Tenants Dwelling Rents 15,856 - - 362-16,218 126.1 Allowance for Doubtful Accounts - Dwelling Rent (13,244) - - (289) - (13,533) 126.2 Allowance for Doubtful Accounts - Other - - - - - - 127 Notes, Loans, & Mortgages Receivable - current 10,354 - - 2,102-12,456 128 Fraud recovery - - - - - - 128.1 Allowance for doubtful accounts - fraud - - - - - - 129 Accrued interest receivable - - - - - - 120 Total Receivables, net of allowances for doubtfu 195,693 10 5,746 148,106-349,555 131 Investments - Unrestricted - - - - - - 132 Investments - restricted - - - - - - 135 Investments - restricted for payment of current lia - - - - - - 142 Prepaid Expenses and Other Assets 81,212 1,335 7,388 5,867-95,802 143 Inventories 33,130 - - 4,833-37,963 143.1 Allowance for Obsolete Inventories (1,346) - - (115) - (1,461) 144 Interprogram due from - - 247,281 - (247,281) - 145 Assets held for sale - - - 14,500-14,500 146 Amounts to be provided - - - - - - 150 Total Current Assets 2,297,290 118,331 685,877 205,069 (247,281) 3,059,286 Total 38

Memo Accounts PHA: FYED: 3/31/14 Line Item No. 10000 Account Description Total AMPS Section 8 Housing Choice Voucher Program Cost Center Operating Fund 14.850 Business Activities - Elimination Excess (deficiency) of total revenue over (under) total expenses (76,967) (34,625) 150,755 134,578-173,741 11020 Required annual debt principal payment - 98,400 - - - 98,400 11030 Beginning Equity 8,898,198 136,012 407,163 426,116-9,867,489 Prior Period Adjustments, Equity transfer 11040 and correction of errors - - - - - - 11190 Unit Months Available 4,995 3,619-370 - 8,984 11210 Number of Unit Months Leased 4,995 3,594-360 - 8,949 11170 Administrative Fee Equity - 59,171 - - - 59,171 11180 Housing Assistance Payments Equity - 42,216 - - - 42,216 11270 Excess Cash 1,594,253 - - - - 1,594,253 11610 Land Purchases - - - - - - 11620 Building Purchases - - - - - - 11630 Furniture & Equipment - Dwelling Purchases - - - - - - 11640 Furniture & Equipment - Administrative 18,231 - - - - 18,231 Total 39

FASS 40

MENAR 41

Debt Service Coverage Ratio 42

Summary Guide 43

FASS - Score Adjustments 44

Score Adjustments 45

MASS Summary 46

MASS

MASS - Occupancy

MASS TARS

MASS Accounts Payable

SEMAP 101 The Section Eight Management Assessment Program (SEMAP) measures the performance of PHAs that administer the housing choice voucher program in 14 key areas. SEMAP is completed annually by each PHA that administers a Section 8 tenant-based assistance program. The SEMAP certification is required to be submitted within 60 days after the end of the fiscal year. 54

SEMAP 101 SEMAP will help HUD target monitoring and assistance efforts to PHA programs that need the most improvement. The 14 indicators of performance show how well PHAs help eligible families afford decent rental units at a reasonable subsidy cost as intended by Federal housing legislation. 55

SEMAP - 14 requirements 1. Wait list 2. Reasonable Rent 3. Adjusted income 4. Utility allowance 5. HQS Quality Control 6. HQS Enforcement 7. Expanding housing assistance 8. Payment standards 9. Annual exams 10. Correct Tenant rent 11. Pre-contract HQS inspections 12. Annual HQS Inspections 13. Family Self Sufficiency 14. Bonus Deconcentration Bonus indicator

How does SEMAP work? Remotely measures a PHAs performance and administration of the Housing Choice Voucher Program HUD annually assigns a score for each indicator and an overall performance rating: > 90% - high performer 60 89% - standard < 60% - troubled A few instances create an automatic rating of troubled Late submission Auditor unable to issue an opinion on the financial statements or the Schedule of Expenditures of Federal Awards Inadequate performance on any indicator and/or a troubled rating results in the need for remedial action 57

What does remedial action entail? HUD will conduct an on-site review of PHAs that are rated as troubled The PHA must implement a corrective action plan that HUD will monitor, to ensure improvement in program management 58

So who verifies a PHA s compliance with the 14 self assessed SEMAP indicators? Your Independent Auditor! 59

What do Auditors use to test compliance? The Code of Federal Regulations, Title 24- Housing and Urban Development, Chapter 9 Office of Assistance Secretary for Public and Indian Housing OMB Circular A-133 Compliance Supplement 60

#1 Requirement for a successful audit DOCUMENTATION! Auditors must have a paper trail to follow Per CFR 985.3 Per audit standards Most common SEMAP error HINT: all items organized, documented and available for your auditor to review keeps them out of your way! 61

UNIVERSE AND SAMPLE SIZE

Indicator 1: Selection from the Waiting List Definition a) The PHA has written policies in its administrative plan for selecting applicants from the waiting list. b) Applicants reaching the top of the waiting list and applicants admitted were properly selected from the waiting list for admission and met the selection criteria that determined their place on the waiting list and their order of selection. 66

Indicator 1: Selection from the Waiting List - Purpose This indicator shows whether the PHA has written policies in its administrative plan for selecting applicants from the waiting list and whether the PHA follows these policies when admitting new tenants. Ensures that all eligible citizens are given a fair and equal chance to receive assistance. 67

Indicator 1: Selection from the Waiting List - Score Based on the quality control samples selected, documentation shows that 98% of the families in both samples were properly selected from the waiting list Yes 15 points No 0 Points 68

Indicator 1: Selection from the Waiting List - Sample Quality Control (QC) sample is an annual sample of files/records drawn in an unbiased manner and reviewed by the PHA supervisor Per 24 CFR 985.2(b): 69

Indicator 1: Selection from the Waiting List - Sample Per 24 CFR 985.3(a)(3)(i)(B) Note you must draw 2 separate samples to properly test this indicator Applicants reaching the top of the waiting list Applicants admitted to the program 70

Indicator 1: Selection from the Waiting List Common Errors and Mistakes Improper samples Inadequate documentation to verify proper procedures Incorrect use of preferences Management override of admission policies Improper scoring If you do not meet the 98% threshold for both samples you must check No in the PHA response (All or nothing) 71

Indicator 2: Reasonable Rent Definition The PHA has and implements a reasonable written method to determine and document that the rent to owner is reasonable based on current rents for comparable unassisted units: At the time of initial leasing Before any increase in rent to owner At the HAP contract anniversary if there is a 5% decrease in published FMR in effect 60 days before the anniversary date 72

Indicator 2: Reasonable Rent Definition The PHA s method should also take into consideration the location, size, type, quality, and age of the program unit and similar unassisted units, and any amenities, housing services or utilities provided by owners 73

Indicator 2: Reasonable Rent Purpose To ensure that landlords are not inflating their rent thresholds due to the fact that the unit is being subsidized by the government To ensure that tenant rent payments are adjusted for any decreases in the FMR if applicable 74

Indicator 2: Reasonable Rent Score The PHA follows its written policy for determining rent reasonableness and has documented that rent is reasonable for: 98% of the units sampled 20 points 80 97% of the units sampled 15 points < 80% of the units sampled 0 points 75

Indicator 2: Reasonable Rent Sample Per 24 CFR 985.2(b) 76

Indicator 2: Reasonable Rent Common Errors and Mistakes Lack of documentation Comparing dissimilar units Using outdated information 77

Indicator 3: Determination of Adjusted Income - Definition The PHA s quality control sample of tenant files shows that at the time of admission and reexamination, the PHA properly obtained a third party verification of adjusted income or documented why third party verification was not available. 78

Indicator 3: Determination of Adjusted Income - Definition The PHA must also show that they used verified information in determining adjusted income; properly attributed allowances for expenses; and, when the family is responsible for utilities under a lease, the PHA used the appropriate utility allowances for the unit leased in determining the gross rent 79

Indicator 3: Determination of Adjusted Income - Purpose To ensure that the tenant rent payment is being calculated based on current and accurate information Remember the other side of the tenant payment is your HAP!! 80

Indicator 3: Determination of Adjusted Income - Score The PHA uses independent verification of income, properly attributes allowances and uses the appropriate utility allowances for: 90% or more of the families sampled 20 points 80 89% of the families sampled 15 points < 80% of the families sampled 0 points 81

Indicator 3: Determination of Adjusted Income - Sample Per 24 CFR 985.2(b) 82

Indicator 3: Determination of Adjusted Income Common Errors and Mistakes Lack of proper documentation Use of outdated information Incorrect annualization of third party information Incorrect calculation of medical expenses (pay attention to detail) Lack of support for a student > 18 years old Use of incorrect utility allowances Zero income tenants 83

Indicator 4: Utility Allowance Schedule Definition The PHA maintains an up-to-date utility allowance schedule The PHA reviews utility data once every 12 months and adjusts its utility allowance schedule if there is a change of 10% or more in the rates 84

Indicator 4: Utility Allowance Schedule Purpose To ensure that the tenant rent payment is being calculated based on current and accurate information 85

Indicator 4: Utility Allowance Schedule Score Documentation shows that the PHA reviewed utility rate data and properly adjusted the utility allowances if necessary Yes 5 points No 0 Points 86

Indicator 4: Utility Allowance Schedule Sample No sample for this indicator, you either did it or you didn t 87

Indicator 4: Utility Allowance Schedule Common Errors and Mistakes Not obtaining utility rate data every 12 months Not obtaining reliable data Not updating the allowances when required Not updating the information in the system when a change is made 88

Indicator 5: HQS Quality Control Inspections - Definition A PHA supervisor (or other qualified person) re-inspected a sample of units during the PHA fiscal year, for quality control of HQS inspections 89

Indicator 5: HQS Quality Control Inspections - Purpose To verify that HQS inspections are being performed timely and accurately and are properly tracked by the PHA HQS inspections are performed in order to ensure that the subsidized units are an adequate living environment for the tenants 90

Indicator 5: HQS Quality Control Inspections - Score Documentation shows that the PHA reperformed HQS inspections over a cross section of neighborhoods and inspectors Yes 5 points No 0 Points 91

Indicator 5: HQS Quality Control Inspections - Sample Per 24 CFR 985.2(b) The PHA s reinspected sample must be drawn from recently completed HQS inspections and represents a cross section of neighborhoods and the work of a cross section of inspectors. 92

Indicator 5: HQS Quality Control Inspections Common Errors and Mistakes Annual inspections are not performed Lack of documentation Re - inspections were not performed, or not performed by a supervisor or other qualified individual Sample was not representative of a cross section of neighborhoods and/or inspectors The intent of the reinspection is a QC on the initial inspection. Not an inspection because we need an inspection. ( Quality Control of the Initial Inspection) 93

Indicator 6: HQS Enforcement Definition The PHA s quality control sample of case files with failed HQS inspections shows that for all cases sampled: any cited life-threatening deficiencies were corrected within 24 hours from the inspections all other cited HQS deficiencies were corrected within no more than 30 calendar days (or less per admin plan could be 14 days) from the inspection or any PHA approved extensions 94

Indicator 6: HQS Enforcement Definition If the HQS deficiencies were not corrected within the required time frame the PHA must: Stop housing assistance payments beginning no later than the first of the month following the specified correction period (abatement) or Take prompt and vigorous action to enforce the family obligations 95

Indicator 6: HQS Enforcement Purpose To ensure that HCVP tenants are living in acceptable conditions To ensure that the landlord is properly maintaining the property 96

Indicator 6: HQS Enforcement Score Documentation shows that the PHA s QC sample of failed inspections were properly corrected or abated within the appropriate time frame > 98% - 10 points < 98% - 0 points 97

Indicator 6: HQS Enforcement Sample Per 24 CFR 985.2(b) 98

Indicator 6: HQS Enforcement Common Errors and Mistakes Annual inspections are not performed Incorrect universe used in selecting the sample Follow up of failed inspections not performed timely HAP not abated timely 99

RECAP Board Oversight Be involved in the budget and monitor and understand variances with actual Understand the audit, what it covers and what it doesn t. PHAS MASS and FASS Occupancy, etc SEMAP Maybe try a monthly scorecard (dashboard)

SEMAP Indicator Maximum Points/ SEMAP Goal Jan Feb Mar 1 Waiting List 15 2 Rent Reasonableness 20 3 Adjusted Income 20 4 Utility Allowance Schedule 5 5 Quality Control Inspections 5 6 HQS Enforcement 10 7 Expanding Housing Opportunities 5 8 Payment Standards 5 9 Annual Re-examinations -PIC 10 10 Correct Tenant Rent - PIC 5 11 Pre-contract HQS Inspections - PIC 5 12 Annual HQS Inspections - PIC 10 13 Lease-Up 20 14 FSS 10 Total Points 145 Deconcentration Bonus 5 Score 100% Rating: High, Standard, or Troubled High 90% or above = High Performer 60%-89% = Standard Performer Less Than 60% = Troubled Performer

PHAS improvement mark FASS total points allowed January February March April QR 12 MENAR 11 DSCR 2 FASS total 25 MASS Occupancy 16 TARs 5 AP 4 MASS total 25 103

Questions or Comments? 104

Contact Us Brian Nemeroff, CPA - Partner Phone (321) 757-2020 Email Nemeroff@bermanhopkins.com Visit our website at http://www.bermanhopkins.com