U.S. Department of Housing and Urban Development

H O U S I N G

Special Attention of: Notice H 97-49 (HUD)

State Coordinators, Directors of

Housing; Directors, Multifamily Housing Issued: August 1, 1997

Division, Multifamily Housing Manage- Expires:August 1, 1998

ment and Development Branch Chiefs;

Contract Administrators; All Issuers Cross References:

and/or State and Local Housing

Agencies Who Issued Section 8

Refunding Bonds; Owners and Managers

of Projects with Section 8 Contracts

Adjusted by the Adjustment Factor

SUBJECT: Backing-Out Trustee Sweep Savings Before Calculating AAFs

for Projects which Originally Received a Financial

Adjustment Factor (FAF) and whose Bonds were Refunded

Dissemination of HUD-OGC Opinion Regarding \"Single Audit

Act and McKinney Savings.\"

PURPOSE: This Notice has the following two purposes:

First, the Notice implements and provides written guidance to HUD

Field offices (FOs), Housing Finance Agencies (HFAs), Public

Housing Agencies (PHAS) and other affected parties on backing-out

100 percent of the annual Trustee Sweep Savings before calculating

the Annual Adjustment Factor (AAF).

Second, the Notice disseminates the February 21, 1997, Office of

General Counsel (OGC) Opinion, regarding \"The Single Audit Act and

McKinney Savings\" and explains further certain Refunding Agreement

matters.

I. Backing-Out Trustee Sweep Savings Before Calculating AAFs for

Projects which Originally Received a Financial Adjustment Factor

(FAF) and whose Bonds were Refunded:

The backing-out procedure will result in the application of

the AAF to rent figures for Section 8 New Construction and

Substantial Rehabilitation Contracts that would have resulted had

the ACC, Housing Assistance Payments Contract (HAPC) and Mortgage

Note been amended to reflect the savings achieved from bond

refundings. HUD will begin the backing-out process of the annual

amount of Trustee Sweep savings for Section 8 contracts with

anniversary dates in October 1997. After an AAF calculation (net

of the refunding Savings) is completed, the FO will add the savings

portion back to the product of the calculation and submit same to

Field Accounting Director (FAD) for payment. Thus, AAFs are only

HMMOSM: Distribution: W-3-1,R-1,R-2,R-3-1(H),(RC),R-3-2,R-3-3,

R-6,R-6-2,R-7,R-7-2,R-8

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calculated on that portion of the subsidy which is used to maintain

the project and make the new, ower debt service payments on the

refunding bonds. For purposes of the calculation, please use the

Worksheets (Appendices 2, 3, 4 and 5) supplied with Housing NOTICE [H
97-14](http://www.hudclips.org/sub_nonhud/html/nph-brs.cgi?d=HSGN&s1=97-14%5Bno%5D&SECT1=TXTHLB&SECT5=HSGN&u=../html/shortcut.htm&p=1&r=1&f=G)

(HUD), issued March 17, 1997, and Form HUD-9833-B. A copy of Form

HUD-9833-B is attached.

INTRODUCTION/Background: Since 1989, the office of Housing has

been refunding the existing bonds for projects with new

construction or substantial rehabilitation Section 8 contracts

entered into in the years 1979 through 1984. Pursuant to the

Stewart B. McKinney Homeless Assistance Act of 1988, as amended,

State Housing Agencies/Issuers, are allowed to share in the savings

generated from such refundings. In 1992, Congress amended the

McKinney Act to permit Local Housing Agencies/Issuers to share in

50 percent of the savings on FAF and Non-FAF refundings which

closed after January 1, 1992. The recaptured savings that result

from such refundings are known as \"Section 8 Savings\" or, more

commonly, as \"FAF/McKinney Savings,\" or \"Savings.\" An Agency can

access its share of the savings after a Refunding Agreement and its

appendices are executed. It may use its share of the savings for

housing-related activities, provided that such activities benefit

\"Very Low Income Persons and Households.\" (See HUD Notice 97-5 for

more detailed \"Use Guidelines.\")

In 1993, the HUD office of Inspector General (OIG) issued both

a Draft Audit Report and a Final Audit Report, recommending that

\(1\) Housing develop procedures that will require State HFAs and

PHAs with Trustee Sweeps to apply the AAF to a rent figure that

would have resulted had the Annual Contributions Contract (ACC),

HAPC and Mortgage Note been amended to reflect the savings achieved

from bond refundings or alternatively, (2) eliminate the Trustee

Sweep. Since then, OGC opined that HUD may indeed back out the

FAF/McKinney savings derived from bond refundings prior to applying

the AAF to the rents) for bond refundings where the projects-originally

received a Financial Adjustment Factor (FAF) but NOT for

\"non-FAF\" refundings.

Because only FAF cases will under-go the backing-out

procedure, all FOs were requested to review HAP Contracts of

projects within their jurisdiction whose original bonds were

FAF/McKinney refunded. In most cases, if a project originally

received a FAF, Exhibit E4 contains the following or similar

language: \"In the event of a refunding of the obligations issued to

finance the project, the Owner agrees to a reduction in Contract

Rents commensurate with the resulting decrease in mortgage debt

service, and agrees that HUD may make a corresponding reduction in

contract and budget authority for the project.\" Note that several

FOs found this or similar language in different Exhibits of the HAPC

or related documents.

3

EFFECTIVE DATE AND RESPONSIBILITIES: The Bond Financing Team (the

\"Team\"), Special Projects Division, Office of Multifamily Asset

Management and Disposition is currently recasting Trustee Sweep

savings from refunding bond debt service payment dates to HAPC

Anniversary dates. Priority is given to projects whose HAPC

Anniversary dates are October 1997. Upon completion, the revised

HAPC Savings Summary Schedules (HAPC-SSS), formerly known as PAD

Summary Schedules (PADSS), will be forwarded to the appropriate FO

who will implement the backing out of 100 percent of the annual

HAPC-SSS for all applicable HAPCs whose Anniversary dates are in

October 1997.

Next, the Team will prepare and transmit the remaining eleven

months\' HAPC-SSS and those of newly refunded bonds, subject to the

backing out procedure. Thereafter, the annual HAPC-SSS will be

forwarded to FOs for the backing out process. HAPC-SSS will remain

in effect and must be consulted annually prior to AAF calculations,

unless the Trustee Sweep Method of Rebating or Savings Sharing is

converted to the HAPC/ACC and Mortgage interest rate reduction

method of savings sharing, or is otherwise stopped. To notify

owners/managers that an AAF recalculation has been made, a model

Owner Notification Letter is attached to this Notice. FOs may

alter the Model somewhat to fit a particular case.

On the 15th working day after any month\'s backing-out efforts,

FOs are required to prepare and forward a report to the Team,

signed by the FO Housing Director. The report must list the amount

of AAF savings achieved during the preceding month. Further, each

project involved must be identified by FAF Number, Project Name,

FHA Case Number and Section 8 Number along with the amount saved.

II\. Dissemination of HUD-OGC Opinion Regarding \"Single Audit Act

and McKinney Savings\" and certain Refunding Agreement

Clarifications:

Because Notice HUD 97-5 , entitled \"Guidance on Use and

Administration of Savings\" was required to be issued on February 3,

1997, prior to the Opinion\'s availability, the Opinion is

disseminated as an attachment to this Notice. The Opinion provides

clarification to potential questions from Housing Authorities

regarding reporting requirements in connection with the Annual and

Triennial Audit required by an executed Refunding Agreement (RA),

Plan of Use of Funds (the Plan) and the Escrow Agreement (EA).

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To enable a FO to assume its duties under the documents

comprising the RA, the executed documents will be forwarded to all

FO Housing Directors during August 1997. Thereafter, the documents

will be forwarded as they are executed on a monthly basis. Note

that RAs may only be executed in the Office of Multifamily Asset

Management and Disposition and must undergo both legal and

programmatic review prior to HUD signature. Similarly, when an

Agency requests subsequent changes to the Plan, such changes and

additions must also be executed by this office.

Please note that one or a pool of project mortgages may be the

security for a given bond refunding and that each refunding bond

issuance has its own distinct FAF/Ethics Number. In cases where

more then one project mortgage is involved, each is assigned an

alpha coding as an extension to the FAF/Ethics Number. Since all

documentation is retained under the applicable FAF/Ethics Number,

as are all Trustee Sweep Receivables, all correspondence/inquiries

must refer to this number.

Questions on this matter should be addressed to Ms. Monika F.

Martin of the Special Projects Division at (202) 708-1220 Extension

2436\.

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachments

Owner Notification Letter

for (FAF-AAFs)

Owner

Address

Subject:

Dear Owner.

Pursuant to the HAP contract (HAPC) governing Financing

Adjustment Factor (FAF) projects, HUD has the authority to reduce

contract rents commensurate with the resulting decrease in

mortgage debt service due to a refunding of the original bonds.

The governing language provides \"In the event of a refunding of

the obligations issued to finance the project, the owner agrees

to a reduction in Contract Rents commensurate with the resulting

decrease in mortgage debt service, and agrees that HUD may make a

corresponding reduction in contract and budget authority for the

project.\"

Our records indicate that your project was refunded on

\_\_\_\_(date)\_\_\_\_. However, in your case, the HAPC, the Annual

Contributions Contract (ACC), and the Mortgage Note were not

amended to reflect the reduction of bond debt service and Section

8 savings. Instead, the Trustee Sweep method of \"recapturing\"

savings was used. In this method, during the remaining HAPC

term, no reductions are made in the mortgage interest rate, the

contract rents and the Section 8 payments. The mortgage payments

are received and processed by the mortgage servicer who forwards

the net mortgage receipts to the new Bond Trustee. The trustee,

in accordance with the Trust Indenture and a Refunding Agreement

(where applicable), rebates the interest rate savings to the U.S.

Treasury on behalf of HUD and, pursuant to the Stewart B.

McKinney Homeless Assistance Amendments Act of 1988, to the

public Agency issuer of the refunding bonds.

Starting with Fiscal Year 1998, HUD will calculate and

provide the AAF only on that portion of the subsidy which is used

to maintain the project and make the new, lower debt service

payments on the refunding bonds. Accordingly, this letter serves

to inform you that effective \_\_\_\_\_(date)\_\_\_\_\_ HUD adjusted
your

AAF increase to reflect your project\'s lower debt service. Please

see Notice H 97-\_\_\_ (HUD) for further details.

(Pages 2 & 3 of 8)

PDF FILE OF FORM HUD-9833-B, SECTION 8 ANNUAL CONTRACT

RENT ADJUSTMENT WORKSHEET HERE.

(Page 4 of 8)

THE GENERAL COUNSEL OF HOUSING AND URBAN DEVELOPMENT

WASHINGTON, D.C. 20410

February 21, 1997

MEMORANDUM FOR: Nicolas P. Retsinas, Assistant Secretary

for Housing-Federal Housing Commissioner, H

FROM: George L. Weidenfeller, Acting General Counsel, CA

SUBJECT: The Single Audit Act and McKinney Act Savings

This is in response to the Office of Asset Management and

Disposition\'s February 28, 1996, electronic mail message

requesting an opinion from the Office of General Counsel. We

apologize for the tardiness of this reply.

The Financial Services Division asked whether assistance

provided in accordance with the Stewart B. McKinney Homeless

Assistance Act of 1988 is properly classified as \"Federal

financial assistance\" for purposes of the Single Audit Act of

1984 (the Act), Pub. L. No. 98-502, codified at 31 U.S.C. Secs.

7501-7507. We were also asked whether the Act\'s requirements

take precedence over the audit requirements found in HUD\'s

Standard Refunding Agreement.

The Act was amended by the Single Audit Act Amendments of

1996, Pub. L. No. 104-156, 110 Stat. 1396 (the 1996 Amendments).

The 1996 Amendments apply to all non-Federal entities whose

fiscal years begin on or after June 30, 1996. Non-Federal

entities with fiscal years that begin prior to July 1, 1996, are

subject to the provisions of the old Act.

The 1996 Amendments to the Single Audit Act require each

non-Federal entity receiving \$300,000 ^1^ or more per year in

Federal financial assistance to obtain an annual, independent,

organization-wide audit of its operations. In addition to the

monetary threshold, the 1996 Amendments provide that the Director

of the Office of Management and Budget (OMB) shall prescribe

risk-based program selection criteria which in turn trigger the

requirements of the Act. In general, the risk-based criteria are

based on the proportion of the recipient\'s Federal to total

expenditures.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

^1^ Prior to the 1996 Amendments, the amount necessary to

trigger the provisions of the Act was \$100,000.

(Page 5 of 8)

The annual single audit determines whether the recipient\'s

financial statements are in order, whether the recipient has

maintained adequate internal controls over its Federal

assistance, and whether it has complied with Federal program

requirements. The audit also includes a review of the

participant\'s internal controls which monitor the expenditure of

Federal assistance passed through to subrecipients.

Congress passed the Single Audit Act to address the problem

of overlapping audit requirements which produced duplication and

inefficiency with multiple audit teams visiting the same entity

and reviewing the same financial records. The purposes of the

Act and the 1996 Amendments are (1) to improve the financial

management of non-Federal entities ^2^ with respect to Federal

financial assistance programs; (2) to establish uniform

requirements for audits of Federal financial assistance provided

to such entities; (3) to promote the efficient and effective use

of audit resources; and (4) to ensure that Federal departments

and agencies, to the maximum extent possible, rely upon and use

audit work performed pursuant to chapter 75 of title 31 of the

United States Code (as added by the Act and amended by the 1996

Amendments).

The statute prescribes the major components of the audit:

determinations that the grantee\'s financial statements fairly

present its financial position and the results of its financial

operations, and that it has complied with the laws and

regulations that may materially affect its financial statements;

evaluation of the recipient\'s internal control systems; and

compliance with laws and regulations that may have a material

impact upon applicable major federal assistance programs. This

includes the testing of a representative number of transactions

from each major program. \"Major\" programs are determined under

criteria specified in 31 U.S.C. Sec. 7501(b) (1995) under the Act

and 31 U.S.C. Secs. 7501(a)(12), (b) (1996) under the 1996

Amendments. ^3^

The audit required by the Act is essentially a financial and

compliance audit and does not include \"economy and efficiency

audits, program results audits, or program evaluations.\"

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

^2^ While the Act only pertained to State and local

governments, the 1996 Amendments cover all non-Federal entities,

including not-for-profit organizations.

^3^ Under the Act, annual Federal expenditures of a \"major

federal assistance program\" are those that exceed \$300,000 or

generally three percent of total programmatic expenditures.

Under the 1996 Amendments, a \"major program\" for purposes of the

Act means a Federal program identified in accordance with the

risk-based criteria established by the Director of OMB.

(Page 6 of 8)

31 U.S.C. Sec. 7502(c) (1995). These types of audits \"are

defined in the generally accepted government auditing standards

issued by the Comptroller General.\" 1984 U.S. Code Cong. and

Admin. News, p. 3967. However, the 1996 Amendments do not

contain a similar objective differentiation between programmatic

and financial audits. Nevertheless, for both the Act and the

1996 Amendments 31 U.S.C. Sec. 7503(b), (c) provide that Federal

agencies may conduct or arrange for additional audits as

necessary to carry out Federal responsibilities, and the

authority of Federal agencies to conduct such additional audits

of Federal awards shall not be limited by the provisions of the

1996 Amendments.

Currently, HUD and recipients of McKinney Act Savings sign a

Refunding Agreement in which the recipient agrees to pay for a

programmatic review of how it spends McKinney Act Savings every

three years:

9\. The Agency\'s Housing Plan, which has been approved

by HUD, is attached hereto as Appendix B. Within 90 days of

the end of its fiscal year, the Agency shall provide annual

certifications to HUD that the McKinney Savings are being

used in accordance with the Plan together with a report

setting forth the uses of the McKinney Savings and the

nature of the assistance provided. The Agency further

agrees (a) to provide HUD with such additional information

as may be reasonably requested by HUD, including a general

audit of McKinney Savings expended or received by the Agency

hereunder; (b) to cause to be prepared triennially a report

from an independent consulting firm, which may be a firm of

independent auditors, setting forth that a programmatic

review has been conducted, including a review of the

assistance provided and the families or persons assisted

thereby in accordance with the Act, based on a statistical

sampling if appropriate, and the findings and

recommendations upon such review; . . . In addition, with

respect to each such development, the Agency agrees to

submit annually . . . (i) Project financial statements and

\(ii\) physical inspection reports. The cost of such review

and reports may be paid from funds paid to the agency by HUD

hereunder.

(emphasis added) .

Under the Act, \"Federal financial assistance\" is defined

very broadly to include \"grants, contracts, cooperative

agreements, loans, loan guarantees, property, interest subsidies,

insurance, or direct appropriations.\" 31 U.S.C. Sec. 7501(5)

(1995). Under the 1996 Amendments, the same term is also defined

broadly to encompass \"grants, loans, loan guarantees, property,

cooperative agreements, interest subsidies, insurance, food

commodities, direct appropriations, or other assistance, but does

(Page 7 of 8)

not include amounts received as reimbursement for services

rendered to individuals in accordance with guidance issued by the

Director \[of OMB\].\" 31 U.S.C. Sec. 7501(a)(5). As you know,

McKinney Savings are derived from Section 8 payments, which are

properly characterized as \"Federal financial assistance\" under

the Act and the 1996 Amendments.

A broad definition of \"assistance\" is found in the Federal

Program Information Act as \"the transfer of anything of value for

a public purpose of support or stimulation authorized by \[law\].\"

31 U.S.C. Sec. 6101(3). A similar definition can be found in the

Intergovernmental Cooperation Act of 1968. 31 U.S.C. Sec.

6501(1). Accordingly, we believe that McKinney Savings is

Federal assistance for purposes of the Single Audit Act.

Therefore, McKinney-Savings must be audited annually for

financial austerity pursuant to the Act and its amendments.

Nevertheless, it still may be possible for HUD to demand

that the recipient prepare the triennial report required by the

Refunding Agreement. The Refunding Agreement requires the

recipient to do two things: (1) annually certify that \"the

McKinney Savings are being used in accordance with the \[Housing\]

Plan together with a report setting forth the uses of the

McKinney Savings and the nature of the assistance provided\"; and

\(2\) \"cause to be prepared triennially a report from an

independent consulting firm . . . setting forth that a

programmatic review has been conducted.\" (emphasis added).

The audit required by the Single Audit Act is essentially a

financial and compliance audit. The Single Audit Act requires a

determination, among other things, of whether the recipient has

complied with Federal program requirements. In the legislative

history to the Act, the House Report summary states that the

program requirement component of the Single Audit Act \"is the

testing of selected Federal programs to determine whether the

recipient has complied with grant requirements that may have a

material effect upon the individual programs tested. . . . The

report on compliance testing should include, at a minimum, a

statement of positive assurance as to whether the transactions

tested were in compliance with applicable laws and regulations.\"

1984 U.S. Code Cong. and Admin. News, pp. 3964-65. Similarly,

the Committee Report on the 1996 Amendments provides that \"single

audits are intended to facilitate\--not inhibit\--other oversight

activities, including program reviews, additional audits, and

investigation of suspect grantees. Single audits will not answer

all questions about an entity\'s stewardship of Federal programs.\"

1996 U.S. Code Cong. and Admin. News, p. 1100.

For McKinney Act Savings, the only program requirement to

review is whether the McKinney Savings were spent on very low-

(Page 8 of 8)

income housing purposes. ^4^ The annual audit under the Single

Audit Act would not include the more thorough and specific

examination envisioned by the Refunding Agreement \-- namely,

whether the recipient has spent its McKinney Savings in

accordance with its Housing Plan.

In the absence of any regulations governing the McKinney

Savings, and because the triennial report appears to be exactly

the type of program evaluation excluded from the Single Audit Act

by section 7502(c) under the Act and sections 7503 (b) and (c)

under both the Act and the 1996 Amendments, we believe that HUD

may properly require that this triennial report be prepared, and

paid for by the recipient, in addition to the annual financial

review mandated by the Single Audit Act.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

^4^ Section 1012 of the Stewart B. McKinney Homeless

Assistance Amendments Act of 1988, as amended by the Housing and

Community Development Act of 1992, Pub. L. 102-550, states: \"The

Secretary shall make available to the State housing finance

agency in the State in which a qualified project is located, or

the local government or local housing agency initiating the

financing of the qualified project, as applicable, an amount

equal to 50 percent of the amounts recaptured from the project

(as determined by the Secretary on a project-by-project basis).

Notwithstanding any other provision of law, such amounts shall be

used only for providing decent, safe, and sanitary housing

affordable to very low-income families and persons.\"