Eddie Holmes
Richard Beeland

Contributed photo

The Chattanooga Housing Authority has mismanaged more than $5 million and may have to repay more than $1 million to the federal government, according to a new audit report.

"The Authority mismanaged its finances," states the audit report dated June 11 and signed by inspector James D. McKay from the U.S. Department of Housing and Urban Development's Regional Inspector General for Audit office.

The authority, which provides low-income housing for more than 5,000 low-income and Housing Choice voucher housing units, soon may be forced to repay as much as $1.4 million in federal assistance funds. The $1.4 million, along with more than $4 million in CHA savings and investment reserves, was diverted by former CHA administrators to pay daily operating expenses, the audit report states.

According to the report, the operating expenses were out of control largely because of "excessive" raises and severance packages for CHA administration staff members.

Most of the diversions appear to have been made without the authority board's knowledge, according to HUD auditors who reviewed CHA operations between Oct. 1, 2004, and Sept. 30, 2008.

"Management also failed to inform its board regarding the liquidation of more than $4 million in investments or provide the board other financial detail that could have alerted to the impending financial crisis," the report states.

The managers who were in charge of the program when the problems surfaced no longer are at CHA, and the current director, Elizabeth McCright, said the audit's findings are no surprise, either to CHA or the public, as previous news stories already had highlighted some of the problems.

"This obviously is a financial work in progress," she said of rebuilding the housing authority's stability. She said the problems didn't happen overnight and repairing them can't happen overnight.

Bill Lord, CHA's chief of public information, said the problems were the result of a "very unfortunate management system" by people who "should have known better." He said the result produced a snowball effect.

"But nobody took any money for their personal use. Most of this is a case of people trying to do the right thing the wrong way," he said.

The audit report states CHA's former managers failed to follow HUD and CHA requirements with very costly results.

"As a result, the Authority misused more than $1 million in funding that could have been used to carry out its mission of providing families with decent, safe and sanitary housing," the report states.

Neither Mr. McKay, the HUD inspector, or HUD Inspector General's office spokesman Mike Zerega would comment on the possibility of future investigations.

"We paint what we see," Mr. Zerega said. "We'll let the audit speak for itself."

The two said HUD and the Inspector General's office are separate.

HUD officials, not the inspector general's office, will decide what to do with the audit findings and recommendations, they said.

HUD officials also will determine whether to grant the Chattanooga Housing Authority waivers on the audit report's recommendation that HUD require CHA to repay some of the money.

Ms. McCright on June 1 wrote Mr. McKay a letter responding to his draft audit report and requesting waivers on all but $716,639 of the debt outlined in his audit. She said Friday that CHA has very few non-federal funds, but it has some parcels of land worth less than $20,000.

The agency is unlikely to have money to repay HUD "for a very long time," she said.

HUD spokesman Mark J. Brezina said the agency will review the inspector general audit and Ms. McCright's waiver request. He would not comment further Friday on the audit report.

CHA Board Chairman Eddie Holmes said the board did not know CHA's true financial position.

"If we had, we wouldn't have made some of the decisions we made," he said, referring to bonuses, cost-of-living raises and six-week severance packages, rather than two-week severance packages, for staff reductions.

"That was left to the discretion of (former administrators). We were told there was enough money to cover those things. We took (CHA administrators) at their word. We don't micro-manage," Mr. Holmes said.

He said board members believe the problems simply reflect mismanagement.

"We certainly look at it as abuse of power, but not criminal intent," Mr. Holmes said. "Now we're looking at how we go forward and repair our image."

What was happening

The audit report states there were clear signs CHA was headed for a financial crisis.

"From 2003 through 2007, the Authority's low-income housing program operated at an average annual loss of $1.55 million," it states.

Despite this, the former management "failed to rein in out-of-control operating expenses," and the authority's financial condition steadily deteriorated.

"When the Authority's financial condition became critical during 2007, management misused both HUD funds and proceeds from a Fannie Mae development loan to keep the Authority functioning," the audit states.

CHA from 2001 until 2005 was run by L. Matthew Powell, a former president and CEO of Chattanooga Neighborhood Enterprise. As CHA's CEO, he earned $140,000 annually in July 2005, when he left a month before his contract officially ended.

Mr. Powell cited health reasons for his early departure. He left a month after housing officials reported a $614,000 deficit, and CHA had been warned in a HUD report about its "significant lack of controls" in April 2005.

Bob Dull, CHA's former director of asset management, was named executive director in November 2005, and in the next year, CHA's payroll increased by almost $650,000 -- most of that not approved by the board.

CHA's total payroll jumped from $8.5 million in 2006 to $9.1 million in 2007. Board officials said Mr. Dull made the decision to give $218,000 in bonus pay to selected employees in 2007. The highest bonus given to a single employee, chief financial officer Kari Blakney, was about $3,300. Mr. Dull did not receive a bonus.

Mr. Dull resigned on May 15, 2008. His resignation was announced along with the layoffs of 29 employees. Ms. Blakney resigned a month before he did.

Neither Mr. Dull nor Mr. Powell could be reached for comment.

Ms. McCright, a CHA former deputy director of assisted housing, was named the interim executive director, and later became the director.

Last month, CHA hired Arthur W. Cate, chief operating officer at the Knoxville Community Development Corp., to help CHA set its finances in order. Mr. Cate on Thursday said he was encouraged not to see anything that he did not already know about in the HUD inspector general's audit report.

But he thinks the housing authority cannot repay the money.

"That's going to be very difficult. The housing authority has very few non-HUD funds, if any," he said.

Mr. Cate said so-called receivership would be the "ultimate resolution" if CHA's finances don't improve.

"If HUD calls it a troubled agency, then HUD comes in and declares the housing authority in receivership and HUD runs it directly," he said. "If anything it means the housing authority would look bad in the national press ... and the mayor's office who appoints the board would look like it's losing control."

He said he expects the housing authority and HUD to reach an agreement without receivership.

Richard Beeland, spokesman for Chattanooga Mayor Ron Littlefield, said city officials have not yet had a chance to look over the audit report.

"The mayor has met with CHA (officials). It's no secret that the housing authority is a troubled agency. We're all continuing to look for ways to rectify it," Mr. Beeland said.

FAST FACTS

The Chattanooga Housing Authority operates 5,537 low-income and Housing Choice voucher housing units locally. CHA received HUD public housing grants totaling more than $28.9 million in 2007 and $27.5 million in 2008.

Source: HUD IG audit report

AUDIT FINDINGS

CHA misused more than $1 million that could have been used to carry out its mission. The audit states CHA:

* Used more than $788,000 in Section 8 housing assistance funds for operating expenses in violation of Section 8 rules.

* Used $1.2 million in restricted Fannie Mae loan proceeds to cover operating expenses in violation of the executed loan agreement.

* Paid employee bonuses of more than $210,000 and a cost-of-living adjustment of more than $180,000 in conflict with its own policies.

* Approved more than $193,000 in excessive severance payments during 2008 reductions in force in conflict with its own policies.

* Used $49,316 in public housing operating funds to pay non-HUD expenses in violation of annual contributions contract requirements.

* Liquidated more than $4 million in investments without adequately informing the board, in violation of both HUD and authority requirements.

Source: HUD IG audit report