A report on the agency's financial records “raised some deep concerns regarding accounting irregularities at the MHA,” according to an April 13 letter from executive director Peter Hance and deputy director Lori Davidson. The letter was provided to the Missoulian by the mayor's office.
“We are concerned that these accounting errors may have substantially harmed the MHA and our financial integrity,” said the letter, directed to U.S. Department of Housing and Urban Development offices in Denver and Kansas City.
“I know that the Missoula Housing Authority has taken steps to be less dependent on (HUD money). But if HUD reduces their funding, it always makes a significant impact,” Rayfield said in a telephone interview from her Belfair, Wash., office.
A series of documents provided to the Missoulian by the city appear to show an increasing level of anxiety over the Housing Authority's financial records. At the same time they were sending distress signals to HUD, however, Hance and Davidson publicly maintained that the finances of the organization were in order.
In a March 29 letter to the Housing Authority, Rayfield detailed a variety of accounting mistakes. According to her and Hance, the errors do not appear to impact the financial health of the organization. But there is another problem.
The preliminary financials the agency submitted to HUD last November are not expected to match audited financials due in June. If significant enough, the inconsistencies could lead to a HUD funding reduction, Rayfield said.
In a memo to the Housing Authority board, Hance said the projected variation triggered his letter to HUD.
In addition, Hance said that after receiving Rayfield's critique, he contracted with a certified public accountant - for a second opinion. That assessment heightened concerns about the state of the Housing Authority's financial records.
“The types of errors discovered ... (are) cause for serious alarm,” wrote Sally Hensel, a Missoula Certified Public Accountant, in an April 4 letter to Hance and Davidson. “The lack of basic understanding of accounting appears to be the primary issue and secondarily, the lack of understanding of how to use fund accounting to separate different projects, grants and programs to have usable information.”
Hensel's conclusion: “Management must receive timely, accurate information in a format that they can understand in order to manage the business affairs of the agency, predict cash flow problems, and manage projects appropriately. The documentation provided appears to demonstrate that there was a significant deficiency in ... information provided.”
Two days later, Hance traveled to HUD's regional office in Denver to discuss the matter. As a result, the Housing Authority decided to “self-report” the problems to the HUD Inspector General's Office, citing grave concerns.
Among the problems noted by Hance in his April 13 letter: “Prohibitions concerning commingling of funds and allocation of costs appear to have been substantially violated,” “issues of conflict of interest and fulfilling fiduciary responsibilities ... also have arisen,” and “there is not consensus on our board to obtain ... independent review of our books and accounts.”
April 13 was a Friday.
The following Monday, the Missoulian met with Hance and Davidson. Both insisted the organization's finances were in order and that nothing was amiss.
When asked, Hance confirmed that he had applied for a job outside of Montana, though he said the Housing Authority's financial affairs had no bearing on his decision to do so.
In fact, he said, the agency's finances would appear straightforward - and in order - to anyone with expertise in affordable housing development and federal regulations governing such projects.
Asked later to explain the discrepancy between the information he provided at the meeting with the Missoulian and the litany of difficulties revealed in the accounting reports and his letter to HUD, Hance said he did not share the problems with the Missoulian because he first wanted to present the information to his board.
Hance said he wanted to be forthcoming and warn his board of potentially bad news, though he said HUD may not find the issues problematic.
The reports and letters might not have come to light without attention from the mayor's office, however. Citing privacy concerns, Housing Authority attorneys argued at last Wednesday's board meeting to keep Hance's letter to HUD under wraps.
Mayor John Engen countered, saying the Housing Authority board has a responsibility to run its business in the open. Subsequently, the letter was discussed, though not distributed, by the Housing Authority.
Some of the documents appear to point the finger at former MHA finance officer Bill Sawyer as the source of errors. Sawyer was laid off in January after both recommending his position be cut for financial reasons and raising concerns about authority management.
In an interview, Sawyer said he came on board with no experience in HUD regulations, and was up-front with Hance and Davidson about his background. He attended workshops to familiarize himself with federal requirements. And he said he worked closely with auditors to successfully prepare the previous two years' financial records on time.
He said auditors named one shortfall - a longstanding payroll practice - and Sawyer subsequently implemented new procedures.
“I don't claim I did things perfectly,” Sawyer said.
But he said he was always willing to learn and worked honestly and to the best of his ability. The Housing Authority's financial records were in order when he left the agency, Sawyer said, and he submitted regular financial reports to the director - and believed the agency was on track to deliver audited financials to HUD.
The work environment became challenging during 2006, however. Sawyer said Hance stopped communicating with him last summer, and Davidson did the same beginning in November.
Nevertheless, he said he wishes the organization well.
Rayfield, who is not a CPA but has expertise in HUD regulations, said she believes the books are now in order and the Housing Authority is on track to properly manage its financial records in the future. But the ramifications of past errors are yet to be determined.
If the audited financials significantly stray from the MHA's initial report, HUD could penalize the Housing Authority. The agency is also up against a significant deadline: The audited financials are due June 30.
Meanwhile, auditors are distancing themselves from the Housing Authority's books, according to Hance's April 13 letter to HUD.
JCCS of Missoula “may be withdrawing as our auditors for this year,” he wrote, “based upon the condition of the general ledger,” the audit's timing, “politicization of the current situation” and “additional scrutiny brought on by the local newspaper.”
A late filing has consequences.
“Unless REAC (an arm of HUD) extends that deadline, the non-filing will result in MHA's status being downgraded from ‘High Performer' to ‘Troubled,' ” Hance's April 13 letter warns.
Technically, it's the change in status at HUD that diminishes access to funds. It also leads to more HUD scrutiny and more stringent reporting requirements.
Hance said the authority is working on two fronts in an attempt to file its financials on time. The agency is attempting to quickly bring on board an auditor - perhaps at a higher cost - and is working with HUD to request an extension.
Hance said he sees the matter as more of a scheduling issue. He said the Missoula Housing Authority simply needs HUD to grant a deadline extension. And he characterized the potential downgrade as the difference between a “gold star and a silver star.”
“It's (high performer status) not a huge advantage, other than you have that designation,” Hance said.
Hance said “high performer” status earns the agency a bonus worth $9,000.
But Mayor Engen said he finds the potential change in designation disturbing.
“The authority over time has been pretty proud of its high performer status,” Engen said. He finds it worrisome that the Missoula agency could be demoted to “standard” or “troubled.”
Engen said he noted a marked difference between Hance's characterization of the accounting problems on paper and his depiction to the board at last week's meeting.
“I thought the tone of the letter was alarming. And I thought the tone of the letter was considerably different than the tone of the explanation (at the Board of Commissioners meeting),” the mayor said.
News of the accounting errors comes on the heels of other struggles at the Missoula Housing Authority. Hance has come under fire for helping a development outside Missoula gain low-income tax credits.
A Housing Authority project on Russell Street was denied the same much-needed tax credits and is hemorrhaging money.
And a board member of a Housing Authority affiliate abruptly resigned earlier this month, saying he'd been kept in the dark about some of its vital undertakings.
“I do believe that the difficulties the Housing Authority is experiencing today are cumulative. And I think that there are credibility issues that come into play for the authority as a whole,” said Engen, who has been attending the agency's meetings and repeatedly counseling commissioners to operate within public view.
In the letter to HUD, Hance and Davidson asked that the Office of Inspector General audit or investigate the Housing Authority's programs as it deems necessary.
HUD officials commented in a brief e-mail from spokeswoman Jane Goin: “Mr. Hance outlined concerns about the financial condition of the MHA. HUD will evaluate the information and determine whether or not additional review is necessary.
“HUD's responsibility is to ensure that the MHA is in compliance with all applicable program requirements. The review process will proceed as expeditiously as possible, and it is not appropriate for us to comment further until the process is completed.”
Reporter Keila Szpaller can be reached at 523-5262 or at Keila.Szpaller@missoulian.com
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