Report Says Cash-Strapped Agency Hid Budget Problems
posted May 20, 2008
A review of fiscal problems at the Chattanooga Housing Authority says after the agency got into deep financial problems that the administration of former CEO Bob Dull dipped into restricted accounts to meet the expenses, according to a draft document prepared for the U.S. Department of Housing and Urban Development by Elizabeth McCright.
Ms. McCright, who is currently the CHA's chief operating officer, said the Dull administration took $1.2 million of funds intended for the Mayfair at Market redevelopment project in the 700 block of Market Street to pay other CHA expenses.
Ms. McCright also said the Dull administration utilized funds that are restricted for Housing Assistance Payment Equity to meet ongoing cash flow obligations.
CHA officials in February announced that 26 employees were being laid off.
Then last week CHA announced a reduction affecting 30 staff members, including Mr. Dull.
Ms. McCright gave this draft report:
In 2001, the Chattanooga Housing Authority (CHA) transitioned from a traditional PHA to a streamlined agency that was under private management. In 2004, it became evident that this strategy was neither providing the results nor the level of service that was initially envisioned. Also during that time period, the Chattanooga Housing Authority received a Substandard rating in its Physical PHAS Inspection score (13 out of a possible 30 points). In response to these events, CHA increased personnel and resources to address all operational and service deficiencies identified from HUD’s review. While these increases were initially intended to be temporary, the staffing and higher expenditure levels in effect became permanent. In fact, no significant cutbacks were addressed until the reduction in force that occurred in February 2008. While these cuts were initially characterized as sufficient to return the CHA to a break-even budgetary position, a review of the underlying analysis provided by the former CFO revealed that the revenue projections associated with that budget were overly optimistic and therefore, severely flawed.
2006 FINANCIAL POSITION AND 2007 OPERATING RESULTS
A fiscal snapshot review of the December 31, 2006 audited financial statements is presented as Exhibit A as a preliminary reference point. From this analysis, it was identified that the CHA had $575,000 of excess working capital to facilitate operations. This level is well below HUD guidelines for an agency the size and complexity of CHA. A review of the 2006 financial statements does not readily identify this situation as $5.6 million of Housing Assistance Payments that had been advanced, but remained unexpended as of December 31, 2006 were characterized as unrestricted net assets that substantially skewed the CHA’s financial position and tended to distort the CHA’s fiscal reality.
A preliminary analysis of the December 31, 2007 unaudited financial statements reveal a serious deterioration of available cash reserves and working capital. In addition, the accounts payable position on that date revealed a $1.2 million increase over 2006 levels that suggest that the CHA deferred payment of obligations in response to the lack of available cash flow. A review of Calendar 2008 financial transactions to date revealed that the CHA has inappropriately utilized restricted cash reserves to fund general operations and to meet ongoing payroll obligations.
EFFECTS OF “UNAUTHORIZED” BORROWINGS
An analysis of expenditure activity in relation to available cash-flow funding has revealed two situations whereby the former CFO utilized inappropriate sources of available cash. These instances (as well as the statutory effect of the particular conversion) are as follows:
A review of Calendar 2008 financial transactions to date revealed that the CHA has utilized $1.2 million of FNMA funds intended for the Mayfair at Market redevelopment for general operations. (While these funds are non-Federal Funds and do not trigger violations of Federal awards, the developer of this project is anticipating submission of a pay request to access these funds within the next 45 days).
The Housing Choice Voucher Program has experienced cumulative operational deficits of approximately $710,000 as of March 31, 2008. This situation has caused the CHA to utilize funds that are restricted for Housing Assistance Payment Equity to meet ongoing cash flow obligations (While the inappropriate utilization of funds does not appear to involve any other Federal Programs nor has any fraudulent activity been uncovered, the program has experienced lost investment income (currently 1.56% - computed at a level of 50 basis points below the Federal Funds Rate) that CHA will be reimburse the program for all unrealized interest income earned prior to reimbursement].
2008-2010 WORKOUT STRATEGY
Initial discussions with HUD indicate that in addition to repaying the unauthorized borrowings, operational cutbacks must be sufficient to return the agency to financial viability. A review of the initial budget prepared in January 2008 identified an estimated shortfall of $3.2 million for Calendar 2008 which, if not acted upon, would render the CHA financially non-viable [Exhibit B].
Consequently, the Chattanooga Housing Authority has insufficient reserves and anticipated revenue sources to maintain its existing business plan. In addition, current staffing levels remain at levels higher than many comparably-sized PHA’s. CHA staff has performed an operational analysis and has identified that it needs to build its financial reserves to $2.5 million to return to fiscal solvency and to adequately address cash flow considerations. Current projections indicate that this reserve level should be achieved during Fiscal Year 2010.
In light of this, CHA management has developed a staffing plan and targeted expenditure reductions to “right-size” the CHA in relation to its operating and financial requirements. We believe that the new staffing level will be sufficient to provide decent, safe, and sanitary housing and continue to provide a high level of service that CHA residents have come to expect.
SUMMARY OF PHASED IN CUTBACKS
In order to achieve the necessary budgetary savings, the following cuts are included in the CHA’s “Analysis of Projected Cuts” [Exhibit D]. Phased-in implementation of these corrective measures should be sufficient for the CHA to return to financial viability by 2010.
Major provisions of the cost-savings measures associated with the reorganization plan are as follows:
CHA effected a reduction-in-force (RIF) on March 1, 2008 that reduces CHA’s annual payroll and employee benefits by approximately $1,600,000. CHA will execute an additional RIF on May 15, 2008 that will reduce CHA’s annual payroll and employee benefits by an approximate additional amount of $1,700,000. These reductions result in CHA’s headcount being approximately 150 on May 16, 2008 compared to its January 1, 2008 headcount of 206.
Effective immediately, employee benefits of CHA will be reduced by the 8% retirement contribution. The retirement contribution will be increased from 0% to 2% effective November 1, 2008. Potential CHA funding participation for Calendar 2009 will be determined during a review of all CHA-provided employee benefits during the open enrollment period in December 2008.
Contract services are reduced by approximately 20% effective July 1, 2008. This will be obtained by elimination of all non-essential contracts and increasing cycle times for items such as grass cutting and indirect services.
CHA may be required to suspend payment of principal and interest on its long-term debt and pay vendors on extended terms to maintain sufficient cash flow.
Given that CHA does not have a source of funds to repay such borrowing and interest other than the net sale proceeds from real estate held for development, attempts will be made to sell all unencumbered properties. This includes the Grove Street parcel, James A. Henry School and other scattered site parcels.
Upon receipt of any disposition proceeds, these will be used to repay the $1,200,000 FNMA unauthorized borrowing plus interest. In addition, the $710,000 that CHA has incurred in HCV program operating expenses in excess of administrative fees will be paid out of excess sales proceeds. In the event that proceeds are not available, these funds will be repaid via savings accumulated via budget cuts. Imputed interest will be calculated and paid (based on the Federal Funds Rate less 50 basis points) which represents the amount that would have been earned had the amounts been on deposit as required.
In the absence of corrective action by the CHA, the estimated cash flow deficit as of December 31, 2008 was estimated to be a deficit of $4,156,619 [Exhibit D]. Based upon initial estimates associated with the reorganization plan, it is anticipated that the agency will have approximately $400,000 of excess cash flow as of December 31, 2008 that will enable CHA to be able to meet obligations on a timely basis and return to normal operations [Exhibit E].
While the above measures are indeed quite drastic, they are necessary to return the agency to fiscal health and “right-size” the agency in relation to other PHA’s that have a comparable unit and program mix.
Throughout this difficult process of reorganization service to the residents has been of utmost priority. I am confident that the ongoing dedication of CHA staff will continue to provide a level of excellence that our residents deserve and have come to expect.
Respectfully submitted,
Elizabeth A. McCright
Chief Operating Officer
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