Richmond Housing Authority
Reports of Recommendations
February 2020
Report of Recommendations - Debts Owed Write
Off/Repayment
Richmond Housing
Authority
February 28, 2021
© 2021 CVR Associates, Inc. All rights reserved.
Richmond Housing Authority
Reports of Recommendations
February 2020
Table of Contents
Executive Summary ........................................................................................................................................... 1 Write Off and Repayment Recommendations ................................................................................. 4 Repayment Plan .................................................................................................................................................. 7 Authorized Uses of Federal Funds ......................................................................................................... 8 City Responsibility for RHA Liabilities ................................................................................................ 10 IRS Settlement .................................................................................................................................................. 11 RHA Budgeting .................................................................................................................................................. 13
Richmond Housing Authority
Reports of Recommendations
February 2021
Executive Summary
The Richmond Housing Authority (RHA) is operationally and financially stressed.
Various external and internal audits, reviews, and other reports have indicated that monies are owed from RHA to the City of Richmond (COR or City). To address this fiscal stress long term, RHA transferred its Housing Choice Voucher (HCV) Program to the Housing Authority of Contra Costa County (HACCC) and is disposing of its Public Housing properties via RAD, Section 18, and other asset repositioning strategies. Technical Assistance (TA) was provided by CVR to assist RHA with the HCV program transfer. During this TA, potential duplicate payments to HCV owners were identified which require further review and may be contributing to the amounts owed to the COR by RHA. Another TA provider is assisting RHA with its repositioning efforts.
RHA has raised concerns that some of the amounts indicated as due to C OR may not be accurate, COR may have overcharged RHA for some items, some amounts listed as owed may not have supporting documentation, certain amounts the COR is seeking may not be standard and customary in a PHA/City relationship, and monies may actually be due from the COR to RHA.
An initial amount of $15,371,628 was identified as owed by COR per the audited financial statements dated June 30, 2019. The results of the analyses performed by CVR’s team were provided in a report dated December 31, 2020. Per the report, only $699,907 of this amount could be verified as due. The total amount was adjusted based upon the following:
Amount Description
$15,371,628 Amount Owed per City of Richmond
($5,704,418) Notes & loans payable with accrued interest due from affiliated entities
($174,067) Loan from Community and Development Loan Programs to Westridge paid off by sale of property
$45,969 Difference of direct and indirect charges owed to the COR by RHA as verified with the COR’s 2019 CAFR1
1 The City of Richmond’s 2019 Comprehensive Annual Financial Report (CAFR) can be located at https://www.ci.richmond.ca.us/2969/Comprehensive-Annual-Financial-Report-CA
Richmond Housing Authority
Reports of Recommendations
February 2021
Amount Description
($2,096,527) Incorrect recording of Westridge receivable ($4,772,363) Disallowed indirect cost allocations
($1,401,684) Debt settlement per PHARS agreement
($568,631) Duplicate landlord payments2
$699,907 Verified Amount Due
HUD advised that RHA and its affiliates may possess assets including cash, buildings, and property that can be considered when negotiating any debt repayment amounts and terms. However, RHA lacked the capacity to assess and validate the correct amount owed, if any, identify what assets might be available to repay any amounts owed, and to successfully renegotiate a repayment agreement with the City.
In a report dated January 31, 2021, CVR advised that all of RHA’s unrestricted cash assets and unrestricted future cash flows were encumbered by $8,122,073 of long-term liabilities, all of which would supersede the debts owed to the City.
It is likely that these amounts will become the responsibility of COR once RHA disposes of all its assets.
The following table summarizes RHA’s assets, future cash flows, and liabilities.
Description Amount
Assessed Value of Administrative
Building less sales price $307,649
Unencumbered Public Housing Cash Could Not Be Determined, presumed zero Unencumbered HCV Unrestricted
Net Assets Could Not Be Determined, presumed zero
Known Developer Fees None
Residual Cash and Other Cash Flow
from Affiliates Not Material
Total Available Assets and Cash Flows $307,649
2 This amount will be further reviewed under a separate engagement
Richmond Housing Authority
Reports of Recommendations
February 2021
Description Amount
IRS Liabilities ($71,718)3
Amounts Due Per VCA ($9,506)
Pension Liability ($4,335,771)
Other Employee Benefits Due ($3,005,171)
Debts Owed to COR ($699,907)
Total Liabilities ($8,122,073)
Net Available Assets ($7,814,424)
3 These penalties will continue to accrue until paid or waived. Thus, the actual amount due may be higher.
Richmond Housing Authority
Reports of Recommendations
February 2021
Write Off and Repayment Recommendations
The verified amount due, $699,907 should be the basis for the development of any repayment plan. Depending upon the results of a separate review of potential duplicate Housing Assistance Payments in the Housing Choice Voucher Program, it is possible that this amount can be adjusted upwards.
Pursuant to an approved Section 18 application, RHA is disposing of its Administrative Building. The building is being sold to the City for the price of $1. According to records from the Contra Costa County Assessor’s Office the building and land have an assessed value of $307,650. The difference between the sales price and the assessed value, $307,649, should be used to offset the amounts owed by RHA.
In accordance with the Report of Observations and Recommendation dated December 31, 2020, CVR recommends that RHA requ est that the City adjust its books and records to reflect that as of June 30, 2019, the amount due was $699,907. Once the sale of the Administrative Building is complete, the amount that is subject to any repayment agreement should be $392,285.
In order to reflect the correct amount owed in the City’s books and records, the following adjustments are recommended:
Amount Description Recommended Action
$15,371,628 Amount Owed per City of
Richmond as of June 30, 2019
($5,704,418)
Notes & loans payable with
accrued interest due from
affiliated entities
Adjusted books and records
to show that these funds are
due from affiliated entities
($174,067)
Loan from Community and
Development Loan Programs to
Westridge paid off by sale of
property
Write of f this amount as it
was erroneously booked
$45,969 Difference of direct and indirect
charges owed to the COR by RHA
Post adjustment to reflect
CAFR differences
Richmond Housing Authority
Reports of Recommendations
February 2021
as verified with the COR’s 2019
CAFR4
($2,096,527) Incorrect recording of Westridge
receivable
Write off this amount as it
was erroneously booked.
($4,772,363)
Disallowed indirect cost
allocations
Write off this amount because
the City was not authorized
to make these charges
($1,401,684) Debt settlement per PHARS
agreement
Write off in accordance with
PHARS agreement
($568,631) Duplicate landlord payments5 Write off pending revi ew of duplicate payments
$699,907 Verified Amount Due
$307,649 Net Value of Administration
Building
Reduce debt upon transfer of
building
$392,285 Amount Subject to Repayment
Agreement
RHA’s only consistent revenue streams are its Public Housing Operating Subsidy, tenant rents, and Capital Funds. The use of these funds is limited to certain purposes. The purpose of the rents operating subsidies, as per 24 CFR 990 subpart A is to manage and operate RHA’s public housing properties, thereby providing decent, safe, and affordable housing to low, very low, and extremely low-income families in the City of Richmond. The use of these funds is further restricted by the Asset Management rules contained in 24 CFR 990 Subpart H.
The rules contained in 24 CFR 905 subpart B describe the eli gible uses of the Capital Funds and further clarify that expenditures must be associated with a public housing project or development.
RHA is currently fiscally stressed and its properties are in a substandard condition.
All of the funding sources referenced in the prior paragraph should be committed
4 The City of Richmond’s 2019 Comprehensive Annual Financial Report (CAFR) can be located at https://www.ci.richmond.ca.us/2969/Comprehensive-Annual-Financial-Report-CA 5 This amount will be further reviewed under a separate engagement
Richmond Housing Authority
Reports of Recommendations
February 2021
to the operations, maintenance, and capital needs of the properties until such time as asset repositioning is complete. If RHA is able to generate any surplus cash from these activities, it would be encumbere d by $8,122,073 of liabilities described in the Executive Summary of this report. Once the asset repositioning is complete, any residual cash must also be pledged towards satisfying these liabilities.
Any developer fees, excess cash, or repayment of loan received by RHA from any of its affiliates should be pledged towards the satisfaction of the various liabilities.
RHA should also take due care to negotiate favorable developer fee terms in future redevelopment transactions. This would increase the amo unt of funds available to satisfy all of the various amounts owed by RHA to the City.
The loans to Richmond Village I, II, and III were funded with HOPE VI funds. The proceeds of the loan re -payments are restricted and might not be available to pledge as a source of funds for the Authority’s repayment obligations. Further, these loans were soft loans and are not likely to be repaid unless ownership of the site is transferred.
If loan repayments are received by RHA, then additional research should be done to determine the permissible uses of these loan repayments. Typically, these funds are considered program income that must be used for specific authorized purposes. In accordance with Exhibit H of the Mixed Finance ACC for this project, “If the Authority has earned Program Income through the repayment of loans funded with public housing fu nds, then Program Income must be used for affordable housing purposes.” Further review would be required by RHA or COR legal counsel, in conjunction with HUD, to determine if loan repayment proceeds could be pledged to satisfy RHA’s liabilities.
RHA should pursue forgiveness of the amounts owed to the IRS. Additional information is contained later in this report.
Richmond Housing Authority
Reports of Recommendations
February 2021
Repayment Plan
RHA and the City should enter into a repayment agreement for the verified amount due of $699,907 as of June 30, 2019. This agreement should spell out the sources of funds and the timing of the repayments.
The agreement should stipulate that once the sale of the Administrative Building is complete, the amount that is subject to any repayment agreement should be reduced to $392,285.
The agreement should further stipulate that RHA must utilize all of its current Public Housing revenues to operate and maintain its public housing properties until such time as asset repositioning is complete. Once the repositioning has been completed, to the extent permissible by HUD rules and regulations, any excess cash should be set aside to address RHA’s long -term liabilities. Further, any unrestricted net assets identified during the close out audit for the Housing Choice Voucher Program, should also be pledged to satisfying these liabilities.
Next, the agreement should stipulate that any unrestricted cash earned from its affiliates or redevelopment activities shall be pledged towards satisfying RHA’s long-term liabilities until such time as the total liquid assets of RHA are sufficient to pay all amounts owed.
Finally, the agreement should stipulate that once all other long -term liabilities have been satisfied, RHA must remit any unrestricted cash earned to the City of Richmond until such time as $392,285 has been remitted. Once this amount has been remitted, the debt owed the City should be considered paid in full.
There may be other amounts owed to the City for periods after June 30, 2019.
These amounts should be subject to a separate agreement, but with similar terms.
As of the date of this report, it does not appear that the City has obtained HUD approval for its Indirect Cost Allocation Plan. Until such time as approval is given, these are not eligible costs and should not be considered in any repayment agreement.
Richmond Housing Authority
Reports of Recommendations
February 2021
Authorized Uses of Federal Funds
During the period that debts owed to the City were accumulating, RHA operated three Federal programs: Low Income Public Housing (LIPH), Capital Fund Program (CFP)6, and Housing Choice Voucher (HCV) Program. For a cost to be an eligible expense for one of these Federal programs, it must meet the following standards:
1. The cost is allowed by statutes, regulations, and/or program guidance.
2. The cost is documented, including proper procurement and accounting.
3. The cost is equitable, a true cost of the program.
4. The cost is necessary, meeting a program goal.
5. The cost is reasonable if:
a. It is ordinary and necessary for operations.
b. It is within restraints or requirements imposed by such factors as:
sound business practices; arm’s-length bargaining; Federal, State and other laws and regulations; and terms and conditions of the Federal award.
c. It is consistent with market price for comparable goods or services. d. The PHA acted with prudence considering their entity and staff. e. The PHA did not significantly deviate from policies and procedures and incur costs unjustifiably.
Once RHA has repositioned all of it properties , any remaining LIPH funds must be used to pay remaining eligible obligations . To the extent pension, post - employment benefits, and other liabilities are attributable to LIPH, remaining funds should be pledged to satisfy these debts. If all of RHA’s LIPH liabilities are satisfied, any remaining funds must be used for authorized affordable housing purposes.
Since the close out audit for the HCV Program is not yet complete, it is unknown if any funds remain. If the audit determines any monies are due back to HUD or the Treasury, these pay ments must be made first. Any remaining Housing Assistance Payment funds (Restricted Net Assets) are due and payable to the Housing Authority of the County of Contra Costa (HACCC). Any remaining unrestricted net assets should be pledged to satisfying all liabilities attributable to the HCV Program. If all of RHA’s HCV liabilities are satisfied, any remaining
6 Although the Capital Fund Program provides funding for the long term capital needs of the LIPH units, it is considered a separate program with separate appropriations, regulations, and other requirements.
Richmond Housing Authority
Reports of Recommendations
February 2021
unrestricted funds must be transferred to HACCC. For further information, please refer to PIH Notice 2018-12.
Capital Funds are limited in their use. Further, the use of CFP grants is restricted to items included in the HUD approved 5 Year Action Plan. Once the asset repositioning is complete, any unobligated CFP funds must be returned to the Treasury.
If any Central Office Cost Center (COCC) funds are remaining after repositioning, these funds are considered to be de -Federalized. Thus, there are no HUD restrictions on the use of the funds. However, since the COCC funds are assets of RHA, they would be considered encumbered until such time as all debts and liabilities are satisfied.
Richmond Housing Authority
Reports of Recommendations
February 2021
City Responsibility for RHA Liabilities
RHA is a component unit of the City. Component units are legally separate organizations for which the elected officials of the p rimary government are financially accountable. Per the City’s audited financial statements, RHA is a blended component unit. Blended component units are component units that are so intertwined with those of their primary government that the financial information is usually combined with that of the primary government. A unit is blended when the governing body is substantially the same as that of the primary government, and the primary government has operational responsibility for the blended component unit.
In accordance with guidance published by the State of California Office of the Controller, RHA’s activities are an Enterprise Fund for the City’s financial reporting purposes. Any debts incurred by an Enterprise Fund are secured by a pledge of net revenues from fees and charges and the full faith and credit of a related primary government or component unit, even if that government is not expected to make any payments.
All employees performing work (excluding third party vendors) on behalf of RHA are City employees.
While RHA is a separate legal entity, when considering the totality of the relationship, it appears that the City would be responsible for any liabilities owed to outside parties, the largest of which is for pensions and other post retirement benefits. The City’s General Counsel should further research this matter to determine the City’s obligations for amounts owed by RHA.
Richmond Housing Authority
Reports of Recommendations
February 2021
IRS Settlement
Internal Revenue Service (IRS) requires payments of $600 or more per year be reported to the IRS and a 1099 be sent to the vendor or landlord. The information on the 1099 (name and taxpayer ID (TIN) or Social Security number) must match.
When the information doesn’t match, the IRS requires that the reporting agency correct the mismatched information. If there are discrepancies, IRS Form CP2100A is issued, which lists all the mismatched 1099’s for a particular filing year. The IRS will also propose penalties via this notification via Form 972CG.
Using Publication 1281 as a guide, the reporting agency must follow specific steps to correct the discrepancy or begin backup withholding. The IRS does not require correction to the year reported but required corrective action be taken so that the incorrect information isn’t reported again the following year. By following the guidelines established in Publication 1281 and documenting the corrective action, the reporting agency can request the IRS waive the proposed penalty (Form 972CG).
The reporting agency can respond with the documentation showing Publication 1281 guidelines were followed and mismatches were corrected for the following year. If the reporting agency does not respond, the IRS will issue a Form CP215 which is the penalty letter. The CP215 will have a pay stub along with a payment due date. The Form CP215 is very important and must accompany the payment as it will tell the IRS how to apply the funds.
Richmond Housing Authority has been issued CP215 penalty letters for tax years 2009-2015 and perhaps 2017. The IRS advised that the penalties were $71,718 as of 2019, but further penalties may have accrued. Unfortunately, RHA could not find the individual CP215 letters for 2009-2014.
It is CVR’s understanding that the City sent a letter to the IRS seeking a waiver of the 2009-2014 penalties and the IRS’s response was to either pay the penalty or send in a response documenting why a waiver should be granted.
IRS Publication 1586, Section 3 states that failure to correct mismatched tax information must be due to reasonable cause and not willful neglect and filers must establish both that they acted in a responsible manner both before and after the failure occurred.
The IRS has an office in Maryland which deals specifically with 1099 issues. CVR recommends that finance staff contact the IRS and obtain the contact information in Maryland that specializes in 1099 issues. The IRS will only speak to an officer of the City. Anyone else must send in Form 2848 (power of attorney) to the IRS.
The 1099 office can tell RHA or COR specifically how much is owed for the penalty and interest by tax year. Given the unique nature of RHA’s circumstances,
Richmond Housing Authority
Reports of Recommendations
February 2021
it is possible that the IRS would still consider a waiver of some or all of the penalties. However, the IRS will only engage in this dialog with persons authorized by the City or RHA.
Richmond Housing Authority
Reports of Recommendations
February 2021
RHA Budgeting
City officials have indicated that the root cause of debts owed from RHA is that the agency’s expenses exceed its revenues. As a result, the City has incurred the additional operating costs to ensure RHA residents are provided decent, safe, and affordable housing.
During the course of the of this technical assistance engagement, CVR noted that the indirect costs the City would like to charge exceed RHA’s ability to pay these amounts.7 RHA and the City should take due care to ensure that indirect cost allocations are consistent with RHA’s ability to pay those costs.
It is imperative that the City and RHA work together to ensure the agency adopts and implements an accurate and balanced operating budget and takes measures to ensure that actual expenses. RHA should also take measures to ensure it is drawing down its LIPH operating subsidies in a timely manner while obligating and expending Capital Funds in accordance with statutory deadlines. RHA should also take measures to ensure all tenant rents are paid as required and take prompt and vigorous action to enforce lease violations for non-payment of rent.8 Since RHA’s revenues are generally fixed based upon Congressional appropriations, and tenant rent levels are prescribed by statute, RHA’s primary focus with regard to developing a balanced budget should be on expenses. RHA’s operating expenses should be scrutinized to identify costs that can be eliminated or reduced.
While the health and safety of residents should be first and foremost, and RHA should strive to properly maintain its units, all maintenance and upkeep decisions should be made within the context of the Asset Repositioning Plan. The use of Capital Funds should also be consistent with this Plan.
7 See the Analysis of Indirect Costs (Fees) That Could Have Been Charged by City that is contained in CVR’s Report of Observations and Recommendations dated December 31, 2020. 8 RHA’s ability to enforce the collection of past due rent may be impaired by various eviction moratoriums as a result of the COVID-19 pandemic.