Audit Report on Efforts by the New York City Housing Authority To Maximize Federal Funding, Enhance Revenue, and Achieve Cost Savings

Executive Summary

The New York City Housing Authority (NYCHA) has provided housing for low and moderate income New York City residents since it was chartered in 1934.  Currently, there are more than 400,000 residents in 334 public housing developments in all five boroughs.  NYCHA also administers the Section 8 Housing Choice Voucher Program (Section 8) to provide subsidized rental assistance to 235,000 residents.

NYCHA’s operations are governed by Title 24 of the Code of Federal Regulations and overseen by the United States Department of Housing and Urban Development (HUD).  In addition, New York State and New York City law, regulations, and funding decisions govern aspects of NYCHA’s operations as well.

In its 2013 Annual Report, NYCHA reported total revenues of $3.1 billion, comprised primarily of $1 billion in federal Section 8 subsidy, $920 million in tenant revenue, and $830 million in federal public housing operating subsidy.  NYCHA also reported the receipt of $419 million in federal public housing capital funds.  However, since at least 2002, NYCHA’s funding has not been sufficient to cover either its operating or its capital needs.

In an effort to ensure its long term fiscal stability and preserve public housing, NYCHA developed “The Plan to Preserve Public Housing” (PPPH)  in 2006 and updated that initiative with “PLAN NYCHA: A Roadmap for Preservation” (Plan NYCHA), issued in December 2011.  Each of these plans set forth what NYCHA considered to be critical initiatives that it contended would result in cost savings, revenue enhancements and improved performance.  In connection with Plan NYCHA, NYCHA contracted with the Boston Consulting Group (BCG) to work with NYCHA to develop specific plans to improve the efficiency and effectiveness of NYCHA central support functions and redirect resulting savings to aid property management.

This audit is the first of a series of audits of NYCHA that has been undertaken by the Office of the New York City Comptroller to examine NYCHA’s financial and operating practices in light of the long term persistent decline of operating and capital funding.  The focus of this first audit is on NYCHA’s efforts to maximize its revenue and cost savings in the face of the reduction in government funding.  Based largely on the areas identified by NYCHA as key components of its revenue enhancement and savings plans, we looked at the following initiatives:

• NYCHA’s efforts to obtain additional federal capital funding and decrease its utility expenses through Energy Performance Contracting (EPC) Plans.  EPC is a HUD incentive that allows Public Housing Authorities (PHAs) to use energy/utility cost savings from reduced energy consumption to repay the cost of installing energy conservation measures (ECMs).
• NYCHA’s efforts to obtain federal Section 8 funding for up to 8,400 units in 21 developments constructed but no longer funded by the State and the City.  Pursuant to the Quality Housing and Work Responsibility Act of 1998, PHAs are allowed to enter into Voluntary Conversion Plans that, with tenant agreement, allow them to convert entire developments or individual units within developments from public housing to Section 8 funding.
• NYCHA’s efforts to minimize its operating subsidy losses resulting from a November 2005 change in the operating subsidy formula.  When HUD changed the federal operating subsidy formula, some PHAs would thereafter receive a larger operating subsidy and others would receive less.  For those PHAs that would receive lower operating subsidies under the new formula, HUD offered a “stop-loss” provision to those that successfully demonstrated conversion to an asset management model and implemented project-based management, budgeting, and accounting systems.  The more quickly PHAs converted, the more their losses would be limited.
• NYCHA’s efforts to track and document whether BCG recommendations were implemented and whether and to what extent cost savings and revenue enhancements were realized.

Audit Findings and Conclusions

The audit found that NYCHA failed to meet its goals to obtain much needed funding and implement cost savings and revenue enhancement initiatives.  As a result, it repeatedly failed to achieve the revenue projections and cost savings it presented to the public, the City, and HUD.   NYCHA’s failures to meet its funding and savings goals and the consequent inaccuracies in its budget estimates have hindered its ability to operate as well as to effectively budget and plan for its operations.

In total, we estimate that as a result of failing to effectively implement initiatives to which it had committed, NYCHA has forgone incentives and subsidies totaling $692 million (EPC funding of $353 million, Section 8 funding of $263.1 million, and operating subsidy of $75.9 million).

Additionally, NYCHA did not document and track whether joint NYCHA/BCG-identified cost savings and revenues of $106 million were realized.  Therefore, we could not assess the extent to which, if at all, any of the BCG report recommendations were implemented or the extent to which there were any resulting cost savings and revenues.

Audit Recommendations

To address these issues, we make the following twelve recommendations:

• • • NYCHA should ensure adequate and transparent disclosure of budget estimates and forecasts supported by appropriate substantiated data.
    • NYCHA should adequately plan for and consistently follow through on revenue and cost saving initiatives to ensure that estimated financial benefits are obtained.
    • NYCHA should consider employing ESCOs to develop EPC plans appropriately scaled to NYCHA’s utility costs and unmet capital needs.
    • NYCHA should take steps to reduce the risk of self-managed plans including but not limited to insuring EPC plans, increasing EPC plan margins, and implementing EPC plans with shorter payback periods.
    • NYCHA should immediately conduct and sustain both broad and targeted outreach efforts to engage and educate residents and market the Voluntary Conversion Plan including but not limited to periodically distributing flyers, sending direct mailings, calling and emailing residents, and conducting periodic public meetings with residents, Resident Associations, the Citywide Council of Presidents, the Resident Advisory Board, and housing advocacy groups.
    • NYCHA should consult with HUD on developing a revised marketing and administrative plan to fully implement its Voluntary Conversion Plan.
    • NYCHA should consult with HUD on applications for federal funds prior to submission and respond to HUD feedback.
    • NYCHA should conduct rigorous independent reviews of federal funding applications prior to submission to HUD to ensure compliance with relevant rules and regulations.
    • NYCHA should reassess and document the extent to which all BCG report recommendations were implemented by examining the steps taken, calculating the costs incurred to date, calculating the cost savings and revenues achieved to date, and comparing anticipated and actual net cost savings and revenues achieved to date.
    • NYCHA should develop an appropriate Enterprise Program Management Office (or a comparable cross-departmental, independent unit) staffing structure, maintain authorized staffing levels, and track staff turnover to ensure implementation and tracking of the BCG report recommendations.
    • For those recommendations for which anticipated cost savings and revenues were not achieved, NYCHA should assign project ownership to an Enterprise Program Management Office (or a comparable cross-departmental, independent unit) staff and generate weekly status reports until such time as recommendations are implemented and financial benefits are fully realized.
    • NYCHA should generate status reports that include but are not limited to implementation status, issues, costs, and anticipated and actual cost savings and revenues.

NYCHA Response

In its response, NYCHA maintained that the Comptroller’s audit report was “seriously flawed.”   First, NYCHA objected that much of the audit report concerned NYCHA’s decisions and activities that it asserted took place prior to the audit scope period.  Second, NYCHA stated that the audit report exaggerated or mischaracterized revenue and cost savings opportunities that NYCHA failed to maximize.  Third, NYCHA stated that the audit report did not acknowledge substantial revenue opportunities that NYCHA took advantage of including $900 million from a mixed-finance transaction in connection with the American Recovery and Reinvestment Act (ARRA), $732 million in bond proceeds, and $303.5 million in transition (or “stop-loss”) funding.  Finally, with regard to NYCHA’s failure to document and track how much, if any, of the joint NYCHA/BCG-identified cost savings and revenues of $106 million have been realized, NYCHA stated that it “did not consider it a priority to track those outcomes for the purpose of justifying the BCG study.”

Upon careful consideration, we find NYCHA’s objections to the audit report unfounded.  First, NYCHA’s objection that we have exceeded the audit scope fails to take into account that Generally Accepted Government Auditing Standards (GAGAS) permit audits to consider relevant information outside the audit scope period where necessary and to expand the audit scope beyond the initial stated scope periods where issues identified during the audit process present a need to do so.  That is what was done in the case of this audit.  Second, rather than exaggerating or mischaracterizing the lost revenue and cost savings opportunities identified, all revenue and cost savings figures in the audit report were based on NYCHA’s own data and assumptions.  Third, the report does, in fact, acknowledge revenues to the extent they were achieved.  However, the focus of the audit report is on those revenue enhancements and cost savings that NYCHA itself identified in its planning documents as central to its efforts to ensure its long term fiscal stability and preserve public housing but that it failed to realize.

Lastly, NYCHA did not effectively track BCG report recommendation implementation status or resulting cost savings and revenues.  Given NYCHA’s extreme financial condition, the chronic problems it has faced trying to manage an increasingly aged and scarce housing stock and as a steward of public funds, NYCHA had a responsibility to do both.  Only by tracking implementation of the BCG recommendations and assessing their effectiveness can NYCHA ensure that the ultimate goal of the BCG report is achieved—i.e., that funds are made available to redirect to property management and that they are so redirected to make much needed repairs.

Notwithstanding its objections, NYCHA thanked “the Comptroller’s Office for its efforts and for several useful recommendations.” Of the report’s twelve recommendations, NYCHA agreed to implement one recommendation going forward, maintained that it had in the past and will continue to adhere to seven recommendations, and disagreed with four recommendations related to the BCG report.

NYCHA’s responses and our rebuttals are discussed in greater detail in this report.