The Annapolis Housing Authority did not act improperly in allocating $76,000 from a fund for low-income housing programs to hire a drum and bugle corps and celebrate the agency's 50th anniversary next month, a federal agency concluded this week.

A report issued by the U.S. Department of Housing and Urban Development apparently ended the controversy pitting the agency's director, Arthur G. Strissel, against the city's mayor and low-income residents over the use of the federal housing funds.

Although the HUD report stated that "no law or regulation {was} violated" by the proposed expenditure, HUD officials said that the agency may move to enforce tighter controls on how such government money should be spent by the Annapolis authority.

The proposed $76,000 expenditure, from a federal program that provides rent subsidies for low-income families, had triggered an outcry from Annapolis government officials who charged that the funds should have been used for improving public housing.

The $76,000 "can go a long way towards repairing housing that right now is not habitable," said Annapolis Alderman Carl Snowden (D-Ward 5).

"The funds were not originally intended to be used in that way. This type of spending is what gives public housing programs a black eye."

About $41,000 of the allocation, approved in January by the housing authority, was designated for the authority's drum and bugle corps, and the purchase of a $25,000 bus.

An additional $25,000 was intended for the Aug. 14 celebration, and $10,000 was set aside for two videotapes about the housing authority.

The report concluded that such expenditures are good public relations for the housing authority, and are thereby permitted as "administrative" expenses.

The report also said that HUD's Office of Public and Indian Housing should investigate the use of more than $2,000 allocated by the Housing Authority to buy musical instruments.

That money, according to the report, was allocated from "operating funds" provided by HUD, as opposed to the "management funds" which may be used for administrative expenditures such as the the musical ensemble.

Annapolis Mayor Dennis Callahan said HUD's decision was based on a loophole in the federal regulations.

"In my wildest imagination, I can't imagine the money was meant to be spent in that way, especailly when there are 700 people on waiting lists for public housing," Callahan said. "If there is a way of getting around the spirit of the law, the Annapolis Housing Authority will do it."

Callahan added that while he did not oppose expenditures for the celebration and drum and bugle corps, he said that the funds should have been provided from the Department of Recreation.

The Annapolis Housing Authority, which also is under investigation by the FBI for allegations of fraud and mismanagement, has been the target of widespread criticism by county officials who have charged that Strissel has acted irresponsibly in handling the $3 million annual budget of the agency.

Strissel and other Housing Authority officials did not return a reporter's phone calls yesterday.