We audited the Jersey City Housing Authority's (Authority) administration of its capital fund programs. We selected the Authority because of the size of its capital fund programs and because of its US, Department of Housing and Urban Development (HUD) risk rating. Our audit objectives were to determine whether the Authority (I) obligated and expended funds under the Public Housing Capital Fund program (CFP) and Capital Fund Financing program (CFFP) in accordance with HUD regulations, and (2) had a financial management system in place that complied with program requirements.

The Authority did not always comply with HUD regulations while obligating and expending capital funds, and its financial management system did not always comply with program requirements, Specifically, the Authority (1) inadequately used capital funds for a development that was subject to be converted to tenant-based assistance, (2) drew down capital funds without proper supporting documentation, (3) inappropriately obligated bond proceeds under the CFFP, (4) inadequately disbursed CFFP bond proceeds for preaward costs, and (5) lacked a plan for using force account labor. Consequently, (1) more than $1.3 million in capital funds was inappropriately disbursed for a public housing development that was subject to be converted to tenant based assistance, (2) more than $2 million in draw downs was not adequately supported, (3) $338,236 in CFFP bond proceeds was inappropriately obligated, (4) $53,452 of the CFFP bond proceeds was ineligibly disbursed for costs incurred before HUD's approval of this program, and (5) $1.1 million in force account labor charges was incurred without a plan or analysis of the cost effectiveness of the activities.

There were control weaknesses in the Authority's financial management system. Specifically, accounting records and financial reports were not complete, accurate, and current; and the obligation of funds cannot be effectively tracked and monitored. As a result, the Authority's internal controls were not sufficient to safeguard assets and ensure their use in accordance with applicable requirements.

We recommend that the Director of HUD's New Jersey Office of Public Housing instruct the Authority to (1) provide supporting documents to HUD for the more than $3.3 million in capital funds spent on the Montgomery Gardens Development, and for unsupported draw downs, and reimburse any costs determined to be ineligible; (2) conduct the required annual reviews to identify developments that should be converted to the tenant based program; (3) deobligate $338,236 obligated for contingencies under the CFFP; (4) reimburse $53,452 in ineligible pre award costs to the CFFP bond proceeds from annual capital funds; (5) establish an adequate force account labor plan; and (6) develop procedures that will improve the accounting system and internal controls to ensure that accounting records and financial reports are accurate, current, complete, and adequately supported with source documents.

We also recommend that of HUD's Departmental Enforcement Center and Associate General Counsel for Program Enforcement determine whether further administrative actions should be pursued for not carrying out the actions certified to in the five year plans in relation to the conversion of Montgomery Gardens.