oversight

SF Housing Authority Low-Income and Section 8 Housing Programs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-03-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             AUDIT REPORT




   SAN FRANCISCO HOUSING AUTHORITY

          LOW-INCOME AND SECTION 8
             HOUSING PROGRAMS

          SAN FRANCISCO, CALIFORNIA

                   00-SF-201-1001

                  MARCH 31, 2000


       OFFICE OF AUDIT, PACIFIC/HAWAII DISTRICT
             SAN FRANCISCO, CALIFORNIA



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                                                                        Issue Date
                                                                               March 31, 2000

                                                                        Audit Case Number
                                                                               00-SF-201-1001




TO:           Harold Lucas, Assistant Secretary for Public and Indian Housing, P




FROM:         Roger E. Niesen, Acting District Inspector General for Audit, 9AGA

SUBJECT: San Francisco Housing Authority
         Low-income and Section 8 Programs
         San Francisco, California


We conducted an audit of the San Francisco Housing Authority’s low-income and Section 8 housing
programs. We determined the Authority complied with the rules and regulations governing the Public
Housing Management Assessment Program and properly calculated its housing subsidy under the
Performance Funding System. However, we also identified serious problems in the areas of
contracting, administrative hiring and compensation, and Section 8 receivables. This report contains
four findings and applicable recommendations to improve the effectiveness of the Authority’s housing
programs.

Our recommendation to take administrative action against the Authority’s executive director and board
of commissioners is similar to a recommendation contained in report number 00-CH-201-1002 issued
March 31, 2000 by OIG’s Chicago Office covering its audit of the Cuyahoga Metropolitan Housing
Authority. That report recommends administrative action to be taken against the former chief operating
officer, who is the current executive director at the San Francisco Housing Authority.

The Troubled Agency Recovery Center is currently responsible for monitoring the Authority’s low-
income housing program (a carry-over from when the Authority was considered troubled). The
responsibility for the Section 8 program resides with the Office of Public Housing at HUD’s California
state office. Since the responsibilities at the Authority are split between entities, we addressed our
report to the Assistant Secretary who is over both entities to ensure proper coordination.

Within 60 days, please furnish us a status report on the corrective action taken, the proposed




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Management Memorandum

corrective action and the date to be completed, or why action is not considered necessary, for each
recommendation. Also, please furnish us with copies of any correspondence issued because of the
audit.

If you or your staff have any questions, please contact Mark Pierce, Assistant District Inspector General
for Audit, or myself at 415-436-8101.




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Executive Summary
We reviewed selected aspects of the San Francisco Housing Authority’s low-income housing and
Section 8 programs, generally covering the period March 1996 to September 30, 1999. The audit was
initiated as part of our local audit plan to address concerns expressed by the Director of Public Housing
at HUD’s San Francisco office.

The objective of our review was to determine if the Authority could improve its effectiveness of
operations and compliance with federal requirements. Specifically, we determined whether the
Authority (1) complied with rules and regulations governing the Public Housing Management
Assessment Program reporting for the fiscal year ended September 30, 1998, (2) used the appropriate
number of housing-unit-months-available in determining HUD’s operating subsidy to the Authority under
the Performance Funding System, (3) followed proper contracting procedures in the solicitation, award,
and monitoring processes, (4) used appropriate procedures when hiring and compensating higher level
administrative personnel, and (5) correctly managed its Section 8 receivables. Review of the Public
Housing Management Assessment Program and Performance Funding System disclosed no matters of
significant concern. Nevertheless, we identified serious problems in the areas of contracting,
administrative hiring and compensation, and Section 8 receivables that need immediate attention to set
the proper tone and perspective for improvements.




                                        The Public Housing Management Assessment Program is used
 The Authority Raised Its               by HUD to appraise housing authority performance. HUD
 Public Housing                         determined the San Francisco Housing Authority was a
 Management Assessment                  standard performer for the year ended September 1998.
 Program Score                          Previously, the Authority was considered a troubled performer.
                                        A standard performer is one that receives a score of less than
                                        90 percent but no less than 60 percent based on grades from
                                        21 components grouped into eight categories or indicators. In
                                        its self-certification, the Authority estimated it had a score in the
                                        high range for a standard performer; however, HUD’s
                                        confirmatory review lowered the score to 83.93. Our review
                                        indicated a lower score than HUD’s confirmatory review, but it
                                        was still within the range of a standard performer.

                                        Our tests of the Authority’s calculation of housing-unit-months-
 The Authority Properly                 available disclosed no material exceptions. Housing-unit-
 Calculated Housing-Unit-               months-available is an important factor in determining the
 Months-Available                       amount of subsidy the Authority will receive under HUD’s
                                        Performance Funding System.




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Executive Summary


                              The Authority did not manage its contracting activities for
 Requirements Were
                              consulting services according to federal requirements.
 Disregarded When
                              Specifically, we noted repeated instances where: (1) contracts
 Contracting For Consulting
                              were unjustifiably awarded on a sole-source basis, (2)
 Services
                              competition was unnecessarily limited and certain contractors
                              were provided unfair competitive advantages giving the
                              appearance of favoritism, (3) evaluations of contract proposals
                              were faulty, (4) no independent cost estimates or inadequate
                              cost analyses were performed, and (5) contractor billings and
                              performance were not properly reviewed. In addition, certain
                              critical contract provisions were omitted from the contracts.
                              Further, the Authority had not fully centralized its procurement
                              functions as directed by HUD. The principal reason for the
                              problems noted was disregard of federal requirements.

                              As a result, the Authority’s limited resources were wasted to
                              pay for services not received or ineptly performed. In addition
                              to the $121,300 paid for an invalid applicant waiting list as
                              described in Finding 3, $146,535 was spent for ineligible or
                              unnecessary costs.        Also, costs of $655,188 remain
                              unsupported, principally because there is inadequate evidence
                              that services were received. Also, the Authority lacks
                              assurance that it obtained the best available services at the most
                              advantageous prices.

                              The Authority frequently did not follow sound management
 Sound Practices Were Not     practices or its own policies and procedures when recruiting
 Followed In Recruiting And   and compensating administrative staff. Of eight employees
 Compensating Staff           tested, seven were selected without considering other candi-
                              dates, their qualifications were questionable, or they appeared
                              to be overcompensated. In addition, the executive director
                              received compensation in excess of his contract, and he was
                              inappropriately treated as a contractor rather than an employee.
                              Further, some of the reimbursements made to the Cuyahoga
                              Metropolitan Housing Authority for compensating the acting
                              executive director were unsupported, and San Francisco paid
                              some costs for services the acting executive director performed
                              for Cuyahoga. We identified $173,442 of ineligible or
                              unreasonable costs and $622,523 of inadequately supported
                              costs in connection with these conditions. This occurred
                              primarily because management did not follow the Authority’s
                              policies, insufficient board involvement, and lack of a relocation


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                                                                      Executive Summary


                           policy. As a result of these conditions, the Authority wasted
                           monies that could have been used to further its mission, the
                           effectiveness of its operations was reduced, it created the
                           appearance of favoritism, and it may have incurred a significant
                           tax liability.

                           The contractor chosen to create the Authority’s waiting list used
The Authority Used An      to select Section 8 program beneficiaries did not perform
Invalid Waiting List       adequately. The list contained duplicate names, and names did
                           not appear to be chosen randomly. Additionally, federal and
                           local ranking preferences were not applied correctly. As a
                           result, certain individuals were afforded unfair and unintended
                           advantages to the detriment of others. This occurred because
                           the Authority’s deficient procurement practices resulted in the
                           selection of a contractor with limited experience and the
                           Authority did not adequately monitor the contractor’s
                           performance.

                           The Authority needs to improve its management of Section 8
Overpayments Were Not      overpayments. Specifically, it should do proper research in
Properly Managed           determining receivable balances, take more aggressive recovery
                           actions, and abstain from inappropriately retaining part of the
                           recoveries. Further, it should record the receivables in its
                           general ledger. These actions were not taken because of
                           omissions in Authority policies and procedures and
                           misinterpretation of HUD requirements. As a result, an
                           accurate picture of the extent of receivables was not available,
                           the extent of recoveries was low, monies for Section 8 housing
                           was inappropriately reduced by at least $128,553 because of
                           improper withholding of recoveries, and complete and accurate
                           data was not available in the financial statements.

                           We provided the Authority with a draft audit report and
The Authority Generally
                           obtained its written comments. We also discussed the audit
Disagreed With The Audit
                           results with the Authority’s senior management on March 23,
Conclusions And
                           2000. Due to the voluminous nature of the written response,
Recommendations
                           only the Authority’s summaries in Appendix B are included in
                           this report. We provided a copy of the complete response to
                           the Assistant Secretary for Public and Indian Housing.

                           In general, the Authority strongly disagreed with the report’s
                           conclusions and recommendations. It believed that many of the


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Executive Summary


                    management decisions questioned in the report were justified by
                    exigent circumstances. Further, it took exception with certain
                    cited facts. It also considered some audit conclusions to be
                    subjective and to have been made without adequately
                    considering all relevant factors.

                    We considered the Authority’s comments and made revisions
                    to the report when appropriate. Nevertheless, our conclusions
                    did not change significantly. The Authority did not provide
                    sufficient substantive evidence to warrant changes to our
                    recommendations. Each finding summarizes the Authority’s
                    comments and our evaluation.

                    The findings include recommendations to avoid the continuance
 Recommendations    of the above problems and to mitigate their effects. The more
                    significant recommendations call for HUD to impose
                    appropriate sanctions on the Authority’s senior management,
                    increase its monitoring of the Authority’s contracting and
                    personnel functions, require it to return ineligible, unnecessary
                    and unsupported costs, create a new waiting list for selecting
                    Section 8 applicants, and improve its efforts to recover
                    overpayments of Section 8 funds to landlords.




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Table of Contents

Management Memorandum                                                      i


Executive Summary                                                         iii


Introduction                                                              1


Findings

1    The Authority Did Not Follow Federal Requirements When
     Contracting for Consulting Services                                  5

2    Administrative Employees Were Hired and Compensated
     Without Following Sound Management Practices                        37

3    The Authority Used an Invalid Section 8 Waiting List                59

4    Section 8 Overpayments Were Not Properly Managed                    67




Management Controls                                                      75


Follow Up On Prior Audit Reports                                         77



Appendices
    A Schedule of Questioned Costs                                       79

    B Auditee Comments                                                   81

    C Distribution                                                       99


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Introduction
The major HUD programs funding the San Francisco Housing Authority include Section 8 rental
assistance, operating subsidy, modernization, HOPE VI, and drug elimination. Under Section 8, the
housing authority subsidizes the cost of low-income families in privately-owned housing. Operating
subsidies, based on a regulatory formula, are provided to help the housing authority offset operating
deficits in the maintenance and operation of the low-income housing it owns. The modernization
program pays for capital improvements and related management improvements at the public housing
developments. HOPE VI grants provide funds for innovative mixed-income housing to remedy the
problem of distressed developments. Drug elimination grants are for addressing drug-related crime and
its associated problems in and around public housing developments.




                                      The San Francisco board of supervisors established the
 The Authority Was Created            Housing Authority of the City and County of San Francisco,
 In 1938                              commonly known as the San Francisco Housing Authority, in
                                      1938. The city mayor appoints the members to the Authority’s
                                      governing body known as the board of commissioners.

                                      In 1940, the Authority opened the city’s first low-income
                                      housing development for 188 families. The Authority has grown
                                      to include about 40 developments with a total of nearly 6,000
                                      housing units. Also, since the 1974 inception of the Section 8
                                      program, the number of low-income families whose rents are
                                      subsidized for privately owned housing has risen to
                                      approximately 5,500.

                                      For the fiscal year ended in 1997, the San Francisco Housing
                                      Authority expended $128 million. Its largest programs
                                      consisted of Section 8 ($51 million), low-income housing
                                      operations ($33 million), modernization ($24 million), HOPE VI
                                      new development ($16 million), and drug elimination ($2.8
                                      million).

                                      The Authority was much criticized for its perceived lack of
 HUD Assumed Temporary                competent leadership, physical decay of its housing, poor
 Control Of The Authority In          performance in collecting rent, and the high level of crime
 March 1996                           existing at its housing developments. As a result, in March
                                      1996 the city’s newly-elected mayor announced the firing of the
                                      Authority’s commissioners and executive director. The mayor
                                      invited HUD to temporarily run the Authority and reorganize it,
                                      recruit new management, and establish new policies and

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Introduction


                             procedures.

                             As a result, HUD sent a recovery team (consisting of HUD
                             officials, consultants, and employees from other housing
                             agencies) to assess the Authority’s operations and develop
                             strategies to deal with the problems. This phase was concluded
                             in November 1996. HUD contracted to fill several key
                             management positions to continue the recovery efforts.

                             As part of the recovery effort, the acting HUD Assistant
 The City Regained Control   Secretary for Public and Indian Housing functioned as the
 In September 1997           board of commissioners. In July 1997 the mayor appointed
                             new board members, and in September 1997, HUD turned
                             control over to the newly formed board.

                             Ronnie Davis is the Authority’s current executive director.
                             Beginning in November 1996, he was loaned to the Authority
                             by the Cuyahoga Metropolitan Housing Authority to serve as
                             the acting executive director. The San Francisco Authority
                             board of commissioners hired him on a permanent basis in
                             November 1997.




                             The audit was initiated as part of our local audit plan based on
 Audit Objective And Scope   input from the Director of Public Housing at HUD’s San
                             Francisco office. The Director expressed concerns about sole
                             source and non-competitive contracting, circumvention of
                             waiting list policies, use of Section 8 reserves, and a request for
                             a large release of Comprehensive Grant program money. She
                             expressed specific concerns with consulting contracts.
                             Considering the Director’s concerns and the result of our survey
                             work, our audit objective was to determine if the Authority
                             effectively operated selected aspects of its low-income housing
                             and Section 8 programs in compliance with federal
                             requirements. Specifically we determined if:
                             • The Public Housing Management Assessment Program
                                 reporting for the fiscal year ended September 30, 1998
                                 complied with existing rules and regulations,
                             • The appropriate number of housing-unit-months-available
                                 was used in determining HUD’s operating subsidy to the
                                 Authority for fiscal years 1997 through 1999 under the


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                                                             Introduction


           Performance Funding System,
       •   Proper contracting procedures for consulting services were
           followed in the solicitation, award, and monitoring
           processes,
       •   Appropriate procedures were followed in the hiring and
           compensation of higher level administrative personnel, and
       •   The Authority correctly managed its Section 8 receivables.

       We also planned to assess the appropriateness of expenditures
       under the Comprehensive Grant program; however, due to
       other workload requirements, this work was not completed in
       time to be included in this report. The results will be in a report
       to be issued later this year. Except as noted above, the audit
       covered the period March 1, 1996 to September 30, 1999.

       The primary methodologies for the audit included:
       3 Consideration of the Authority’s management control
          structure and the assessment of risk.
       3 Tests of selected financial activities and transactions.
       3 Interviews of various Authority employees and HUD
          officials acquainted with the Authority.
       3 Reviews of documentation relevant to the 1998 Public
          Housing Management Assessment Program scoring,
          including that contained in the Authority’s self-certification,
          information retained by the HUD confirmatory review team,
          and related documents.
       3 Tests of the Performance Funding System budgets,
          including site visits to two of the larger housing
          developments, to determine whether vacant units were
          appropriately included or excluded in calculating the number
          of unit-months-available.
       3 Tests of selected contracts, including review of contract files
          and vendor payments.             Some unresponsive and
          unsuccessful bidders were also interviewed.
       3 Reviews of personnel files of selected administrative
          personnel.
       3 Reviews of materials from the Section 8 waiting list
          contractor and interview of the contractor to determine if
          the waiting list selection methodologies conformed with the
          terms of the contract.
       3 Tracing a sample of Section 8 receivables from the
          subsidiary ledger to source documents to determine reasons


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Introduction


                      for overpayments and whether receivables were valid, and
                      appropriate collection actions were taken.

                   We conducted the review in accordance with generally
                   accepted government auditing standards.




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                                                                                                Finding 1


           The Authority Did Not Follow Federal
            Requirements When Contracting for
                   Consulting Services
The Authority did not manage its contracting activities for consulting services in accordance with federal
requirements. Specifically, we noted repeated instances where: (1) contracts were unjustifiably
awarded on a sole-source basis, (2) competition was otherwise unnecessarily limited and certain
contractors were provided unfair competitive advantages giving the appearance of favoritism, (3)
evaluations of contract proposals were faulty, (4) no independent cost estimates or inadequate cost
analyses were performed, and (5) contractor billings and performance were not properly reviewed. In
addition, certain critical contract provisions were omitted from the contracts. Further, the Authority had
not fully centralized its procurement functions as directed by HUD. The principal reason for the
problems noted was a disregard of federal requirements.

As a result, the Authority’s limited resources were wasted to pay for services not received or ineptly
performed. In addition to $121,300 paid for an invalid applicant waiting list as described in Finding 3,
$146,535 was spent for ineligible or unnecessary costs. Also, costs of $655,188 remain unsupported
there is a lack of evidence that services were received. The Authority has no assurance that it obtained
the best available services at the most advantageous prices.




                                        The Annual Contributions Contract between HUD and the
 Various Regulations Govern             Authority requires compliance with regulations contained in Title
 Contracting Activities                 24 of the Code of Federal Regulations (24 CFR) pertaining to
                                        the development, modernization, and operation of public and
                                        Indian housing. Administrative Requirements for Grants and
                                        Cooperative Agreements with State, Local and Federally
                                        Recognized Indian Tribal Governments (24 CFR subpart
                                        85.36) contains HUD’s procurement requirements.

                                        These regulations require the Authority to:
                                        • Have and use their own procurement standards that reflect
                                           applicable state and local laws and regulations, provided the
                                           standards also conform to applicable federal laws and
                                           standards [24 CFR 85.36(b)(1)];
                                        • Maintain records sufficient to detail the significant history of
                                           a procurement. These records must include the rationale
                                           for the method of procurement, selection of contract type,


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Finding 1


                       contractor selection or rejection, and the basis for the
                       contract price. [24 CFR (85.36(b)(9)];
                   •   Conduct all procurements in a method providing full and
                       open competition. Grantees are prohibited from placing
                       unreasonable qualification requirements on firms and are
                       prohibited from taking any arbitrary action in the
                       procurement process [24 CFR (85.36 (c)(1)];
                   •   Perform a cost or price analysis in connection with every
                       procurement action including contract modifications. The
                       method and degree of analysis is dependent on the facts
                       surrounding the particular procurement situation, but as a
                       starting point, grantees must make independent cost
                       estimates before receiving bids or proposals [24 CFR
                       (85.36(f)(1)];
                   •   Solicit proposals from an adequate number of qualified
                       sources [24 CFR (85.36(d)(3)];
                   •   Make procurements non-competitively only when
                       competitive procurement is not feasible and the item is
                       available from only one source, a public exigency or
                       emergency exists that will not permit a delay caused by a
                       competitive solicitation, the awarding agency authorizes the
                       procurement, or after a solicitation of a number of sources
                       the grantee determines that competition is inadequate; [24
                       CFR (85.36(d)(4)(i)]; and
                   •   Maintain a contract administration system that ensures
                       contractors perform in accordance with the terms and
                       condition of their contracts [24 CFR (85.36 (b)(2)].

                   There are additional requirements concerning contract costs and
                   payments that must be followed.
                   • 24 CFR 85.36(f)(3) states that costs based on estimated
                      costs for contracts will be allowable only to the extent that
                      the costs are consistent with federal cost principles.
                   • 24 CFR 85.22 requires contracted costs with for-profit
                      firms to conform with the cost principles found in the
                      Federal Acquisition Regulation (FAR), 48 CFR part 31.
                   • 48 CFR 31.205-33(f) states, “Fees for services rendered
                      shall be allowable only when supported by evidence of the
                      nature and scope of the service furnished.”
                   • 48 CFR 31.205-33(f)(2), requires that supporting invoices
                      include sufficient detail as to the time expended and the
                      nature of the actual services provided.


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                                                                                                             Finding 1


                                              Further, HUD Handbook 7460.8 REV-1, Procurement
                                              Handbook for Public and Indian Housing Authorities 4-23,
                                              A. contains additional requirements regarding contract cost
                                              analysis, proposal ratings, and contract clauses. The handbook
                                              requires proposal ratings to include a written evaluation plan
                                              defining scores and written justifications to support ratings
                                              given. The handbook also requires a new solicitation be issued
                                              if there is a substantial change in the request for proposals
                                              subsequent to the proposal due date.

                                              We initially selected 33 procurement actions for review,
    OIG Focused On 17                         including eight construction and 25 non-construction actions.
    Procurement Actions                       These included 28 written contracts, one verbal agreement, and
                                              four written amendments awarded during the period August
                                              1995 to May 1999. This review indicated there were
                                              significant problems with service contracts. Therefore, we
                                              selected 16 actions related to service contracts for additional
                                              scrutiny, and one action not in our sample (the action followed
                                              two others with the same contractor that were in our sample)
                                              where there was a problem with limited competition.

                                              Of the 17 procurement actions:
                                              • six actions used improper sole source selection;
                                              • three vendors (eight procurement actions) had a prior
                                                  relationship with the Authority’s executive director;
                                              • eight actions were procured through use of unnecessarily
                                                  limited competition or where unfair advantage was given to
                                                  one bidder;
                                              • five actions were procured as a result of faulty evaluations
                                                  of proposals and vendors; and
                                              • thirteen actions lacked independent cost estimates.

                                              The following table summarizes the review results by individual
                                              action.1




1
  In the table, “X” denotes a noted instance, and “N/A” means “not applicable.” For instance, the review of the first
McFarlin contract was limited to billings, and the review of the PSI contract did not include billings. Also, we did not
double count improper sole source selection with limited competition. In the table, the term “limited competition” is
when there was some but not sufficient competition or unfair advantage was given to a particular bidder.

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Finding 1




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Personnel Services Industries Amend
                                                                                                                                                                                                                                                                                                                                                                                                                   Second Zirl Smith Contract Amend




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Personnel Services Industries Cntr
                                                                                                                                                                                                                                                                                                                                               First Zirl Smith Contract Amend
                                                                                                                                                                              Second Deloitte Contract Amend
                                                             Second Consulting Contract




                                                                                                                                                                                                                                                                                                                                                                                      Second Zirl Smith Contract
                                                                                          Third Consulting Contract




                                                                                                                                                                                                                                                                                        Second McFarlin Contract




                                                                                                                                                                                                                                                                                                                                                                                                                                                       Third Zirl Smith Contract
                                 First Consulting Contract




                                                                                                                                                                                                                                                                                                                   First Zirl Smith Contract
                                                                                                                                                   Second Deloitte Contract




                                                                                                                                                                                                                                                              First McFarlin Contract
                                                                                                                                                                                                               Third Deloitte Contract
                                                                                                                       First Deloitte Contract




                                                                                                                                                                                                                                         Wil Davis Contract
Elements of Solicitation
Improper Sole-Source                X                                                                                                 X                                                          X                                                             N/A                      X                                                                                                                                               X                                                                                                      X
Selection - 24 CFR 85.36(d)(4)(i)
Prior Relationship with             X                                      X                              X                           X           X                                              X                            X                    X           N/A
AuthorityExecutive Director
Limited Competition/               N/A                                     X                              X               N/A                     X                            N/A                                            X                    X           N/A N/A                                                                          N/A                               X                                    N/A                            X                                                  X                   N/A
Unfair Advantage - 24 CFR
85.36(c)(1),(d)(3)
Faulty Evaluations - HUD           N/A                                     X                              X               N/A                     X                            N/A N/A N/A N/A N/A                                                                                                                 X                            N/A                              N/A                                   N/A N/A                                                                           X                   N/A
Handbook 7460.8, 4-23, A.
No Independent Cost                 X                                      X                              X                           X           X                                              X                            X                    X           N/A                      X                          X                                               X             LATE                                                   X             N/A                                                                                      X
Estimates - 24 CFR 85.36(f)(1)
No/Inadequate Cost                  X                                      X                              X                           X           X                                              X                            X                    X           N/A                      X                          X                                               X              X                                                     X             N/A                                                X                                     X
Analysis - 24 CFR 85.36(f)(1)
Faulty Review of Billings - 24 CFR X                                       X                              X                           X           N/A N/A N/A                                                                                      X                         X          X                          X                                               X              X                                                     X             N/A N/A N/A
85.36(b)(2), 48 CFR 31


                                                                                                                      Detailed discussions of the individual procurements follow.

                                                                                                                      Creative Consulting Management Group

                                                                                                                      The Authority obtained services from Creative Consulting
 The Executive Director Had                                                                                           Management Group for maintenance management consulting
 A Previous Relationship                                                                                              under three separate procurement actions. The executive
 With The Contractor                                                                                                  director had a previous relationship with the firm. The
                                                                                                                      procurements were made in ways that unnecessarily restricted
                                                                                                                      competition, and unallowable payments were made.

                                                                                                                      While serving as the chief operating officer at the Cuyahoga
                                                                                                                      Metropolitan Housing Authority, the Authority’s executive
                                                                                                                      director planned to form a consulting group with the Cuyahoga
                                                                                                                      executive director and the principals of the Creative Consulting
                                                                                                                      Management Group. The consulting group was to provide
                                                                                                                      strategic planning services, including assessment of housing and
                                                                                                                      maintenance operations, to the San Francisco Housing
                                                                                                                      Authority.

                                                                                                                      The group was never formed, but the Authority’s executive
                                                                                                                      director, while serving in the capacity as acting executive

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                                                             Finding 1


       director, secured the services of Creative Consulting Man-
       agement Group to “evaluate the systemic nature of the
       maintenance service delivery problem for the purpose of
       developing short and long term corrective systems and
       procedures.” There was no evidence of a formal process of
       procurement for these services and no indication that the
       Authority entered into a written agreement with the contractor
       prior to September 1997 when the Authority awarded the
       contractor a second contract. In July 1999 the Authority paid
       the contractor $56,264 for services and expenses for the period
       November 1996 through April 1997.

       This initial procurement was made non-competitively. In an
       April 1997 letter to the acting HUD Assistant Secretary for
       Public and Indian Housing, the acting executive director
       attempted to justify his action. He explained that a non-
       competitive procurement was proper because there was an
       exigent need to correct critical maintenance hazard conditions.
       The executive director claimed the Authority did not have the
       staff capacity to bring these conditions under control. He cited
       the annual contributions contract with HUD and other federal
       regulations permitting sole-source procurements when there is a
       public exigency requiring immediate delivery. He also cited that
       a public exigency is a “sudden and unexpected happening;
       unforeseen occurrence or condition; perplexing contingency or
       complication of circumstances; or sudden or unexpected
       occasion for action.”

       We disagree with the executive director’s justification. While
       we agree that proper maintenance of its housing stock had long
       been problematic, there was no need to bypass normal
       procedures in hiring the consultant.        The      Authority’s
       maintenance operations were in the hands of a capable manager
       who was on hand when the consultant arrived at the Authority.
       Under the manager, a comprehensive maintenance plan had
       been developed and the number of outstanding work orders
       and length of vacant unit turnaround had been reduced.

       Also, the Authority did not prepare an independent cost
       estimate of the services. Further, it did not obtain estimated
       costs from the vendor so that the costs could be analyzed.



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Finding 1


                           On July 16, 1997, the Authority issued a request for proposals
 An Unfair Advantage Was
                           for a contract, not to exceed $100,000, for maintenance
 Given To The Contractor
                           management consultant services. The Authority’s contracting
                           files did not contain any documentation or cost estimate
                           showing how the $100,000 contract amount was determined.
                           The request for proposals instructed interested parties to submit
                           a detailed description of the consultant’s understanding of the
                           scope of services and describe in detail how they would fulfill or
                           solve 12 tasks/problems. The proposals were due in only 15
                           days, significantly limiting the time to prepare an adequate
                           proposal and giving an unfair competitive advantage to Creative
                           Consulting Management Group which had been already
                           performing these services.

                           The Authority received four proposals for evaluation by a panel
 There Was No Cost         of four Authority employees. Analysis of the proposals was
 Analysis Or Proper        compromised because the Authority did not perform the
 Evaluation Plan           required independent cost estimate prior to proposal
                           solicitation. Further, the objectivity of the proposal evaluation
                           scoring is questionable because the panel members did not have
                           written rating descriptions in the evaluation plan on which to
                           base their scoring and they did not always provide written
                           justifications for the scores given to the proposals. The highest
                           overall score was given to the Creative Consulting Management
                           Group proposal. The Authority’s executive director approved
                           contract 97060 on September 22, 1997.

                           Contract 97060 was for a two-year period ending September
                           21, 1999. The $100,000 contract limit included up to $15,000
                           of reimbursable travel and business expenses. By the end of
                           January 1998 (approximately 4 months), the contractor had
                           exceeded the expense limit and the contract had to be modified
                           to increase the reimbursable expense limit to $25,000. At the
                           end of March 1998, only six months into the two-year contract,
                           the contractor’s billings (including expense reimbursements and
                           $8,320 paid on the contractor’s behalf for a rental apartment)
                           totaled $108,315. Although the contractor received payments
                           in excess of the entire contract amount, it had not completed all
                           of the contract requirements, including the delivery of six reports
                           containing an overview of the Authority’s maintenance
                           operations and its recommendations on how to improve the
                           operations. As a result, the Authority solicited proposals again.


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                                                                                Finding 1


                         We noted that during this contract the contractor billed the
                         Buffalo Municipal Housing Authority for consulting services.
                         And similarly during the subsequent contract, billed Cuyahoga
                         Metropolitan Housing Authority. Some of the dates billed were
                         the same as those billed to the San Francisco Authority;
                         however, it appears the contractor was performing services at
                         the San Francisco Authority at the time.

                         On March 10, 1998, the Authority issued a new request for
The Follow-on Contract   proposals for a new maintenance management consulting
Had Similar Problems     contract. Again, the Authority did not demonstrate that the
                         required cost estimate was performed to determine the total
                         cost of the procurement and to use as a basis to evaluate the
                         proposals. The request for proposals stated that the Authority
                         would enter into a two-year agreement and that the executive
                         director would assign tasks on an as-needed basis. The request
                         for proposals contained no dollar limitation and its scope of
                         services contained eight specific tasks that included three tasks
                         required by the previous contract with Creative Consulting
                         Management Group: the implementation and monitoring of
                         maintenance operating procedures; an analysis of staff for the
                         purpose of implementing staff training and development
                         programs; and the implementation of maintenance information
                         systems.

                         As in the previous maintenance consulting contract, proposals
                         were due in 15 days, giving an unfair advantage to the current
                         contractor who had already been performing many of the
                         solicited services. The current contractor was given a further
                         advantage over other competitors as the Authority did not
                         attach deliverables from the previous contract. Providing
                         deliverables from a prior contract helps respondents know what
                         is expected and provides information, otherwise, only the
                         current contractor would know.

                         The Authority received proposals from the current contractor
                         and only one other firm. The two proposals were evaluated by
                         a panel of three senior Authority staff, none of whom worked in
                         the maintenance department. As in the previous maintenance
                         consulting procurement, the Authority did not do a cost
                         analysis. Further, the objectivity of the proposal evaluation
                         scoring is questionable since the panel members did not have


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                      rating descriptions on which to base their scoring and did not
                      always provide written justifications for the scores given to the
                      proposals. The three evaluators scored the two proposals as
                      follows:

                                           Current Contractor          Bidder # 2
                       Evaluator # 1                91                     87
                       Evaluator # 2                93                     91
                       Evaluator #3                 100                     71
                          TOTALS                    284                    249


                      The objectivity of the evaluation is questionable since evaluators
                      all gave the current contractor high scores in spite of the fact
                      that the firm did not complete the terms of its previous contract.
                      Further, the scores given by evaluator #3 are controversial as
                      he gave the current contractor 15 points for fee structure and
                      gave bidder # 2 no points even though its billing rates were
                      significantly less than the current contractor’s.          (More
                      appropriately, the other evaluators gave the current contractor
                      score of 10 and bidder #2 a score of 15 for fee structure.)
                      Evaluator #3 told us that he could not recall why he scored the
                      fee structure element the way he did.

                      Based on the above scoring, on May 2, 1998, the Creative
                      Consulting Management Group was awarded a two-year,
                      $312,500 contract.

                      According to the Federal Acquisition Regulation, the
 Poor Monitoring Of   documentation to support fees for services should have included
 Contractor Lead To   invoices with sufficient detail about the time expended and
 Improper Payments    nature of the actual services provided, and the current
                      contractor’s work products and related documents such as trip
                      reports, collateral memoranda, and reports. Further, the
                      second contract called for invoices to set forth the actual work
                      completed, and the third contract required invoices itemizing the
                      services performed.

                      From June 9, 1997 through November 12, 1998 the Authority
                      paid Creative Consulting Management Group, or on its behalf,
                      a total of $185,419 in fees and expense reimbursements. The
                      Authority did not adequately review the invoices to ensure all

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       charges were proper. For the billing of services, the contractor
       identified the employees working, days worked, and hours
       billed. However, the services were merely described as
       “maintenance management consulting services” but did not
       describe the specific work being done. As a result, we had to
       request from the consultant a breakdown of services performed
       that corresponded with the invoices. While these after-the-fact
       estimates of what services were performed generally supported
       the billings, we noted $27,687 of unallowable expenditures:

          Date of
          Expense      Amount                    Description

        11/12/97        $10,000   Retainer fees which were not attributed to
        (contract 2)              any expenses of or services provided by
        6/19/98          15,000   Creative Consulting Management Group.
        (contract 3)
        5/14/98            800    Invoice was billed at a higher hourly rate
        (contract 2)              that was not yet in effect for the period
                                  billed, resulting in a $400 overcharge.
                                  Also, there was a math error in the invoice
                                  resulting in an additional $400 overcharge.
        8/6/98            1,300   Vendor charged $1,735 for round-trip
        (contract 3)              airfare between San Francisco and Cleve-
                                  land that normally costs $435.
        11/12/98           587    Vendor charged $1,022 for round-trip
        (contract 3)              airfare between San Francisco and Cleve-
                                  land that normally costs $435.
        TOTAL           $27,687


       The Authority stated that Creative Consulting Management
       Group reconciles its retainer fees at the end of its contract
       period. As support, the Authority provided a schedule of hours
       covering the month of April 1998, prepared by the consultant,
       to reconcile the $10,000 retainer fee.          However, this
       documentation shows no independent evidence, such as
       expense receipts, that the consultant was performing services at
       the Authority during the time period noted. Further, we noted
       that this documentation indicates that the consultant provided
       services including “management oversight and supervision” yet it
       had previously billed the Cuyahoga Authority for full-time
       consulting services in Cleveland for the entire month of April
       1998. The San Francisco Authority has not provided any
       reconciliation of the $15,000 retainer fee.



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                         Payment of unallowable expenditures occurred because the
                         Authority failed to monitor the contractor’s billings for
                         compliance with the Federal Acquisition Regulation. The
                         contract monitor is the Authority’s executive director. Invoices
                         were approved by the executive director who said he relied on
                         the Authority’s finance department to determine if the
                         expenditures were allowable and reasonable. However, we
                         found that this was not always the case as some invoices were
                         approved without finance department review.

                         Deloitte & Touche

                         The Authority entered into three contracts and one modification
 Deloitte Was Selected   with the Cleveland office of Deloitte & Touche LLP while
 Without Competing       excluding or highly limiting competition. Also, no proper cost
                         estimates or analyses were used to determine contract amounts,
                         and the utility of one contract was questionable.

                         The Authority’s acting executive director circumvented federal
                         procurement requirements when initially hiring Deloitte. In
                         January 1997 he signed an engagement letter with the Cleveland
                         office of Deloitte to provide consulting support services for the
                         Authority’s Section 8 program. This is the same consulting firm
                         that he previously worked with in his capacity as chief operating
                         officer at the Cuyahoga Authority. The acting executive
                         director entered into this contract with Deloitte without going
                         through a formal process of solicitation and procurement as
                         required by federal regulations. The engagement letter stated
                         that Deloitte would, at the direction of the acting executive
                         director, provide technical support in identifying improvements
                         in business processes and management of the Authority’s
                         Section 8 program. The fees for these services included an
                         hourly rate of from $55 to $275 for Deloitte staff plus expenses.

                         The Authority did not perform an independent cost estimate for
                         these services, nor did it obtain a cost breakout from the vendor
                         so that a cost analysis could be performed as required.




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                          Deloitte began working on January 12, 1997; however, the
Contract Work Proceeded   acting executive director did not seek approval of the contract
Without HUD Approval      until April 19, 1997, by which time Deloitte had billings totaling
                          $249,289. Conditional approval came in the form of a board
                          resolution (the acting Assistant Secretary for Public and Indian
                          Housing was the board at that time) authorizing the acting
                          executive director to engage Deloitte, “…subject to receipt of
                          any required HUD approvals.”

                          In an April 25, 1997 letter to the board, the acting executive
                          director explained that a non-competitive procurement was
                          proper because there was an exigent need to bring in Deloitte to
                          oversee the Section 8 department. He claimed that HUD staff
                          managing Section 8 had walked off without notice. Again, we
                          disagree with this justification as the need was not an
                          unexpected event and does not fit the definition of a public
                          exigency.

                          In a November 29, 1996 letter, the city mayor asked HUD to
                          cancel its procurement action to contract out the Section 8
                          program because he believed it would be best if the Authority
                          managed and administered the program. The letter stated that
                          several options existed with the most preferable being to hire a
                          full-time manager. Also, a December 8, 1996 memorandum
                          from the HUD Deputy Assistant Secretary for Public and
                          Assisted Housing Operations urged HUD’s Secretary not to
                          reverse the decision to outsource administration of the program.
                          It states “…at HUD’s request in the procurement, the firms
                          have lined up management staff and subcontractors to be on-
                          site starting January 1, 1997, if they are the successful firm, to
                          begin the transition to private management.” The Deputy
                          Assistant Secretary said that HUD staff would leave the
                          Authority if the Secretary agreed with the Authority’s request
                          unless requested to remain. Since plans had already been made
                          by HUD for contracting out the Section 8 program, the city
                          mayor did not wish to contract out the program, and HUD staff
                          left as a result of the Authority’s wishes, it was neither urgent
                          nor necessary for the Authority to hire Deloitte in the manner it
                          did. If any exigency existed, it was a result of decisions made
                          by the Authority’s management.




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                              In an April 30, 1997 memorandum, HUD’s General Deputy
                              Assistant Secretary noted that the Authority issued a stop work
                              order for the Deloitte contracts, as directed by HUD, and
                              stated HUD would evaluate Deloitte’s work plan and
                              deliverables to determine legitimate costs relating to the
                              contract. The General Deputy Assistant Secretary also
                              instructed that Deloitte was not to be paid without HUD’s
                              approval. On May 1, 1997, the Deputy Assistant Secretary
                              asked for a copy of the Deloitte agreement and the scope of
                              services provided along with a listing of all Deloitte personnel
                              involved, the number of hours worked, their specific duties, and
                              billing rates. He also informed the acting executive director that
                              HUD had found that the work performed by Deloitte added
                              little, if any, value to the administration of the Section 8
                              program.

                              On May 21, 1997 the Authority provided materials prepared
 Contrary To HUD’s            by Deloitte describing their accomplishments to date. On June
 Instructions, Deloitte Was   11, 1997 the General Deputy Assistant Secretary responded,
 Paid $249,289                stating that the materials did not provide the data requested,
                              including information on the scope of services, staffing levels,
                              dates of project participation, and pay rates. He also noted that
                              the documents sent earlier were prepared by Deloitte
                              subsequent to April 21, 1997 in violation of HUD’s directive to
                              issue a stop work order effective on that date. He reiterated
                              that the Authority was not to make any payments to Deloitte
                              unless they were approved by HUD. The Authority ignored
                              this directive, and on June 13, 1997 paid Deloitte $249,289 for
                              services covering the period January 12, 1997 to April 19,
                              1997.

                              We reviewed the supporting documentation for the June 13,
                              1997 check. The payment was only based on four invoices
                              without other documentation. The invoices only showed the
                              hours worked, hourly rates, and amounts for subsistence,
                              transportation, and apartment rental. Contrary to federal
                              requirements, the invoices were not supported by itemized
                              documentation of tasks or services performed, and reimbursed
                              travel and other expenses were not supported by receipts.
                              Payment of these invoices without supporting documents
                              indicates the Authority did not adequately monitor the
                              contractor’s performance or costs.


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                          It took the Authority two months from the time of our request to
Work Duplicated Earlier   provide documents produced by Deloitte and six months for
HUD Efforts               receipts to support expenses shown on the Deloitte invoices.
                          Our review of these documents confirmed the HUD General
                          Deputy Assistant Secretary’s opinion that the work performed
                          by Deloitte added little, if any, value to the administration of the
                          Section 8 program. We noted that some of the documents
                          supporting the work performed were actually produced
                          subsequent to the January to April 1997 period covered by the
                          invoices. These documents included a copy of a presentation
                          showing Deloitte’s accomplishments which highlighted the hiring
                          of the leased housing director on November 6, 1997 and the
                          February 1998 hiring of a contractor to reopen the Section 8
                          waiting list. Further, much of what the Authority represented to
                          the OIG as work performed by Deloitte was work that had
                          already been done by the HUD recovery team, including: the
                          creation of the Authority’s Section 8 administrative plan; the
                          identification of duplicate vendor numbers; researching
                          portability disputes; and correcting Annual Contributions
                          Contract tables.

                          Our review of the supporting receipts also found the following
                          unallowable and unsupported expenses:

                           Amount                          Description
                            $1,757      Excess per diem charges
                               161      Expenses for trips unrelated to work at Authority
                             1,373      Miscellaneous expenses not supported by receipts
                             1,587      Airfare not supported by ticket/receipt
                            $4,879       TOTAL

                          The unallowable and unsupported expenses totaling $249,289
                          charged by Deloitte were paid because the Authority
                          disregarded HUD’s instructions and did not obtain and review
                          supporting documentation prior to approving payment.

                          On July 16, 1997, the Authority issued a request for proposals
Competition For Second    for another contract for business analysis and advisory
Contract Was Limited      consultant services not to exceed $100,000 for the leased
Unnecessarily             housing program on a continual basis. The Authority’s
                          contracting files did not contain any documentation indicating
                          that a cost estimate or analysis was accomplished. The request

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                            for proposals instructed interested parties to provide detailed
                            profiles of the staff to be assigned to this project along with
                            samples of previous related work they completed. It also
                            required that responses include a detailed description of the
                            applicant’s understanding of all 11 items in the request for
                            proposals’ scope of services section and provide a detailed
                            description on how the firm would approach the task, analyze
                            and solve problems, and assure that its solutions would be
                            effective. The request was sent to ten firms on July 21 and 22,
                            1997, with responses due on July 31, 1997. This significantly
                            limited the time to prepare an adequate proposal, giving an
                            unfair advantage to Deloitte who had already provided
                            consulting services at the Authority’s leased housing office. As
                            a result, only Deloitte’s Cleveland office and one other firm
                            submitted proposals.

                            A panel of three Authority staff and a former HUD official
 Evaluation Of Second
                            evaluated the proposals. None of the three Authority staff
 Contract’s Proposals Was
                            worked in the Section 8 area, and two of them (evaluator #2
 Flawed
                            and #4) had been employed at the Authority for less than six
                            months.      The panel’s evaluation of the proposals was
                            compromised because the Authority did not perform the
                            required independent cost estimate prior to proposal
                            solicitation. The objectivity of the scoring is also questionable
                            as the panel members did not have rating descriptions on which
                            to base their scoring and did not always provide written
                            justification for the scores given to the proposals. The four
                            proposal evaluators scored the two proposals as follows:

                                                       Deloitte            Bidder # 2
                             Evaluator # 1                74                   71
                             Evaluator # 2                67                   62
                             Evaluator # 3                80                   79
                             Evaluator #4                 93                    64
                                 TOTALS                  314                   276


                            The scoring of the two proposals by evaluators 1, 2, and 3 was
                            close, however evaluator #4’s scores had the greatest gap
                            between the two proposals, but his scores were not supported
                            by any written justifications on the evaluation score sheets.


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                          Based upon the above scoring, the Authority awarded Deloitte
                          a two-year, $100,000 contract on September 26, 1997.

                          On July 23, 1998, the Authority’s board of commissioners
 Work Added By An
                          approved an amendment to the Deloitte contract for an
 Amendment Was Not Open
                          additional $75,000. The amendment expanded the scope of
 To Competition
                          work “to provide a risk assessment of the organizational and
                          business process infrastructure related to finance and accounting
                          functions of the San Francisco Housing Authority.” One
                          commissioner questioned if this contract modification was in
                          accordance with procurement regulations since the original
                          contract was for work performed on the Section 8 program and
                          the amendment was to expand the scope beyond that program.
                          In response to this concern, the Authority’s general counsel
                          wrote an opinion stating that the resolution for the contract
                          amendment “…pertains to the Conventional Public Housing
                          Program, and the work done by D&T [Deloitte] for the Section
                          8 Program is substantially the same as the proposed services for
                          the Conventional Program.” The opinion further stated “It is
                          our opinion that the contemplated change order is consistent
                          with HUD requirements and the Changes Clause…”

                          We disagree with this opinion. The $75,000 amendment was
                          to provide services related to the Authority’s financial and
                          accounting functions. The request for proposals and the original
                          contract’s scope of work contain a list of tasks that are specific
                          to the management of the Section 8 program and are not
                          directly related to general financial and accounting functions.
                          Since the scope of the additional work in the contract
                          amendment was substantially different from the original contract,
                          the authority should have issued a new request for proposals
                          and entered into a new contract for these additional services.
                          We also noted that no cost estimate or analysis was done for
                          this amendment.

                          On March 10, 1998, while the September 26, 1997 contract
Competition For Third     with Deloitte was still in effect, the Authority issued a request
Contract Was Also         for proposals for monitoring of the newly reorganized leased
Unnecessarily Limited     housing office. The Authority’s solicitation files only showed
                          evidence that copies of the request for proposals were sent out
                          to three prospective bidders, including the Cleveland Deloitte
                          office. The request for proposals was sent on March 12, 1998


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                              with responses due on March 25, 1998, giving respondents less
                              than 13 days to submit a complete proposal package. As a
                              result, only the Cleveland Deloitte office responded, and it
                              received the contract on April 7, 1998. Although Deloitte’s
                              proposal was in the amount of $60,000 to $75,000 for a six
                              month period, it was awarded a two year $100,000 contract on
                              April 7, 1998. There was no documentation explaining this,
                              and there was no cost estimate or analysis.

                              Wil Davis Management Company

                              The Authority’s procurement to create a Section 8 waiting list
 Wil Davis Had An Inside
                              was managed by a consultant working out of the Cleveland,
 Track Before The Request
                              Ohio office of Deloitte & Touche LLP. This consultant had no
 For Proposal Was Issued
                              prior experience in contracting for a Section 8 waiting list on
                              behalf of a housing authority. The Deloitte consultant wrote the
                              Authority’s October 9, 1997 request for proposals for the
                              development of its Section 8 waiting list. Key sections of the
                              proposal were copied word for word from an April 15, 1997
                              description of services which the Deloitte consultant obtained
                              from the Wil Davis Management Company, also of Cleveland,
                              Ohio. The management company had previously prepared the
                              Section 8 waiting list for the Cuyahoga Metropolitan Housing
                              Authority when the San Francisco Authority’s executive
                              director was its chief operating officer.

                              The request for proposals was advertised only in the October
 Competition Was
                              19 and October 26, 1997 editions of two local newspapers.
 Unnecessarily Limited, And
                              The proposal was also mailed to four potential bidders,
 Proper Cost Estimate And
                              including Wil Davis Management Company, that were
 Analysis Were Not Done
                              recommended by the Deloitte consultant, but was not mailed
                              until October 20, 1997 with a deadline for submission of
                              October 31, 1997. This gave potential bidders less than 11
                              days to submit a proposal. The only vendor that submitted a
                              proposal within this short period was the Wil Davis Company.
                              There was no documentation to justify why the Authority only
                              gave potential bidders less than 11 days to respond. Further,
                              there was no evidence showing that the Authority performed the
                              required independent cost estimate prior to issuing the request
                              for proposals. Also, a proper cost analysis was not performed.
                              Although the contractor provided a cost breakdown by task,



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                            there was no analysis of costs by element such as labor,
                            overhead, and profit.

                            On November 25, 1997, the Deloitte consultant sent a
                            memorandum to the Authority’s purchasing department
                            recommending awarding the contract to the Wil Davis
                            Company. The consultant attempted to justify the award stating
                            “This is a specialized type of service and there are not many
                            companies that can provide such services…[and] we advertised
                            for two weeks in the San Francisco Chronicle and specifically
                            asked three management firms to bid, but Wil Davis was the
                            only company that chose to bid.” The consultant did not
                            disclose that he wrote the request for proposals from
                            information obtained from the Wil Davis Company, nor that the
                            bidders were only given 11 days to submit a proposal. Based
                            upon the recommendation, on December 17, 1997, the
                            Authority awarded a $149,200 contract to the Wil Davis
                            Management Company.

                            As a result, the Authority appears to have used favoritism in
                            awarding the contract. Awarding the contract to the Wil Davis
                            Company was essentially the same as awarding a contract to a
                            hand-picked, sole-source provider because the consultant
                            tailored the request for proposals specifically to the company’s
                            alleged capabilities, limited advertising of the proposal to two
                            local newspapers, and did not provide enough time for other
                            vendors to respond. During the contracting process there was
                            no evidence of oversight or input from either the Authority’s
                            leased housing office, board of commissioners, or the executive
                            director’s office. We found similar problems and lack of
                            oversight with other contracts when the Authority handled these
                            responsibilities directly.

                            Because of the improper award process, the ineptness of the
The Waiting List Prepared   contractor, and inadequate monitoring of the contractor’s
By The Contractor Was       performance (the Authority had not reviewed the waiting list to
Invalid                     determine if it met contract specifications), the Authority is using
                            an invalid waiting list. Finding 3 discusses this in more detail.




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                      Dr. Emma McFarlin

                      Two contracts were awarded to Dr. Emma McFarlin. In our
 Two Contracts Were
                      opinion, the second contract was unjustifiably awarded non-
 Issued To Dr. Emma
                      competitively. Further, the contractor’s billings for both
 McFarlin
                      contracts were not adequately supported and appeared to be in
                      excess of services provided.

                      Acting in his capacity as the board for the Authority, the acting
                      HUD Assistant Secretary for Public and Indian Housing signed
                      a contract with Dr. Emma McFarlin. According to the contract,
                      McFarlin would serve as the executive monitor to advise HUD
                      on the implementation and development of the HUD recovery
                      plan for the Authority, and perform the executive director’s
                      duties until a new executive director could be hired. The
                      contract covered the six-month period from September 3, 1996
                      to March 2, 1997 and provided that Dr. McFarlin would be
                      paid $50,000 ($8,333 per month) plus $38 per day subsistence
                      expense. Dr. McFarlin would also be provided housing in San
                      Francisco and be reimbursed for two round-trip airfares per
                      month to her Los Angeles home base. On January 24, 1997,
                      the contract was modified to eliminate her executive director
                      duties which were assumed by the new acting executive
                      director.

                      Although the contract expired on March 2, 1997, the Authority
                      continued to pay Dr. McFarlin for March through May 1997
                      and, on May 28, 1997, retroactively extended the contract to
                      May 31, 1997 to cover these payments. From June through
                      August 1997, the Authority continued to pay rent for an
                      apartment for Dr. McFarlin past the amended contract’s
                      expiration date. In November 1998, the executive director
                      advised that Authority did not have a contract with Dr.
                      McFarlin for this period; however, on December 3, 1998 the
                      Authority provided us a copy of a June 1, 1997 contract
                      addendum. The addendum provided for an increase in the
                      compensation rate and implied an extension for an indefinite
                      period. However, it was not until December 1998 that the
                      executive director approved payment to reimburse Dr.
                      McFarlin’s claims for June and July 1997 travel. The
                      authenticity of the amendment is questionable since an original
                      of the document was not available.


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                           On February 26, 1998, the Authority’s board of commissioners
Award Of Second Contract
                           signed a new agreement with Dr. McFarlin. The one-year
Was Questionable
                           contract was made retroactive to September 1, 1997 and
                           called for paying Dr. McFarlin $10,000 per month, a $38 per
                           diem, housing in San Francisco, and four round-trip airfares to
                           Los Angeles each month. The contract was modified to change
                           the initial September 31, 1998 termination date to February 20,
                           1999 to allow Dr. McFarlin to take a leave of absence from
                           July 1, 1998 to October 19, 1998.

                           The second contract was not awarded competitively. The
                           Authority did not solicit proposals for the contracted services
                           nor did it prepare a cost estimate or analysis to determine if the
                           contract costs were reasonable.

                           Further, the continued need for Dr. McFarlin’s services under
                           the second contract was not apparent. HUD had turned over
                           control of the Authority, a permanent and highly paid executive
                           director had been appointed, and the services of other
                           consultants had been obtained to assist the transition. Dr.
                           McFarlin spent little time at the Authority and there was no
                           evidence of services provided.

                           The Authority paid the following costs associated with the first
Costs Of The First         McFarlin contract:
McFarlin Contract Were
Not Supported And Fees             Fees for services             $75,000
Were Excessive                     Travel expenses                13,160
                                   Housing rent                    6,988
                                   Cell phone                        892
                                    Total of first contract      $96,040

                           We consider all of the above expenditures questionable since
                           the Authority could not provide any documentation to support
                           work actually performed. The Authority had no records,
                           reports, or any other work products from the contractor.

                           Further, information indicated that Dr. McFarlin was not
                           working full time, but was paid for full-time work. On May 22,
                           1997 the HUD Office of Troubled Agency Recovery reported
                           on its site visit to the Authority. The report noted that the
                           executive monitor’s contract required that all invoices be

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Finding 1


                            supported by time records and that Dr. McFarlin advised that
                            she did not maintain time sheets to support time worked under
                            the contract. The report also stated that HUD’s field office and
                            Authority staff noted that the contractor was not at the
                            Authority on a full-time basis. The report criticized the
                            Authority for paying for full time work and suggested that the
                            Authority require the contractor to refund payments that were in
                            excess of work performed.

                            Since the contractor did not submit any time sheets, we
                            reviewed other documents submitted by the contractor including
                            vouchers, invoices, supporting receipts, and cell phone bills to
                            determine when Dr. McFarlin was in San Francisco during the
                            term of the first contract. We found that she was in San
                            Francisco or in travel status on official Authority business for
                            only 163 days (including weekends and travel days) of 259
                            days (not including weekends to give the contractor the benefit
                            of the doubt), or 63 percent of the regular work days covered
                            by the contract. The 37 percent of unaccounted for time
                            represented $27,750 of her fees.

                            Thus, we consider $27,750 to be ineligible, and the $74,290
                            remainder of the first contract’s payments to be unsupported.

                            The Authority paid for similar costs for the second contract.

                                    Fees for services                   $140,000
                                    Travel expenses                       10,529
                                    Housing rent                          17,193
                                    Cell phone                             3,707
                                    Total of Second Contract            $171,429

                            Even though Dr. McFarlin was paid $10,000 per month for her
 Similar Problems With
                            services, she spent little time at the Authority during the second
 Costs Were Noted For The
                            contract period. Vouchers, invoices, supporting receipts, and
 Second Contract
                            cell phone bills submitted by Dr. McFarlin showed that she was
                            in San Francisco or in travel status for only 163 days (including
                            weekends and travel days) of 292 days (not including
                            weekends to give the contractor the benefit of the doubt), or 56
                            percent of the regular work days covered by the contract and
                            contract amendment. The 44 percent of unaccounted for time
                            represented $61,600 of her fees.


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       Further, there was no evidence to show that Dr. McFarlin
       actually performed any of the duties required by the contract.
       The contract called for the executive monitor to: advise and
       consult with the Authority concerning operations, policies, and
       procedures; assist in organizing and setting up departments;
       provide input for hiring permanent department heads; and train
       the board of commissioners. The Authority could not provide
       any substantial evidence to show that the contractor actually
       performed these functions.

       We also identified $1,002 of unnecessary cell phone costs:
       $891 for the period of July 1 to October 19, 1998 during the
       contractor’s leave of absence, and $111 for the period of
       March through June 1999 which was the contract expired.

       Payment of unallowable expenditures occurred because the
       Authority failed to monitor Dr. McFarlin’s billings for
       compliance with the Federal Acquisition Regulation. The
       contract monitor for the contracts was the Authority’s executive
       director. Invoices were approved by the executive director
       who said he relied upon the Authority’s finance department to
       determine if the expenditures were allowable and reasonable.
       We found that this was not always the case as some invoices
       were approved without finance department review.

       Thus, we consider $61,600 for time away from the Authority to
       be ineligible, $1,002 in phone charges as unnecessary, and the
       remaining $108,827 of the second contract to be unsupported.

       Zirl Smith & Associates, Inc.

       The Authority contracted with Zirl Smith & Associates, Inc.
       under three separate procurement actions for (1) assistance to
       transfer the Authority from HUD to the city, contract 97062
       awarded October 23, 1997 for an initial amount of $100,000;
       (2) training and consulting services, contract 98031 for an initial
       amount of $286,000 awarded May 21, 1998; and (3) HOPE
       VI organizational and financial advice, contract 99017 for
       $398,5000 awarded August 13, 1999. Although the HOPE VI
       contract was not in our sample of transactions tested, an issue
       came to our attention. We noted flaws in the procurement and



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                            monitoring of the HOPE IV contracts similar to those discussed
                            on other contracts.

                            The Authority received three proposals in response to its
A Cost Estimate And         solicitation for the first contract. However, the analysis of the
Analysis Was Not Done       proposals may have been compromised as there was no
For The Initial Contract    evidence that the Authority performed the required independent
                            cost estimate prior to proposal solicitation or that there was a
                            cost analysis of bids.

                            The contract was subsequently amended to expand the scope
                            of services within the financial and time constraints originally
                            stated in the contract. Four months later, in March 1998, the
                            board of commissioners passed a resolution to increase the
                            contract by $40,000 for the additional work called for in the
                            amendment. However, no cost estimate and analysis was done
                            to determine the reasonableness of the increase.

                            Cost estimates were prepared for the second contract and its
 The Second Contract Had    $150,000 amendment. Nevertheless, the estimate for the initial
 Similar Problems           award was prepared after the proposal was received. Further,
                            the cost analysis for the contract award and the analysis of the
                            amendment were faulty. Neither the analysis nor the cost data
                            addressed separate elements of labor overhead, general and
                            administrative expenses, and profit which made up the billing
                            rates.

                            The procurement for the second contract was made in such a
 Competition For Second     way as to unnecessarily restrict competition. The Authority
 Contract Was Restricted,   allowed only 13 days to respond to the request for proposals.
 And An Amendment Was       These were complex consulting services and 13 days was not
 Made Over HUD’s            an adequate amount of time for potential bidders to prepare an
 Objection                  adequate proposal. Two potential bidders told us that they
                            would have responded if they were given adequate time to
                            prepare.

                            As a result, only Zirl Smith & Associates responded to the
                            request. Instead of reopening the request for proposals to
                            obtain other bids, the Authority made a sole-source award.

                            The Authority requested approval from HUD to make an
                            amendment in scope to the second contract, adding $150,000.


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                            HUD denied this request and directed the Authority to solicit
                            another contract as the additional services were a major
                            augmentation to the original work scope. Nevertheless, the
                            board of commissioners, with knowledge that HUD had
                            disapproved the amendment, passed a resolution authorizing the
                            amendment. Since the amendment was made over HUD’s
                            objection, we take exception with its costs.

                            During the procurement process for the HOPE VI consulting
                            contract in March 1999, HUD’s procurement and contracting
                            team told the Authority that when one contract builds upon a
                            previous contract, any deliverables provided to the Authority as
                            a result of the earlier contract should be provided to all potential
                            bidders for the more current contract.

                            However, 26 days after this meeting, one of the potential
Potential Bidders Were At   bidders for the HOPE VI contract requested clarification on the
A Disadvantage When         “Policy Brief 98-1” which was identified in the request for
Bidding On A Third          proposals. Only after this question was a copy of this brief
Contract                    made available to all potential bidders, just eight days before
                            bids were due. Prior to this date, this information was held only
                            by the Authority and Zirl Smith. Also, Authority staff said there
                            were other deliverables that would have been of use to potential
                            bidders but were never provided.

                            The Authority did not properly review Zirl Smith’s billings.
There Were Unsupported      Two payments under the first contract totaling $39,750
And Duplicate Payments      (invoices dated December 1 and 8, 1997), and one payment
                            under the second contract for $40,950 (invoice dated
                            December 7, 1998) were made with no documentation to show
                            what services were actually performed.

                            Further, the Authority accepted copies of expense receipts
                            submitted by Zirl Smith under the second contract as docu-
                            mentation for two reimbursements in the amounts of $69,083
                            and $30,100 (check numbers 176521 and 178851). As a
                            result, the Authority reimbursed Zirl Smith twice for $26,578 of
                            expenses.

                            Professional Service Industries

                            The Authority contracted with Professional Service Industries to


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                         perform environmental reviews. We found that the award
                         process unnecessarily restricted competition and did not
                         properly evaluate contractor proposals. The contract was
                         initially in the amount of $48,415, but was later amended with
                         an increase of $24,000.

                         The Authority sent out a request for proposals to 25 vendors
                         and advertised on August 2 and 9, 1998, but only one response
                         was received. The Authority then extended the time for receipt
                         of proposals to September 25 and mailed the proposal package
                         to another ten vendors. This time the Authority received two
                         proposals, including one from the original bidder.

                         Approximately a month later, however, the Authority
 Competition Was         dramatically reduced the level of services to be contracted, a 73
 Unnecessarily Limited   percent reduction in the number of developments. As a result,
                         the bidders reduced their bids by 83 and 90 percent. The
                         reduction in scope was so substantial that the Authority should
                         have issued a new request to give other firms an opportunity.
                         We contacted two firms who had not responded and asked
                         whether they would have responded if the scope of work had
                         been dramatically reduced. Both firms indicated that it was
                         highly likely that they would have.

                         Further, the Authority did not give other firms an opportunity to
                         bid for work included in an amendment to the contract.

                         The initial contract covered projects involving 1998
                         Comprehensive Grant program funding. The amendment was
                         to include 1999 Comprehensive Grant project funding. This
                         was done in an attempt to speed up funding. However, the
                         Authority knew that as of April 1998, there was a new
                         regulation that required these reviews to be performed prior to
                         release of funds.

                         The Authority wanted to receive the funds in early October
                         rather than the typical late November to February releases it
                         had obtained in the past. Therefore, it selected September 3 as
                         the date the reviews were needed. To justify modifying the
                         existing contract rather than soliciting new proposals, the
                         Authority considered that it was confronted with an emergency
                         situation. At the August 26 board of commissioners meeting the


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                                             executive director said he should have gotten the reviews done
                                             earlier. Before this meeting and the amendment, however,
                                             work had already begun on the 1999 Comprehensive Grant
                                             project reviews. Nevertheless, the review was not completed
                                             until the end of December and the Authority did not receive the
                                             funds early as planned.

                                             We believe that the emergency was not justified since the
                                             Authority knew at the beginning the of solicitation process that
                                             the reviews would be required for future Comprehensive Grant
                                             funding.

                                             The evaluation plan used to evaluate the two bidders did not
The Contractor Selection                     contain rating descriptions and panel members did not always
Process Was Faulty                           document the basis for the scores given. As a result, one
                                             evaluator gave the winning bidder more points than allowed for
                                             one element. Also, another evaluator scored one vendor twice
                                             with different scores.

                                             While the Authority obtained a cost estimate to evaluate bids
                                             for the original contract award, the one done for the amendment
                                             was made after receipt of proposals. Further, the Authority did
                                             not obtain cost data from the contractor for either the original
                                             award or the amendment, nor did it perform a cost analysis for
                                             the original award. The supposed “cost analysis” performed for
                                             the amendment appears to have been another version of the
                                             cost estimate as the total amount does not correlate to the bid
                                             price. Nor does it include analysis of the separate elements as
                                             required such as salary, overhead, and profit.

                                             In addition to the problems described above for the
Required Clauses Were                        procurements selected for detail review, we noted that the
Omitted From All Contracts                   contract agreements omitted required clauses. We also noted
Tested                                       that the Authority had not fully centralized its contracting
                                             functions as HUD had recommended.

                                             As identified in the following schedule, all of the 12 contracts
                                             reviewed in detail were missing (as denoted by “X”s) one or
                                             more required clauses.2 These clauses provide rights and
                                             remedies for the Authority and help ensure compliance with

2
  The listed requirements are not all necessarily applicable to all contracts. For example, the remedies clause was not
required for the first Creative Consulting Management Group contract as it did not exceed $100,000.

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                                          federal requirements.




                                                                                                                                                                                                                                                                                                             Second Zirl Smith Contract
                                                                                                                                                                                                                                                      Second McFarlin Contract
                                                                                                                                                  Second Deloitte Contract




                                                                                                                                                                                                                                                                                 First Zirl Smith Contract
                                                                           Second CCMG Contract




                                                                                                                                                                                                                            First McFarlin Contract
                                                                                                                                                                             Third Deloitte Contract
                                                                                                  Third CCMG Contract

                                                                                                                        First Deloitte Contract
                                                     First CCMG Contract




                                                                                                                                                                                                       Wil Davis Contract




                                                                                                                                                                                                                                                                                                                                          PSI Contract
                        Clause:
                        Remedies for Breach of
                                                                                                    X                   X                                                                              X                                                X                                                      X
                        Contract
                        Termination for Cause and
                                                              X                                                         X
                        Convenience
                        Copyrights                            X            X                        X                   X                         X                            X                       X                    X                           X                        X                             X                          X
                        Access to Records                     X            X                                            X                         X                            X                                                                        X                                                      X
                        Retention of Records                  X            X                                            X                         X                            X                                                                        X                                                      X
                        Allowable Costs                       X            X                        X                   X                         X                            X                                                                        X                        X                             X
                        Limitation of Costs                   X            X                        X                   X                         X                            X                                                                                                 X                             X


                                                    Table Legend
                                                    CCMG - Creative Consulting Management Group
                                                    PSI - Professional Service Industries


                                          In its September 1996 report, HUD’s contracting division
Contracting Functions
                                          recommended that the Authority centralize its contracting and
Remain Decentralized
                                          procurement departments. Further, the July 22, 1998 OIG
                                          audit report on the Authority’s drug elimination program also
                                          made this recommendation. A March 1999 HUD report
                                          indicated that the consolidation had been accomplished.
                                          Nevertheless, we were on-site and determined that the
                                          Authority still effectively has two contracting departments. All
                                          construction related contracts were handled out of the Egbert
                                          Avenue office and all non-construction related contracts out of
                                          the Turk Street office.

                                          In an April 21, 1997 memorandum to Authority staff, the
                                          executive director said effective May 5, 1997, all contracting
                                          and procurement services would be performed by the
                                          contracting division. He further said these services would
                                          include but not be limited to issuing solicitations, receiving
                                          quotes, bids and offers, and recommending contract awards.
                                          However, Authority staff indicated that for construction related
                                          contracts, the housing development and modernization
                                          departments, located at the Egbert Avenue office, issue

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                            advertisements and requests for proposals, review proposals,
                            and perform the bid tabulations. Once the contract is awarded,
                            the bid tabulation is sent to the Turk Street office with a
                            package and transfer sheet. However, the advertisements and
                            the losing proposals are retained at the Egbert office.

                            As a result, when we originally requested to see documents in
                            solicitation and contracting files, the Authority was unable to
                            provide complete files for many of the procurement actions in a
                            timely manner. Authority staff said portions of the files were at
                            each of the offices. While we eventually received generally
                            complete files for the construction procurement actions, the
                            non-construction procurement files were often incomplete.

                            The principal reason for the problems noted was that the
 Senior Management’s        Authority’s senior management did not follow federal and its
 Departure From             own procurement procedures, as well as direct HUD
 Requirements Caused The    instructions. There were several instances where this occurred
 Problems                   with the appearance of favoritism. There was a pattern where
                            certain contractors from Cleveland, Ohio were unjustifiably
                            given sole source awards, and once they had inside knowledge,
                            were awarded subsequent contracts using information that was
                            not available to all bidders and; therefore, unnecessarily
                            restricted competition. Also, evaluations of bids were not
                            adequately documented and some scoring also gave the
                            appearance of favoritism.

                            One effect of the improper contracting practices was that the
The Improper Practices      Authority’s limited resources were wasted to pay for services
Wasted Critical Resources   not received or ineptly performed, and for other unnecessary or
                            ineligible costs. A three bedroom unit costs $619 a month for a
                            low or moderate income family. The amount of funds
                            questioned ($801,723) could have provided 108 three
                            bedroom units for a one year ($801,723) divided by annual per
                            unit costs of $619 times 12). Additionally, the Authority cannot
                            provide assurance that it obtained the best available services at
                            the most advantageous price for many of its contracts. Further,
                            potential contractors refrained from bidding because the
                            procurement process was perceived as unfair or was too
                            restrictive.




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 Auditee Comments   The Authority generally disagreed with the finding’s conclusions
                    for the following reasons:

                        •   The finding failed to acknowledge that some of the
                            sampled contracts were awarded under exigent
                            conditions and further fails to include a cost/benefit
                            analysis of the contributions the sampled contractors
                            have made to the Authority and its recovery effort.

                        •   The HUD IG failed to understand or acknowledge
                            exigent conditions existing during the recovery effort or
                            valid approvals received for contracts sole-sourced
                            under exigent circumstances.

                        •   The finding was not representative of contracting
                            activities as the finding is based on an extremely small
                            percentage of the Authority’s contracting activities.

                        •   The finding failed to acknowledge corrective actions
                            since the beginning of the recovery effort. The
                            Authority further stated that prior OIG audits of its
                            contracting indicated, that as late as August 1, 1997, it
                            was using an open and competitive selection processes.
                            It quoted audit memorandum 97-SF-201-1803 as stat-
                            ing: “…Also, the housing authority’s present selection
                            process appears to be open and competitive (emphasis
                            added).”

                    The Authority disagreed with the recommendation to impose
                    appropriate sanctions on it and its executive director. It stated
                    that the recommendation represents a response to actions which
                    indicate, at worse, excessive zeal in the cause of public housing
                    recovery. It further stated that actions taken were well within
                    management’s discretion and authority, and that in all cases,
                    these were the actions that would have been taken by a
                    reasonable and prudent person to protect the health, safety and
                    welfare of the residents, employees, and property. The
                    Authority contended that all its contracting actions were within
                    the spirit and intent, if not the letter, of applicable laws and
                    regulations.


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                    The Authority also disagreed with the recommendation to
                    intensify HUD's monitoring of the Authority's contracting
                    activities. The Authority contended that the contracts it entered
                    into were appropriate and substantially complied with
                    applicable laws and regulations. Thus, the extraordinary level of
                    scrutiny is not warranted. It claimed that most of the finding
                    covered contracts that were entered into several years ago, and
                    that the urgent and extraordinary conditions giving rise to the
                    questioned contracts no longer exist, since significant action has
                    been taken to improve contracting policies and processes.

                    The Authority further asserted that amounts questioned are
                    overstated and are based upon the OIG’s subjective opinions.
                    It believed that the amount should only be $31,341 and said
                    that it has billed the contractor and Cuyahoga Authority
                    appropriately.



OIG Evaluation Of   We reviewed the Authority’s detailed responses and supporting
Auditee Comments    exhibits and have made modifications to the audit report where
                    appropriate. However, these changes did not significantly
                    change our conclusions or recommendations.

                    We did not include a cost/benefit analysis of Authority
                    achievements as this was not an objective of the audit. Benefits
                    are expected from any expenditure, so whether some benefits
                    were obtained had no bearing on the conclusion that
                    management did not always follow its policies and procedures
                    or federal requirement, which resulted in wasted resources.

                    A recurring assertion in the Authority’s response was that it was
                    in a state of exigency and emergency during the period
                    reviewed. The purported state of emergency was presented in
                    the responses as the overall and primary reason for disregarding
                    federal requirements. The executive director cited several
                    primary sources that he believed gave him and the
                    commissioners the management discretion to dispense with
                    regulations, policies and established procedures. We reviewed
                    several of the citations regarding emergencies and exigent
                    conditions and found no relevance to the types of procurements
                    questioned in this report. For example:


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                   •   5 USC, n6, Part II, Section B, Section 12 regarding
                       “discretion to dispense with advertising, if exigency or
                       public service requires immediate delivery or performance”
                       is the citation from a court case (not a statute), United
                       States vs. Speed, from the year 1869 regarding a military
                       officer procuring supplies or services.

                   •   Government Accounting Office December 20, 1999
                       decision in the matter of Paramatic Filter Corporation dated
                       12-20-99 concerned a protest by a vendor against the U.S.
                       Army wherein the decision’s digest reads, in part, the
                       “…Contracting officer reasonably determined that
                       modification of ongoing contract was necessary to meet
                       urgent requirements for a limited number of filters to protect
                       against nuclear, biological and chemical threats…”

                   In our opinion, the Authority’s practices of hiring select
                   consultants without regard for federal requirements is not
                   equivalent to the U.S. military making decisions to procure
                   immediately needed supplies or urgent requirements for filters to
                   protect against chemical threats.

                   Similarly, the response included a claim that an internal audit
                   memorandum dated August 1, 1997 from the District Inspector
                   for Audit to the Director of the Office of Public Housing seems
                   contrary to the findings in the current audit report for contracts
                   for the same period. That memorandum was the result of a
                   highly limited review of only one procurement action: the
                   selection of the developer of a single HOPE VI project, Hayes
                   Valley. The Authority took the quote out of context, giving the
                   false impression that the entire procurement process for
                   selecting contractors was satisfactory. The following quotation
                   from the memorandum correctly reflects the review results
                   which showed that the developer selection process was
                   deficient.

                           “In our opinion, the selection of the developer was
                           made without competition, contrary to requirements.
                           This resulted in the lost opportunity to consider
                           proposals from other potential developers and imparted
                           the appearance of possible favoritism. Consequently,
                           there is no assurance the best selection was made.


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                         However, it does not appear practical or prudent to
                         stop the progress made-to-date on Hayes Valley to
                         reopen the selection process for a developer. We also
                         noted that developer selection for subsequent HOPE
                         VI developments is competitive.”

                  The competitive process referred to above related only to the
                  subsequent, on-going HOPE VI developments, not to the
                  Authority’s procurement process at large.

                  While the number of contracting actions sampled was small, the
                  named contracts discussed in the finding represented over $2
                  million, or 16 percent of that spent on architectural and
                  engineering, consultant, and service contracts. (As mentioned in
                  the Introduction section, we are separately reviewing the
                  Authority’s modernization activities costing $70 million.)
                  Regardless, the negative impact on the Authority resulting from
                  the noted abusive practices is significant. In our opinion, the
                  mission of housing low-income and homeless residents was not
                  best served by the type practices identified in the report. We
                  recognize that providing housing is often a difficult task.
                  However, the executive director and commissioners appear to
                  have lost sight of the fact that compliance with federal
                  requirements and sound management practices is necessary to
                  make the most of what is allotted to provide affordable housing.

                  The president of the board of commissioners informed us there
                  were 13,000 to 14,000 names on the Authority’s housing
                  waiting list. With this large, unfilled need for housing, it is
                  imperative that the Authority pay no more for services than
                  necessary. We believe that administrative action against the
                  Authority’s senior management should be pursued to send a
                  clear message that actions will not be tolerated that are not in
                  the best interest of the low and moderate income persons
                  served by HUD.




Recommendations   As described in the Prior Audits section of this report, a
                  previous OIG audit raised similar concerns with the Authority’s
                  contracting practices. Four recommendations from that audit
                  remain open because HUD does not yet have assurance that


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                   the Authority has successfully implemented them. While the full
                   implementation of those recommendations will partly address
                   the problems described in the current report, additional actions
                   are necessary.

                   We recommend the Assistant Secretary for Public and Indian
                   Housing:

                   1A.      Impose appropriate sanctions on the San Francisco
                            Housing Authority’s senior management, including the
                            executive director and the board of commissioners.

                   1B.      Intensify HUD’s monitoring of the Authority’s
                            contracting activities. This should include on-site visits
                            by experts to scrutinize contract procurement and
                            monitoring functions.

                   1C.      Require the Authority to get HUD’s advance approval
                            for personal service contracts over $50,000.

                   1D.      Require the Authority to reimburse the appropriate
                            HUD program for the ineligible, unsupported, and
                            unnecessary/unreasonable costs identified Appendix A
                            of this report for Finding 1.




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Finding 2


      Administrative Employees Were Hired and
       Compensated Without Following Sound
               Management Practices
The San Francisco Housing Authority frequently did not follow sound management practices or its own
policies and procedures for recruiting and compensating administrative staff. Of eight employees tested,
seven were selected without considering other candidates, their qualifications were questionable, or they
appeared to be overcompensated. In addition, the executive director received compensation in excess
of his contract, and he was inappropriately treated as a contractor rather than an employee. Further,
some of the reimbursements made to the Cuyahoga Metropolitan Housing Authority for compensating
the acting executive director were unsupported, and San Francisco paid some costs for services the
acting director performed for Cuyahoga. We identified $173,442 of ineligible or unreasonable costs
and $622,523 of inadequately supported costs in connection with these conditions. The problems
occurred because management did not follow Authority policies, there was insufficient board
involvement, and there was no relocation policy. As a result, the Authority wasted funds that could
have been used to further its mission, the effectiveness of its operations was reduced, it has created an
appearance of favoritism, and it may have incurred a significant tax liability.




                                        Office of Management and Budget Circular A-87, Cost
 Regulations And Policies
                                        Principles for State, Local and Indian Tribal Governments,
 Require Sound
                                        says governmental units are responsible for the efficient and
 Management Practices
                                        effective administration of federal awards through the
                                        application of sound management practices. Consistent with
                                        that requirement, the Authority established policies for the
                                        recruitment and selection of employees. Specifically, policy I-
                                        002 requires a variety of outreach efforts to be made and all
                                        recruitment information regarding vacancies be accessible to
                                        staff, tenants, the community at-large and the greater Bay Area.

                                        Policy I-003 on employee selection says the Authority will
                                        conduct a selection process for potential employees that will
                                        ensure a fair and consistent manner for evaluating the
                                        qualification of each applicant. The policy also provides for the
                                        following procedures: (1) the human resources department is to
                                        receive all applications and forward them to the appropriate
                                        manager; (2) applicants meeting requirements are to be
                                        interviewed and ranked in order of their interview results; and
                                        (3) once a top candidate has been identified, reference checks

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Finding 2


                            to verify the credentials and past work performance of the top
                            applicant are to be conducted and documented.

                            We reviewed the Authority’s hiring procedures by selecting and
 Proper Hiring Procedures   reviewing a judgmental sample of eight out of twenty seven
 Were Not Followed          administrative staff. We chose staff hired since March 1996
                            and with salaries of $62,000 or more. We determined the
                            Authority did not follow its personnel rules and hiring
                            procedures for five of them. The executive assistant and the
                            director of leased housing were hired even though they were not
                            among those who had submitted applications in response to the
                            job announcements. The manager of family sweep was hired
                            without any job announcement being issued.                     Job
                            announcements were prepared for the financial advisor, and
                            inter-governmental affairs specialist positions, but the positions
                            were filled prior to the announcements.

                            Executive Assistant. The Authority received resumes from at
                            least 20 applicants responding to an August 22, 1997 job
                            announcement. Eight met the minimum required qualifications.
                            However, there was no evidence that any of the applicants
                            were interviewed and ranked. Instead of selecting from these
                            applicants, the executive director hired an individual in January
                            1998 who had not applied for the position. The executive
                            assistant had previously worked with the executive director in
                            Cleveland, Ohio.

                            Director of Leased Housing. The Authority announced the
                            position vacancy on February 20, 1997 and received a
                            significant number of applicants. It identified 12 applicants who
                            met the job qualifications. However, there was no evidence to
                            indicate the Authority conducted interviews of the qualified
                            applicants or ranked them as called for in its personnel rules and
                            procedures. Instead, the executive director hired the current
                            director of leased housing on September 22, 1997. The
                            individual was hired even though he was not one of the
                            applicants, and HUD had instructed the executive director the
                            month before not to hire the individual. The HUD recovery
                            team had terminated the individual in 1996 because he had
                            poorly managed the Section 8 department.

                            General Manager of Family Sweep. The executive director


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       hired the individual for this position in November 1997 without
       a job announcement being issued. There was no evidence that
       any other person was given the opportunity to be considered.
       Similarly, the individual had been previously hired in February
       1997 as a temporary construction project manager without a
       job announcement being issued or evidence that others were
       given the opportunity to apply for the position.

       Financial Advisor. A job announcement for the position of
       financial advisor was dated September 11, 1998 and specified
       a closing date of September 25, 1998. However, there was no
       evidence that the opening was advertised to give the public an
       opportunity. As a result only two persons applied: the person
       holding the position temporarily since August 31, 1998, and a
       person who heard of the job through a friend who worked at
       the Authority. The person holding the job temporarily was
       selected and there was no evidence the unsuccessful candidate
       was considered.

       Additionally, the person selected was holding the job tem-
       porarily, based on a July 22, 1998 offer. The executive
       assistant had contacted him to advise him of the opening. There
       was no evidence that other potential candidates were
       considered for the temporary position.

       Inter-Governmental Affairs Specialist. The executive
       director created the position of inter-governmental affairs
       specialist and moved an employee into that position on
       December 9, 1998, six days before the Authority posted the
       job announcement internally on December 15, 1998. Six
       people applied for the position. Three people were identified as
       being qualified for the job, including the person already in the
       position. Although three non-Authority employees applied for
       the position, candidates outside of the Authority did not have
       equal opportunity to apply for the position since the job was not
       advertised in the newspaper.

       This individual held two other temporary positions immediately
       prior to the inter-governmental affairs position. He was hired as
       a temporary conservation corps coordinator in December 1996
       and as a temporary construction project manager in June 1997.
       In both cases there was no job announcement or evidence of


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                            open recruiting efforts.

                            Employees need to possess necessary skills and qualifications
 Employees Need To Be       to ensure they perform effectively and compensation is
 Qualified                  reasonable. The Authority’s policy I-001 requires employees
                            to be selected for available positions based solely on their
                            applicable experience, education, and demonstrated ability to
                            perform the work specified. Its policy II-010 says: “The
                            housing authority intends to follow the applicable state and
                            federal laws with regard to wage and salary administration and
                            to pay reasonable and equitable wages and salaries to all its
                            employees. The salary range minimum reflects an entry level
                            salary position for an employee learning a new set of job skills
                            and who meets the position’s minimum requirements.”

                            For agencies like the Authority, Office of Management and
 Compensation Must Be       Budget Circular A-87 says compensation for personnel services
 Reasonable                 is reasonable to the extent that it is comparable to that paid for
                            similar work in the labor market in which the agency competes
                            for the kind of employees involved. Compensation surveys
                            providing data representative of the labor market are an
                            acceptable basis for evaluating reasonableness.

                            The Authority’s personnel policies are generally consistent with
                            this requirement. Policy II-010 requires salaries for each
                            position to be comparable to those to similar industries within
                            the same geographical region. To achieve this, the Authority
                            compares the knowledge, skills, and requirements of its job
                            position to the compensation paid by the City and County of
                            San Francisco. The Authority usually uses City and County pay
                            scales for positions it considers comparable.             Since
                            compensation is based on comparable knowledge and skill
                            qualifications, employees must meet those requirements for the
                            compensation to be reasonable.

                            Of the eight administrative employees reviewed, it was
 It Was Not Apparent Half
                            questionable whether four met the minimum required quali-
 Of The Employees Tested
                            fications such as knowledge, skills, or education for the
 Were Fully Qualified
                            position. Three of these employees, as previously discussed,
                            were selected without considering other potential applicants.




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       General Manager of Family Sweep. The general manager
       of family sweep, initially hired as a temporary construction
       project manager (a similar position), did not meet the minimum
       required qualifications for either of the positions. (The salaries
       received for the above positions were over double and triple his
       salary respectively before coming to the Authority.) The
       positions required the employee to have the educational
       equivalent of a bachelor’s degree with major or minor course
       work in architectural design, construction engineering, public
       administration or a related field. He did not have such a degree.
       Further, it was not evident that he possessed the required
       knowledge and skills. His resumé indicated no prior experience
       with the development or implementation of modernization and
       rehabilitation of construction programs; preparing cost esti-
       mates; or developing and implementing operating capital
       projects, and grant budgets.

       Being responsible for many millions of dollars in modernization
       work, the general manager position is complex and requires
       extensive experience in housing modernization and management.
       The employee’s previous construction experience was not
       anywhere near this level. His previous job at the Cuyahoga
       Authority was that of a construction job captain where he was
       responsible to survey, plan, and control the generation of data
       by the construction department.

       Financial Advisor. It was not evident that the person hired for
       this position had the requisite knowledge and skills. The duties
       of the job are to evaluate the HOPE VI program and improve
       financial operations; conduct cost and time studies; monitor
       activities and compliance with applicable rules and regulations;
       and prepare budget, accounting, and other reports on the
       program.

       The job’s minimum required qualifications include a thorough,
       experience-based understanding of: public housing
       administration practices in the areas of accounting and
       budgetary management and control; principles and practices of
       organization, administration and fiscal management; federal,
       state, and local legislation on public housing, with particular
       emphasis in goals, objective, performance and financial
       requirements; and management system operational programs


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                   related to auditing both fiscal and operational programs. The
                   person must possess the ability to plan, assign, direct, review
                   and coordinate the activities of staff engaged in a complex
                   financial operation; and analyze, evaluate and resolve routine
                   and complex system and operational problems.

                   In contrast, the person’s experience for the previous fifteen
                   years was in the field of investment, marketing and managing
                   investment products and services for bank clients. His
                   responsibilities included tax planning, retirement analyses, and
                   strategic review of investment portfolios. He was a principal
                   agent for lines of credit, tax strategies, estate planning. His skills
                   included marketing analysis, research and modern portfolios.
                   He had some accounting experience, but it was very limited to
                   approximately one year back in 1984/85. Although employed
                   as a management analyst with HUD from 1979 to 1984, it was
                   not evident he had experience with HOPE VI or public housing.

                   Inter-Governmental Affairs Specialist. The inter-govern-
                   mental affairs specialist did not meet the minimum required
                   qualifications for either this position or his former position as
                   temporary construction project manager. Both positions
                   required a suitable bachelor’s degree, but the individual did not
                   possess one.

                   Further, his previous job experience was not the experience
                   required for the positions. In his previous job he was a con-
                   servation coordinator at the Authority involving landscape
                   maintenance and prior to that he was a camp manager in Ohio.
                   The intergovernmental affairs specialist position called for
                   experience in the planning and implementation of resident
                   empowerment and economic development programs for low-
                   income individuals and families; or the statutory and regulatory
                   requirements associated with such programs. The construction
                   manager position required knowledge in the modernization and
                   rehabilitation of housing. His employment file information
                   showed no such credentials.

                   Director of Contracting. The individual hired in June 1999 as
                   director of contracting did not meet the minimum experience
                   requirements for the position. One of the qualifications in the
                   position description was an experience-based understanding of


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                             the principles and practices associated with federal laws, rules
                             and regulations relating to procurement activities. However, this
                             requirement was omitted from the job announcement. We
                             consider the requirement for experience in federal rules and
                             regulations essential, particularly because of the serious
                             deficiencies noted in the Authority’s procurement activities over
                             the years. This individual was employed as a commodity man-
                             ager prior to his employment with the Authority. His primary
                             experience was in material management in the health industry
                             such as hospital and medical centers. However, the individual
                             did not have experience with federal procurement regulations.

                             The following table shows the salaries paid through September
                             30, 1999 to the individuals with questionable qualifications.

                                                    Position                          Amount
                              General manager of family sweep (and                    $201,463
                              construction project manager)
                              Financial advisor                                        102,703
                              Inter-governmental affairs specialist (and               146,528
                              construction project manager)
                              Director of contracting                                   29,567
                                       Totals                                         $480,261


                             The Authority did not check references or credentials for most
References And Credentials   of the eight employees tested, despite its policy requiring that it
Were Not Adequately          be done. Policy I-003 says at least three reference checks are
Checked                      to be made on all selected job applicants to confirm work
                             history, and where a license or degree is required, applicants
                             are to provide evidence of them. Nevertheless, there was
                             complete verification for only one of the selected applicants.
                             For six of the eight employees there was no evidence
                             verifications were done. For the attorney, only education and
                             license were verified. (A recent event shows the peril of not
                             checking references and credentials. Although not among the
                             eight individuals tested, a director of social services at the
                             Authority reportedly lied that he was a licensed clinical social
                             worker to get the position. When this became known, the
                             Authority reduced the employee’s pay.)




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                           Of the eight employees previously discussed, three also had
 Salaries And Relocation   salaries (regardless of qualifications) in excess of Authority
 Compensation Were         policies, and two received excessive compensation for
 Sometimes Excessive       relocation. Also, one employee received compensation while
                           not performing Authority duties.

                           General Manager of Family Sweep.        This employee
                           received $5,230 of excessive relocation compensation,
                           consisting of the following.

                           •   $2,300 for reimbursement for lodging expense in excess of
                               two months. The Authority has no policy for compensating
                               relocation costs. Federal Acquisition Regulations limit
                               reimbursement to two months lodging. However, the
                               executive director reimbursed the Authority for the amount
                               paid on his behalf that was in excess of two months lodging.
                               This indicates the Authority realized that two months was
                               the maximum allowable lodging expense in relation to
                               relocation.
                           •   $2,930 to offset tax effects of the relocation reimburse-
                               ments. Federal regulations do not provide for payments to
                               offset tax effects in this situation, and it is not Authority
                               policy to provide such payments.

                           Director of Leased Housing. As previously mentioned, the
                           Authority uses City and County salary scales for each position.
                           The scales have five steps. An employee normally starts at the
                           first step and progresses over time to the higher steps. Under
                           certain conditions and when documented, such as superior
                           qualifications or to match the person’s previous pay, an
                           employee can be started at a higher step.

                           The director of leased housing was hired in November 1997 at
                           step 1, but this was retroactively changed to step 5 in 1998, a
                           salary level over 20 percent higher than step 1. The step 1
                           salary was $80,388, 14 percent more than his salary at his
                           previous job (the Authority’s assistant director of subsidized
                           housing), thus the change to step 5 was unjustified. The
                           unwarranted increase resulted in excess pay of $29,998 through
                           September 30, 1999.

                           Director of Finance. When hired, the director of finance


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       started at step 3 rather than step 1. However, Authority
       records provide no basis for the higher step.         The
       unsubstantiated increase resulted in excess pay of $8,324
       through September 30, 1999.

       Inter-Governmental Affairs Specialist. This individual had
       been an employee of the Cuyahoga Authority in Cleveland,
       Ohio, providing landscaping and related services.            As
       evidenced by expense reports this employee submitted to the
       Cuyahoga Authority, he was absent from his San Francisco
       Authority job for 34 days between February 25 and October
       24, 1997 while performing services for Cuyahoga.
       Nevertheless, the time sheets he submitted to the San Francisco
       Authority claimed that he was working for it. Based on the time
       sheets, the Authority inappropriately compensated the
       employee $7,324 while in positions held previous to that of
       inter-governmental affairs specialist: $1,844 while he was a
       conservation coordinator and $5,480 while he was a
       construction project manger. This individual is no longer
       employed at the Authority.

       Executive Assistant. This employee was hired at a pay rate
       substantially higher than the previous employee holding the same
       position, as well as given several pay increases (two
       retroactively) which increased his salary to 2.3 times what he
       earned previously. The basis for setting his compensation was
       not adequately supported and appeared arbitrary and
       excessive.

       The previous employee was compensated using pay schedule
       71.0. If this schedule was used, the present executive assistant
       would have received an annual salary of $76,160, which was
       14 percent more than his previous job as acting human
       resources director at Cuyahoga. Instead, he was hired in
       February 1998 at step 5 of pay schedule 70.45 at $90,123, a
       26 percent increase over his previous salary.

       Within a year the employee’s annual salary was effectively
       raised to $154,460, 61 percent more than his starting pay, and
       132 percent more than it was prior to working for the
       Authority.



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                   •   In April 1998 his salary was retroactively increased to
                       schedule 71.0 step 5 ($96,022).
                   •   In August 1998 it was increased to schedule 77.20 step 5
                       ($125,254).
                   •   In February 1999 it was retroactively increased effective
                       August 1998 to schedule 80.90 step 5 ($149,866) and
                       increased effective February to schedule 81.50 ($154,460).

                   The Authority did not believe the position of executive assistant
                   was directly comparable to any City of County positions, nor
                   did it have documentation showing how the job requirements
                   related to the City and County classifications. The first
                   retroactive pay increase was given on the basis that the initial
                   pay scale was selected in error. The pay was increased to be 5
                   percent greater than that of the position of Authority general
                   counsel. The subsequent increases were on the basis that the
                   individual had increasingly taken on the duties of a deputy
                   executive director. The last increase was on the basis of 85
                   percent of the executive director’s salary. The Authority had no
                   justification for the 85 percent figure.

                   We examined the City and County’s pay scale schedule
                   effective July 1997 looking for positions that might be
                   comparable to deputy director. The schedule showed the
                   beginning salary for deputy general manager of the municipal
                   railway was $77,714 (schedule 71.50), for deputy director of
                   the department of building inspection it was $86,996 (schedule
                   73.80), and for deputy director of planning it was $107,720
                   (schedule 74.20). All of these salaries were significantly less
                   than the pay given to the Authority employee after August
                   1998.

                   We consider the salary in excess of the pay scale given to the
                   previous executive assistant to be unsupported. This excess
                   totaled $84,745 through September 1999. We also take
                   exception with $31,312, or 23 percent of the accepted salary
                   pay scale. This represents the amount the executive assistant is
                   paid one week each month when he is permitted to tele-
                   commute from Ohio. The Authority has no policy providing for
                   tele-commuting. Further, in this situation there is no apparent
                   benefit to the Authority, nor is it evident that the responsibilities
                   of his position can be readily fulfilled halfway across the


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                             continent.

                             The executive assistant also received excessive relocation
                             compensation totaling $17,213 consisting of the following:

                             •   $8,400 for temporary lodging in excess of two months.
                             •   $3,543 excess moving allowance. The employee received
                                 $5,000. However, when an employee provides no
                                 accounting for actual expenses as in this case, federal
                                 regulations (5 USC 5724a) limit reimbursement to no more
                                 than one week’s pay of a GS-13 ($1,457).
                             •   $5,270 to offset tax effects for the relocation
                                 reimbursements.

                             In addition to the eight employees tested as discussed above,
The Compensation Paid To     we compared the payments to the executive director with his
The Executive Director Was   employment agreement. The agreement with the executive
Excessive                    director gave him the option to assign his rights to the Ron C.
                             Davis Company, Ltd. and to have payments, including benefits,
                             made directly to the company. The executive director
                             exercised this option in February 1998. However, the
                             payments to the company exceeded the compensation provided
                             for in the contract by $60,273 through September 1999.

                             •   $38,523 was paid, in addition to his salary, for vacation,
                                 sick leave, and personal leave days. The Authority’s
                                 personnel policies provide only for payment of accrued
                                 vacation upon termination of employment. Further, the
                                 payments to the executive director were not reduced
                                 although Authority staff told us he had taken leave. The
                                 executive director himself also indicated that he had taken
                                 leave and that neither he nor anyone else at the Authority
                                 had kept track of the leave he had taken. Therefore, we
                                 consider this amount to be duplicative of his salary.
                             •   $11,250 of the monthly payments was for a performance
                                 bonus. The calculation used to make the monthly payments
                                 included the bonus before the bonus had been earned or
                                 approved.
                             •   $10,500 included in the monthly payments to offset taxes
                                 on the above bonus. The contract did not provide for this
                                 and, as previously noted, neither do Authority policies.



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                              In addition, the executive director was being paid approximately
                              ten days in advance, before the compensation was earned. This
                              was inappropriate because it is inconsistent with prudent
                              business practices and the Authority’s policies.

                              The executive director also received $9,359 in excessive
                              compensation for relocation.

                              •   $8,594 excess moving allowance. The director received
                                  $10,000. However, where an employee provides no
                                  accounting for actual expenses as in this case, federal
                                  regulations limit reimbursement to no more than one week’s
                                  pay of a GS-13 ($1,406).
                              •   $765 to partially offset tax effects for the relocation
                                  reimbursements. After we brought this matter to the
                                  Authority’s attention, the executive director repaid this
                                  amount.

                              When the executive director exercised his option for
 The Executive Director Was   compensation to be paid to his company, the Authority stopped
 Inappropriately Treated As   withholding from his pay income and other taxes paid by
 A Contractor                 employees and also stopped paying the employer’s share of
                              social security taxes and Medicare. This was inappropriate
                              because, Internal Revenue Service rules (in its publications 15
                              and 15A) require that he be treated as an employee. Some of
                              the factors why the executive director should be treated this
                              way include (1) he was originally treated as an employee, (2)
                              his services are key to regular Authority business, and (3) he is
                              provided with all necessary facilities, materials and training. The
                              rules make the Authority liable for unpaid taxes when an
                              employee is treated as a non-employee. In March 2000 the
                              executive director and Authority entered into a new contract
                              with the executive director as an employee.

                              Previous to his contract with the Authority, the current executive
   Reimbursement To           director was on loan from the Cuyahoga Metropolitan Housing
   Cuyahoga Was Not All       Authority as the acting executive director. The Authority
   Unsupported                agreed to reimburse Cuyahoga for the individual’s salary and
                              related costs. Cuyahoga was reimbursed a total of $236,691
                              for salary and benefits that covered the period October 26,
                              1996 to November 24, 1997. We consider $43,804 of this to
                              be unsupported.


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                           •   $35,168 was for a bonus in August. Of that $18,277 was
                               based on 15 percent of three-fourths of the $162,465
                               annual salary, plus $16,891 to reduce the tax impact. The
                               Authority’s board authorized a 15 percent after-tax-bonus.
                               The board authorized this based on Cuyahoga’s statement
                               that the acting director would have gotten a bonus based on
                               the presumption of his outstanding performance at the
                               Authority. However, considering the lack of a written
                               evaluation of the person’s performance, we consider the
                               bonus unsupported.
                           •   $8,636 was paid for life and disability insurance. Cuyahoga
                               provided no support concerning life insurance paid on
                               behalf of its other employees so that the reasonableness of
                               the amount paid on the borrowed employee’s behalf could
                               be determined. Further, Cuyahoga did not provide
                               disability insurance to its other employees. We note that
                               these costs greatly exceed similar costs that would have
                               been paid if the acting director had been a San Francisco
                               Authority employee. At San Francisco the costs would
                               have been $558 and $159 respectively for life and disability
                               insurance.

                           HUD reimbursed the Authority for certain expenses incurred
                           during its recovery period through September 1997. Included
                           in the reimbursement was $43,711 for the $35,168 bonus and
                           $8,543 of the $8,636 life and disability insurance discussed
                           above. Thus, to the extent that the Authority cannot provide
                           support to show the reasonableness of such costs, it should
                           return the funds to HUD as well as reimburse the Authority’s
                           federal program accounts.

                           The State of Ohio Auditor disallowed $12,135 of charges the
Excess Per Diem Was Paid   acting executive director made using the Cuyahoga credit card
                           while on loan to San Francisco. San Francisco subsequently
                           reimbursed the costs to Cuyahoga, using the Authority’s
                           miscellaneous fund containing non-federal funds. A portion of
                           these charges was for restaurant meals for the executive
                           director and others at restaurants such as Lulu, Morton’s, and
                           Julie’s Supper Club where the average cost of meals is as high
                           as $58 per person.



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                            These charges, however, duplicated the per diem allowance the
                            acting executive director received from Cuyahoga and that were
                            subsequently reimbursed by the Authority. When meals are
                            otherwise provided, the per diem should have been reduced
                            ($8 each for breakfast and lunch, and $20 for dinner), but they
                            were not. We identified $856 of excess per diem related to 50
                            meals between January and August 1997.

                            In April 1997, the loaned acting director attended a HOPE VI
 The Authority Was Billed
                            conference in Detroit on behalf of Cuyahoga. Nevertheless, the
 For Costs Of Work Done
                            Cuyahoga billing to the Authority included the employee’s
 For Cuyahoga
                            salary and travel expense related to the trip. As a result, the
                            Authority paid $3,553, consisting of salary of $1,799 and travel
                            expense of $1,754, that was not necessary to Authority
                            operations.

                            As previously mentioned, there was no performance appraisal
 Annual Appraisals Of       for the acting executive director while on loan from Cuyahoga.
 Employee Performance       This is in contrast with Authority policy II-011, requiring
 Were Not Done              supervisors to give employees annual performance appraisals as
                            well as a six-month appraisal for probationary employees.
                            Appraisals serve to justify compensation increases as well as to
                            provide feedback to employees to encourage improved
                            performance. However, tests of 20 employees disclosed no
                            performance appraisals were given in recent years.

                            After the period covered by this audit (September 30, 1999),
                            the Authority had begun performing some employee appraisals.
                            Our subsequent March 2000 test of 18 selected employees
                            showed that five of them had appraisals. Of the seven
                            employees discussed in this finding, only one had been
                            appraised.

                            In our opinion, the principal reasons the above conditions arose
 Various Causes Were        were as follows:
 Noted For The Conditions
                            •   Management officials did not follow the Authority’s written
                                policies as well as sound management practices. This was
                                particularly evident in the hiring process where frequently
                                there was limited or no consideration of multiple potential
                                applicants or proper screening of applicants to assure they
                                met minimum required qualifications. The inattention to


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                                    policies was also evident in the absence of verification of
                                    selected applicant’s background and preparation of
                                    employee performance evaluations.
                                •   The executive director gave the appearance of using
                                    favoritism in hiring acquaintances and former associates.
                                    These included the executive assistant, general manager of
                                    family sweep, and financial advisor. These individuals were
                                    hired without considering other applicants and/or their
                                    qualifications were questionable.
                                •   Proper analyses for establishing the executive assistant’s
                                    various salary levels were not performed.
                                •   There was insufficient board involvement, especially in the
                                    setting of the executive director’s compensation. The
                                    finance director was to have computed the monthly
                                    payment amount and present it to the board for its
                                    approval, but this was not done.
                                •   There was no written policy concerning compensation for
                                    relocation.

                                The effects of the poor management practices are:
Funds Were Wasted,
Effectiveness Was               •   Funds were spent for ineligible, unnecessary and
Reduced, Also Potential             unreasonable costs that reduced funding that could have
Tax Liabilities And Penalties       been available to further the Authority’s mission.
Exist                           •   The highest qualified and capable individuals were not hired,
                                    thus, the effectiveness of the Authority’s operations was
                                    reduced. Employee effectiveness was also not assured due
                                    to a lack of positive feedback and constructive criticism
                                    given as a result of performance evaluations.
                                •   The appearance of favoritism in personnel practices
                                    diminishes the Authority’s effectiveness by reducing
                                    employee morale and undermining the credibility of
                                    management. The excessive compensation unnecessarily
                                    wasted resources and sends the wrong message to
                                    struggling low and moderate income persons who are
                                    supposed to be helped by the Authority’s programs.
                                •   A significant and unnecessary potential tax liability exists
                                    because the executive director was treated as a contractor
                                    rather than an employee. A penalty may arise resulting
                                    further unnecessary expenses.




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                    The Authority generally disagreed with the finding’s conclusions
 Auditee Comments   based on the following arguments.

                        •   The finding failed to acknowledge that the Authority
                            followed its policies/practices in effect at the time and to
                            include a cost/benefit analysis of the contributions as
                            well as the achievements the employees at issue in this
                            finding have made relative to its recovery effort.

                        •   The finding did not acknowledge the valid exercise of
                            management discretion in the hiring of temporary/term
                            employees to continue the recovery.

                        •   The finding was not representative of the Authority’s
                            employment activities as it was based on an extremely
                            small percentage of all the Authority’s employee
                            population.

                        •   The finding failed to acknowledge corrective actions
                            taken since the beginning of the recovery effort.

                    The Authority also stated that all of the finding’s recom-
                    mendations should be dropped, claiming that it followed sound
                    personnel practices and did not deviate from its policies,
                    procedures or practices. It contended that the OIG used a very
                    small sample to arrive at a major and erroneous conclusion, and
                    that a salary of $61,999 does not represent a highly
                    compensated person in the San Francisco labor market. It
                    argued that the recommendation for the monitoring of the
                    Authority’s employment practices will remove or restrict the
                    Authority’s appointing authority.

                    The Authority claimed that its classification of employees was in
                    full compliance with Office of Management and Budget Circular
                    A-87 and was based upon the classifications used at the City
                    and County of San Francisco. It added that its approaches
                    were both prudent and consistent with well-established and
                    widely accepted classification and compensation practices and
                    noted that its personnel decisions were sound and improving.



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       With respect to the recommendation to review payments made
       for the loaned employee and return unreasonable or
       unsupported amounts, the Authority said that HUD had
       reviewed these expenses and deemed them appropriate and
       adequately supported. It also contended that HUD reimbursed
       it for the payments made to Cuyahoga for the loaned employee
       as an allowed, supported, and justified HUD recovery expense.

       Regarding the recommendations concerning the executive
       director’s contract, the Authority contended that all actions
       were in accordance with the conditions of the employment
       agreement which was approved by the board as an exercise of
       their statutory authority. It further noted that the November 19,
       1997 employment agreement between the Authority and the
       executive director was negotiated at arms-length between the
       executive director, the board of commissioners, and its
       attorney.

       The Authority’s response to the recommendations concerning
       the former intergovernmental affairs specialist was that he did
       not have a contract with, nor was he paid by Cuyahoga, and
       therefore seeking reimbursement from the employee was
       unwarranted. The Authority further asserted that, although it
       paid the employee while he was working for Cuyahoga, he was
       not paid by both housing authorities for the same time worked,
       that the payments were simply a time keeping error, and that
       there was no attempt on the part of the employee to deceive
       anyone.

       On the final recommendation, the Authority noted that the
       recommendation did not provide any legal, regulatory or policy
       citations regarding the travel regulations that might apply to
       public housing authorities. The Authority further stated that its
       draft revised personnel policies, which were given to the OIG,
       contains a relocation travel policy that allows for reimbursement
       of reasonable relocation expense.




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 OIG Evaluation Of   We reviewed the Authority’s detailed responses and supporting
 Auditee Comments    exhibits and have made modifications to the report where
                     appropriate. However, these changes did not significantly
                     change our conclusions or recommendations.

                     We did not include a cost/benefit analysis of Authority
                     achievements as this was not an objective of the audit. Benefits
                     are expected from any expenditure, so whether some benefits
                     were obtained had no bearing on the conclusion that
                     management did not always follow its policies and procedures
                     or federal requirement, which resulted in wasted resources.

                     In its responses, the Authority repeatedly implies that it has the
                     right to the valid exercise of management discretion in its
                     actions; however, this does not give its management the right to
                     circumvent Office of Management and Budget and other federal
                     requirements when expending federal funds. Contrary to the
                     Authority’s assertion that it followed its own policies at the time,
                     our review of the hiring of administrative staff members showed
                     that it did not do so.

                     Our review concentrated on the higher-salaried positions and
                     not the general employee population because the higher salaried
                     employees have a greater impact on the management of the
                     Authority and the use of its limited funds, and most were key
                     administrative staff. The review of the employees selected
                     clearly showed that the Authority routinely hired candidates with
                     questionable qualifications to carry out key responsibilities. Our
                     review showed any corrective actions the Authority may have
                     taken since the beginning of the recovery period were not
                     working effectively.

                     Although the Authority claimed that salaries in excess of
                     $61,999 does not represent a highly-compensated person in
                     San Francisco, it is well above the $50,700 average annual
                     salary for Authority employees, particularly if a person is not
                     fully qualified. The recommendation to monitor the Authority’s
                     employment practices is not intended to remove or restrict the
                     Authority’s hiring authority, but is intended to eliminate
                     favoritism, ensure that the best qualified persons are hired, and


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       ensure conformance with Office of Management and Budget
       Circular A-87 and sound management practices.

       Although the Authority appeared to be basing the classifications
       of most of its employees on the basis used at the City and
       County, it did not always hire employees who met the minimum
       qualifications for those positions. For example, when the
       Authority hired the construction project manager (who later
       filled the intergovernmental affairs specialist position), it used the
       City and County classification for a civilian engineer which
       required a bachelor’s degree. He had not have the required
       degree. We further believe that the Authority’s employment
       practices were not prudent as it did not always announce jobs
       to obtain an adequate pool of applicants and, when it did
       announce the openings, did not give adequate consideration to
       all those applying.

       We also disagree with the Authority’s claim that HUD’s
       reimbursement of the loaned employee’s expenses means that
       these expenses are appropriate and adequately supported as it
       was not evident that HUD performed a detailed analysis of
       these expenditures. Concerning the executive director’s
       employment agreement, we agree that the board had the power
       to legally bind the Authority to a contract, but only long as
       contract payments from federal funds conform with HUD and
       other federal requirements. However, as detailed in the body of
       the finding, payments were made in excess of the terms and
       conditions of the contract and were not always in conformance
       with the Authority’s own policies.

       In its response to the recommendation regarding the inter-
       governmental affairs specialist, the Authority stated that this
       person did not have a contract with and was not paid by
       Cuyahoga. However, this is irrelevant as the Authority paid for
       work that this person performed for Cuyahoga We disagree
       that these payments were a time keeping error since the
       misreporting of attendance was repeated over an extended
       period of time.

       The final recommendation was modified to cite the applicable
       federal requirements pertaining to relocation cost
       reimbursements. Since the board has not yet approved changes


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                   to the Authority’s personnel policies, the Authority will have an
                   opportunity to ensure conformance with the cited requirements.




 Recommendations   We recommend the Assistant Secretary for Public and Indian
                   Housing:

                   2A.      Direct the Authority to stop deviating from sound
                            personnel practices and its written policies and
                            procedures, and requires the Authority to submit a plan
                            to HUD on how this will be accomplished. The plan
                            should, at a minimum, include improved controls and
                            board of commissioners oversight.

                   2B.      Closely monitor the Authority’s employment and
                            personnel practices until there is confidence that the use
                            of sound methods are in effect and will continue, and
                            requires the Authority to submit for HUD’s review the
                            documentation supporting the selection process and the
                            basis for compensation for key and highly compensated
                            (over $61,999 annual salary) positions before a job is
                            offered to a selected applicant.

                   2C.      Have an independent, HUD-approved expert in
                            personnel classification and compensation review the
                            qualifications and salaries of the questioned personnel.
                            Require the Authority to take appropriate action on
                            employees not meeting minimum qualifications and
                            adjust salary rates, responsibilities, and status.

                   2D.      As a result of recommendation 2C, require the
                            Authority to reimburse its federal programs for all
                            excessive salaries. In addition, require it to similarly
                            return all other ineligible, unreasonable, and unnecessary
                            compensation also identified in this finding. (See
                            unnecessary/unreasonable costs identified in Appendix
                            A of this report for Finding 2.)

                   2E.      Require the Authority to obtain documentation in
                            support of the reasonableness of amounts billed for the
                            loaned employee. Have an independent, HUD-


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                approved expert in personnel classification and
                compensation to evaluate compensation paid, and
                require the Authority to return to its federal program
                any amount considered unreasonable or unsupported.

       2F.      Require the Authority to obtain a refund from Cuyahoga
                for costs associated with the loaned employee when he
                was performing at Cuyahoga.

       2G.      Require the Authority to stop paying the executive
                director in advance, and provide evidence that any tax
                liability is paid.

       2H.      Require the Authority to obtain reimbursement for the
                former intergovernmental affairs specialist who was
                compensated while not working on Authority business.

       2I.      Initiate administrative sanctions against the former
                intergovernmental affairs employee who submitted time
                sheets to the Authority for time he was not working on
                Authority business.

       2J.      Require the Authority to implement a written policy
                addressing relocation expenses that complies with
                federal requirements, including the Federal Acquisition
                Regulation, Office of Management and Budget Circular
                A-87,       and      5      USC       chapter       57.




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                                                                                                  Finding 3


                   The Authority Is Using an Invalid
                        Section 8 Waiting List
The contractor chosen to create the Authority’s waiting list used to select Section 8 program
beneficiaries did not perform adequately. The list contained duplicate names, names did not appear to
be chosen randomly, and federal and local ranking preferences were not applied correctly. As a result,
the Authority is using an invalid list that gives certain individuals unfair and unintended advantages to the
detriment of others. This occurred because the Authority did not adequately monitor the contractor’s
performance. Further, the Authority’s improper procurement practices resulted in selecting a contractor
with limited experience.




                                         Under the Section 8 program, recipients must normally be
 HUD Required A New                      selected from a waiting list in accordance with an acceptable
 Waiting List                            plan. Thus, in January 1997 HUD instructed the Authority’s
                                         acting executive director to plan for the opening of a new
                                         waiting list to provide an applicant pool sufficient to effectively
                                         utilize available funds. When HUD returned the Authority to
                                         local control later that year, HUD further instructed the
                                         Authority to contract out the development of the new list.

                                         On February 8, 1998 the Authority entered into a $149,200
                                         contract with the Wil Davis Management Company of
                                         Cleveland, Ohio to create the waiting list. The contract called
                                         for setting up a telephone-based application process and using a
                                         computer program to randomly select applicants for the waiting
                                         list. The contractor’s responsibilities included identifying and
                                         deleting any duplicate applicants from the waiting list prior to
                                         delivery. The contractor was also required to provide all
                                         applicant data obtained during the application process.

                                         The contractor provided a waiting list which the Authority
                                         began using in May 1998. However, the contractor had not
                                         delivered the database containing all the applicants from which
                                         the waiting list was created. Subsequent to our pointing this
                                         out, the Authority withheld final payment to the contractor.
                                         Thus, only $121,300 was paid.

                                         In August 1999, after nine months and numerous attempts to
                                         obtain the contractor’s cooperation, the contractor provided the

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                               database and a written narrative describing the waiting list
                               selection process.

                               According to the contractor’s narrative, (1) 38,417 applicants
The Waiting List Was           were entered into the applicant database, (2) the database was
Created From A Faulty          scanned several times for duplicate social security numbers, and
Database                       (3) all duplicates were purged, leaving over 29,000 applicants
                               on the “purified” database from which the waiting list was
                               created. However, we found that the supposedly cleaned-up
                               database contained the records of 1768 applicants whose
                               social security numbers appeared more than once and as many
                               as 11 times in the database. As a result, those individuals listed
                               more than once have a greater advantage in being selected for
                               the waiting list.

  Individuals Did Not Appear   We searched the waiting list for duplicate social security
  To Be Selected Randomly      numbers and found that it contained the names of 195
                               applicants holding more than one position on the list. Further,
                               the selection of applicants for the waiting list did not appear to
                               be done randomly because 26 of the applicants appearing more
                               than once on the list were assigned sequential rankings, that is,
                               the duplication of their names on the list appeared immediately
                               after the first appearance.

                               The Authority’s administrative plan for the Section 8 program
 Federal and Local             provides for federal preferences as well as two local
 Preferences Were To Be        preferences: (1) residents of and persons working in San
 Assigned                      Francisco and (2) veterans of the U.S. armed services. The
                               plan provides for the following priority categories for the
                               ranking of Section 8 applicants:




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                              Priority Level            Category
                                  1            Federal Preference, Resident, Veteran
                                  2            Federal Preference, Resident, Non-Veteran
                                  3            Federal Preference, Non-Resident, Veteran
                                  4            Federal Preference, Non-Resident, Non-Veteran
                                  5            No Federal Preference, Resident, Veteran
                                  6            No Federal Preference, Resident, Non-Veteran
                                  7            No Federal Preference, Non-Resident, Veteran
                                  8            No Federal Preference, Non-Resident, Non-Veteran


                              According to the contractor’s narrative describing the creation
The Contractor Did Not        of the waiting list, the list ranked names using the above
Properly Assign Preferences   guidelines. However, we found that due to the contractor’s
                              data entry and programming errors, persons selected for the
                              waiting list were not correctly ranked in accordance with above
                              preferences. This resulted in higher-category individuals being
                              placed in lower positions on the waiting list than lower
                              preference category individuals. Some of the inconsistencies in
                              assigning preference categories included:

                              •   46 persons with at least one federal preference who were
                                  San Francisco residents and veterans and were assigned to
                                  priority category 2, even though they qualified for priority
                                  category 1.
                              •   718 persons who had addresses in San Francisco and were
                                  paying greater than 50 percent of their incomes for rent (a
                                  federal preference) and were assigned to priority categories
                                  3, 4, 5, and 6 even though they qualified for priority
                                  category 2.
                              •   182 applicants assigned to the priority 2 category even
                                  though they did not have either of the local preferences
                                  required to be listed in category 2.
                              •   673 persons on the waiting list who were paying over 50
                                  percent of total income for rent that were not identified as
                                  having the federal preference for this.
                              •   317 persons on the waiting list who had San Francisco
                                  addresses that were not identified in the database as having
                                  a residence preference.

                              The Authority has been setting up eligibility appointments in the
                              order that applicants appear on the waiting list without making
                              any adjustments for the incorrect assignment of priority
                              categories by the contractor. Thus, Section 8 assistance is



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                               being offered to persons having a lower preference ranking than
                               some applicants with higher rankings.

                               We attribute the above problems to the Authority’s inadequate
   Inadequate Monitoring And   monitoring of a contractor that had limited experience. The
   Limited Experience Caused   Authority did not evaluate the final product (the waiting list) nor
   The Problems                ensure that the contractor provided all deliverables. Also, the
                               Authority used a solicitation process that resulted in only one
                               firm responding, and that firm’s previous experience was limited
                               to waiting list work done at the Cuyahoga Metropolitan
                               Housing Authority in Cleveland, Ohio. Finding 1 in this audit
                               report discusses systemic weaknesses in the Authority’s
                               contracting activities.


 Auditee Comments              While acknowledging some difficulties with the contractor, the
                               Authority believes that the duplication and preference problems
                               were not significant. This conclusion was based on an analysis
                               done by a consultant from the Cleveland office of Deloitte &
                               Touche to scrutinize our analysis. Thus the Authority believes
                               that the contractor substantially performed the contract
                               requirements, and it disagrees with the finding’s
                               recommendations.

                               The Authority said that a scan on social security number alone
                               may not result in an accurate indication of potential duplicates
                               and asked Deloitte to test the finding based on a match of social
                               security number, first name, and last name. The Deloitte
                               consultant concluded that there were only 798 true duplications
                               in the database when last and first names are matched with
                               those records with duplicate social security numbers. The
                               consultant also concluded that the effects of the duplicate
                               applicants was immaterial as the “true” duplicate applicants had
                               less than a 2 percent increased probability of being selected
                               over those applicants appearing only once in the database. The
                               Authority also stated that the Wil Davis Management Company
                               had notified them that there were 143 duplicate names on the
                               original waiting list and that these names were purged leaving a
                               waiting list consisting of 9,857 records. Deloitte tested the
                               9,857 records in response to the audit finding and concluded
                               that there were only 66 applicants duplicated on the final waiting
                               list.


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                    The Authority also used Deloitte to analyze the preference
                    issue. Deloitte concluded that our figures were not accurate if
                    the analysis is conducted on the 9857-name list and stated that
                    it found only 206 individuals who were not given the proper
                    preference ranking due to errors made by Wil Davis. The
                    Authority advised that any of these individuals that had not been
                    housed were called in for eligibility appointments. Further, it
                    said it verifies preferences when an applicant is called in for an
                    eligibility appointment and any applicant that cannot verify the
                    preferences claimed is moved to the appropriate position on the
                    waiting list. The Authority contends that the balance of the
                    preference ranking errors reported by OIG was overstated
                    because the Wil Davis Company was only instructed to enter
                    preferences into the database that were self-declared by the
                    applicants and that the contractor was not required to analyze
                    the data and assign the preferences. The preferences do not
                    occur until the applicant is called in from the waiting list and the
                    amount of adjustments necessary have not been material enough
                    to support our conclusion.

                    The Authority contended that it took all reasonable and prudent
                    steps to ensure the propriety of the waiting list. The Authority
                    also believed that the vendor had sufficient experience.




OIG Evaluation Of   The Deloitte consultant hired to analyze this finding was the
Auditee Comments    same consultant who managed the contracting for the waiting list
                    and who recommended the authority contract with the Wil
                    Davis Management Company. (See Finding 1.)

                    Deloitte’s methodology of using social security numbers along
                    with first and last names to identify duplicates in the Wil Davis
                    applicant database found fewer duplications because it did not
                    take into account spelling or typing errors by the Wil Davis staff
                    who took down and input applicant information into the
                    database. Deloitte’s search for duplicates would also fail to
                    account for deliberate first or last name changes made by the
                    applicants to escape detection when applying more than once in
                    an attempt to increase their chances of selection for the waiting
                    list.



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                   The following are examples of applicants we identified as
                   duplicates but claimed by Deloitte and the Authority as not
                   being duplicate applicants:
                   • Applicant numbers 012308 and 014546 - Both had same
                       social security number and last name, but two letters of the
                       first name were transposed on the applicant intake form.
                   • Applicant numbers 014462 and 28810 - Both had same
                       social security number and first name, but the last name was
                       mistyped into the data base and was off by one letter.
                   • Applicant numbers 009122 and 009225 - Both had the
                       same social security numbers and last name, but two letters
                       in the first name were transposed when typed into the
                       database.

                   In our search for duplicate persons selected for the waiting list,
                   we used the original 10,000-name list Wil Davis gave to the
                   Authority. It used this 10,000-name list for calling in applicants
                   for their Section 8 eligibility interviews beginning in May 1998.
                   For its analysis, Deloitte used a revised 9857-name list that Wil
                   Davis delivered to the Authority in August 1999, 16 months
                   subsequent to when the authority began using the original list.
                   The new list was purged of 143 duplicate names identified by
                   Wil Davis. Our analysis of the 143 names that were removed
                   from the new list showed the Authority had already called in
                   most of these people for eligibility interviews, and these people
                   continued to hold other positions on the revised list even though
                   they had already been called in.

                   Verification of the preferences is not the issue. The issue is that
                   names are ordered on the waiting list on the basis of the
                   preferences, so if the claimed preferences are not properly
                   indicated, individuals are not properly ranked. The contractor
                   obviously did not consider information affecting the preferences.
                   For instance, when individuals gave a San Francisco home
                   address, the contractor often did not give a preference for a
                   San Francisco residence.         Similarly, high housing cost
                   preference was often not given even though the housing cost
                   and income information collected from the individual indicated
                   that they would qualify. The contractor could have readily
                   programmed the database to avoid errors for those two
                   preferences. Still, the apparent carelessness of the contractor
                   indicates that errors in other preferences (such as veterans’


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                  where other data were not available to indicate whether the
                  preferences applied) also occurred.

                  We disagree that the Authority took all reasonable and prudent
                  steps since even a cursory review of the waiting list would have
                  identified problems, and examination of intake forms would
                  have shown inconsistencies of indicated preferences verses
                  other information on the form.

                  We concluded the vendor did not have adequate experience,
                  since the contractor had only one similar previous contract and
                  demonstrated general ineptitude on the subject contract. As
                  described in Finding 1, the limited opportunity given to other
                  potential contractors reduced the possibility of selecting a more
                  competent contractor.




Recommendations   We recommend the Assistant Secretary for Public and Indian
                  Housing require the Authority to:

                  3A.      Discontinue use of the current Section 8 waiting list.

                  3B.      Develop and implement a proper Section 8 waiting list.

                  3C.      Repay from non-federal funds the cost of the contract
                           issued to develop the waiting list.

                  3D.      Privatize its Section 8 activities if it does not implement
                           recommendations 3A and 3B.




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                      Section 8 Overpayments
                     Were Not Properly Managed
The Authority needs to improve its management of Section 8 overpayments. Specifically, it should do
proper research in determining receivable balances, take more aggressive recovery actions, and abstain
from inappropriately retaining part of the recoveries. Further, it should record the receivables in its
general ledger. These actions had not been taken because of omissions in policies and procedures and
misinterpretation of HUD requirements. As a result, an accurate picture of the extent of receivables was
not available, the extent of recoveries was low, monies for Section 8 housing was inappropriately
reduced by at least $128,553 from the improper withholding of recoveries, and complete and accurate
data was not available in the financial statements to monitor the Authority.



                                       The purpose of the Section 8 program is to provide housing for
 Landlords Are To Return               low-income families by subsidizing their rents through direct
 Any Overpayments                      payments to private landlords. To receive the payments, an
                                       owner enters into a lease with the tenant which requires both
                                       parties to comply with program requirements. The lease
                                       requires both the tenant and landlord to notify the Authority of
                                       any termination of tenancy.

                                       The owner also enters into agreement with the Authority,
                                       known as a Housing Assistance Payments contract. The
                                       contract specifies the conditions to be met in order to receive
                                       the payments. These payments may only be paid to the owner
                                       for the period of the lease and while the family is residing in the
                                       unit.

                                       An owner is in breach of the contract if it violates any of its
                                       conditions, including accepting housing assistance payments on
                                       a unit no longer occupied by a Section 8 tenant. Title 24 CFR
                                       subpart 982.453 states that a housing authority’s rights and
                                       remedies against the owner under the Housing Assistance
                                       Payments contract includes recovery of overpayments. Thus, a
                                       housing authority has the right to a refund, as well as the
                                       responsibility to take all appropriate action to recover the
                                       overpayments.

                                       In September 1997 HUD returned control of the Authority to
                                       its board of commissioners and issued a report containing

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                           specific actions (termed benchmarks) to be taken by the
                           Authority to improve its Section 8 program. The benchmarks
                           included the identification of Section 8 receivables from
                           property owners and the establishment of policies and
                           procedures for collection of owner receivables.

                           To determine the cause of the housing assistance overpayments
 Tests Were Made Of        and test the effectiveness of the leased housing office’s
 Individual Receivable     collection efforts, we obtained the January 5, 1999 listing of all
 Balances                  owner receivables from the Authority’s Creative Computer
                           Solutions system. From the list we selected a sample of 25
                           owners with receivable balances in excess of $1,000. The
                           sample consisted of all 14 owners with receivable balances in
                           excess of $3,500 and 11 of the 89 owners with balances
                           between $1,000 and $3,500. The receivables tested totaled
                           $123,027 (23 percent) of the $524,860 of total owner
                           receivables shown in the system.

                           Our tests showed that only $41,509 (33 percent) of the
 The Majority Of           $123,027 in receivables tested were verifiable overpayments.
 Receivables Were          The tested receivables were overstated by $81,518, primarily
 Erroneous                 due to data entry errors and because the Creative Computer
                           Solutions listing did not account for checks that had been
                           voided or returned. Also included in the overstated balance
                           was $18,970 of recorded overpayments from years 1993 and
                           1994 for which the Authority had insufficient supporting
                           documentation.

                           The overstatement occurred because the Authority’s written
                           policy to research the individual receivables had not been
                           followed. However, we noted the leased housing office had
                           begun to review the validity of the receivables in the Creative
                           Computer Solutions system during the audit.

                           There were three reasons why the 13 valid receivables in our
 There Were Three Causes   sample existed. Six overpayments totaling $24,349 were due
 For The Overpayments      to failure of landlords or tenants to timely inform the Authority
                           of Section 8 lease cancellations. Another six totaling $14,820
                           existed because leased housing office staff failed to timely enter
                           the cancellations into the system. This problem appears to have
                           been corrected. One $2,340 overpayment occurred due to a



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                           human error resulting in duplicate payments for three months’
                           subsidy.

                           As of October 1999, the Authority had only recovered $8,450
The Rate Of Recovery Was   (21 percent) of the net valid receivables ($40,981) in the audit
Low                        sample, leaving an unrecovered balance of $32,531.

                           We believe the low rate of recovery was due to the Authority
                           not taking aggressive action. As of December 1999, efforts to
                           recover the overpayments had been limited to sending landlords
                           payment request letters in December 1998 and follow-up letters
                           in February 1999. The Authority had not contacted owners
                           directly who had not responded to the letters, referred
                           uncollected balances to a collection agency, or initiated legal
                           procedures against the owners to recover the overpayments.
                           We phoned one landlord who had received 13 months’ pay-
                           ments after lease termination to confirm the balance.
                           Immediately after this contact, she began negotiations with the
                           Authority.

                           The Authority’s written policies and procedures do not call for
                           aggressive recovery actions. Its administrative plan for the
                           Section 8 program does not have any provisions for the
                           collections of housing assistance overpayments other than
                           sending invoices to the landlords for the overpayment amounts.
                           The Authority’s March 3, 1997 interim procedures on amounts
                           due from landlords, state that the clerk is to enter the
                           overpayment information into the system, generate an invoice
                           for the overpayment, and mail the invoice to the landlord. The
                           procedures contain no provisions for further action if the
                           landlord fails to pay the invoice.

                           When the Authority receives reimbursement of overpayments
The Authority              from the Section 8 owners, it credits the housing assistance
Inappropriately Retained   payment accounts in the general ledger for the full
Recoveries                 reimbursement. Similarly, collections of Section 8 tenant
                           accounts receivables are credited to various housing assistance
                           payment expense accounts. Thus, the owner overpayments and
                           tenant reimbursements are initially returned to accounts from
                           which the payments were originally made. Nevertheless,
                           $128,553, (50 percent) of all the recoveries collected from
                           October 1998 through August 1999 were inappropriately


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Finding 4


                           transferred from the housing assistance payment accounts into
                           the Authority’s fraud recovery account.

                           According to Title 24 CFR subpart 792.102, retention of fraud
                           recoveries applies only in instances where a tenant or owner
                           commits a fraud and the recoveries are obtained through
                           litigation, court-ordered restitution, or an administrative
                           repayment agreement as a result of a grievance procedure
                           pursuant to subpart 882.216 or 887.405. The retention of
                           fraud recovery funds does not apply in cases of calculation
                           errors. Further, subpart 792.204 requires the Authority to
                           maintain all records including the amounts recovered, the nature
                           of the judgment or repayment agreement, and the amount of
                           legal fees and expenses incurred in obtaining the judgment or
                           repayment agreement and recovery.

                           The director of leased housing said it was his decision to retain
                           50 percent of receivables collected upon hearing of HUD’s
                           fraud recovery program. However, the leased housing office
                           produced no documentation that the receivables were
                           generated because of owner or tenant fraud. Further, the
                           Authority was unable to show that it had incurred legal
                           expenses related to the collections of the owner and tenant
                           receivables.

                           An Authority official advised us that a decision had not been
                           made on how the funds in the fraud recovery account will be
                           used. In our opinion, any use other than what was originally
                           intended (that is, to provide rental subsidies to families) would
                           be improper unless the retentions complied with program
                           requirements.

                           The Authority did not include the overpayments in its general
 Overpayments Were Not     ledger. This is contrary to HUD handbook 7420.6, Housing
 Included In The General   Assistance Payments Program Accounting which says public
 Ledger                    housing agencies should maintain complete and accurate books
                           of account and records. The Authority kept a list of the
                           receivables, but since this information was not included in its
                           general ledger, the receivables were also omitted from the
                           financial statements. Thus, HUD and other users of the financial
                           statements do not have a complete accounting of Section 8
                           activities.


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                                                                             Finding 4


                   Authority management said the receivables were not recorded
                   in the general ledger because they viewed the receivables as
                   being owed to HUD and not to the Authority. These funds are
                   owed to HUD in the sense that they reduce program
                   expenditures, making funds available for providing additional
                   Section 8 assistance (or to be returned to HUD if it terminates
                   the Section 8 program at the housing authority). Nevertheless,
                   the Authority is responsible to recover these funds, and to use
                   the funds in accordance with HUD requirements.




Auditee Comments   The Authority asserted that they had already identified that
                   $220,737 (42 percent) of the $526,284 in owner receivables
                   were erroneous. It noted that adjustments were made in the
                   Creative Computer Solutions system for the erroneous amounts
                   but that the incorrect balance continues to show on the
                   summary reports because the only way to remove these
                   balances is by writing them off. The Authority also said, since it
                   took control from the HUD recovery team in September 1997,
                   it has implemented procedures and a tracking system to collect
                   past amounts owed by the section 8 landlords and, in 1999,
                   had collected a total amount of $176,808 from these landlords.
                   The Authority said this represents a collection rate 190 percent
                   greater than prior to 1996.

                   The Authority asked that we drop the recommendation to
                   create and implement a collection policy that describes actions
                   to be taken when written requests for repayment fail.
                   Nevertheless, it said that it will ensure that written policies will
                   reflect the aggressive procedures it currently claims are in use.
                   It added that it will continued to research the receivables and
                   will implement the recommendations to record all valid
                   receivables in the general ledger.

                   Regarding the retention of 50 percent of its recoveries, the
                   Authority said that it believed it was in compliance with the spirit
                   and intent of the CFR regulations and was thus entitled to retain
                   50 percent of funds recovered. Thus, it will continue the
                   practice.




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Finding 4




 OIG Evaluation Of   We acknowledge that the Authority has made progress in the
 Auditee Comments    identification and collection of overpayments to landlords since
                     it resumed control in 1997. However, we believe that the
                     Authority should continue this progress and take all necessary
                     steps, including write off, to remove erroneous receivables from
                     its accounting records and report the corrected receivable
                     balance in the general ledger.

                     Further, the Authority still needs to establish and implement
                     effective policies and procedures to ensure the collection of the
                     overpayments from landlords who are not responsive to letters
                     requesting repayments. We saw no evidence of aggressive
                     collection claimed by the Authority. The collection rate of
                     validated receivables remains low and, in our opinion will not
                     improve until stronger collection methodologies are
                     implemented.

                     The Authority is entitled to retain part of the recoveries only
                     when certain conditions are met as described in the regulations.
                     However, it did not demonstrate that it met those conditions.
                     For instance, it did not demonstrate that the payments collected
                     were generated because of owner or tenant fraud. Also, it had
                     not incurred legal expense in connection with any particular
                     overpayment.




 Recommendations     We recommend the Assistant Secretary for Public and Indian
                     Housing require the Authority to:

                     4A.      Create and implement an effective overpayment
                              collection policy as part of the administrative plan for
                              the Section 8 program. The policy should describe
                              actions to be taken when written requests for
                              repayment fail. These actions should include assessing
                              penalties for late repayment, referring receivables to
                              collection agencies, and referring receivables to the
                              Authority’s legal department to commence legal action.
                              The policy should also conform with HUD’s
                              requirements regarding retention of recoveries from


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                                                               Finding 4


                overpayments that occur due to fraud.

       4B.      Return the $128,553 retention to the Section 8 contract
                accounts along with all amounts improperly retained
                since August 1999.

       4C.      Thoroughly research all Section 8 owner receivables for
                validity and provide a detailed analysis showing the
                research results covering the initial $524,860 receivable
                balance.

       4D.      Record all validated receivables in the general ledger in
                accordance      with    HUD        Handbook       7420.6




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Management Controls
In planning and performing the audit, we considered the management control systems used by the San
Francisco Housing Authority to determine the audit procedures and not to provide assurance on
management control. Management control is the process effected by an entity’s board, management,
and other personnel, designed to provide reasonable assurance for achieving objectives for program
operations, validity and reliability of data, compliance with applicable laws and regulations, and
safeguarding resources.




                                     The following control systems were relevant to the audit
 Relevant Management                 objective:
 Controls Were Considered
                                     •   Public Housing Management Assessment Program
                                         reporting
                                     •   Performance Funding System reporting
                                     •   Contracting
                                     •   Administrative personnel hiring and compensation
                                     •   Section 8 receivables

                                     We obtained an understanding of the control structure for the
                                     above systems and determined the risk exposure to design audit
                                     procedures. We concluded that the audit would be performed
                                     more efficiently by doing substantive tests without reliance on
                                     management control. Therefore, we did not necessarily make a
                                     complete assessment of control design or determine whether all
                                     policies and procedures had been placed in operation.

                                     A significant weakness exists if management control does not
 Significant Weaknesses              give reasonable assurance that control objectives are met. We
 Were Noted                          observed significant weaknesses with contracting (Findings 1
                                     and 3), administrative personnel (Finding 2), and Section 8
                                     receivables (Finding 4).




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Follow Up on Prior Audit Reports
The HUD Office of Inspector General previously audited the Authority’s Drug Elimination Program for
the period of July 31, 1995 through December 31 1997. The audit report (number 98-SF-201-1003)
was issued July 22, 1998.




                                      In the area of contracting, the audit raised similar issues to those
 The Report Contained                 problems identified in the current report. Specifically:
 Similar Issues
                                      •     Contractor billings were not adequately reviewed to
                                            determine their propriety.
                                      •     Documentation of the procurement process was often
                                            unavailable.
                                      •     Written contracts were sometimes absent.
                                      •     Proper cost analyses were not performed.
                                      •     Contract advances were made without proper accounting.

                                      The audit’s recommendations that pertain to the above issues
 Prior Recommendations
                                      are still open. These include recommendations:
 Remain Open
                                      1D.      Provide proper training and written instructions to
                                               assure contract payments are correct and proper.
                                      4A.      Complete implementation of a centralized contracting
                                               unit.
                                      4B.      Revise written procurement procedures.
                                      4C.      Discontinue use of contract terms that provide advances
                                               to entities that are not required to be accounted for.




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                                                                                                  Appendix A


Schedule of Questioned Costs
                     ISSUE                          INELIGIBLE        UNNECESSARY/            UNSUPPORTED
                                                        1/           UNREASONABLE 2/               3/
     Finding 1 – Contracting
Second Creative Consulting Management                   $10,800
Group contract, improper charges
Third Creative Consulting Management                     15,000                    $1,887
Group contract, improper charges
First Deloitte contract, questionable utility,            1,918                                      $247,371
and improper and unsupported charges
Wil Davis contract (see Finding 3 on next
page of this chart)
First McFarlin contract, excess charges and              27,750                                         68,290
unsupported work
Second McFarlin contract, excess charges                 61,600                       1,002            108,827
and unsupported work
First Zirl Smith contract, unsupported services                                                         39,750
Second Zirl Smith contract, duplicate                    26,578                                         40,950
payments and unsupported services
Amendment to Second Zirl Smith contract,                                                               150,000
made over HUD’s objection
                Total Finding 1                        $143,646                    $2,889            $655,188
     Finding 2 – Administrative Personnel
Questionable employee qualifications                                                                   480,261
General manager of family sweep’s excess                  5,230
relocation compensation
                                                                                  1
Director of leased housing paid at too high a                                      29,998
step
Director of finance paid at too high a step                                           8,324
Inter-governmental affairs specialist paid while          7,324
not at work
Executive assistant’s questionable salary level                                                         84,745
Executive assistant’s compensation while tele-                                     31,312
commuting
Executive assistant’s excess relocation                  17,213
compensation
                                            Continued on Next Page

1
  This amount is also included two rows above in the $480,261 unsupported amount. The total unsupported costs
for Finding 2 of $622,523 on the next page does not include the $29,998.

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Appendix A


              ISSUE -CONTINUED                       INELIGIBLE       UNREASONABLE/           UNSUPPORTED
                                                                       UNNECESSARY
Executive director’s compensation in excess                                  $60,273
of contract
Executive director’s excess relocation                     $9,359
compensation
Unsupported reimbursement of compensation                                                              $43,804
on behalf of loaned Cuyahoga employee
                                                                                                       2
Portion of unsupported reimbursement of                                                                 43,711
$43,804 reimbursed by HUD
Excess per diem due to duplicate meal                         856
reimbursement
Costs related to loaned employee performing                 3,553
duties for Cuyahoga
               Total Finding 2                            $43,535               $129,907             $622,523
     Finding 3 – Flawed Waiting List                                            $121,300
Inept contract performance
               Total Finding 3                                 $0               $121,300                     $0
     Finding 4 - Section 8 Overpayments                  $128,553
Improper retention of refunds
               Total Finding 4                           $128,553                       $0                   $0

1/      Ineligible amounts are those that are questioned because of an alleged violation of a provision of
        a law, regulation, contract, grant, cooperative agreement, or other agreement or document
        governing the use of funds, or are otherwise prohibited.

2/      Unnecessary amounts are those which are not generally recognized as ordinary, prudent,
        relevant, or necessary within established practices. Unreasonable amounts exceed those that
        would be incurred by the ordinarily prudent person in the conduct of a competitive business.
        Costs must be necessary and reasonable to be eligible under federal cost principles.

3/      Unsupported amounts are those whose eligibility or reasonableness cannot be clearly
        determined during the audit since they were not supported by adequate documentation or due
        to other circumstances. Under federal cost principles, a cost must be adequately supported to
        be eligible.




2
  To the extent this amount is sustained, funds should be returned to HUD since HUD reimbursed the Authority for
these costs. For other amounts in the schedule, if sustained, the Authority should reimburse its federal program
accounts with non-federal funds.

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                                                                                                                                            Appendix B


Auditee Comments
[Due to the large volume of the Authority’s written responses to the draft report, only its
summaries are included here.]


The San Francisco Housing Authority (SFHA) has prepared and submitted detailed responses to the four
draft findings delivered to the SFHA for review and comment. These draft findings and the response of
the SFHA are summarized as follows:

1. Draft Finding 1 – The SFHA Disregarded Federal Requirements When Contracting for Consulting
   Services

    SFHA Response:

•   The draft findings first fails to acknowledge that some of these contracts were awarded
    under exigent conditions and further fails to include a cost/benefit analysis of the
    contributions these contractors have made to the SFHA and its recovery effort.

    •   The HUD OIG has, in the past, conducted a cost benefit analysis to determine the appropriateness
        of issuing findings. (See attached HUD OIG report dated August 1, 1997 relative to an audit of a
        $40 million sole-source contract to McCormack Baron, marked Exhibit A)
    •   The total monetary contributions of only 4 of the 6 contractors at issue exceeds $29 million as
        follows:
        These contractors conservatively contributed over $29 MM of monetary benefits to the SFHA
                                                                             SFHA Costs     Net Savings to
            Contractor      Cost to SFHA             Deliverable               Benefits       the SFHA
        Deloitte & Touche          $     528,082                                                    $     3,190,750      $     2,662,668
                                                     Portability payments                           $     1,026,750
                                                     Accounts Receivables                           $     1,300,000
                                                     Annual reoccuring benefits. Identified
                                                     1,200-1,500 additional voucher
                                                     cerrtificates which were not being
                                                     used. This action caused the wait
                                                     list to be re-opened.                          $       864,000
        Dr. Emma McFarlin          $     453,689                                                    $     2,500,000      $     2,046,311
                                                     Established in-house legal
                                                     department resulted in a savings for
                                                     the SFHA. At the time of Dr.
                                                     McFarlin's arrival, HUD Recovery
                                                     Team had legal costs of apx. $2MM.             $        800,000
                                                     Annual reoccuring benefits.
                                                     Retention of Section 8 Program
                                                     management. Upon Dr. McFarlin's
                                                     arrival, the HUD Recovery Team was
                                                     poised to outsource Section 8, which
                                                     would have resulted in a significant
                                                     loss of administrative fees.                   $     1,700,000
        Zirl Smith                 $     700,858                                                    $    25,000,000      $   24,299,142
                                                     Instrumental part of team of financial
                                                     advisors who leveraging $100MM.
                                                     Conservative evaluation of ZSA
                                                     contrbution is 25%.                            $    25,000,000
        CCMG                       $     449,579                                                    $     1,026,552      $       576,973
                                                     Annual reoccuring benefits. Reduced
                                                     insurance coverage premiums due to
                                                     improved maintenance conditions at
                                                     the SFHA                                       $        300,000
                                                     Provide day to day supervision for the
                                                     Customer Service organization from
                                                     9/98 - 9/98 (No SFHA staff member
                                                     was in place during this time                  $        133,600
                                                     Due to implementation of improved
                                                     rent collection procedures, the SFHA
                                                     collected additional rents of $294,492
                                                     from FY97 to FY98 and $298,460
                                                     from FY98 to FY99                              $        592,952
        Totals:                    $ 2,132,208                                                      $ 31,717,302         $ 29,585,094
        NOTE: These amounts do not include the qualitative benefits of training, analysis, developed processes and day to day activities


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Auditee Comments



•   The HUD IG fails to understand or acknowledge exigent conditions existing during this
    recovery effort or valid approvals received for contracts sole-sourced under exigent
    circumstances.

    •   All sole-source contract awards were made in response to unforeseen and unexpected
        occurrences or conditions; perplexing contingencies or complication of circumstances;
        exigent circumstances which had historically gone unaddressed; or sudden or unexpected
        occasions for action to protect the health safety and welfare of the residents of the SFHA and in
        accordance with federal regulations governing such situations.
    •   All sole–source awards were duly authorized by Secretary Cisneros Designee Kevin Marchman,
        acting on behalf of the SFHA Board, or by the SFHA board of Commissioners. (See for example,
        correspondence from former Secretary Cisneros Designee Marchman dated March 10, 2000
        clarifying approval of sole-source contract to Deloitte & Touche, marked Exhibit B)

•   The draft findings confuse requests for approval of HUD to fund a Zirl Smith & Associates
    contract amendment with a request for HUD approval of the procurement process.

    •   On December 31, 1998, the SFHA requested HUD approval to charge a contract amendment for
        Zirl Smith & Associates to HOPE VI funding.
    •   HUD indicated that the SFHA would be required to competitively bid the additional work in the
        event the costs were charged to HOPE VI. (See letter dated February 19, 1999 from Eleanor
        Bacon, Deputy Assistant Secretary, Office of Public Housing Investments, marked Exhibit C)
    •   The contract amendment costs were not charged to HOPE VI funding and as such, HUD
        approval was not required.
    •   The SFHA Board of Commissioners had the authority and duly authorized the contract
        amendment.

•   The draft findings are not representative of SFHA contracting and procurement activities as
    they are based on an extremely small percentage of SFHA contracting and procurement
    activities.

    •   In the past 3 years, the SFHA has procured some $139 million in goods and services for the
        agency.
    •   This draft report concerns itself with $2.1 million or only 1.6% of all SFHA procurement
        activity over the past 3 years.

•   The draft findings fail to acknowledge corrective actions taken by the SFHA since the
    beginning of the recovery effort.

    •   Previous audits of SFHA contracting and procurement indicated that as late as August 1, 1997,
        the SFHA was using open and competitive selection processes. Audit Memorandum 97-SF-201-
        1803 states: “ Also, the housing authority’s present selection process appears to be open and
        competitive”. (emphasis added) (See attached HUD OIG Audit Memorandum 97-SF-201-1803
        dated August 1, 1997 relative to an audit of a $40 million sole-source contract to McCormack
        Baron, marked Exhibit A )


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                                                                                        Auditee Comments

    •   Much of the significant criticisms contained in the February 24, 2000 draft report involves
        contracts procured prior to August 1, 1997.

    •   The HUD Troubled Agency Recovery Center (TARC) reviewed the Contracting/Procurement
        Division and on December 17, 1998 recommended that the SFHA Board raise its approval limit to
        $100,000 and that HUD remove zero-
        threshold limits. (See attached TARC Letter dated December 17, 1998, marked Exhibit D)
    •   On May 5, 1997, the Executive Director consolidated contracting and procurement activities by
        establishing the Contracting/Procurement Division.
    •   During 1997, the Executive Director requested HUD assistance in the centralization of
        contracting/procurement.
    •   HUD provided assistance from its staff in Kansas and elsewhere to provide the SFHA with
        guidance and assistance in the centralization process
    •   In June of 1999, the SFHA revised its solicitations to include required contract provisions for
        consultant (non-construction) contracts.
    •   In January of 2000, draft revised contracting/procurement policies and procedures were circulated
        and are being reviewed by the TARC and the Board for adoption.

2. Draft Finding 2 – Administrative Employees Were Hired and Compensated Without Following Sound
   Management Practices.

SFHA Response:

•   The draft findings fail to acknowledge that the SFHA followed its policies/practices in effect
    at the time and to include a cost/benefit analysis of the contributions as well as the
    achievements the employees at issue in this finding have made relative to the SFHA and its
    recovery effort.

    •   In all instances cited in this report, the SFHA acted consistently with its policies, practices and
        sound business judgment.
    •   While the IG may not agree with the results of SFHA classification and salary administration, all
        classification actions and salary benchmarks were set and well documented in accordance with
        policy and sound classification principles.
    •   The employees at issue under this draft finding have contributed to the recovery of this agency as
        follows:
    •   Addition of $33.4 million in funding to support and further the recovery effort as well as adding
        $23 million in HOPE VI funding for Valencia Gardens.
    •   Removal of the SFHA from the HUD list of financially and operationally “Troubled Housing
        Authorities” with an increase in PHMAP scores from 50.71% to 83.92% for 1998 and a score of
        95% for Management Operations for 1999.
    •   This has been accomplished in a little over 2 years.
    •   The Section 8 Department receives consistent reviews from HUD indicating significant
        improvements in program delivery.
    •   The Section 8 Department has been nominated for "Best Practices” awards by HUD.
    •   Our HOPE VI developments are moving expeditiously towards completion with Hayes Valley
        North and South having been completed and occupied.


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Auditee Comments

    •   The SFHA will continue its efforts to achieve full recovery including strengthening and improving
        its policies, procedures and internal controls.
    •   The SFHA and the recovery team has performed exceptionally in moving this agency towards full
        recovery.

•   The draft findings do not acknowledge the valid exercise of management discretion in the
    hiring of temporary/term employees to continue the recovery of the SFHA.

    •   On October 10, 1996, Gary Albright, District Inspector General for Audit, in a Memorandum to
        then Secretary Cisneros Designee, Kevin Marchman suggested that the recovery effort would
        continue at least 18 more months and stated that:

                 “We found that while the environment of public housing residents has not improved
                 significantly, the recovery team has made some substantive progress such as beginning a
                 preventive maintenance program and enforcing leases more effectively. Much of the
                 recovery plan has yet to be effected, including the recruitment of key managers that is
                 expected to occur this fall.” (emphasis added) (See attached Evaluation of the HUD
                 Recovery Team’s Efforts at the San Francisco Housing Authority, marked Exhibit E ).

    •   4 of the 8 employees discussed in this finding were hired as temporary/term employees for the
        purpose of aiding and assisting the continued recovery of this agency as part of the Executive
        Director’s “recovery team”.
    •   The recruitment of members of the recovery team is not an issue of “favoritism”, but rather an
        effort to bring the skills and experience to this recovery necessary to maintain and enhance the
        momentum of this recovery effort as well as build staff capacity.

•   The draft findings are not representative of SFHA employment activities as they are based
    on an extremely small percentage of all the SFHA employee population.

    •   The SFHA currently employs approximately 630 employees.
    •   This draft report concerns itself with 8 employees or barely 1% of the employment
        population.

•   The draft findings fail to acknowledge corrective actions taken by the SFHA since the
    beginning of the recovery effort.

    •   SFHA Personnel Policies have not been revised since 1987.
    •   Revised Personnel Policies and Procedures addressing the issues raised in this draft finding have
        been drafted and are currently being reviewed by the Personnel Committee of the SFHA Board
        of Commissioners for recommendation on adoption.
    •   A copy of the revised Personnel Policies and Procedures were given to the HUD OIG on
        September 15, 1999 for review and comment.
    •   The HUD OIG declined comment.
    •   75% of SFHA employees have undergone and received Performance Evaluations.
    •   New hires are screened through personal and professional reference checks, background checks
        and verification of credentials as appropriate to the position.


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                                                                                         Auditee Comments



3. Finding 3 – The SFHA Is Using a Flawed Section 8 Waiting List

SFHA Response:

•   This draft finding is based on an analysis of the SFHA Section 8 Wait List that used flawed
    criteria by the HUD OIG.

    •   The SFHA had an outside review conducted of the Wait List process by Deloitte & Touche, LLP,
        one of the 5 largest accounting and consulting firms in the nation, and determined that the
        conclusions reached by the HUD OIG were immaterial in nature. (See attached report of
        Deloitte & Touche, LLP, marked Exhibit F)
    •   The IG scanned the data base of potential applicants by social security number only to identify
        potential duplicates.
    •   During this period of time, the SFHA had opted out of requiring U.S. citizenship for public housing
        residents under the Quality Housing and Work Responsibility Act (QWHRA) and, as such, not all
        potential applicants would possess a social security number.
    •   A scan by social security number alone necessarily resulted in inaccurate and artificially inflated
        results.
    •   The IG analyzed the setting of preferences for San Francisco residents, those paying in excess of
        50% of income for rent, etc. against background information provided by the applicant.
    •   The SFHA assumed that background information may not necessarily accurately reflect the
        applicants true situation.
    •   For example, an applicant may give a relative’s address in San Francisco for purposes of
        notification to ensure notification where the applicant’s housing situation is unstable.
    •   When an applicant indicated rental payments, the amount may reflect full rent although the
        applicant might be sharing an apartment and actually pay a lesser amount.
    •   As a result, the preferences were explained to the applicant and the applicant was asked to “self-
        declare” which preferences applied.
    •   A scan by anything other than the “self-declaration” will result in inaccurate and artificially
        inflated results.
    •   In addressing the draft findings for the Section 8 Wait List, the SFHA reviewed 100% of the
        original source documents.
    •   The results of this review were then validated by Deloitte & Touche, LLP
    •   As a result of using irrelevant criteria in the analyses, this draft finding is hopelessly inaccurate,
        irrelevant and unsupported.

4. Finding 4 – Section 8 Overpayments Were Not Properly Managed

SFHA Response:

•   The auditor used only a 9 month period as the sample to draw this conclusion. The SFHA
    has collected in excess of $1.5 million in accounts receivable under the Section 8 Program
    since early 1997.
•   As a part of the continuing recovery effort, the SFHA will continue to review and evaluate
    its management of Section 8 overpayments, will amend its policies to ensure


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Auditee Comments



    that policy reflects the aggressive collection efforts of the Section 8 program will work with
    HUD to ensure proper treatment of monies recovered by the SFHA as a result of our
    efforts to identify fraud.




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                                                                                        Auditee Comments


RECOMMENDATIONS

This is the official San Francisco Housing Authority response to the recommendations
contained in the draft report of the HUD Inspector General, number 00-SF-201-1002. The
below responses to each recommendation should be included, unedited, in the official
report as Auditee comments.

CONTRACTING

HUD-OIG RECOMMENDATION IA: Impose appropriate sanctions on the housing authority and
its executive director.

SFHA RESPONSE: The recommendation to impose sanctions on the SFHA and its Executive
Director is utterly without foundation in the audit report and represents a bizarrely vindictive response to
actions which indicate, at worse, excessive zeal in the cause of public housing recovery.

A request for sanctions might have basis if a person or entity had flagrantly disregarded material federal
requirements for an improper purpose. Although the draft report asserts at one point that there was a
deliberate disregard of rules, it does not advance any evidence in support of that assertion, which is in
any event contrary to facts. Nor, aside from vague allusions to “favoritism”, does the audit report
establish that the Executive Director and SFHA Board of Commissioners had any purpose, improper or
otherwise, other than the urgent transformation of the SFHA.

The OIG may disagree with the SFHA’s findings of exigent circumstances, but it cannot in good faith
deny that the findings were made under circumstances where reasonable people might will think the
exception applied, and that the SFHA made the finding in an open and procedurally proper manner.
The OIG may believe that top recovery staff should be hired competitively, from among strangers,
rather than by temporary appointments of people known to and respected by the Executive Director,
but it cannot in good faith deny that SFHA’spersonnel practices were applied to these temporary
appointments in the same manner as all temporary appointments and that use of these temporary
appointments in a turnaround situation would not be seen by reasonable people as improper. The OIG
may not believe it was good business to compensate the Executive Monitor on the basis of overall
performance rather than by the hour, but it cannot in good faith say that a deal approved by the
Secretary of HUD and the Secretary’s Designee became flagrantly improper when continued by the
SFHA.

We believe the auditors have told us how they reached their conclusions that exigent and urgent
conditions did not, in their opinion, exist. The auditors disagree that the seriously deteriorated and
deteriorating conditions in SFHA residential units constituted an urgent and exigent circumstance. This
includes conditions in and around residential units that threatened life, health and safety.

The auditors state:


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        The poor state of maintenance at the housing authority’s developments was not a sudden,
        unexpected or unforeseen condition. HUD and the SFHA were aware of this problem long
        before the acting executive director arrived at SFHA. Although there was a need to reorganize
        the maintenance operations at the housing authority, this need did not constitute an emergency
        situation for which a sole source procurement could be justified.
                                         - - HUD-OIG February 24, 2000

This is an unbelievably outrageous conclusion by representatives of the very agency charged with
protecting the lives of those who reside in public housing. The auditors suggest that the problem is little
more than a need to reorganize maintenance operations. To establish the magnitude of the
problem, note that the SFHA maintenance department has completed more than 104,000
maintenance work orders during the period October 1, 1997 to September 30, 1999. The
auditors apparently conclude that conditions that would be universally recognized as requiring urgent
and immediate action are not urgent when they only affect the residents of public housing. The SFHA
vehemently disagrees.

The auditors conclude that exigent or urgent conditions to justify noncompetitive contracts were not
present. However, their own office believed differently as expressed in a memorandum on October 10,
1996, subject: Evaluation of the HUD Recovery Team’s Efforts at the San Francisco Housing
Authority. This memorandum, signed by the District Inspector General for Audit, states:

        We found that while the environment of public housing residents has not improved
        significantly, the recovery team has made some substantial progress such as beginning a
        preventive maintenance program and enforcing leases more effectively. Much of the recovery
        plan has yet to be effected, including recruitment of key managers that is expected to occur
        this fall.... The CVR recovery phase is expected to last at least 18 months (emphasis not in
        original).
                                        - - HUD-OIG October 10, 1996

These comments are contemporaneous with the events and conditions that resulted in many of the
contracts now being questioned in the glare of 20/20 hindsight by a different team of HUD-OIG
auditors. We believe these 1996 comments by an earlier group of HUD-OIG auditors should be given
great credence and clearly point out exigent conditions calling for urgent and immediate action, including
noncompetitive contracts to protect the health and safety of the residents and the publicly owned assets
of this agency.

The SFHA is concerned that the HUD-OIG has malleable standards when reviewing contracting
actions. In their Audit Memorandum 97-SF-201-1803, August 1, 1997 dealing with the selection of a
developer for Hayes Valley, the HUD-OIG stated:




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        Although the selection of the developer violated requirements for open competition, we have no
        recommendations. Reprocuring a developer for Hayes Valley would not be practical or
        prudent. Also, the housing authority’s present selection process appears to be open and
        competitive.
                                        - - HUD-OIG August 1, 1997

The above quotation suggests two conclusions. First, the HUD-OIG selectively applies and enforces
the regulations for unknown reasons. Second, the HUD-OIG believed that the SFHA’s selection
process for contractors was open and competitive. This second statement seems contrary to the
findings of the current HUD-OIG team looking at contracts from the same period.

The suggestion of sanctions in this recommendation is grossly disproportionate to the actual events or
even the alleged findings of the auditors. The actions taken by the Housing Authority and its Executive
Director were well within their discretion and authority and in all cases, these were the actions that
would have been taken by a reasonable and prudent person to protect the health, safety and welfare of
the residents, employees, and property. The SFHA contends that all its contracting actions were within
the spirit and intent, if not the letter, of applicable laws and regulations. In most cases, the current
team of auditors does little more than to substitute their judgement for the judgement of the
management of the housing authority. THIS RECOMMENDATION SHOULD BE DROPPED
FROM THE REPORT.

HUD-OIG RECOMMENDATION I B: Intensify HUD's monitoring of the housing authority's
contracting activities. This should include onsite visits by experts to scrutinize contract procurement and
monitoring functions as well as the HUD experts' advance approval of service contracts over $50,000.

SFHA RESPONSE: The SFHA contends that the contracts it entered into were appropriate and
substantially complied with applicable laws and regulations. The extraordinary level of scrutiny
suggested in this recommendation is not warranted and is not a prudent use of HUD resources. This
recommendation is also grossly disproportionate to the actual or even the alleged findings of the
auditors. It should be noted that most of the alleged findings cover contracts that were entered into
several years ago. The urgent and extraordinary conditions giving rise to the questioned contracts no
longer exist.

The SFHA has taken significant action to improve its contracting and procurement policies and
processes, including:

        -           Drafted new contracting policies and procedures.
        -           Moved to further consolidate contracting while ensuring internal controls.
        -           Hired a new contracting professional to provide leadership to the contracting
            function.
        -           Published procedures for processing payments.
        -           Published procedures for contract evaluation panels.


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        -          Published procedures for reviewing proposal documents.
        -          Published procedures for reviewing solicitations.
        -          Published procedures for ensuring the proper transfer of contracts between
            departments.

The draft procurement policies and procedures have been sent to TARC for review and comment. The
SFHA is moving in a very positive direction in strengthening its administrative policies, procedures and
practices. There is no need for additional HUD intervention.
THIS RECOMMENDATION SHOULD BE DROPPED FROM THE REPORT.

HUD-OIG RECOMMENDATION 1C: Require the housing authority to reimburse its HUD
programs for the ineligible, unnecessary/unreasonable, and unsupported costs identified in Appendix A
for this finding.

SFHA RESPONSE: The amounts the auditors allege were ineligible, unnecessary/r unreasonable or
unsupported are significantly overstated. The bulk of the amounts identified by the auditors are based
on little more than their subjective opinions, innuendo and hearsay which have been largely refuted
in the SFHA response to the draft report (see SFHA Comparative Analysis of HUD-OIG Schedule A,
Ineligible, Unnecessary and Unsupported Amounts). The SFHA analysis shows that the actual
amount of ineligible expenses is $31,341. The SFHA has billed the contractor or CMHA for
the appropriate amounts. There are no unnecessary/ unreasonable or unsupported costs.

PERSONNEL AND ADMINISTRATIVE PRACTICES

HUD-OIG RECOMMENDATION 2A: Instruct the housing authority to stop departing from sound
personnel practices and its written policies and procedures. Also, require it to present, for your
evaluation, a plan of action on how this will be accomplished. The plan, among other things, should
include improvements in the board's oversight of personnel activities.

SFHA RESPONSE: This recommendation misstates the facts and is based on erroneous conclusions.
The SFHA followed sound personnel practices and did not deviate from its policies, procedures or
practices. In the bulk of personnel actions included in the draft report, the auditors merely substitute
their opinions for the judgements of experienced Human Resources (HR) professionals and
management officials in the exercise of legitimate and sound management discretion. As the
auditors know, but do not acknowledge, the SFHA has revised its personnel policies, rules and
procedures and these revisions are being reviewed and coordinated now. A copy of the draft was sent
to the HUD-OIG on September 15, 1999. This is an extensive process that covers all current polices
and involves review and comment by nine (9) labor unions representing SFHA employees as well as the
Board of Commissioners. The majority of the existing personnel policies were adopted in 1987 and do
not cover topics that have emerged in recent years, e.g., telecommuting, use of electronic mail. The
draft personnel policies, rules and procedures have been sent to TARC for review and comment. In



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addition to the revisions to its personnel policies, the Authority has made significant improvements in the
past approximately two years including:

        -          Establishment of a Board of Commissioners Personnel Committee.
        -          Hired human resource professionals with a combined total of more than 75 years
            experience.
        -          Reinvigorated the performance management process.
        -          Personal and professional references and all credentials are checked for new hires
        -          Instituted criminal background checks on new employees.
        -          Strengthened and provided credibility to the internal EEO investigation process.
        -          Conducted training in the prevention of sexual harassment.
        -          Instituted formal employee orientation and clearance processes.
        -          Renegotiated nine labor agreements.
        -          Provided employee relations training to supervisors.
        -          Strengthened internal controls.
        -          Improved security of records and files.

Most of the actions questioned by the auditors took place in 1996-1998 during the initial stages of
recovering an authority whose infrastructure was, by definition, dysfunctional. The urgent and
extraordinary conditions that existed in 1996-1997 no longer exist. The sample used by the auditors
was not random or statistical. They concentrated on eight personnel actions they apparently believed
were problems or approximately 1% of the total employee population of the SFHA. Of the eight, four
of the employees were hired as temporary employees hired for the specific purpose of furthering the
recovery effort and building staff capacity. These employees were instrumental in adding some $30
million in additional funding for the recovery effort and establishing the SFHA Section 8 Program as a
national model having recently been nominated for “best practices” by HUD in program delivery. The
auditors conclude these temporary appointments were a problem because a job announcement was not
issued. In every temporary appointment, including to the present, individuals were and are hired without
posting a job announcement. This is a consistent practice that the SFHA believes is cost effective and
results in timely and high quality placements. Any placement of a temporary employee into a permanent
position is done through fair and open competition. This was the case with two temporary employees
discussed in the draft report who competed for permanent positions. One other employee was rehired
into the position he left. All of the other actions were filled through fair and open competition. The draft
report covers eight employees while the SFHA hired 271 administrative employees during the audit
period. The auditors used a very small (and largely dated) sample to arrive at a major and erroneous
conclusion. THIS RECOMMENDATION SHOULD BE DROPPED FROM THE REPORT.

HUD-OIG RECOMMENDATION 2B: Closely monitor the housing authority's employment and
personnel practices until there is confidence that the use of sound methods are in effect and that this will
continue. In    regards to employee hiring, you should require the housing authority to submit for your
review the documentation supporting the selection process and the basis for compensation for key and



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highly compensated (over $61,999 annual salary) positions before the job is offered to the selected
applicant.

SFHA RESPONSE: This recommendation is based totally on the false premise that the SFHA’s
employment, personnel, and compensation practices violated some standard. It also assumes that
$61,999 represents “highly compensated” in the San Francisco labor market. We note that journey-
level plumbers and electricians are paid more than $61,999. This is an erroneous conclusion and this
recommendation should be dropped from the report.

The draft audit report and this recommendation fail to acknowledge the significant improvements made
in all the administrative processes including Human Resources, in recent years. The focus of the draft
report is on an old and highly selective sample of personnel actions. Most of these actions took place
during a time of great urgency and extraordinary circumstances.

The essence of this recommendation is to restrict or remove appointing authority from the SFHA. This
is an outrageous recommendation. In federal service, the U.S. Office of Personnel Management
(OPM) conducts evaluations of federal personnel programs. They have authority to restrict the ability
of a federal agency to make appointments. The use of this authority by OPM is extremely rare and
reportedly amounts to a “handful” of cases over many years. The OPM will only consider such an
action if they are confronted with willful, systemic, flagrant, repeated, and clear-cut violations of law and
federal regulations. They would not consider such an action when the findings are subjective, isolated
and within the discretion of the appointing official. The typical corrective action directed by OPM, and
others, when they find an individual case where a regulation was violated, is to direct the correction of
the individual action. However, the actions of the SFHA do not warrant either the withdrawal of
appointing authority or correction of individual personnel actions since the actions were within
established policies and practices and within sound management practices.

HUD-OIG RECOMMENDATION 2C: Have an independent, HUD approved expert in personnel
classification and compensation review the qualifications and salaries of the questioned personnel. As
necessary, require the housing authority to terminate or demote the administrative staff not meeting
minimum required qualifications and adjust salary rates to a reasonable level.

SFHA RESPONSE: In the draft report, the auditors conclude that the SFHA’s classification and
compensation system complies with OMB Circular A-87, but that individual classifications are
problems. This is another area in which the auditors substitute their judgement for the judgement
of experienced personnel specialists and management officials. It is interesting to note that many
of the actions covered in the draft report occurred under the leadership of a former HUD Regional
Personnel Director with over 30 years of extensive experience in HUD and several other federal
agencies. The more recent actions were taken under the leadership of a former Department of Army,
Civilian Personnel Officer with 30 years of experience in all aspects of personnel management. It is also
interesting to note that in federal service, corrective actions almost never call for, or result in the
termination of the incumbent employee. Under existing federal rules for grade and pay retention,


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downgrades to correct previous erroneous classification actions may result in the position being
reclassified to a lower grade with the incumbent remaining in the position and receiving grade retention
for two (2) years, followed by indefinite pay retention. The auditors seek to apply a much more severe
standard to the SFHA demonstrating again their lack of knowledge in personnel management.

The classification and compensation approach used by the SFHA fully complies with OMB Circular A-
87. This circular (Attachment B 11.b., Compensation for personnel services) states as follows:

        Compensation for employees engaged in work on Federal awards will be considered
        reasonable to the extent that it is consistent with that paid for similar work in other activities of
        the governmental unit . . . . Compensation will be considered reasonable to the extent that it is
        comparable to that paid for similar work in the labor market in which the employing
        government competes for the kind of employees involved (emphasis added).

The classification system used by the SFHA generally seeks to identify comparable classes in the City
and County of San Francisco (CCSF) as a benchmark. In some cases, there are directly matching
classes in the CCSF, and in other cases, SFHA classes will be benchmarked to a CCSF class with a
different title but with similar organizational placement, duties, responsibilities, spans of control, and
qualification requirements. In these instances, the SFHA class salary may be set above or below the
CCSF class to recognize the differences. In other cases, SFHA class salaries are established for
internal consistency and equity. For example, some class salaries are set at a level above or below
other class salaries in the organization to recognize supervisor/subordinate relationships or to maintain
internal alignment within the organization. Other salaries for classes of positions that supervise trades
and crafts may be set at a given percentage above the highest craft supervised. We believe these
approaches are both prudent and consistent with well-established and widely accepted classification
and compensation methods, principles, and practices. The SFHA recently hired a new Classification
and Employment Manager with more than 23 years of state and local government and private sector
experience in this field.

Contrary to statements by the auditors, classification and compensation rationale is available. However,
the auditors opined that the rationale was not adequate and was not acceptable to them. The SFHA
disagrees. The SFHA contends that its personnel decisions are sound and improving. Having an
alleged “independent, HUD-approved expert” review classification and compensation is not warranted
and is not a prudent use of HUD resources. THIS RECOMMENDATION SHOULD BE DROPPED
FROM THE REPORT.

HUD-OIG RECOMMENDATION 2D: As a result of C, require the housing authority to reimburse
its federal programs for all excessive salaries through the time they are adjusted downward. In addition,
require it to similarly return all other ineligible, unreasonable, and unnecessary compensation also
identified in this finding. (See schedule A in this report for an itemization of questioned costs.).




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SFHA RESPONSE: As stated in the entire SFHA response to this audit and its draft findings, the
underlying assumptions for this recommendation are totally unsupported, unsupportable, not based on
any objective data, and unwarranted. SFHA positions are properly classified in accordance with well-
established and widely accepted classification and compensation methods, principles and practices.
Compensation levels were established consistent with SFHA policies and prudent management. THIS
RECOMMENDATION SHOULD BE DROPPED FROM THE REPORT.

HUD-OIG RECOMMENDATION 2E: Require the SFHA to obtain documentation in support of
the reasonableness of amounts billed for the loaned employee. Have an independent, HUD approved
expert in personnel classification and compensation to evaluate compensation paid, and require the
SFHA to return to its federal program any amount considered unreasonable or unsupported.

SFHA RESPONSE: HUD has reviewed the expenses of the loaned employee and deemed the
expenses (including salary) to be both appropriate and adequately supported. HUD reimbursed the
SFHA for these expenses, including the expenses discussed in the draft report. The loaned employee
also reimbursed the SFHA for some minor costs that were discovered by SFHA or the auditors. We
believe the review by HUD, and the payment of expenses for the loaned employee constitutes the
review the auditor is recommending and should fully satisfy this recommendation. THIS
RECOMMENDATION SHOULD BE DROPPED FROM THE REPORT.

HUD-OIG RECOMMENDATION 2F: Require the CMHA to refund to the SFHA payments
received for costs associated with the loaned employee while he was performing CMHA duties.

 SFHA RESPONSE: HUD reimbursed these costs to the SFHA as an allowed, supported and
justified HUD recovery expense. THIS RECOMMENDATION SHOULD BE DROPPED.

HUD-OIG RECOMMENDATION 2G: Require the housing authority to treat the executive director
as an employee rather than the contractor, stop paying him in advance, and provide evidence that any
tax liability is paid.

SFHA RESPONSE: As the auditors know, a new employment agreement between the SFHA and the
Executive Director was approved on March 14, 2000. All actions reviewed by the auditors were in
accordance with the terms and conditions of the November 19, 1997 employment agreement between
the Executive Director and the SFHA, approved by Resolution of the SFHA Board as an exercise of
their statutory authority to determine policy and legally bind the SFHA by contract. This agreement was
negotiated at arms-length between the Executive Director, the Board of Commissioners and their
attorney. This agreement was replaced by the new March 14, 2000 employment agreement. The new
agreement requires the Executive Director to be an employee of the SFHA. Further, the minor issue of
advance payment has been corrected. THIS RECOMMENDATION SHOULD BE DROPPED.




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HUD-OIG RECOMMENDATION 2H: Require the housing authority to obtain reimbursement from
the former intergovernmental affairs specialist who was compensated while not working on SFHA
business.

SFHA RESPONSE: This recommendation is based on a totally false assumption about the nature of
the employee’s service to CMHA. The draft report states, “This individual had a contract with CMHA
to provide landscaping and related services.” This is a highly misleading statement. The employee was
performing work for CMHA as a Contract Technical Representative. He did not have a contract with
CMHA and he was not paid by CMHA. The suggestion that the SFHA obtain reimbursement from the
employee is unwarranted. However, as restated below, reimbursement will be requested from CMHA.

The draft report has a discrepancy in the number of days when the employee might have been
performing work for CMHA. The draft audit report states the employee was at CMHA for 41 days.
However, a review of the worksheets prepared by and provided by the auditors shows the employee
was at CMHA for 42 days. In reviewing the documentation provided by the auditors, it is evident the
employee frequently traveled to Cleveland on late night flights (as documented by airline tickets obtained
from the auditors) or returned by approximately Noon. In each of these cases, the employee worked
all or part of a day. The SFHA believes the employee may have performed work for CMHA for a net
total of 34 days and a request for payment for 34 days has been submitted to CMHA. THIS
RECOMMENDATION SHOULD BE DROPPED FROM THE REPORT.

HUD-OIG RECOMMENDATION 2I: Take administrative sanctions against the employee who
was compensated while not working on SFHA business.

SFHA RESPONSE: This recommendation is absurd on its face. As the auditors know and
acknowledge in their draft report, this employee resigned from SFHA on December 17, 1999. This
employee was paid by SFHA while performing work for CMHA. However, the employee was not
paid by CMHA for this same time. This issue is little more than a timekeeping error. The employee
should have taken leave from SFHA and been paid by CMHA or SFHA and CMHA should have
worked out a reimbursable detail before the services were performed. This employee was performing
work that would be paid with HUD funds from one housing authority or the other. There was no
attempt on the part of the employee to deceive anyone. There is absolutely no basis for any type of
punitive action or administrative sanction against this former employee. THIS RECOMMENDATION
SHOULD BE DROPPED.

HUD-OIG RECOMMENDATION 2J: Require the housing authority to implement a written policy
addressing relocation expenses that complies with federal requirements.

SFHA RESPONSE: The draft audit report does not provide clarity to this issue. In the draft finding
relating to the General Manager of Family Sweep (page 43 of the draft report), the auditor cites the
Federal acquisition regulations as guidance on reimbursement for lodging expenses. In this same finding,
they cite “federal regulations” without providing a specific citation. In the finding relating to the


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Executive Assistant (page 46) the auditors cite language from 5 U.S.C. 5724a relating to “excess
moving expenses.” We note that 5 U.S.C. 5724 is the law underlying the federal travel regulations and
the specific citation deals with reimbursement for miscellaneous expenses.

The draft report does not provide any legal, regulatory or policy citations regarding the travel regulations
that might apply to public housing authorities. Without this information, the SFHA will be hard pressed
to develop the written policy recommended by the auditors. However, the SFHA had independently
determined that payment of relocation expenses should be an explicit part of our revised personnel
policies, rules and procedures. The draft policy has a relocation travel policy that allows for
reimbursement of reasonable relocation expenses. The draft of this policy was furnished to the
OIG audit staff on September 15, 1999. THIS RECOMMENDATION SHOULD BE
DROPPED.

SECTION 8 WAITING LIST

HUD-OIG RECOMMENDATION 3A: Suspends use of the current Section 8 waiting list.

SFHA RESPONSE: The criteria and methodology of the HUD-OIG in reviewing the Section 8
waiting list was based on irrelevant criteria resulting in a hopelessly flawed analysis, unsupported and
irrelevant conclusions. The waiting list has been in use since May 1998. The SFHA knew that by its
nature, the use of a lottery together with the wide diversity of the populace of San Francisco, would
create issues that needed to be resolved during the project and continuing through the administration of
the waiting list, e.g., duplicate names, preference. These issues were deemed small compared to the
overall effort to produce a proper waiting list. This list has now been thoroughly vetted. The SFHA
reviewed 100% of the source documents to determine the quality of the list. In addition, the SFHA
employed Deloitte & Touche (D&T) to validate the SFHA review. D&T deemed the issues raised by
the auditors as immaterial. Based on the analyses of the SFHA and D&T, the comments of the auditors
relating to alleged flaws in this list are severely overstated. THIS RECOMMENDATION SHOULD
BE DROPPED.

HUD-OIG RECOMMENDATION 3B: Creates a proper Section 8 waiting list.

SFHA RESPONSE: The SFHA has thoroughly vetted the Section 8 waiting list and is certain it is a
properly constituted list and adequate for continued use. See response to Recommendation 3A, above.
THIS RECOMMENDATION SHOULD BE DROPPED.

HUD-OIG RECOMMENDATION 3C: Recovers all payments made to the contractor.

SFHA RESPONSE: There is no legal or regulatory basis for this recommendation. This contract was
properly executed and the company did substantial work to develop a waiting list. The contractor had
contact with nearly 40,000 applicants and narrowed the applicant database to approximately 29,000.
A lottery process narrowed the actual waiting list to approximately 10,000. The company substantially


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performed the requirements under the scope of work in the contract. The auditors conclude the
contractor produced a “flawed” waiting list. The SFHA, and Deloitte & Touche have not reached the
same conclusion. Based on a thorough and objective analysis by D&T, the “flaws” are immaterial and
have little bearing on outcomes for those on the list. Finally, the SFHA is not aware of any law or
regulation that would allow withholding payment for services rendered or attempting to recover payment
when the contractor has substantially fulfilled the work called for in the contract. We note the original
contract was for $149,200. As of March 2000, the SFHA has not paid the contractor $27,900.36 or
approximately 19% of the total. THIS RECOMMENDATION SHOULD BE DROPPED.

SECTION 8 OVERPAYMENTS

HUD-OIG RECOMMENDATION 4A: Creates and implements an effective overpayment
collection policy as part of the SFHA administrative plan for the Section 8 program. The policy should
describe actions to be taken when written requests for repayment fail. These actions should include
assessing penalties for late repayment, referring receivables to collection agencies, and referring
receivables to the housing authority's legal department to commence legal action. The policy should also
conform to HUD's requirements regarding retention of recoveries from overpayments that occurred due
to, fraud.

SFHA RESPONSE: As was explained to the auditors, the SFHA has implemented procedures and a
tracking system to collect past due amounts owed by landlords. In 1999, the first full year under the
improved collection procedures, the SFHA collected $176,808, which represents a collection rate of
approximately 38%. Since early 1997, the SFHA Section 8 program has collected in excess of $1.5
million in accounts receivable. The SFHA will ensure it has written policies that accurately reflect the
aggressive collection procedures currently used by the SFHA staff. THIS RECOMMENDATION
SHOULD BE DROPPED.

HUD-OIG RECOMMENDATION 4B: Return the $128,533 retention to the Section 8 contract
accounts along with all amounts improperly retained since August 1999.

SFHA RESPONSE: The SFHA believes it is in compliance with the spirit and intent of the cited
regulations and thus will retain 50% of the funds recovered. However, the SFHA will work with HUD
to ensure the issue of retention of funds is resolved between the SFHA and HUD. THIS
RECOMMENDATION SHOULD BE DROPPED.

HUD-OIG RECOMMENDATION 4C: Thoroughly researches all Section 8 owner receivables for
validity and provides a detailed analysis showing the research results covering the initial $524,860
receivable balance.

SFHA RESPONSE: The SFHA has and will continue to thoroughly research receivables.




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HUD RECOMMENDATION 4D: Record all validated receivables in the general ledger in
accordance with HUD Handbook 7420.6, Housing Assistance Payments Program Accounting.

SFHA RESPONSE: This recommendation is being implemented as the SFHA converts to GAAP.

Prior Audit Findings

The HUD Office of Inspector General previously audited the SFHA's drug elimination program for the
period of July 31, 1995 through December 31 1997. The audit report ([sic] number 98-SF-201-1003
was issued July 22, 1998.

Some Similar Issues Were Noted

The audit raised issues in the area of contracting, similar to those discussed in the report in-hand.

        -           Contractor billings were not adequately reviewed to determine their propriety.
        -           Documentation of the procurement process was often unavailable.
        -           Written contracts were sometimes absent.
        -           Proper cost analyses were not performed.
        -           Contract advances were made without an accounting.

Prior Recommendations Remain Open

The audit's recommendations that pertain to the above issues are still open. These include
recommendations:

        - 1D. Provide proper training and written instructions to assure contract payments are correct
              and proper.
        - 4A. Complete implementation of a centralized contracting unit.
        - 4B. Revise written procurement procedures.
        - 4C. Discontinue use of contract terms that provide advances to entities that are not required
              to be accounted for.

SFHA Response

General comment

The District Inspector General for Audit conducted an audit of the Drug Elimination Program and issued
report number 98-SF-201-1003 dated July 22, 1998. This report contained recommendations for
HUD. The prior audit findings were resolved and sufficient documentation provided to HUD Troubled
Agency Recovery Center (TARC) demonstrating compliance. Indeed, HUD TARC has recommended
full closure of these findings. It has been the direct intervention of the auditors conducting the March


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1996 to September 1999 audit, apparently to bolster a 19 month audit which produced little to justify
an enormous expenditure of federal funds and staff resources, that has prevented closure of these prior
findings (see attached correspondence dated October 4, 1999 and January 11, 2000).




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                                                                              Appendix C


Distribution
Director, Office of Public Housing, California State Office, HUD
Secretary’s Representative, California State Office, HUD
Office of Comptroller, Texas State Office, HUD
Director, Troubled Agency Recovery Center, Memphis Area Office, HUD
Comptroller, Office of Public and Indian Housing, HUD
Director, Office of Budget, HUD
Director, Enforcement Center, HUD
Deputy Secretary, HUD
Chief of Staff, HUD
Special Assistant to the Deputy Secretary for Project Management, HUD
Assistant Secretary for Administration, HUD
Assistant Secretary for Congressional and Intergovernmental Relations, HUD
Senior Advisor to the Secretary, HUD
Director of Scheduling and Advance, HUD
Counselor to the Secretary, HUD
Deputy Chief of Staff, HUD
Deputy Chief of Staff for Operations, HUD
Deputy Assistant Secretary for Public Affairs, HUD
Special Assistant for Inter-Faith Community Outreach, HUD
Executive Officer for Administrative Operations and Management, HUD
Senior Advisor to the Secretary for Pine Ridge Project, HUD
General Counsel, HUD
Director, Office of Federal Housing Enterprise Oversight, HUD
Assistant Secretary for Housing / Federal Housing commissioner, HUD
Office of Policy Development and Research, HUD
Assistant Secretary for Community Planning and Development, HUD
Government National Mortgage Association, HUD
Assistant Secretary for Fair Housing and Equal Opportunity, HUD
Chief Procurement Officer, HUD
Assistant Secretary for Public and Indian Housing, HUD
Chief Information Officer, HUD
Director, Office of Departmental Operations and Coordination, HUD
Director, Real Estate Assessment Center, HUD
Director, Office of Multifamily Assistance Restructuring, HUD
Public Affairs Officer, HUD
Chief Financial Officer, HUD
Deputy Chief Financial Officer, HUD
Audit Liaison Officer, Office of Chief Financial Officer, HUD
Acquisition Librarian, HUD
Committee on Governmental Affairs, U.S. Senate

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Committee on Government Reform, U.S. House of Representatives
Subcommittee on General Oversight and Investigations, U.S. House of Representatives
Subcommittee on Criminal Justice, Drug Policy & Human Resources, U.S. House of Representatives
Director, Housing and Community Development Issue Area, U.S. General Accounting Office
Chief, Housing Branch, Office of Management and Budget
San Francisco Housing Authority




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