The U.S. Department of Housing and Urban Development's (HUD) Office of Inspector General audited the Housing Authority of the City of Michigan City's (Authority) nonprofit development activities. The review of public housing authorities' development activities is set forth in our annual audit plan. We selected the Authority because it was identified as having high-risk indicators of nonprofit development activity. Our objective was to determine whether the Authority diverted or pledged resources subject to its annual contributions contract (contract), other agreement, or regulation for the benefit of non-HUD developments.

The Authority diverted and pledged assets subject to its contract, other agreements, or HUD's regulations for the benefit of Michigan City Housing Development, Incorporated (nonprofit), the Authority's nonprofit entity. It failed to file declarations of trust on 32 properties purchased using Turnkey III Homeownership (Turnkey III) sales proceeds. It also inappropriately transferred ownership of 29 of the 32 properties valued at more than $1.1 million to its nonprofit without HUD approval and did not ensure that it complied with its HUD-approved plan regarding the use of the sales proceeds. As a result, fewer funds were available to serve the Authority's low-income families.

Further, the Authority did not comply with HUD's property disposition requirements and did not ensure that its nonprofit used the proceeds from the sale of property in accordance with its agreement with HUD. As a result, HUD lacks assurance that the sale of the property served the best interests of HUD, the Authority, and its residents.

We informed the Authority's executive director and the Director of HUD's Cleveland Office of Public Housing of minor deficiencies through a memorandum, dated November 19, 2007.

We recommend that the Director of HUD's Cleveland Office of Public Housing require the Authority to submit executed declarations of trust for the Turnkey III properties to HUD, negotiate with its nonprofit to transfer ownership of the 29 Turnkey III properties back to the Authority and amend its promissory note with Horizon Bank to remove the properties held as collateral or pay HUD for the properties from nonfederal funds, reimburse its Public Housing program from nonfederal funds for rental income received from the Turnkey III properties, and replenish its Public Housing program to comply with its approved HUD plan or provide a revised plan to HUD for review and approval. We also recommend that the Director require the Authority to implement adequate procedures and controls for monitoring the progress of the urban park development or exercise its right to reversion of title if the park is not fully developed, negotiate with its nonprofit to discontinue using sales proceeds to pay interest payments, and implement a written plan for use of the proceeds. Additionally, we also recommend that the Director take appropriate action to declare the Authority in substantial default of its contract.