Report | Feb. 12, 2019

Accounting and Financial Reporting for the Military Housing Privatization Initiative DODIG-2019-056


Objective

 

We determined whether the DoD Military Housing Privatization Initiative (MHPI) program was properly accounted for in DoD financial and property systems and reported in the FY 2017 DoD Agency-Wide Financial Statements. The DoD Deputy Chief Financial Officer (DCFO) requested this audit on May 26, 2017.

 

Background

 

Public Law 104-106 established the MHPI program to improve the condition of housing for military personnel and their families; attract private lending, expertise, and innovation; and provide housing more efficiently. Before this program was established, DoD personnel estimated that it would take over 30 years and $20 billion to improve the DoD-owned military housing units. Since the program was established in FY 1996, the Military Departments have privatized 99 percent of their military family housing, or approximately 201,600 units. DoD personnel do not publish stand‑alone financial statements for the MHPI program but report the program’s financial information as part of Other Defense Organizations in the DoD Agency‑Wide Financial Statements.

 

Findings

 

Defense Finance and Accounting Service–Indianapolis (DFAS-Indianapolis) personnel did not properly account for and summarize MHPI transactions in DoD financial systems. Specifically, DFAS-Indianapolis personnel incorrectly:

 

  • recorded transactions for equity investments using guidance for similar transactions because there was no directly applicable Treasury guidance;

  • recorded $155.5 million in disbursements for a Government guaranteed private loan which had only $120 million in disbursements;

  • summarized $145.1 million in transactions during the financial reporting process as a result of recording and crosswalking errors; and

  • recorded $4.2 billion in accounting adjustments without the required supporting documentation.

 

MHPI financial management personnel also did not report $2.6 billion of real property (such as housing units and other structures) ownership transferred to equity investment projects, $489.5 million of equity investment net losses allocated to the Military Departments, and all required information about the financial risks to the MHPI projects.

 

These accounting and reporting deficiencies occurred because DCFO personnel did not develop adequate accounting policy or conduct adequate oversight and because DFAS‑Indianapolis personnel lacked the procedures needed to ensure proper accounting and reporting. As a result, the FY 2017 DoD Agency-Wide Financial Statements, as related to the MHPI program, were misstated and unsupported. In addition, the FY 2018 DoD Agency-Wide Financial Statements were misstated, as the reported equity investment balance remained unchanged from FY 2017 and there remained no discussions about the financial risks to MHPI projects.

 

In addition, MHPI program and financial management personnel need to improve funds and privatized housing inventory management for MHPI projects. Specifically, MHPI program and financial management personnel:

 

  • unnecessarily paid $1.8 million in subsidy costs to the DoD Family Housing Improvement Fund for the Fort Wainwright/Greely project loan guarantee;

  • did not resolve internal disagreements on the availability of equity investment sales proceeds;

  • did not resolve internal disagreements about the methodology used to reestimate direct loan and loan guarantee subsidy costs; and

  • did not identify and correct discrepancies between privatized housing inventories or populate the enterprise Military Housing (eMH) system with all privatized housing records.

 

These funds management and privatized housing inventory deficiencies occurred because MHPI program and financial management personnel lacked adequate oversight, policies, and procedures to properly manage funds and maintain complete and accurate private housing inventories.

 

Without effective funds management and privatized housing accountability controls, MHPI program management personnel may not be able to efficiently manage and oversee the MHPI program and related projects or obtain necessary MHPI-related information, including information for required reports to Congress.

 

Recommendations

 

We recommend that the DCFO:

 

  • develop an interim plan to account for equity investments and coordinate with the Department of the Treasury to update Treasury guidance;

  • update the DoD guidance once Treasury guidance is established;

  • issue accounting policy requiring DFAS‑Indianapolis personnel to correctly report real property ownership transfers, equity investment profits and losses allocated to the Military Departments, and all required direct loan and loan guarantee information in the DoD Agency-Wide Financial Statements; and

  • issue policy for reestimating subsidy costs.

 

We recommend that the Under Secretary of Defense (Comptroller)/Chief Financial Officer, DoD (USD[C]/CFO), ensure that equity investment and loan information is reported correctly in the DoD Agency-Wide Financial Statements.

 

We recommend that the DFAS-Indianapolis Director:

 

  • review the accounting transactions for equity investments and revise them as needed once the DoD guidance is updated;

  • develop and implement procedures to reconcile, on a quarterly basis, MHPI loan supporting documentation to amounts reported in the Great Plains system and the financial statements; and

  • develop and implement a plan to identify root causes for unsupported accounting adjustments and correct the causes or support the adjustments.

 

We recommend that the Assistant Secretary of Defense for Sustainment (ASD[S]):

 

  • issue policy requiring the maximum loan amount on promissory notes to match the corresponding loan agreements and promissory notes to contain complete histories of all amendments;

  • coordinate with DoD Deputy Comptroller for Program/Budget and Military Department personnel to issue policy requiring the identification of deobligation opportunities and to develop corresponding procedures;
  • issue policy requiring Military Department personnel to ensure that the Office of Management and Budget (OMB)-approved amounts are in the DoD Family Housing Improvement Fund prior to agreeing to any changes to loan terms; and

  • coordinate with the eMH system Program Management Office to create procedures for Military Department personnel to input housing records in the eMH system.

 

We recommend that the Assistant Secretary of the Army for Installations, Energy, and Environment coordinate with the appropriate MHPI program and financial management personnel to rebalance the subsidy cost for the Fort Wainwright/Greely project loan guarantee after the next reestimatation process, to include deobligating the $1.8 million that Army unnecessarily paid.

 

We recommend that the DCFO and the DoD Deputy Comptroller for Program/Budget coordinate with the Department of the Treasury and OMB to update accounting policy with guidance on whether funds should be considered expended (spent) when initially invested and whether any portion of equity investment sales proceeds are available for use without a new appropriation.

 

We recommend that Military Department personnel develop and implement procedures to reconcile their privatized housing inventories with the private partners’ and the eMH system inventories.

 

Management Comments and Our Response

 

The DCFO, also responding for the USD(C)/CFO and the DoD Deputy Comptroller for Program/Budget, agreed with our findings and recommendations. He also agreed to take or stated that he has taken the following actions.

 

  • Update the DoD Transaction Library with the equity investments accounting transactions proposed to the Department of the Treasury (Completed and Verified by Auditors).

  • Issue implementing guidance for the accounting treatment of equity investments (Estimated Completion Date: February 28, 2019).

  • Draft policy requiring Military Department personnel to monitor and report the financial condition of their equity investments, and obtain and provide to DFAS-Indianapolis personnel the supporting documentation needed to record real property transfers and equity investment profits and losses allocated to the Military Departments (Estimated Completion Date: February 28, 2019).

  • Determine the proper subsidy cost reestimation procedures for direct loans and loan guarantees and update the DoD guidance accordingly (Estimated Completion Date: March 31, 2019).

  • Ensure real property ownership transferred to projects as equity investments and equity investment profits and losses allocated to Military Departments are reported in the DoD Agency-Wide Financial Statements (Estimated Completion Date: September 30, 2019).

 

The DCFO, responding for the DFAS-Indianapolis Director, agreed with our findings and recommendations. He also stated that the DFAS‑Indianapolis Director agreed to take or has taken the following actions.

 

  • Develop procedures to reconcile information in direct loan and loan guarantee supporting documentation the Great Plains system, and the DoD Agency-Wide Financial Statements (Completed and Verified by Auditors).

  • Develop procedures to research and analyze unsupported manual journal voucher adjustments and require the resolution of new unsupported adjustments within 90 days (Completed and Verified by Auditors).

  • Review the accounting transactions for equity investments and revise them as needed once the DoD guidance is updated (Estimated Completion Date: May 30, 2019).

The ASD(S) partially agreed with our recommendations, but addressed all specifics of the recommendations in his response. He agreed to take the following actions.

 

  • Issue policy requiring the maximum loan amount on promissory notes to match the corresponding loan agreements.

  • Coordinate with USD(C)/CFO and Military Department personnel to determine whether additional policy requiring the identification of deobligation opportunities is needed and issue policy as needed.

  • Issue policy requiring Military Department personnel to ensure that the OMB-approved subsidy cost amounts are in the DoD Family Housing Improvement Fund prior to changes to loan terms (Estimated Completion Date: September 30, 2019).

  • Coordinate with the eMH Program Management Office to develop procedures for recording housing records in the eMH system.

 

The Naval Facilities Engineering Command (NAVFAC) Headquarters Inspector General, responding for the NAVFAC Commander, agreed with our recommendations and agreed to take or has taken the following actions.

 

  • Reconcile privatized housing records between the Navy’s housing records and the eMH system (Completed Pending Verification).

  • Develop procedures for annual reconciliations between the Navy’s privatized housing records and the eMH system (Estimated Completion Date: January 31, 2019).

 

The recommendations related to the proposed actions provided by the DCFO, ASD(S), and the NAVFAC Headquarters Inspector General, discussed above, remain open. We will close each recommendation once we receive the documentation needed to verify the actions taken and the recommendations are fully addressed.

 

While the DCFO agreed, in principle, with our recommendation that all required direct loan and loan guarantee information should be reported in the DoD Agency-Wide Financial Statements, he stated that our related recommendation was premature. Therefore, the recommendation is unresolved and we request further comment to the final report.

 

The Deputy Assistant Secretary of the Army (Installations, Housing, and Partnerships), responding for the Assistant Secretary of the Army for Installations, Energy, and Environment, disagreed with our recommendation but proposed an alternative recommendation to rebalance the subsidy cost for the Fort Wainwright/Greely project loan guarantee after the next reestimate process. Therefore, we revised this recommendation and the related potential monetary benefit. We will close this recommendation once we receive the documentation needed to verify completion of the subsidy cost rebalancing, to include deobligating the $1.8 million Army unnecessarily paid that can provide monetary benefit to other MHPI projects.

 

The Privatized Housing and Lodging Program Chief, responding for the Assistant Chief of Staff for Installation Management, Department of the Army, agreed with the recommendation to develop and implement procedures to reconcile privatized housing inventories with the private partners’ and the eMH system inventories. However, the comments did not address the proposed actions, with milestones, to ensure the accuracy of the different privatized housing inventories. Therefore, the recommendation is unresolved and we request further comment to the final report.

 

The Air Force Civil Engineer Center Director did not provide comments to the recommendation. Therefore, the recommendation is unresolved and we request comments to the final report.

 

This report is a result of Project No. D2018-D000FL-0050.000.