An audit report from Housing and Urban Development (HUD) on financial problems threatening to bankrupt the Chattanooga Housing Authority says the CHA board paid Bob Dull, the executive director who left the agency in disarray, $86,804 in severance pay after he resigned.

It says other CHA employees recently let go in a reduction of force got high severance pay also - costing the agency a total of $292,589.

The report says under the CHA policy manual, the outgoing employees (other than Dull) should have gotten only a total $81,071.

It says CHA had a $3.1 million increase in operating expenses in fiscal year 2007, and nearly 84 percent of it was for salaries and benefits.

The report says, "While the authority's staffing levels remained essentially unchanged during fiscal year 2007, its salary and benefits expense increased by $2.6 million. The majority of the increases benefited two departments: administration and maintenance."

It says CHA's administrative salary and benefits expense increased by $2.36 million, from $5.7 million in 2006 to $8.1 million in 2007. This was a 41 percent increase."

HUD said the Chattanooga Housing Authority has been left in such straits by the severance pay and keeping staffing levels too high that "drastic" measures are necessary to save it.

These include major layoffs and the sale of some CHA properties. Some of those actions have already been taken.

HUD said CHA administrative costs rose 44 percent from fiscal year 2004 ($2.47 million) to $3.5 million in fiscal year 2007.

It says CHA used some restricted funds to help cover costs and those must now be repaid.

One of those was using part of a $3.6 million Fannie Mae loan for the Mayfair on Market project on Market Street. Developer Trey Stanley is now seeking those funds, but portions of the money has been spent, it was stated.

HUD said CHA breached the covenants of its Mayfair on Market loan and security agreement with Fannie Mae and has been declared in default.

The report says CHA moved to a private management firm in 2002 and that was expected to bring $2.8 million in operational savings. But it actually caused expenses to go up by $222,359.

It says for the Greenwood Terrace project, CHA improperly "borrowed" $96,000 of funds earmarked for that project and used the money to cover operating costs for the authority's low rent public housing program. The funds were repaid in early May.

HUD said CHA has pledged a percentage of the annual operating subsidy at Greenwood Terrace, McCallie Homes and Johnson Terrace (now known as The Oaks at Camden) to subsidize rents.

The report says, "Since CHA does not own the redeveloped properties, each dollar pledged decreases the amount of revenue available to fund the authority's operations. Further, for two of the three new developments, CHA did not retain the right to manage the rental units, resulting in forgone fee income that could have been used to offset the authority's operating costs.

"This leveraged development approach has exposed the authority to increased financial risks."

HUD said the deal with Mayfair on Market and one at the Grove Street Center shopping complex "have increased CHA's risk exposure."

It said CHA opted to spend $3.8 million to renovate its warehouse on Holtzclaw Avenue to its new headquarters over the objection of Mayor Ron Littlefield.

CHA is now considering finding smaller headquarter space. The report says it is paying $29,000 in monthly rent, and should find space at a monthly savings of $11,000.

HUD said over the past five years, CHA has operated its low-income public housing program at an average annual deficit of approximately $5.2 million per year.

The report says the operating subsidy to CHA has remained fairly consistent over the past five years, averaging about $9 million per year. It went up from $8.4 million in fiscal year 2005 to $9.68 million in fiscal year 2007.

Total program revenue also increased during that period from $13.5 million in fiscal year 2005 to $15.85 million in fiscal year 2007.

HUD said CHA has depleted the low-rent program's cash reserves.

The report says from Dec. 31, 2006, to Dec. 31, 2007, CHA's total operating expenses rose $3.1 million, while total operating grant revenue dropped $1.36 million.

During fiscal year 2007, CHA's total cash and investment position decreased by $5.24 million, or 46 percent of the 2006 fund balance.

The report said the current CHA budget projected a $3.7 million surplus, but "unfortunately, that projection proved to be overly optimistic. Faced with mounting deficits, on March 1, CHA reduced its workforce by 26 employees."

HUD said, "By April 2008, CHA's financial situation had become dire." It said the board was told in April the deficit had grown to $5.3 million.

In a letter to HUD on April 29, Executive Director Dull asked for assistance in reorganizing the agency. A shortfall of over $1 million from the month of May was reported.

The report said, "More alarming, CHA had used $1.2 million of the proceeds from the Mayfair on Market loan to cover operating shortfalls. In addition, CHA reported that it used $181,000 of HCV program funds, $96,000 of funds from Greenwood Terrace LLC accounts, and $166,112 of funds from Holtzclaw Development LLC to cover shortfalls."

CHA officials said they needed a $3.3 million cash infusion to return the agency to solvency.

The reorganization plan offered HUD included cutting an additional 30 employees and suspending employee retirement contributions that had been at 8 percent. Also, reduce contract services by 20 percent and eliminate all non-essential contracts. CHA has since identified 10 contracts that is has either suspended or modified.

HUD said CHA's new management "faces a difficult situation. In order for the recovery strategy to work, CHA must:"

- Reduce the authority's operating costs to a sustainable level

- Raise sufficient capital to repay its outstanding obligations

- Replenish the authority's working capital.

HUD said CHA "must quickly reduce its monthly operating costs to a level sustainable from its monthly operating revenues." HUD said CHA must trim the monthly budget by $379,000 just to break even.

It says to repay its debts, CHA would have to cut the monthly expenses an additional $189,000.

The report says, "Said another way, CHA has to cut its cost structure by approximately 29 percent $568,000 monthly or $6.8 million annualized)
in order to pay off its existing bills and keep from going further into debt."

CHA had 54 employees in October 2002 when it moved to a management firm. Staffing peaked at 262 in April 2005. It was down to 142 employees at the end of May - after two layoffs.

Bill Lord, CHA spokesperson, said he has not seen Bob Dull since late May and does not know where he is now.