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We audited the Chattanooga Housing Authority's (Authority) financial operations after the U.S. Department of Housing and Urban Development (HUD), Office of Public Housing, Tennessee State Office, informed us of the Authority's deteriorating financial condition. We began with a review of the Authority's development activities but expanded the review based on our survey results.

The Authority, with the exception of $49,316 in ineligible expenses, generally complied with HUD requirements with respect to its development activities. However, its deteriorating financial condition led its management to use restricted funds to cover excessive general operating expenses. In addition, management unnecessarily expended scarce resources during a time of financial crisis and failed to provide adequate financial reporting to its board. In total, the Authority misused more than $1 million in funding that could have been used to carry out its mission of providing families with decent, safe, and sanitary housing. Authority management

Used more than $788,000 in Section 8 housing assistance funds for Authority operating expenses in violation of Section 8 regulations,
Used $1.2 million in restricted Fannie Mae loan proceeds to cover operating expenses in violation of the executed loan agreement,
Paid employee bonuses of more than $210,000 and a cost of living adjustment of more than $180,000 in conflict with its own policies,
Approved more than $193,000 in excessive severance payments during two 2008 reductions in force in conflict with its own policies,
Used $49,316 in public housing operating funds to pay non-HUD expenses in violation of annual contributions contract requirements, and
Liquidated more than $4 million in investments without adequately informing the board, in violation of both HUD and Authority requirements.
We recommend that the Authority (1) repay more than $1 million in ineligible costs, (2) support or repay from non-federal funds excessive performance-based compensation and cost of living adjustment payments totaling $402,862, and (3) develop and implement internal controls over the use of HUD funds to ensure that funds are expended only for eligible expenses.