oversight

Delta Housing Authority Delta, Colorado Low-Rent Housing and Section 8 Housing Assistance Payments

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-10-07.

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

         AUDIT REPORT




       Delta Housing Authority
             Delta, Colorado

Low-Rent Housing and Section 8 Housing
    Assistance Payments Programs
             2003-DE-1002

            October 07, 2002

      OFFICE OF AUDIT, ROCKY MOUNTAIN
             DENVER, COLORADO
                                                                   Issue Date
                                                                           October 07, 2002

                                                                   Audit Report Number
                                                                           2003-DE-1002




TO: Linda Camblin, Director, Office of Public Housing, 8APH




FROM: Robert Gwin, Regional Inspector General for Audit, 8AGA

SUBJECT: Delta Housing Authority
         Delta, Colorado
         Low-Rent Housing and Section 8 Housing Assistance Payments Programs

We have completed an audit of the Delta Housing Authority in Delta, Colorado. The audit resulted
from a request by the Office of Investigations that we review allegations it received from citizen
complaints. Our overall audit objective was to determine whether complainants’ allegations against the
Delta Housing Authority were valid and to determine whether Housing Authority funds were used in
accordance with applicable HUD policies and procedures.

Our report contains three findings with recommendations requiring action by your office. The three
findings address the improper use of HUD funds; circumvention of the procurement policy; and the
abuse of admission and occupancy procedures, and related administrative activities.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without a management decision, a status report on: (1) the corrective action taken; (2)
the proposed corrective action and the date to be completed; or (3) why action is considered
unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for
any recommendation without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

Should you or your staff have any questions, please contact me at (303) 672-5452.
Management Memorandum




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2003-DE-1002              Page ii
Executive Summary
We performed an audit of the Delta Housing Authority to determine whether complainants’ allegations
about the Delta Housing Authority’s operations were valid and to determine whether Housing Authority
funds were used in accordance with applicable HUD policies and procedures. Specifically, we
reviewed procurement activities, selection of applicants from the waiting lists, Section 8 voucher
payments for tenants previously residing in Authority-owned units after moving-out, allocation of costs
to the Housing Authority’s housing programs and activities, and maintenance activities.

We found that the Housing Authority had deviated from its own policies and procedures in some areas
and was not conforming to HUD requirements in carrying out its HUD funded housing programs. As a
result, HUD funds were used to pay ineligible expenses; procurement policies were circumvented to
provide contracts to favored contractors; admission policies were ignored to facilitate favoritism on the
public housing waiting lists; excess Section 8 voucher payments and administration fees were collected
for Authority-owned housing units; and unrecorded tenant fees and deposits were used for unallowable
activities.




                                        The Housing Authority used funds intended for HUD programs
  Costs Improperly Allocated            to pay both direct and indirect costs allocable to other
  to HUD Programs                       programs administered by the Housing Authority. Also,
                                        maintenance salaries are unsupported because there is no
                                        system to track the actual time spent on each program.

                                        For direct costs, we identified that the Housing Authority had
                                        charged $101,233 to the HUD funded program for direct costs
                                        of its independent housing program. Authority management
                                        apprised us that the Housing Authority borrowed HUD funds to
                                        pay ineligible direct costs of the Authority’s independent
                                        housing program until such time as monies could be obtained
                                        from a mortgage on one of its independent program’s
                                        properties. Subsequent to our site work, the Housing Authority
                                        repaid the borrowed funds to the HUD funded housing program
                                        account.

                                        For indirect costs, the Housing Authority charged its
                                        independent housing program for indirect costs in fiscal year
                                        2000. However, the Authority ceased charging any indirect
                                        costs to its independent housing program in December 2000.
                                        Therefore, the Housing Authority began funding indirect costs
                                        applicable to its independent housing with HUD funded
                                        program monies.



                                             Page iii                                        2003-DE-1002
Executive Summary


                              The Housing Authority was unaware that its cost allocation plan
                              was deficient or that maintenance employees needed to track
                              their actual time. Consequently, HUD funds were used for non-
                              HUD project activities and as such, these monies were not
                              available for administration of the public housing and Section 8
                              voucher programs.

                              We identified deficiencies with four of the five procurement
 Procurement Policy Needs     actions we reviewed. The Housing Authority simply did not
 to Be Followed to Ensure     follow procurement policies for the most part and circumvented
 Services Are Obtained at a   the requirements to procure services from favored contractors.
 Fair and Reasonable Price    Although, the Housing Authority provided documents to show
                              that competitive bids were obtained we found the documents
                              questionable in two cases. Consequently, the Housing
                              Authority may not have obtained services for a fair and
                              reasonable price.

                              Contrary to HUD requirements, the Housing Authority has not
 Compliance with              been properly and correctly implementing its tenant occupancy
 Occupancy and                and related administrative activities. More specifically, we
 Administrative               noted: (1) favoritism when selecting applicants off the waiting
 Requirements Needs to Be     list; (2) excess Section 8 voucher payments and administrative
 Improved                     fees for Authority-owned units; (3) lack of independent agency
                              to provide tenant counseling, rent reasonableness and Housing
                              Quality Standards inspections for Authority-owned units with
                              Section 8 assistance; and (4) non-recording of tenant fees and
                              deposits. These deficiencies occurred because the Housing
                              Authority either circumvented the requirements or was
                              unfamiliar with the requirements. Consequently, (1) applicants
                              are not fairly selected for assistance; (2) the Housing Authority
                              received excess funds it was not entitled when it continued to
                              receive assistance for a vacant PHA-owned unit and received
                              excess Section 8 voucher administrative fees; (3) tenants of
                              PHA-owned units who receive Section 8 assistance may not
                              benefit from a third party agency overseeing the Authority,
                              which is both the administrator of the Section 8 assistance and
                              landlord; and (4) unrecorded funds can be used for unallowable
                              costs without the knowledge of outside parties.

                              We recommend that HUD require the Housing Authority to
   Recommendations            devise a plan to ensure all costs are properly allocated to the
                              appropriate cost objectives. Also, action needs to be taken by
                              the Housing Authority to ensure that its Procurement Policy is

2003-DE-1002                      Page iv
                                                               Executive Summary


                   properly implemented and documented. Furthermore, the
                   Housing Authority needs to implement proper management
                   controls over its tenant admission and occupancy procedures
                   and related administrative activities. To do so will help the
                   Housing Authority to ensure that its HUD funded housing
                   programs are being properly and correctly carried out in
                   conformity with HUD requirements.

                   We provided the Authority with a copy of the draft report for
Auditee Comments   comment on August 22, 2002. We received the Authority’s
                   written comments on September 13, 2002. The comments
                   were considered and the report was modified as appropriate.
                   We included the written comments in Appendix B of the report,
                   except for the exhibits provided with the written comments due
                   to the lengthiness of the response. The exhibits were provided
                   to HUD by separate cover.




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Executive Summary




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2003-DE-1002          Page vi
Table of Contents
Management Memorandum                                                   i



Executive Summary                                                      iii



Introduction                                                           1



Findings

1. Costs Improperly Allocated to HUD Programs                          3

2. Procurement Requirements Need to Be Followed to Ensure Services
   Are Obtained at a Fair and Reasonable Price                        11

3. Compliance with Occupancy Requirements Needs to Be Improved        21



Management Controls                                                   31



Follow Up On Prior Audits                                             35



Appendices
   A. Schedule of Questioned Costs                                    37

   B. Audit Comments                                                  39

   C. Distribution                                                    51




                             Page vii                        2003-DE-1002
Table of Contents


Abbreviations:
CFR            Code of Federal Regulation
CIAP           Comprehensive Improvement Assistance Program
FmHA           Farmers Home Administration
HUD            Department of Housing and Urban Development
OIG            Office of Inspector General
OMB            Office of Management and Budget
PHA            Public Housing Authority




2003-DE-1002                           Page viii
Introduction
The Delta Housing Authority located in Delta, Colorado is governed by a five member Board of
Commissioners. The Board members are appointed by the City Council and serve five-year terms.
The Board establishes policies and takes official action as required by Federal and State law. An
Executive Director manages the small Housing Authority, which employs two office support and three
maintenance staff. The books and records are maintained at 511 East Tenth Street, Delta, CO 81416.

The Housing Authority’s fiscal year is from January 1 through December 31. The Housing Authority
operates seventy-five public housing units and administers over 210 HUD Section 8 Housing Assistance
Program vouchers. In addition to HUD programs, the Housing Authority operates a ten-unit Farmers
Home Administration (FmHA) insured elderly development, twenty-five Authority-owned units and a
transitional housing unit that is leased to a local non-profit organization.




                                      Our audit objectives were to review the allegations about the
 Audit Objectives                     Authority’s operations and to determine whether Housing
                                      Authority funds were used in accordance with applicable HUD
                                      policies and procedures.

                                      To determine whether the allegations had merit, we reviewed
 Audit Scope and                      various aspects of the Housing Authority’s operations and
 Methodology                          primarily included:

                                      •   Procurement activities;
                                      •   Selection of applicants from the waiting lists;
                                      •   Section 8 voucher payments for tenants previously residing
                                          in Authority-owned units after moving-out;
                                      •   Allocation of costs to the Housing Authority’s housing
                                          programs and activities; and
                                      •   Maintenance activities.

                                      We focused our review on allegations in areas within our
                                      jurisdiction involving HUD funded housing program activities.

                                      To determine whether PHA funds were used in accordance
                                      with applicable HUD policies and procedures we reviewed:

                                      •   Management controls;
                                      •   All disbursements from the general fund for the audit period;
                                      •   The indirect cost allocation plan; and
                                      •   The support for maintenance salaries.

                                           Page 1                                         2003-DE-1002
Introduction



                       In performing our review of the Housing Authority’s
                       management controls, we conducted a non-representative
                       testing of transactions to evaluate the Housing Authority’s
                       control structure. In connection with specific complaints, we
                       tested sufficient transactions to perform an assessment of the
                       validity of the complainants’ concerns. In those cases where
                       the concerns were substantiated, we expanded our transactions
                       testing to identify the nature and extent of the deficiency.

                       An OIG Appraiser was used to evaluate the cost
                       reasonableness and installation quality of the removal and
                       installation of kitchen cabinets, countertops, faucets, drain
                       pipes, supply pipes and stops in forty HUD funded housing
                       project dwelling units.

                       The audit covered the period from January 1, 2000 to
                       December 31, 2001. We extended the review, where
                       appropriate, to include other periods. The audit fieldwork was
                       conducted between March 2002 and May 2002.

                       We conducted the audit in accordance with generally accepted
 Generally Accepted
                       government auditing standards.
 Government Auditing
 Standards




2003-DE-1002                Page 2
                                                                                                 Finding 1


   Costs Improperly Allocated to HUD Programs
The Delta Housing Authority used HUD funds to pay ineligible expenses of $101,233 that it expended
on its independent housing program. Also, the cost allocation plan used by the Authority is deficient and
does not fully distribute indirect costs to the various programs the Authority administers. Furthermore,
maintenance salaries are unsupported because there is no system to track the actual time spent on each
program. The Housing Authority borrowed HUD funds to pay ineligible direct costs of the independent
program and ceased charging indirect costs to the independent program. Also, the Authority
management was unaware that the indirect cost allocation plan was deficient or that maintenance
employees needed to track their actual time. Consequently, HUD funds are not available for
administration of the public housing and Section 8 voucher programs. We recommend that HUD
require the Housing Authority to reimburse ineligible costs to the appropriate HUD accounts and to
devise an equitable cost allocation plan to ensure all costs are properly allocated to the appropriate cost
objectives.




                                         Title 24, Code of Federal Regulation (CFR), Section 85.22(b)
  Costs Must be Necessary,               requires grantees to comply with the Office of Management and
  Reasonable and Adequately              Budget (OMB) Circular A-87. This Circular establishes
  Documented                             principles and standards for determining costs for Federal
                                         awards carried out through grants, cost reimbursement
                                         contracts, and other agreements with State and local
                                         governments.

                                         The Housing Authority administers three non-HUD funded
  Non-HUD Programs                       programs. First, the Authority has initiated its own independent
                                         housing program to purchase single-family properties to provide
                                         low-income housing. The Authority currently has 25 occupied
                                         units with two more under construction. Second, the Authority
                                         administers a ten-unit Farmers Home Administration (FmHA)
                                         insured elderly development. Finally, the Authority owns a
                                         transitional housing unit that is leased to a local non-profit
                                         organization.

                                         We found that HUD funds are used to pay both direct and
                                         indirect costs allocable to these other programs. Also,
                                         maintenance salaries are unsupported because there is no
                                         system to track the actual time spent on each program.

                                         Direct costs are those that can be identified specifically with a
  Ineligible Costs                       particular final cost objective, as defined by Circular A-87. To

                                              Page 3                                          2003-DE-1002
Finding 1


                             allocate the direct costs to the benefiting program, the Housing
                             Authority codes the account number on the invoices and enters
                             the payables into the accounting system.

                             The Housing Authority expended $101,233 for ineligible costs
                             applicable to the Housing Authority’s independent housing
                             program. This amount is shown in the following chart by fiscal
                             year.

                                                                      Paid by  Percentage
                                            Total      Paid by     Independent  Paid by
                             Year          Amount       HUD          Program     HUD
                             2000             39,870    19,668          20,202    49%
                             2001             80,552    73,360           7,192    91%
                             2002             12,729     8,205           4,524    64%
                             Total          133,151    101,233         31,918     76%

                             We identified total direct costs of $133,151 incurred by the
                             independent housing program, for the period January 1, 2000
                             to March 31, 2002. HUD funds were used to pay 76% of
                             these costs during the period. We identified independent
                             housing program costs by reviewing supporting invoices to
                             determine whether expenses were properly coded in the
                             accounting system and reimbursed with funds from the
                             independent program. The accounting system showed that
                             90% of the ineligible costs were allocated to the
                             Comprehensive Improvement Assistance Program (CIAP) and
                             Capital Fund Grants, and the rest were allocated to operating
                             funds.

                             The Housing Authority management told us that the Housing
                             Authority was borrowing the money from HUD until the
                             Authority could get a mortgage on one of the properties of the
                             independent program to repay the monies. The use of HUD
                             program monies to fund non-HUD housing projects is contrary
                             to the terms of the Annual Contributions Contract.

                             The total direct costs of the independent program, identified
 System Needed to Allocate   above, are incomplete because there was insufficient
 Costs of Supplies and       documentation to identify all costs associated with the program.
 Materials                   For example, when reviewing the work order repair forms we
                             noted instances where appliances, water heaters and a furnace

2003-DE-1002                      Page 4
                                                                                     Finding 1


                              were replaced. However the cost of these items were not
                              charged to the independent housing program or readily
                              identifiable.

                              We observed instances when the maintenance staff purchased
                              materials at the time of a repair and the invoice was
                              subsequently charged to the correct program. However, if a
                              maintenance staff used materials or supplies out of inventory for
                              its independent housing program, then the costs were not
                              always charged to the independent housing program. During
                              our review the Housing Authority was unable to provide us with
                              a current inventory report because a physical inventory had not
                              been taken in several years. The Housing Authority needs to
                              perform a physical inventory and should consider keeping a
                              perpetual inventory where materials and supplies are shown as
                              expenditures when consumed. Then these expenditures can be
                              allocated to the proper cost objective or program as materials
                              and supplies are used.

Indirect Costs Not Properly   Circular A-87 defines indirect costs as those costs ”(a) incurred
Allocated                     for a common or joint purpose benefiting more than one cost
                              objective and (b) not readily assignable to the cost objectives
                              specifically benefited, without effort disproportionate to the
                              results achieved”. Also, the Circular requires grantees to
                              develop and carry out a plan to support the allocation of any
                              joint (indirect) costs that benefit more than one program.
                              Formal accounting records that prove propriety of the charges
                              must support all costs included in the plan.

                              The cost allocation plan used by the Authority is deficient and
                              does not fully distribute indirect costs to the various housing
                              programs it administers. The Housing Authority management
                              asserted to us that the following cost allocation breakdown was
                              used when coding invoices in 2001.

                                     Cost Objective           Percentage
                                Public Housing                   31%
                                Section 8 Voucher                58%
                                FmHA-insured Project              7%
                                Independent Program               4%




                                   Page 5                                          2003-DE-1002
Finding 1


                         We estimate that non-salary indirect costs were over $50,000
                         in 2001. The Housing Authority only used its allocation plan on
                         almost $3,800 of these costs. There were primarily two non-
                         salary expenses that the allocation plan was used, the telephone
                         bill and postage. For these bills, the actual allocation
                         breakdown differed from the Housing Authority’s assertions.
                         The FmHA-insured project was charged 5%, the independent
                         program was not charged at all and the remaining 5% was
                         charged to the CIAP grant. Only a small percentage of non-
                         employee indirect costs were allocated. Although the Housing
                         Authority attempted to allocate indirect costs, the Authority did
                         not always know what constituted an indirect cost.

                         Administrative salaries and benefits, which are also indirect
                         costs, totaled about $185,200 in 2001. Similarly, the actual
                         breakdown differed from the Housing Authority’s assertions, as
                         follows.

                                Cost Objective            Percentage
                           Public Housing                    33%
                           Section 8 Voucher                 62%
                           FmHA-insured Project               5%

                         Overall, HUD is paying 95% of the indirect costs and the
False Assertion by the   FmHA-insured project is paying 5%. The Housing Authority’s
Housing Authority        independent and transitional house programs paid almost none
                         of the indirect costs in 2001. Indirect costs were charged to the
                         independent program in fiscal year 2000. However, the
                         Housing Authority ceased charging indirect costs to the
                         program in December 2000. Housing Management asserted to
                         us that the Authority was charging the independent program 4%
                         of the indirect costs. The assertion that the independent
                         program paid indirect costs was correct until the Authority
                         ceased charging the independent program for indirect costs in
                         December 2000.

                         The cost allocation plan used by the Authority is deficient and
                         does not fully distribute indirect costs to the various programs it
                         administers. The Housing Authority needs to review and
                         update its cost allocation plan and ensure that it equitably
                         distributes indirect costs to all of the cost objectives
                         administered by the Housing Authority.


2003-DE-1002                  Page 6
                                                                                  Finding 1



                           OMB Circular A-87, Attachment A, Sections 11(h)(4) and (5)
Maintenance Salaries Are   stipulate that:
Unsupported
                               “Where employees work on multiple activities or cost
                               objectives, a distribution of their salaries or wages will
                               be supported by personnel activity reports or equivalent
                               documentation. Personnel activity reports or
                               equivalent documentation must: (1) reflect an after-the-
                               fact distribution of the actual activity of each employee,
                               (2) be prepared at least monthly and (3) be signed by
                               the employee. Budget estimates or other distribution
                               percentages determined before the services are
                               performed do not qualify as support.”

                           The Housing Authority has three maintenance employees. The
                           maintenance employees did not maintain activity reports or time
                           sheets showing the actual activity of the employee.
                           Furthermore, the Housing Authority did not document how
                           many hours the maintenance employees worked. We observed
                           that the Authority had a time clock but the maintenance
                           employees only punched the clock in the morning and not when
                           they left at the end of the day.

                           Maintenance salaries and benefits totaled about $117,300 in
                           2001. These costs are unsupported because the maintenance
                           employees did not track where they spent their time. During the
                           period, the Housing Authority allocated 96% of the
                           maintenance salary costs to HUD and 4% to the FmHA-
                           insured development. The Authority did not allocate any
                           maintenance costs to its Authority-owned units although the
                           maintenance workers turned over twelve units and completed
                           almost 100 work orders.

                           The Housing Authority was not aware that the maintenance
                           employees needed to document their actual activity in order to
                           allocate maintenance costs to the benefiting cost objective. The
                           Housing Authority needs to implement a system to document
                           the maintenance employees’ actual activity and allocate the
                           costs to the appropriate cost objective.

                           The Housing Authority used funds intended for HUD programs
Summary                    to pay both direct and indirect costs allocable to other

                                Page 7                                         2003-DE-1002
Finding 1


                     programs administered by the Housing Authority. Also,
                     maintenance salaries are unsupported because there is no
                     system to track the actual time spent on each program. The
                     Housing Authority borrowed HUD funds to pay ineligible direct
                     costs of the independent housing program until such time as
                     monies from a mortgage could be obtained. In addition, the
                     Authority ceased charging indirect costs to its independent
                     housing program. Furthermore, the Housing Authority was
                     unaware that the indirect cost allocation plan was deficient or
                     that maintenance employees needed to track their actual time.
                     Consequently, HUD funds are not available for administration
                     of the public housing and Section 8 voucher programs. We
                     recommend that HUD require the Housing Authority to
                     reimburse ineligible costs to the appropriate HUD account and
                     to devise a plan to ensure all costs are properly allocated to the
                     appropriate cost objectives.




  Auditee Comments   The Delta Housing Authority has already repaid ineligible costs
                     of $101,233 per our draft recommendation and is taking steps
                     to address the deficiencies cited in the finding. HUD confirmed
                     that the funds were repaid to the general fund during a recent
                     site visit. Therefore, we will exclude this recommendation from
                     the finding.

                     The Authority addressed the cause of the finding in its response.
                     The Authority stated that it was unaware of the limitations for
                     using HUD funds and believed that it could use the funds for
                     any housing related expenditures provided that such funds were
                     reimbursed to the appropriate accounting category at the
                     appropriate time.

                     The Authority plans on performing a random motion study to
                     properly allocate indirect and direct costs.

                     The Authority did not recall telling us that it was charging its
                     independent housing program 4% of the indirect costs. The
                     Authority responded that in 2001 the Authority charged the
                     independent housing program 8% for indirect costs.




2003-DE-1002              Page 8
                                                                            Finding 1




OIG Evaluation of   We disagree with the Authority’s comment that it was unaware
Auditee Comments    it was using HUD funds for ineligible purposes. Based on
                    management’s comments and actions during the course of our
                    audit, it was apparent to us that management was aware that it
                    used these funds inappropriately.

                    A random motion study is not a valid method for allocating
                    indirect or direct costs. The Authority needs to follow the cost
                    allocation requirements cited in OMB Circular A-87 and the
                    guidance provided by HUD.

                    Although, management could not recall advising us that it
                    charged the independent program 4%, this assertion was
                    provided to us in writing. The Authority did not provide us with
                    any evidence to support that it charged the independent
                    program 8% in 2001. Our review of the Authority’s records
                    showed that in 2001 there were no payments from the
                    independent program to the general fund for indirect costs,
                    except for one insignificant transaction.



Recommendations     We recommend that the Office of Public Housing:

                    1A.     Require the Authority to devise a plan to ensure all
                            costs are properly allocated to and paid by the
                            appropriate cost objective by:

                            1. Requiring that a physical inventory is done and the
                               Housing Authority charges materials and supplies
                               from inventory to the benefiting program.
                            2. Requiring the Housing Authority’s cost allocation
                               plan equitably distributes indirect costs to all of the
                               cost objectives administered by the Housing
                               Authority.
                            3. Requiring the Housing Authority to implement a
                               system that adequately and equitably documents the
                               maintenance employees’ actual activity and
                               allocates the costs to the appropriate cost
                               objective.


                          Page 9                                         2003-DE-1002
Finding 1


               1B.      Monitor the Housing Authority to ensure that actual
                        costs are paid in accordance with the approved cost
                        allocation plan.




2003-DE-1002         Page 10
                                                                                              Finding 2


    Procurement Policy Needs to Be Followed to
     Ensure Services Are Obtained at a Fair and
                 Reasonable Price
The Housing Authority has not carried out its procurements in accordance with HUD requirements and
has circumvented its Procurement Policy. As a result, the Housing Authority may not have procured its
goods and services at a fair and reasonable cost. Our review showed that competitive bid
documentation was questionable for two of the five Housing Authority procurements we reviewed. In
one case, we determined that the Authority paid $54,850 above the reasonable cost for shoddy kitchen
renovation work. Action needs to be taken by the Housing Authority to ensure that its Procurement
Policy is properly implemented and documented.




                                       Title 24, Code of Federal Regulation (CFR), Section 85.36(c)
 Full and Open Competition             requires all procurement transactions to be conducted in a
 Required                              manner providing full and open competition. Housing authorites
                                       must seek, through the use of their policies and procedures, to
                                       maximize competition and minimize opportunities for favortism
                                       and collusion.

                                       The Delta Housing Authority’s procurement policy states that all
                                       purchases and contracts over $25,000 require formal bids.
                                       Sealed bidding is the appropriate procurement method for
                                       construction contracts and supplies above the small purchase
                                       limitations. This procurement method requires written
                                       specifications that describe the requirements clearly, accurately
                                       and completely. The solicitation of bids needs to be advertised.
                                       The Authority holds a public bid opening and bases the award
                                       of the contract on the lowest responsive bid.

                                       The Housing Authority’s procurement policy also states that all
                                       purchases and contracts between $500 and $25,000 require
                                       competitive negotiation. Competitive negotiation means that the
                                       Authority shall invite offers orally, by telephone or in writing
                                       from at least three suppliers or contractors.

                                       We received an allegation that the Housing Authority had
 Procurement Process                   circumvented its procurement policy and improperly
 Circumvented                          documented its records to show compliance. To determine the

                                           Page 11                                         2003-DE-1002
Finding 2


                              validity of the allegation, we selected for review two
                              procurements requiring formal bids and three requiring
                              competitive negotiation, for the period January 1, 2000 to
                              December 31, 2001. We found that the allegation had merit,
                              and identified definciencies with four of the five procurement
                              actions.

 Authority Continued to Use   Over the last few years the Authority has done major
 the Same Contractor After    renovation on its public housing stock. Most of the work was
 the 1998 CIAP Work Was       funded with the 1998 Comprehensive Improvement Assistance
 Completed                    Program (CIAP) grant. Due to the size of the award, the
                              Housing Authority used a private consultant to administer the
                              bidding process and the contract. The private consultant’s
                              recommendation of an independent contractor was followed by
                              the Authority. The Housing Authority has continued to use the
                              same independent contractor on subsequent jobs without the
                              benefit of full and open competition.

                              The Housing Authority used the independent contractor to
                              renovate kitchens and bathrooms, and to do miscellaneous
                              work, in public housing. Also, the contractor has built several
                              single-family units for the Authority’s independent housing
                              program.

                              The Housing Authority paid the independent contractor
 Questionable Bids for        $129,458 in 2001 to remove and replace kitchen cabinets,
 Procurement of Kitchen       countertops, faucets, pipes and stops in forty public housing
 Renovation                   units. Housing Authority management asserted to us that the
                              Authority bid out the job and awarded the contract to the
                              lowest bidder.

                              We reviewed the procurement documents and found that the
                              Housing Authority did not follow the formal bidding process.
                              The Housing Authority did not have written specifications that
                              described the requirements clearly, accurately and completely;
                              and did not advertise the solicitation of bids. The Authority had
                              three proposals from contractors. The independent
                              contractor’s bid of $121,638 was the lowest.

                              We tried unsuccessfully to contact the other two construction
                              companies that bid on the job. The first contractor’s proposal
                              showed that the contractor’s address was in Grand Junction,
                              Colorado but the telephone number provided was a local

2003-DE-1002                      Page 12
                                                                                   Finding 2


                           number in Delta, Colorado. However, the telephone number
                           belonged to an unrelated citizen who never heard of the
                           construction company.

                           We found that the telephone number on the second contractor’s
                           proposal was also a private residence. Therefore, the validity
                           of the two proposals is questionable and indicates the Housing
                           Authority circumvented its procurement policy by not obtaining
                           the required three bids for the construction work.

                           An OIG Appraiser inspected the kitchen renovations to
Contractor Over-Billed     determine whether the cost paid for the work was reasonable.
Authority                  When inspecting the units it became obvious that the
                           independent contractor double-billed the Housing Authority for
                           three units. Thirty-nine of the forty family units had the kitchen
                           cabinets replaced. The contractor billed the Authority for forty-
                           two kitchen renovations. One unit did not need new cabinets
                           because they had already been replaced recently by the
                           Housing Authority.

                           Further review showed the contrator only acquired forty kitchen
                           cabinets. Thirty-nine were installed into Housing Authority units
                           while the last kitchen cabinet set had never been picked up from
                           the lumber store.

                           After our fieldwork was completed, the independent contractor
                           researched the matter and informed us that there were mistakes
                           in the billings. The contractor informed us that he would
                           reimburse the Authority $7,894 for the over-billing.

                           The OIG Appraiser valued the cost of the kitchen renovation
Contractor Paid Over       work at $74,606 using the prevailing Davis Bacon wage rates.
$54,850 Above Reasonable   The Housing Authority paid the contractor $129,458. Thus,
Cost for Shoddy            the Housing Authority paid the contractor over $54,850 above
Workmanship                the reasonable cost for the renovation work. In addition, the
                           OIG appraiser said the work was shoddy. Specifically, the
                           appraiser noted:

                           1. The gap between the countertop's backsplash and the wall
                              was spacious and filled with an excessive amount of
                              caulking.
                           2. There was an incident where a wall cabinet located by a
                              window separated from the wall.

                               Page 13                                          2003-DE-1002
Finding 2


                            3. There were variations in the installation of the drainpipes,
                               supply pipes and P traps. It's questionable whether these
                               parts were replaced in all of the units.

                            The contractor was unlicensed, however, the State and local
                            governments do not require contractors in the jurisdiction of
                            Delta, Colorado to be licensed. Furthermore, the City of Delta
                            does not require building permits or final inspections for the
                            scope of work performed. Only the Housing Authority was
                            responsible for inspecting the kitchen renovation work.

                            There was an incident where one of the kitchen cabinets next to
                            a window separated from the wall injuring a child. During the
                            appraiser’s inspections we noted that the fasteners for the
                            cabinet were angled to hit the wall studs. We noted damage of
                            the pressboard cabinet backing when the fasteners were driven
                            in too far causing the wood to crack and break.

                            In March 2001 the Housing Authority paid an individual
                            handyman $2,079 to secure and rescrew the kitchen and
                            bathroom cabinets of the seventy-five public housing units, after
                            the kitchen cabinet fell. The Authority’s staff should have
                            performed the inspections and held the independent contractor
                            responsible for correcting any deficiencies. Therefore, the
                            $2,079 payment is questionable.

                            In fiscal year 2000 the Housing Authority paid the independent
 Procurement Policy Not     contractor $83,493 to replace bathroom cabinets, sinks,
 Followed for Another Job   faucets, toilets, medicine cabinets, plumbing and florescent lights
 Awarded to Independent     in all seventy-five public housing units. The job was paid with
 Contractor                 1999 CIAP grant monies and funds left over from the 2000
                            Capital Fund grant. The Housing Authority did not solicit
                            sealed bids for this job. Housing Authority management told us
                            bids were not solicited for this job because it was part of the
                            procurement activities awarded under the 1998 CIAP grant.
                            However, the bathroom renovations were not included in the
                            scope of work under the original contract and should have been
                            procured by sealed bidding.

                            The OIG Appraiser made a preliminary inspection of several
                            bathroom renovations. However, we did not perform a
                            detailed review because the total renovation cost appeared to
                            be reasonable.

2003-DE-1002                    Page 14
                                                                                  Finding 2



                          We also reviewed three procurements with two contractors and
Questionable Bids for     a service provider that required competitive negotiation. In
Procurement of Handyman   2001 the Housing Authority paid a handyman $45,897 for
Services                  miscellaneous jobs. This was almost as much as the combined
                          wages of two of the Authority’s maintenance employees. The
                          Housing Authority provided us with two bid sheets to show that
                          the procurement of handyman services complied with policies.
                          We believe that these procurement documents are also
                          questionable.

                          The first bid sheet shows that the Housing Authority sought bids
                          from three handymen in May 2001. The bid sheet showed that
                          two of the handymen contacted were not interested in doing
                          work for the Authority and the work was awarded to a
                          handyman used exclusively by the Authority. We contacted the
                          two handymen who were not interested in the work. One
                          handyman said that he used to do handyman work for another
                          apartment complex but has been out of the business for about
                          three years; he was sure that he had not been contacted by the
                          Authority in at least three years. The other handyman also told
                          us that he did not remember being contacted by the Authority
                          last year.

                          A second bid sheet showed that in June 2001 the Housing
                          Authority received bids for fence installation at an independent
                          program property. There were quotes from the same
                          handyman, the independent construction contractor previously
                          discussed, and a fence installation contractor. The bid of
                          $5,436 was awarded to the handyman.

                          The bid sheet showed a quote of $9,000 per job from the fence
                          installation contractor. We contacted the contractor and we
                          were informed that the Housing Authority never requested a
                          quote. The contractor keeps a log book of all calls and
                          documents all quotes. The contractor researched the log book
                          and found no calls from the Authority. The contractor also
                          informed us that they would never give a general quote like the
                          one described on the bid sheet. Furthermore, the contractor
                          drove by the property with the new fence and said that the price
                          paid for the work was excessive.



                              Page 15                                          2003-DE-1002
Finding 2


                            The Housing Authority has been providing various jobs to the
 Questionable Payments to   handyman in which the payments are questionable. We
 Handyman                   identified $3,079 in questionable payments to the handyman. In
                            June 2000 the Housing Authority paid the handyman $1,000.
                            The only support for the payment was a handwritten piece of
                            paper showing that the payment was for consulting fees. As
                            previously discussed, the Authority paid the handyman $2,079
                            to inspect cabinets.

                            Procuring the services of a handyman appears to be
                            unnecessary since the services provided by the handyman could
                            have been performed by the Housing Authority’s staff, resulting
                            in a savings to project costs. The Housing Authority employs
                            three full-time maintenance staff to maintain only 111 units. In
                            addition, the Authority contracts with a groundskeeper and an
                            individual who cleans and paints vacant units. The Authority
                            could have used its staff to do the work assigned to the
                            handyman.

                            The Housing Authority did not obtain any bids for painting and
 Procurement Policies Not   cleaning services. The painting contractor received $4,825 for
 Followed for Painting &    services provided in 2001. The Housing Authority stated that
 Cleaning Services          we misinterpreted the policy and that purchases under $25,000
                            did not require competitive bids. However, upon further
                            examination the procurement policy clearly stated that
                            purchases and contracts from $500 to $25,000 require
                            competitive negotiation.

                            The Housing Authority has recently revised its procurement
                            policy. However, at the time of our review, the Board of
                            Directors had not reviewed or approved the updated policy.

                            We identified deficiencies with all procurement actions we
 Summary                    reviewed, except one. The Housing Authority simply did not
                            follow procurement policies for the most part and circumvented
                            the requirements to procure services from favored contractors.
                            Although, the Housing Authority provided documents to show
                            that competitive bids were obtained we found the documents
                            questionable in two cases. Consequently, the Authority may
                            not have obtained services for a fair and reasonable price.




2003-DE-1002                    Page 16
                                                                              Finding 2




Auditee Comments    The Authority generally agreed that there were deficiencies with
                    the procurement process and is taking steps to correct the
                    problem. However, the Authority believes that management
                    obtained valid bids for the kitchen cabinet renovation and the
                    handyman jobs.

                    The Authority also disagreed with our valuation of the kitchen
                    renovation work and provided two additional bids to support
                    the costs paid.

                    The Authority responded that the contractor did not perform
                    garbage disposal removal. Also, the Authority states that
                    installation of drainpipes, etc. is a result of constant maintenance
                    and modification since 1974 and does not believe that it can be
                    attributed to the work of the contractor.

                    The Authority believed that bathroom renovation work fell
                    within the 1998 CIAP grant and provided an attachment in
                    Exhibit D as verification.

                    The Authority took exception to the questionable payments to
                    the handyman from three transactions.

                    The Authority asserted that it solicited bids from six insurance
                    companies but only received a bid from two.


OIG Evaluation of   The Authority maintains that the bids for the kitchen renovation
Auditee Comments    and the handyman work are valid. We find these bids
                    questionable because we had allegations that there were
                    problems with these bids and we could not verify that the bid
                    documentation was legitimate. We could not verify the bid
                    documentation because the contact information was either
                    invalid or the parties denied giving quotes to the Authority.

                    Our cost estimate of the kitchen cabinet renovation is based on
                    the quantity and quality of materials actually installed by the
                    contractor. The kitchen cabinets and countertops are similar to
                    the actual purchase price from cabinet supply store and the
                    calculation of the labor wage for each trade was based on
                    hourly Davis Bacon Prevailing Wages in 2000 for the Delta

                        Page 17                                            2003-DE-1002
Finding 2


               area. Additional adjustments of 33% are included in the labor
               hour calculation to reflect the increase in labor hours due to the
               degree of difficulty for the renovation. The contractor's 20%
               overhead and profit calculation was also included in the cost
               estimation.

               The Authority provided two bids it solicited after the conclusion
               of our audit. However, due to the lack of specifications the
               OIG appraiser cannot evaluate these bids without the cost
               breakdowns of the: 1) the quantity, quality and the type of the
               materials; and 2) labor wages for each trade and labor hours
               needed to complete the renovation. Also, the scope of work in
               the proposals did not include the removal and replacement of
               the drainpipes, supply pipes and stops.

               It was our understanding that the garbage disposal removal was
               done by the maintenance staff. This is a separate issue and
               reference to it will be removed from the body of the finding.
               We questioned the quality of the pipes and stops because the
               contractor’s proposal showed that it was going to remove and
               replace the drainpipes, supply pipes and stops. The cost of
               which was included in our cost estimate. However, based on
               your response it appears that the contractor did not replace all
               of the pipes and stops.

               Exhibit D of the Authority’s response shows a draft budget,
               which includes bathroom renovations with the word delete next
               to the amount. This line item was dropped from the final
               budget. Regardless of whether the line item was included or
               not, the bathroom renovation work was not included in any of
               the request for proposals associated with the 1998 CIAP grant
               and procurement policies were not followed when procuring the
               services.

               We agreed with the Authority that the transaction for lead
               based paint training is an eligible expense and will remove it
               from the amount cited in the finding. The other two transactions
               however are questionable because the Authority lacked
               adequate documentation to specifically show what services
               were actually performed. As a result, we could not determine
               whether these expenses were reasonable or necessary.



2003-DE-1002       Page 18
                                                                          Finding 2


                  We agreed with the Authority’s response that it solicited bids
                  for insurance from at least three vendors and removed this
                  deficiency from the finding.



Recommendations   We recommend that the Office of Public Housing:

                  2A.      Require the Housing Authority to take necessary steps
                           to ensure that its Procurement Policy is being properly
                           implemented and documented.

                  2B.      Once the action in recommendation 2A is implemented,
                           ascertain that the Housing Authority’s procurement
                           policy is being properly implemented and documented
                           and is in conformity with HUD requirements.




                        Page 19                                        2003-DE-1002
Finding 2




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2003-DE-1002     Page 20
                                                                                                Finding 3


 Compliance with Occupancy and Administrative
     Requirements Needs to Be Improved
Contrary to HUD requirements, the Housing Authority has not been properly and correctly
implementing its tenant occupancy and related administrative activities. More specifically, we noted: (1)
favoritism when selecting applicants off the waiting list; (2) excess Section 8 voucher payments and
administrative fees for Authority-owned units; (3) lack of independent agency to provide tenant rent
negotiations, rent reasonableness and Housing Quality Standards inspections for Authority-owned units
with Section 8 assistance; and (4) non-recording of tenant fees and deposits. These deficiencies
occurred because the Housing Authority either circumvented the requirements or was unfamiliar with the
requirements. Consequently: (1) applicants are not fairly selected for assistance; (2) the Authority
received excess funds it was not entitled when it continued to receive assistance for a vacant PHA-
owned unit and received excess Section 8 voucher administrative fees; (3) tenants of PHA-owned units
who receive Section 8 assistance may not be adequately protected from the Authority, which is both the
administrator of the Section 8 assistance and landlord; and (4) unrecorded funds can be used for
unallowable costs without the knowledge of outside parties.

These deficiencies point out the need for the Housing Authority to implement proper management
controls over its tenant admission and occupancy procedures and related administrative activities. To
do so will help the Housing Authority to ensure that its HUD funded housing programs are being
properly and correctly carried out in conformity with HUD requirements.




                                        Under HUD requirements, the Housing Authority is obligated to
  Housing Authority to Follow           comply with certain regulations and procedures relating to its
  Specific HUD Requirements             tenant selection and occupancy activities. More specifically, the
                                        Housing Authority is to select tenants in a prescribed order from
                                        its tenant application waiting list. This is to be done to ensure
                                        that applicants are uniformly and consistently selected for any
                                        vacant Housing Authority dwelling unit. Under the Section 8
                                        program, the Authority is to receive specific amounts for any
                                        vacated units; and to collect a specified amount as
                                        administrative fee for the administration of the Section 8 housing
                                        program. Furthermore, the Housing Authority is to utilize an
                                        independent agency to provide tenant rent negotiations, rent
                                        reasonableness and Housing Quality Standards inspections for
                                        those Authority-owned residents who are receiving Section 8
                                        housing assistance. Monies received from the operation of its
                                        housing programs are to be properly receipted and recorded on


                                             Page 21                                         2003-DE-1002
Finding 3


                            the Authority’s official books of account and used for allowable
                            program costs.

                            However, we noted that the Housing Authority had not
                            established the proper management controls over its tenant
                            selection and related occupancy and management procedures.
                            Primarily, we found: (1) favoritism when selecting applicants off
                            the waiting list; (2) excess Section 8 voucher payments and
                            administrative fees for Authority-owned units; (3) lack of
                            independent agency to provide tenant rent negotiations, rent
                            reasonableness and Housing Quality Standards inspections for
                            Authority-owned units; and (4) non-recording of tenant fees
                            and deposits.

                            Title 24, Code of Federal Regulation (CFR), Section
 Authority Is Required to
                            960.206(e)(1) and (2) pertains to public housing units and
 Select Applicants Who
                            requires the Housing Authority to select applicants off the
 Applied First for Public
                            waiting list by the date and time of application. The method for
 Housing or Vouchers
                            selecting applicants must leave a clear audit trail. Title 24,
                            CFR, Section 982.204 (a) pertains to Section 8 vouchers and
                            requires the housing authority to select participants from the
                            waiting list in accordance with the Housing Authority’s
                            admission policies.

                            The Housing Authority’s admission policy states that applicants
                            shall be selected in order of date and time of the initial
                            application with consideration given to the regulations governing
                            income targeting as well as any adopted local preferences. The
                            Housing Authority told us that it has not adopted any local
                            preferences.

                            We received information that the Housing Authority was not
 Favoritism In Selecting    following its admission policy. To evaluate this, we reviewed
 Public Housing Tenants     the records relating to 27 public housing units that were filled in
                            2001. We compared the date of the move-ins with the public
                            housing waiting lists. We found that the information provided to
                            us had merit. We identified five applicants who were not
                            selected from the waiting list in order of the documented date
                            and time of initial application. One applicant received public
                            housing although their name was not on the waiting list and four
                            received preferential treatment when other applicants higher on
                            the waiting list were skipped. For example, in July 2001


2003-DE-1002                    Page 22
                                                                                      Finding 3


                            nineteen applicants were skipped when awarding a 2-bedroom
                            family unit.

                            In addition to applicants receiving preferential treatment, we
                            found that the Housing Authority crossed 24 applicant’s names
                            off the public housing waiting list and transferred them to the
                            Section 8 voucher waiting list without sufficient written
                            justification. Many applicants are in desperate need for housing
                            so they sign up for both the public housing and Section 8
                            voucher waiting lists. Twenty applicants were crossed-off the
                            public housing wait list without justification but remained eligible
                            for the Section 8 wait list. Six applicants were removed from
                            the public housing wait list and immediately given Section 8
                            vouchers, four of which were not on the Section 8 wait list, one
                            skipped 78 applicants on the voucher wait list and the other
                            skipped 49. Nineteen of the 24 applicants crossed off the
                            public housing waiting list subsequently received a Section 8
                            voucher.

                            We also reviewed the Section 8 voucher waiting list. The
Favoritism In Selecting     Housing Authority administers over 210 Section 8 vouchers.
Section 8 Voucher Tenants   There were approximately 60 new Section 8 vouchers issued in
                            2001. Generally the Housing Authority followed the order on
                            the waiting list. However, fourteen applicants received
                            preferential treatment on the voucher waiting list. As previously
                            discussed, six public housing wait list applicants received
                            preferential treatment on the voucher wait list. We also
                            identified seven tenants of the Authority’s independent housing
                            program who received preferential treatment on the Section 8
                            waiting list. Furthermore, one voucher recipient was not on any
                            of the waiting lists.

                            The Housing Authority filled 13 independent program units
Tenants of Authority’s      between January 2001 and February 2002, eleven of which
Independent Program         also received Section 8 vouchers. As previously mentioned,
Received Preferential       seven tenants of Authority-owned units received preferential
Treatment                   treatment on the voucher waiting list. One of the tenants was
                            not on the waiting list. Between 7 and 75 applicants were
                            skipped to house six of the tenants. The Housing Authority
                            holds mortgages on the independent program properties. It
                            appears that the Housing Authority is ensuring a steady stream
                            of cash flow to its independent housing program by giving
                            tenants Section 8 vouchers.

                                 Page 23                                           2003-DE-1002
Finding 3



                            The Housing Authority used favoritism when selecting
                            applicants from the waiting list. This occurred because the
                            Housing Authority circumvented the waiting list requirements.
                            The Housing Authority needs to implement adequate
                            procedures to ensure its tenant selection and admission
                            requirements are followed, thereby, giving each tenant applicant
                            due process when Housing Authority dwelling units become
                            available.

                            We received an allegation that Section 8 voucher funds are paid
 Allegation of Improper     to the Housing Authority for vacant units of the Authority’s
 Section 8 Voucher          independent housing program. Information was provided that
 Payments                   anytime a tenant with a Section 8 voucher vacated or was
                            evicted from a scattered site property, the Housing Authority
                            would continue to pay itself the subsidy until the unit was filled.
                            Typically this would not be more than two months.

                            We identified 12 tenants who moved out of Authority-owned
 Excess Section 8 Voucher   houses in 2001, ten of which had Section 8 vouchers. To
 Payments                   determine the validity of the allegation, we selected five of these
                            cases for review. We found that the allegation had merit. In
                            one out of the five cases, the Housing Authority received a
                            Section 8 voucher payment it was not entitled. A tenant moved
                            out on June 30, 2001 and the Authority continued to process a
                            Section 8 voucher payment for the month of July 2001. The
                            excess payments totaled $219. The excess unauthorized
                            payment provided monies with which the Housing Authority
                            could meet its mortgage payment on the dwelling unit.

                            Per 24 CFR Part 982.352 the housing authority will not earn a
 Additional Voucher         preliminary administrative fee for authority-owned units, whose
 Requirements for PHA-      tenants are receiving Section 8 voucher assistance, and will
 owned Units                collect a reduced administrative fee for the unit. In addition, the
                            following conditions are to be met:

                            1. The authority must inform the family both orally and in
                               writing that the family has the right to select any eligible unit
                               available for lease and an authority-owned unit is freely
                               selected by the family, without pressure or steering;
                            2. That the unit is not ineligible; and
                            3. The housing authority must obtain the services of an
                               independent entity to perform the following functions: rent

2003-DE-1002                     Page 24
                                                                                   Finding 3


                              reasonableness; assist the family to negotiate the rent to
                              owner and Housing Quality Standards inspections.

                          HUD must approve the independent agency that is selected.

                          The Housing Authority was receiving the full Section 8
Excess Section 8          administrative fee for vouchers belonging to tenants of its PHA-
Administrative Fees       owned units. In order to estimate the average monthly excess
                          fees we reviewed the fees calculated in a current month. There
                          were 17 Section 8 voucher recipients living in Authority-owned
                          units in April 2002. For this month, we found that the Authority
                          charged Section 8 administrative fees of $60.28 for each of the
                          17 vouchers. The Housing Authority should have charged a
                          reduced fee of $25.08 per voucher. As a result, the Authority
                          calculated excess fees of $598 for these units in April 2002.

                          The Housing Authority also needs to obtain the services of an
Services of Independent   independent entity: to perform rent reasonableness, assist the
Agency Needed             family to negotiate the rent to the owner and to perform
                          Housing Quality Standards inspections. Housing Authority
                          management apprised us they were aware they were only
                          entitled to a reduced administrative fee but was not aware of the
                          other requirements. HUD needs to have the Housing Authority
                          research the excess Section 8 payments for administrative fees,
                          for an appropriate period of time, to determine how much the
                          Authority owes HUD. Also, HUD needs to approve an
                          independent agency selected by the Authority for overseeing the
                          Housing Authority’s independent owned units subsidized with
                          Section 8 vouchers.

                          While reviewing the Housing Authority’s internal controls we
Unrecorded Tenant Fees
                          identified over $700 of unrecorded funds. We performed a
                          cash count on April 4, 2002 and found a cash surplus of $250.
                          We also identified a bank account in the name of the Housing
                          Authority, called the employee benefit account, with $459 that
                          was also not recorded in the Authority’s accounting system.

                          Housing Authority staff told us that late fees were collected
                          from tenants and used to fund a Christmas party and buy gifts
                          for the staff. The fees are generally kept in cash in an envelope
                          with petty cash funds or deposited into the employee benefit
                          account. The use of such funds to pay for staff parties and gifts


                              Page 25                                           2003-DE-1002
Finding 3


                       is an unallowable activity under OMB Circular A-87,
                       Attachment B, Section 18. This section states:

                            “Costs of entertainment, including amusement,
                           diversion, and social activities and any costs directly
                           associated with such costs are unallowable.“

                       The Housing Authority told us that late fees are never recorded
                       in the Authority’s accounting system. The process followed by
                       the Authority was to give the tenant a handwritten receipt for
                       the late fee payment if the tenant asked for one, but a copy was
                       not kept. The only place the fees may be documented is on the
                       tenant ledger cards. We verified this by scanning the tenant
                       ledger cards and identifying a tenant who paid late fees in
                       January and May 2001 totaling $60. The late fees were not
                       recorded in the Authority’s official accounting system.

                       We also noted an envelope in the cash drawer called “hose
                       fund”. The Housing Authority allows tenants to borrow a
                       garden hose to water their lawns if they leave a $5 deposit. The
                       unrecorded cash most likely consists of the late fees and hose
                       deposits.

                       The Housing Authority needs to establish procedures that late
                       fees and any other monies received such as hose deposits are
                       promptly receipted and deposited into the Authority’s bank
                       accounts. In addition, the collections need to be properly
                       recorded in the Authority’s books of accounts. By failing to do
                       so, the Authority significantly reduces its controls over such fees
                       and collections and is unable to ensure that such funds are used
                       for allowable housing program activities.

                       These deficiencies point out the need for the Housing Authority
 Adequate Management   to implement proper management controls over its tenant
 Controls are Needed   admission and occupancy procedures by: fairly selecting
                       applicants for assistance, properly assessing Section 8
                       administrative fees over its independent housing program;
                       acquiring an independent agency to oversee tenant rent
                       negotiations, rent reasonableness and Housing Quality
                       Standards inspections; and ensuring to receipt and record all
                       miscellaneous fees and collections on its books of accounts. To
                       do so will help the Housing Authority to ensure that its HUD


2003-DE-1002               Page 26
                                                                             Finding 3


                    funded housing programs are being properly and correctly
                    carried out in conformity with HUD requirements.




Auditee Comments    The Authority generally disagreed with the finding.

                    The Authority did not recall advising us that it had not adopted
                    local preferences, asserting that it adopted local preferences for
                    selecting applicants from the waiting lists in 1999.

                    The Authority provided explanations for the selection of
                    applicants that we cited were not fairly selected for assistance.

                    The Authority disagreed with our example where five applicants
                    were skipped when awarding a 3-bedroom unit.

                    The Authority also disagreed with the amount of the excess
                    Section 8 payments received for a vacant unit.

                    The Authority responded that the number of residents in PHA-
                    owned units who received Section 8 assistance in April 2002
                    was 17 rather than 18. Also, the Authority disagreed with the
                    overcharge for excess Section 8 Administrative fees stating that
                    the overcharge was about $110.




OIG Evaluation of   Our conclusions are based on the information provided to us by
Auditee Comments    management and our review of the records. When we asked
                    management whether the Authority used any preferences we
                    were told that it didn't use local preferences. In Exhibit F of the
                    Authority’s response is a copy of the Board resolution whereby
                    local preferences were adopted on June 10, 2002. This
                    resolution occurred after our exit conference and would not
                    apply to the cases we reviewed. Furthermore, the records we
                    reviewed did not contain any documentation showing that a
                    local preference was requested by the tenant or was equitably
                    applied by the Authority. It appears that this policy was
                    adopted after the fact to justify the practice of favoritism we
                    observed.



                        Page 27                                           2003-DE-1002
Finding 3


                  The Authority did not provide any documentation to support its
                  justification for the selection of applicants that we cited received
                  favorable treatment.

                  We confirmed that an applicant on the three-bedroom waiting
                  list was awarded a four-bedroom unit and there were no other
                  applicants on the four-bedroom waiting list. We modified our
                  example and changed the body of the finding to exclude this
                  applicant.

                  The Authority stated that the excess Section 8 voucher
                  payments for the vacant unit was less than the amount cited in
                  the report. HUD confirmed that the Authority performed a
                  move-out inspection of the unit on June 30, 2001. Therefore
                  we amended the finding to show one month of excess payments
                  instead of two.

                  We confirmed that there were only 17 tenants residing in PHA-
                  owned units who received Section 8. The report will be
                  changed to reflect the correct number of vouchers and the
                  excess fees. Although the April 2002 voucher was not
                  submitted until after our audit we used it merely to provide an
                  example of the monthly overcharges that have been occurring
                  since the Authority began giving Section 8 vouchers to tenants
                  of PHA-owned units. We revised the paragraph to show this is
                  an estimate. The Authority did not provide a basis for their
                  calculation of the excess Section 8 Administrative fees when it
                  derived $110.80. We consulted with HUD and were advised
                  that our methodology for calculating the excess fees was
                  correct.



Recommendations   We recommend the Office of Public Housing:

                  3A.      Require the Housing Authority to establish a system to
                           ensure that applicants are fairly selected from waiting
                           lists that are maintained in order of date and time of
                           application and require the Authority to maintain
                           documentation to support the selection of applicants.

                  3B.      Review Section 8 payments and Section 8
                           administrative fees paid for Authority-owned units, for

2003-DE-1002            Page 28
                                                         Finding 3


         the last thirty-six month period of time, and recover
         monies collected by the Authority that it was not
         entitled.

3C.      Approve an independent agency selected by the
         Housing Authority to perform rent reasonableness and
         Housing Quality Standards inspections, and assist
         tenants to negotiate rent for Authority-owned units
         whose tenants receive Section 8 assistance.

3D.      Require the Housing Authority to record all tenant fees
         and deposits in the accounting system and to deposit
         any unused tenant fees and deposits into the
         appropriate project account.

3E.      Monitor the Housing Authority as appropriate to ensure
         that the Authority complies with occupancy and
         administrative requirements.




      Page 29                                         2003-DE-1002
Finding 3




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2003-DE-1002     Page 30
Management Controls
In planning and performing our audit, we considered the management controls of the Delta Housing
Authority to determine our auditing procedures, not to provide assurance on the controls. Management
controls include the plan of organization, methods, and procedures adopted by management to ensure
that its goals are met. Management controls include the processes for planning, organizing, directing,
and controlling program operations. They include the systems for measuring, reporting, and monitoring
program performance.




                                       We determined the following management controls were
 Relevant Management
                                       relevant to our audit objectives:
 Controls
                                       •   Program Operations – Policies and procedures that
                                           management has implemented to reasonably ensure that a
                                           program meet its objectives.

                                       •   Validity and Reliability of Data – Policies and procedures
                                           that management has implemented to reasonably ensure that
                                           valid and reliable data are obtained, maintained, and fairly
                                           disclosed in reports.

                                       •   Safeguarding Resources – Policies and procedures that
                                           management has implemented to reasonably ensure that
                                           resources are safeguarded against waste, loss and misuse.

                                       We assessed the relevant controls identified above.

                                       It is a significant weakness if management controls do not
                                       provide reasonable assurance that the process for planning,
                                       organizing, directing, and controlling program operations will
                                       meet an organization’s objectives.

                                       Based on our review, we believe the following items are
 Significant Weaknesses                significant weaknesses:

                                       •   Program Operations

                                           Generally, the Housing Authority had adequate controls to
                                           ensure that the Authority operated its public housing
                                           according to program requirements. Even though, the
                                           Authority had adequate policies and procedures, they were

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Management Controls


                          sometimes subject to management override. For example,
                          management circumvented the waiting list requirements
                          resulting in favoritism when selecting applicants for
                          subsidized housing assistance.

                      •   Validity and Reliability of Data

                          The Authority’s controls did not ensure that the data it
                          maintained was valid and reliable. The Housing Authority
                          needs to ensure that all direct costs are charged to the
                          correct program and indirect costs are identified and
                          allocated in accordance with an approved cost allocation
                          plan. The Authority also needs to track the actual amount
                          of time spent on each program by the maintenance staff to
                          support the salary costs. Furthermore, the Housing
                          Authority needs to perform an inventory count to verify the
                          quantities of recorded equipment and materials.

                      •   Safeguarding Resources

                          The Housing Authority lacked adequate checks and
                          balances to safeguard its resources. Management’s
                          circumvention of polices and procedures resulted in waste,
                          loss and misuse. Management misused over $100,000 of
                          HUD funds when it used them to support its independent
                          housing program. In addition, due to an inadequate cost
                          allocation plan and the failure to charge the maintenance
                          staff’s actual time to each program, HUD funds are
                          subsidizing non-HUD programs.

                          Management circumvented procurement policies and
                          procedures to procure the services of select contractors
                          and individuals. In one case, the Authority paid a
                          contractor at least $54,000 above the reasonable cost. The
                          Authority also made questionable payments of $3,079 to a
                          handyman.

                          Management violated administrative requirements when it
                          authorized the payment of Section 8 subsidies for a vacant
                          Authority-owned unit. The Authority also charged HUD
                          excess administrative fees for Section 8 voucher payments
                          received for Authority-owned units. Finally, management
                          diverted tenant fees and deposits, keeping them off of the

2003-DE-1002              Page 32
                                         Management Controls


   Authority’s official books of account and by doing so, used
   the monies for unauthorized program expenses.

These weaknesses are more fully described in the findings
section of this report.




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Follow Up On Prior Audits

This is the first audit of the Delta Housing Authority by the Office of Inspector General.




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2003-DE-1002                  Page 36
                                                                                        Appendix A

Schedule of Questioned Costs

     Finding            Type of Questioned Cost
     Number                  Ineligible 1/2/

       1                      $101,233


1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that
       the auditor believes are not allowable by law, contract or Federal, State or local policies or
       regulations.

2/     Subsequent to our site work HUD confirmed that the Authority repaid questioned costs of
       $101,233.




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                             Appendix B

Auditee Comments




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          Appendix B




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          Appendix B




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          Appendix B




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          Appendix B




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          Appendix B




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                                                                                    Appendix C

Distribution Outside of HUD
Chairman, Committee on Governmental Affairs, 340 Dirksen Senate Office Building,
  United States, Senate, Washington, DC 20510
Ranking Member, Committee on Governmental Affairs, 706 Hart Senate Office Building,
  United States, Senate, Washington, DC 20510
Chairman, Committee on Government Reform, 2185 Rayburn Building, House of
  Representatives, Washington, DC 20515
Ranking Member, Committee on Government Reform, 2204 Rayburn Building
  House of Representatives, Washington DC 20515
Subcommittee on Oversight and Investigations, Room 212 O’Neil House Office Building
  Washington, DC 20515
Director, Housing and Community Development Issue Area, United States General Accounting
  Office, 441 G Street NW, Room 2474, Washington DC 20548
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human
  Resources, B373 Rayburn House Office Building, Washington, DC 20515
Chief, Housing Branch, Office of Management & Budget, 725 17th Street, NW, Room 9226,
  New Executive Office Building, Washington, DC 20503




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