ILLINOIS HOUSING DEVELOPMENT AUTHORITY

COMPLIANCE EXAMINATION

For the Year Ended June 30, 2008

SELECTED ACCOUNT BALANCES	6-30-08	6-30-07
Debt outstanding (net of unamortized discount) Multi-Family Program Bonds...................................... Housing Bonds........................................................... Housing Finance Bonds.............................................. Multi-Family Variable Rate Demand Bonds................ Multi-Family Housing Revenue Bonds........................ Multi-Family Housing Revenue Bonds (Marywood).... Multi-Family Bonds (Turnberry II).............................. Affordable Housing Program Trust Fund Bonds.......... Residential Mortgage Revenue Bonds......................... Homeowner Mortgage Revenue Bonds...................... Administrative Funds.................................................. Total.................................................................... Cash and equivalents (proprietary funds)........................... Investments (all funds)......................................................	$ - 504,700,000 - - - 15,500,000 5,200,000 72,000,000 300,000 1,042,700,000 4,600,000 $1,645,000,000 $9,671,123 $772,814,058	$52,600,000 396,400,000 13,900,000 2,800,000 53,100,000 15,600,000 5,200,000 77,100,000 300,000 968,800,000 1,700,000 $1,587,500,000 $17,045,729 $774,886,753
SUPPLEMENTARY INFORMATION	FY 2008	FY 2007
Expenditures of Federal Awards Section 8 Project-Based Cluster......................... HOME Investment Partnerships Program............ Interest Reduction Payments – Rental and Cooperative Housing for Lower Income Families Program... National Foreclosure Mitigation Counseling Program Total............................................................ Average Number of Employees (unaudited)..............	$144,766,553 21,850,617 5,395,775 593,697 $172,606,642 197	$147,131,685 29,019,515 5,288,726 - $181,439,926 189
SELECTED ACTIVITY MEASURES
Total Number of Bond Issues Outstanding.................. Housing Units Produced Since Inception.....................	86 190,825	86 178,765
EXECUTIVE DIRECTOR
During Audit Period: DeShana Forney Currently: DeShana Forney

HUD audit noted noncompliance

Authority delegated activities to subrecipients

Information from subrecipients was not complete

Annual report to HUD not supported

Federal funds are held too long

Residual receipts from developments were late

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE ADMINISTRATION OF THE SECTION 8 MODERATE REHABILITATION PROGRAM

The Authority did not properly administer the Section 8 Moderate Rehabilitation Program. The Section 8 Moderate Rehabilitation (Mod Rehab) Program assists low income families to obtain decent, safe and sanitary housing by encouraging property owners to rehabilitate substandard housing and lease the units with rental subsidies to low income families. The Mod Rehab program assistance is considered a project-based subsidy because the assistance is tied to specific units under an assistance contract with the owner for a specified term. A family that moves from a unit with project-based assistance does not have any right to continued assistance. As provided in the Authority’s Administrative Plan for the Mod Rehab Program, the Authority passes through the Mod Rehab subsidies to the developments or the owners of the property, which the Authority considers to be subrecipients of the program. The Authority conducts on-site programmatic and fiscal monitoring as well as desk reviews of audit reports of the subrecipients to monitor compliance with the Mod Rehab Program requirements.

During fiscal year 2007, staff from the Illinois Office of Public Housing (a regional office of the U.S. Department of Housing and Urban Development (HUD)) conducted an audit of the Authority’s Mod Rehab Program to assess the Authority’s compliance with HUD regulations. The final audit report received from the Illinois Office of Public Housing indicated the Authority did not comply with numerous HUD regulations when the audit team assessed the Authority’s overall program operation of the Section 8 Mod Rehab Program. The final audit report stated the Authority is receiving administrative fees to operate the Section 8 Mod Rehab program, yet it is not performing the major administrative functions HUD expects it to perform under its contractual obligations with HUD due to the manner in which the Authority delegates the performance of programmatic activities to its subrecipients. HUD is concerned that the Authority is not maintaining a waiting list for the Mod Rehab Program. Additionally, HUD is concerned that the Authority is not assessing eligibility, conducting briefings, conducting reexaminations, monitoring the assignment of appropriate unit sizes, evaluating Utility Schedules or conducting inspections regularly. The audit report states that the Authority is overseeing the administration of these functions by monitoring the properties that receive funding for units under the Section 8 Mod Rehab program. However, the entities actually administering the program do not have contracts with the Authority to administer the program, nor are they operating it in accordance with the applicable HUD regulations. The audit report further states that there is no provision in the federal law that would allow the Authority to contract its oversight functions to the owner. To allow this to occur would be a conflict of interest. Failure to administer the Mod Rehab program in accordance with HUD regulations could result in the payment of ineligible payments, resulting in unallowable costs. (Finding 7, pages 24-26)

We recommended the Authority consult with the U.S. Department of Housing and Urban Development to interpret the federal laws and regulations relating to the administration of the Section 8 Moderate Rehabilitation Program and make necessary changes to conform with those requirements.

Authority management concurred and stated they have consulted with HUD and implemented a number of procedural and administrative changes. In January 2009, the Authority sent additional correspondence to HUD regarding remaining open findings.

INADEQUATE MONITORING OF SECTION 3 REPORTS FROM MULTI-FAMILY PROJECTS AND UNSUPPORTED ANNUAL PERFORMANCE REPORT (SECTION 3) OF THE AUTHORITY

The Authority did not receive completed Section 3 compliance forms from subrecipients. The Authority is required to submit an annual “HUD 60002, Section 3 Summary Report, Economic Opportunities for Low-and Very Low-Income Persons” (Section 3 Summary Report) to report annual accomplishments regarding employment and other economic opportunities provided to low and very low income persons under Section 3 of the Housing and Urban Development Act of 1968. The amounts reported include Section 3 expenditure data from the subrecipients of the HOME program.

The Authority issued new procedures on Section 3 Compliance for Multi-Family Projects which includes standard forms to be completed prior to closing of the loan. The requirements of this new procedure include the submission of a completed Section 3 Certification and a completed Recipient Section which includes information on the Current Work Force Profile and Hiring Plan, Section 3 Report, Estimated Project Work Force Breakdown, Contracting Plan Worksheet, Section 3 Clause and Home Program Contractor and Subcontractor Activity Summary Combined MBE/WBE.

During our audit, we noted that 5 multi-family projects that are required to comply with the new procedures (effective October 2007), did not comply with the Authority’s new requirements as stated in the Section 3 Manual for Multi-Family Projects. We also reviewed 11 contractor/subcontractor projects (occurring prior to October 2007) required to submit the Section 3 report and observed that the majority of the forms submitted were not properly completed.

Failure to accurately report Section 3 expenditures prevents HUD from effectively monitoring the Section 3 program. (Finding 6, pages 22-23)

We recommended the Authority implement procedures to ensure information reported in the annual Section 3 Summary Report is complete and accurate.

Authority officials concurred and indicated they recently developed procedures for reviewing the information received from subrecipients for completeness.

INADEQUATE CASH MANAGEMENT PROCEDURES

The Authority did not have procedures in place to ensure cash draws are performed in accordance with U.S. Treasury Regulations. The Authority receives its Section 8 program funding during the first week of each month, based upon monthly reports for individual properties submitted by the Authority during the previous month and then approved by the U.S. Department of Housing and Urban Development (HUD). The Authority receives its Interest Reduction Program funding during the first week of each month based upon amounts approved by HUD in the Housing Assistance Payment (HAP) contracts. The Authority either applies the amounts received to the loan principal or interest balance or transfers the amount to the development during the third week of the month. During our testing we selected three months of HAP (Section 8) payments and two of the three months had payments that were submitted one to two days late. We also selected 32 Interest Reduction subsidy payments received and noted that the Authority held funds for an average of 11 days before the funds were either applied to the loan balances or disbursed to the development. U.S. Treasury Regulations require that the timing and amount of funds transfers must be as close as is administratively feasible to the Authority’s actual cash outlay for direct program costs. This section has been interpreted to mean that funds should be disbursed within 3 – 5 business days from receipt.

Authority management stated that a substantial portion of subsidy amounts received are applied to the development’s next billing, if the development has financing with the Authority, and only a portion, if any, of the subsidy amount is physically transferred to the recipient. All of the developments cited had loans with the Authority to which the subsidy amount was applied.

Failure to draw funds in accordance with the U.S. Treasury Regulations could result in HUD sanctioning the Authority for noncompliance or possibly reducing the funding of the Section 8 and Interest Reduction Programs. (Finding 4, pages 18-19) This finding was first reported in 2004.

We recommended the Authority implement procedures to ensure federal funds are disbursed in accordance with the U.S. Treasury Regulations.

Authority officials responded that they have accelerated the federal funds disbursement process and are developing and implementing additional computer system and procedural enhancements to further streamline the process. (For the previous Authority response, see Digest footnote #1.)

INADEQUATE MONITORING OF RESIDUAL RECEIPTS

Residual receipts due from the developments were not deposited within the required 60 days grace period following the development’s year end. During our audit, we tested 20 residual receipts totaling $2,078,820 and noted 17 developers did not deposit residual receipts within the timeframe set forth by the program. On average, the deposits were 90 days late.

Per A-133 Compliance Supplement of the Section 8 cluster, any project funds in the project funds account at the end of the fiscal year shall be deposited with the mortgagee or other HUD-approved depository in an interest bearing account. For projects under 24 CFR part 883, the funds must be deposited with the State Agency or other Agency-approved depository in an interest bearing account. Withdrawals from this account may be made only for project purposes and with the approval of HUD or the State Agency. The main objective of this special provision is for a residual receipts account to be properly established, required deposits made within the 60 days following year-end, and disbursements only for approved project purposes. (Finding 9, pages 29-30)

We recommended the Authority implement procedures to ensure residual receipts are deposited within the required timeframe.

The Authority concurred in principal with the recommendation. They stated the amounts of the residual receipts to be deposited are not determined until the audits of the existing developments are completed. From these audits, the Authority then makes a determination of the residual receipt amount and then bills the developments for these amounts. It is not possible for all audits and the ensuing determination processes to be completed within the 60 day time frame, as there are only a limited number of firms conducting such audits. The Authority indicated they will discuss this requirement with HUD and seek a determination of their expectations of developments meeting this requirement.

OTHER FINDINGS

The remaining findings are reportedly being given attention by the Authority. We will review the Authority’s progress toward the implementation of our recommendations in our next engagement.

AUDITORS’ OPINION

We conducted a compliance examination of the Authority for the year ended June 30, 2008 as required by the Illinois State Auditing Act. A financial audit covering the year ending June 30, 2008 was issued separately.

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WILLIAM G. HOLLAND, Auditor General

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SPECIAL ASSISTANT AUDITORS

McGladrey & Pullen LLP were our special assistant auditors for this engagement.

DIGEST FOOTNOTES

#1 – INADEQUATE CASH MANAGEMENT PROCEDURES – Previous Authority Response

The Authority concurs that federal funds should be disbursed in accordance with the U.S. Treasury Regulation but believes that its existing procedures, which include an acceleration of its billing cycle in fiscal year 2006 in order to accelerate the federal funds disbursement process, are administratively feasible and cannot be further accelerated without introducing the risk of making inaccurate transfers. When federal funds are received, they are immediately invested in U.S. Treasury securities, rather than left as cash, which does not earn any funds. HUD requires that such funds be invested in interest bearing, FDIC insured accounts or invested. The Authority invests these funds in U.S. Treasury obligations, which always mature on a Thursday, and that maturity date dictates when wire transfers may be made. The Authority needs several days from the receipt of the funds to determine their application, as HUD has recently changed its process to transfer only the approved funds to the development, but does not send to the Authority reports that detail these transfers. Thus, the Authority before releasing these funds must go through a matching process to ensure that the proper amounts are being transferred.

The timing of passing through Section 8 and Section 236 project funding is performed in conjunction with the billing cycle, which was previously accelerated to the second week of the month. Through the billing cycle, a number of reports are generated that document the transfer process. A large portion of the funds are not passed through directly to the recipient, but instead are retained by the Authority to pay the recipients’ debt service payments and fund escrow accounts. Any amount in excess of the debt service and escrow funding requirements are then transferred to the recipient. This process assists recipients to streamline the administrative process for the payment of debt service and escrow funding. Section 8 and Section 236 projects funds to recipients that do not have loans to the Authority are transferred to these recipients on either the first or second Thursday of each month.

The Authority is of the opinion that, to further accelerate the transfer of funds to meet the 3 to 5 day business day requirement for the transfer of funds, improper amounts could be transferred. In addition, funds management would be inefficient, as funds would be un-invested until a wire transfer could be made. The Authority will review this with HUD and request that they issue a final determination letter on this matter.

SYNOPSIS

ILLINOIS HOUSING DEVELOPMENT AUTHORITY

SELECTED ACCOUNT BALANCES

SELECTED ACTIVITY MEASURES

Total Number of Bond Issues Outstanding..................

EXECUTIVE DIRECTOR

During Audit Period: DeShana Forney

OTHER FINDINGS