oversight

Minneapolis Public Housing Authority Supplemental Police Services Minneapolis, Minnesota

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-04-14.

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

          AUDIT REPORT




  MINNEAPOLIS PUBLIC HOUSING AUTHORITY
      SUPPLEMENTAL POLICE SERVICES

        MINNEAPOLIS, MINNESOTA

                2004-CH-1003

               APRIL 14, 2004




           OFFICE OF AUDIT, REGION V
               CHICAGO, ILLINOIS




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                                                                  Issue Date
                                                                          April 14, 2004
                                                                 Audit Case Number
                                                                           2004-CH-1003




TO:            Diane Cmiel, Director of Public Housing Hub, 5KPH


FROM:          Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT:       Minneapolis Public Housing Authority
               Supplemental Police Services
               Minneapolis, Minnesota

We completed an audit of the Minneapolis Public Housing Authority’s supplemental police
services. We initiated the audit based on a citizen complaint to our Office. The complainant alleged
that the Authority did not conduct its procurement of supplemental police services through full and
open competition. Our audit objectives were to determine whether the complainant’s allegation
was substantiated and HUD’s rules and regulations were followed. Our specific objectives were
to evaluate the effectiveness of the Authority’s procedures and controls over contract awards,
contractor performance, and contract payments. The audit resulted in three findings.

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 Thomas Towers, Assistant Regional
Inspector General for Audit, at (313) 226-6280 extension 8062 or me at (312) 353-7832.




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Executive Summary
We completed an audit of the Minneapolis Public Housing Authority’s supplemental police
services. We initiated the audit based on a citizen complaint to our Office. The complainant alleged
that the Authority did not conduct its procurement of supplemental police services through full and
open competition. Our audit objectives were to determine whether the complainant’s allegation
was substantiated and HUD’s rules and regulations were followed. Our specific objectives were
to evaluate the effectiveness of the Authority’s procedures and controls over contract awards,
contractor performance, and contract payments—with the focus on supplemental police services
contracts. Throughout the report we use the term supplemental police services to describe private
security guard services, police services contracted directly between the Authority and the
Minneapolis Police Department, and services provided by off-duty police officers, procured by the
Authority for the safety and security of tenants residing in their housing units.

Supplemental police services contracts were generally awarded through full and open competition,
but contracts were not always executed or renewed on time. Improvements were also needed in the
administration of supplemental police services and controls over contractor payments. During our
audit, we determined that the Authority failed to: (1) adequately support $1,119,274 paid to off-duty
police officers; (2) consistently follow Federal requirements and its procurement policies in the
administration of supplemental police services contracts; and (3) consistently implement effective
controls to prevent overpayments of $268,349 that included overpaid sales taxes ($260,923) and
duplicate invoices ($7,426).



                                      The Authority failed to adequately support $1,119,274 paid to
 Payments To Off-Duty                 off-duty police officers. The payments were also made
 Police Officers Were Not             without a written agreement outlining the supplemental
 Adequately Supported                 police services at seven of the Authority’s housing projects.
                                      Although the Authority received invoices, it lacked weekly
                                      timesheets to substantiate the amounts paid or hours worked.
                                      In addition, we found inconsistencies in the number of hours
                                      claimed and the hourly pay rates in some instances where the
                                      Authority provided documentation.

                                      The Authority did not consistently adhere to its procurement
 The Administration Of                policy or Federal requirements for administering procurement
 Supplemental Police                  contracts. Specifically, the Authority did not always: (1)
 Services Contracts Needed            execute contracts (in lieu of purchase orders) or renew
 Improvement                          contracts on time; (2) obtain Board approvals when
                                      required; (3) ensure its contract award recommendations
                                      were independently reviewed; (4) prepare independent cost
                                      estimates prior to obtaining quotes; (5) disburse funds in
                                      accordance with prescribed procedures; and (6) adequately



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Executive Summary


                            document contractor performance related to the terms of
                            the contract.

                            The Authority’s controls over contractor payments needed
 Controls Over Contractor   improvement. Specifically, the Authority did not always
 Payments Needed            ensure: (1) payments to contractors were made according to
 Improvement                contract terms; (2) contract administrators’ duties were
                            properly segregated; (3) requests for checks were properly
                            used; and (4) contract obligations were sufficient to cover
                            all invoice payments. These weaknesses resulted in the
                            Authority misspending $268,349 in HUD funds. During
                            our audit, the Authority’s management implemented
                            corrective actions to address some of these deficiencies.

                            We recommend that HUD’s Director of Public Housing
 Recommendations            Hub, Minneapolis Field Office, assure that the Authority
                            reimburses its appropriate HUD Program for the
                            inappropriate use of funds and implements controls to
                            correct the weaknesses cited in this report.

                            We presented our draft audit report to the Housing
                            Authority’s Executive Director, the Board of
                            Commissioners’ Chairperson, and HUD’s staff during the
                            audit. We held an exit conference with the Authority’s
                            Executive Director on January 6, 2004. The Authority
                            disagreed that HUD funds were inappropriately used.




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Table Of Contents
Management Memorandum                                                  i



Executive Summary                                                    iii



Introduction                                                          1



Findings

1. Payments To Off-Duty Police Officers Were Not Adequately
   Supported                                                          5


2. The Administration Of Supplemental Police Services Contracts
   Needed Improvement                                               13


3. Controls Over Contractor Payments Needed Improvement             25




Management Controls                                                 37



Follow-Up On Prior Audits                                           39



Appendices
  A Schedule Of Questioned Costs                                    41


  B Auditee Comments                                                43

  C HUD Comments                                                    67

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Introduction
The Minneapolis Public Housing Authority was established under the laws of the State of
Minnesota. The Authority contracts with HUD to provide eligible individuals and families in
Minneapolis, Minnesota with decent, safe, and affordable housing. The Authority is the largest
in Minnesota and the 25th largest in the country. The Authority manages nearly 5,800 housing
units, which include 4,856 units (40 high-rise buildings), 731 single-family homes, and 184
townhomes.


                                  Total Housing Units: 5,771
          High-Rise
          Buildings
         4,856 Units                                                     High Rise
                                               Single-Family
                                                  Homes
                                                                         Buildings
                                                    731                  Single-Family
                                                                         Homes
                                                                         Townhomes
                                           Townhomes
                                              184




In addition to providing housing services, the Authority also provides its residents with a variety
of services and programs. These include assisted living programs for elderly adults; Head Start
programs; economic self-sufficiency and employment programs; and security and drug
prevention programs that use the services of the Minneapolis Police Department, private security
contractors, and off-duty police officers. The Authority spent over $17 million, including
$1,259,209 in payments to off-duty police officers, to fund its supplemental police services. The
Authority used $11,983,491 (about 69 percent) of HUD funds to pay for these services, using a
combination of the Capital Fund Program (formerly Comprehensive Grant Program), Public
Housing Operating Subsidies, and Public Housing Drug Elimination Program.
A nine-member Board of Commissioners governs the Housing Authority. Cornell Moore is the
Chairperson of the Board of Commissioners, and Cora McCorvey is the Executive Director of
the Authority. The Authority’s official books and records are maintained at 1001 Washington
Avenue North, Minneapolis, Minnesota.




                                      The audit resulted from a citizen complaint to our Office.
 Audit Objectives                     The complainant alleged that the Authority awarded
                                      supplemental police services contracts without full and open

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                   competition. Based on the complaint, our objectives were to
                   determine whether the complainant’s allegation was
                   substantiated and HUD’s rules and regulations were
                   followed. Specifically, we evaluated the effectiveness of
                   the Authority’s procedures (with an emphasis on
                   supplemental police services contracts) for: (1) awarding
                   contracts; (2) monitoring contractor performance; and (3)
                   making payments to contractors

                   We conducted the audit at HUD’s Minneapolis Field Office
 Audit Scope And   and the Authority’s Office. We performed our on-site audit
 Methodology       work from January 2003 through August 2003.

                   Our scope covered the Authority’s procurement activities
                   over supplemental police services contracts for the period
                   January 1, 1996 through December 31, 2002. The period was
                   adjusted as necessary. We conducted the audit in accordance
                   with Generally Accepted Government Auditing Standards.

                   To accomplish our audit objectives we interviewed: HUD’s
                   staff; the Authority’s former and current staff; the
                   complainant; the complainant’s legal counsel; former and
                   current police officers of the Minneapolis Police
                   Department; and two State of Minnesota auditors.

                   Additionally, we reviewed the following:
                      • Parts 85 and 761 of Title 24 of the Code of Federal
                          Regulations;
                      • HUD Handbook 7485.3;
                      • HUD’s files for the Authority;
                      • Office of Management and Budget Circular A-87;
                      • General Accounting Office’s Assessing Internal
                          Controls in Performance Audits; and
                      • Authority’s security contractor payments; Security
                          Guard Requests for Proposals; supplemental police
                          services     procurement     files;   Procurement
                          Procedures Manual (dated March 22, 1995 and
                          revised January 9, 2003); timesheets, invoices and
                          check requests provided by the Authority and the
                          Minneapolis Police Department for one of the
                          contractors; Board meeting minutes; Annual
                          Contribution Contract; organizational chart; Public
                          Housing Drug Elimination Program agreement
                          with HUD; Moving To Work Demonstration


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               Program agreement with HUD; the Cooperative
               Agreement between the Authority and the City of
               Minneapolis; payroll and other records obtained
               from the complainant’s legal counsel; an affidavit
               of the former Deputy Executive Director; and
               Audited Financial Statements for Fiscal Years 1996
               through 2002.

       We used Computer Assisted Audit Techniques, including
       ACL, to analyze: (1) the Authority’s contract register; (2)
       payments made to off-duty officers and security
       contractors; and (3) selected samples for audit. We did
       limited tests of the reliability of computer-processed data
       by corroborating information through reviews of contract
       files, and verification with the Authority’s staff.

       Using ACL, we performed reasonableness tests on 9,179
       (100 percent) contract/purchase order transactions recorded
       in the Authority’s contract register as of January 28, 2003.
       Additionally, we used ACL to analyze 5,472 (100 percent)
       payment transactions to off-duty officers for determining
       hourly rates and total compensation per officer. We also
       selected 20 of 811 payment transactions made to three
       security contractors and the local law enforcement agency
       between August 1, 1996 and December 31, 2002. In
       selecting our sample, we stratified the population by
       contractors and selected a test sample size of five from
       each stratum. From this sample, we were able to
       determine, through extrapolation, that the Authority made
       overpayments of sales taxes to two of its contractors over a
       42-month period.

       We provided a copy of this report to the Housing
       Authority’s Executive Director and the Chairperson of the
       Board of Commissioners.




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                                                                                          Finding 1


    Payments To Off-Duty Police Officers Were
           Not Adequately Supported
The Minneapolis Public Housing Authority paid $1,259,209 in HUD funds to off-duty police
officers without executing a written agreement or having adequate support for expenses incurred
between February 1999 and December 2000. This occurred because the Authority’s former Deputy
Executive Director approved the use of check requests to respond to an emergency situation.
However, the use of check requests continued for 22 months without a written agreement being
executed. As a result, the Authority lacked assurance that the invoiced services were for reasonable
and necessary expenses, and failed to maintain adequate documentation in support of $1,119,274 in
payments to off-duty police officers.


                                      Part A, Section 15(A) of the Annual Contributions Contract
 Federal Requirements                 between HUD and the Housing Authority requires the
                                      Authority to maintain complete and accurate records.
                                      Section 5 of the Contract requires the Authority to operate
                                      its project in compliance with Federal requirements such as
                                      HUD’s regulations and Office of Management and Budget
                                      Circulars. Office of Management and Budget Circular A-
                                      87, Cost Principles for State, Local, and Indian Tribal
                                      Governments, Attachment A, paragraph C(1)(j) provides
                                      that costs must be adequately documented in order to be
                                      allowable under Federal awards.

                                      24 CFR Part 85.20(b)(6) requires that accounting records
                                      be supported with source documentation, such as cancelled
                                      checks, paid bills, payrolls, time and attendance records,
                                      contract and sub grant award documents.

                                      24 CFR Part 761.15(b)(1)(ii)(C), revised April 1, 1999,
                                      states if a local law enforcement agency is receiving funds
                                      from the Authority, the Authority and the agency are
                                      required to execute a written agreement. The agreement
                                      must describe the activities to be performed by the agency,
                                      their scope of authority, how they will coordinate their
                                      activities, and the types of activities the agency is expressly
                                      prohibited from undertaking. These same requirements
                                      were reiterated in 24 CFR Part 761.17(a)(1)(ii)(C), revised
                                      as of April 1, 2003.

                                      HUD Handbook 7485.3 G, Appendix 2.1, Comprehensive
                                      Grant Program Guidebook, paragraph 4(e) requires the

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                           Authority to execute a long-term law enforcement service
                           agreement (over and above local law enforcement baseline
                           services) with the primary law enforcement provider (local
                           police, sheriff, and/or State). Paragraph (4)(h) states the
                           Authority will not incur expenditures until it and the local
                           law enforcement agency execute a contract for the
                           additional law enforcement activities.

                           The Authority’s Procurement Procedures Manual dated
 Authority’s Procurement   March 22, 1995, revised October 26, 2000, and VI Section
 Policy                    C of the Authority’s Procurement Procedures Manual states
                           the Authority is required to execute a written agreement for
                           professional services over $25,000. Prior to October 26,
                           2000, a contract was required for professional services over
                           $10,000.

                           The Authority paid $1,259,209 in HUD grant funds to
 Source Of Funds For       Knight Security and to 146 off-duty Minneapolis police
 Paying Knight             officers from February 1999 through December 2000. The
 Security                  Authority used $616,886 of HUD’s Capital Fund Program
                           (formerly Comprehensive Grant Program), $538,697 in
                           Operating Reserves (Performance Funding System),
                           $75,240 in Public Housing Drug Elimination Program
                           funds, and $28,386 in other unidentified funds.


                                                   Funds Distribution

                                                                         6%     2%


                                         43%



                                                                                           49%




                                                 CGP      PFS     PHDEP       Unknown

                            Legend: Comprehensive Grant Program (CGP); Performance Funding System (PFS); Public
                            Housing Drug Elimination Program (PHDEP)


                           The Authority treated its procurement of supplemental
 Written Agreement Not     police services as professional services, to provide greater
 Executed As Required      assurance of obtaining quality services. However, the

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                         Authority did not execute a written agreement with Knight
                         Security for supplemental police services in accordance
                         with Federal requirements and the Authority’s procurement
                         policies.

                         Instead, supplemental police services were provided over a
                         22-month period based on a verbal agreement between the
                         Authority’s former Deputy Executive Director and a
                         Minneapolis Police Department Sergeant. The Police
                         Sergeant was the former Housing Police Team Supervisor
                         for the Authority and later represented Knight Security.

                         According to the Authority’s former Deputy Executive
Services Were Obtained   Director, the Authority became concerned about increased
To Address An            criminal activity in several of its housing projects in early
Emergency Situation      1999. The Deputy Director said he made a verbal
                         agreement with a Police Sergeant to use off-duty police
                         officers from the Minneapolis Police Department. He did
                         this because the Police Department could not provide
                         additional police officers, and the use of unarmed guards in
                         high-rise buildings was insufficient. When the off-duty
                         police officers were brought into the Authority’s housing
                         projects to patrol at night, the former Deputy Executive
                         Director said it was viewed as an emergency situation
                         requiring quick action on behalf of the Authority in
                         response to increased criminal activity.

                         Originally, the Authority made payments to Knight
                         Security from February through March 1999, and from
                         these payments, the Police Sergeant wrote checks to each
                         off-duty officer. Beginning in April 1999, the off-duty
                         officers were paid directly by the Authority.

                         Under the terms of the verbal agreement, check requests
                         were used by the Police Sergeant to pay the off-duty police
                         officers and the Authority’s former Deputy Executive
                         Director approved the payments.        According to the
                         Authority’s Procurement Procedures Manual, check
                         requests should be initiated in lieu of other methods of
                         procurement when deemed prudent and approved by the
                         Authority’s Executive Director or its Director of Finance.
                         The manual included examples such as payments for
                         attending    meetings,    out-of-town     travel,   certain
                         subscriptions, and stipends for Commissioners.         The
                         Authority’s Director of Finance said approval of the off-
                         duty officers’ check requests was an oversight and the
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Finding 1


                             Authority stopped this practice after HUD-OIG auditors
                             addressed the issue with them. The Authority implemented
                             new procedures during the audit to correct this deficiency.

                             As a result of having a verbal agreement with Knight
 Authority Lacked            Security, the Authority lacked assurance that all invoiced
 Assurance That Costs Were   services were for reasonable and necessary expenses. For
 Reasonable And Necessary    example, for over 40 pay periods between March 1999 and
                             December 2000, three off-duty police officers worked more
                             than 24 hours a week for Knight Security while working
                             full time as officers of the Minneapolis Police Department.
                             One of the three officers—the Police Sergeant in charge of
                             Knight Security—claimed 3,627 hours of work, or about 38
                             hours per week during the 22-month period while working
                             as a full-time officer with the Minneapolis Police
                             Department. Working both jobs, we estimated that the
                             Police Sergeant worked an average of 11 hours a day—
                             seven days a week—for 22 months, and earned $178,377
                             from Knight Security.

                             The Authority used at least $1,119,274 in HUD’s funds to
 Payments Lacked Adequate    pay Knight Security and its officers without maintaining
 Adequate Support
 Support                     adequate support. The Authority was unable to provide
                             timesheets and/or sign in sheets to substantiate all of the
                             services received.

                             For the period February 1999 to December 2000, the
                             Authority furnished 12 of 95 invoices containing
                             supporting documentation such as summary timesheets
                             showing total daily hours worked by each officer, amounts
                             paid, and the locations worked. Neither the Authority nor
                             the Police Sergeant could provide documentation to support
                             the remaining 83 weeks of billed services. The Police
                             Sergeant said he was not required by the Authority to
                             submit timesheets showing daily totals by officer, and kept
                             them only for about two to three months in case the officers
                             had questions about their pay.

                             We determined that the Authority paid Knight Security a
                             total of $1,259,209 for services received from February
                             1999 through December 2000.          A total of $7,426
                             represented duplicate payments that we addressed in
                             Finding 3, leaving a balance of $1,251,783. We reviewed
                             the 12 weekly payroll summary worksheets provided by the
                             Authority and determined that $132,509 of the payroll was

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                   adequately supported. As a result, the Authority did not
                   have assurance that the remaining HUD funds totaling
                   $1,119,274 ($1,251,783 less $132,509) to Knight Security
                   were for reasonable and necessary expenses. This amount
                   represents unsupported expenses that should be reimbursed
                   to the Authority’s appropriate Programs.



Auditee Comments   [Excerpts paraphrased from the Housing Authority’s
                   comments on our draft finding follow. Appendix B, pages
                   4 to 6, and 12 to 17 contain the complete text of the
                   Authority’s comments for this finding.]

                   While the Housing Authority did not have a formal written
                   contract with Knight Security, the contract was based upon
                   Knight’s written proposal, the weekly invoices, check
                   requests and the course of dealing between the parties.

                   The lack of a formal written contract and the use of check
                   requests did not result in a lack of adequate controls over
                   the rates charged for the off-duty police officers as
                   suggested in the audit report. The Authority agrees that it
                   should have had a formal written contract and should not
                   have used check requests to pay for off duty police
                   services. However, Knight Security’s written proposal
                   clearly stated the regular hourly rate is $23 per hour and the
                   holiday rate is $33 per hour.

                   Payments to off-duty police officers are adequately
                   supported and are eligible Federal costs. The Authority
                   respectfully requests that the Office of Inspector General
                   revise its report to delete the recommendation that the
                   Authority should reimburse the appropriate HUD Program
                   from non-Federal funds in the applicable amount. This
                   request is based upon: a) the admitted need and success of
                   the off-duty police service; b) the fact that in 99.93% of the
                   time, the Authority paid the officers an hourly rate of $23
                   or $33; c) the clear language in 24 CFR 85.20 (b)(6) which
                   is misquoted in the report; and d) the payment
                   documentation provided to support the police services.

                   The Authority believes that its limited and dwindling
                   resources are best used to implement the changes that the
                   OIG has recommended and to continue to provide quality
                   housing for low-income persons.
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   OIG Evaluation Of   In the absence of a formal written contract, we looked for
                       support in the form of timesheets documenting the hours,
   Auditee Comments    days and locations certified as worked by each of the off
                       duty police officers. In instances where the Authority
                       provided this documentation, we excluded the appropriate
                       amounts from our unsupported figure. In all other
                       instances where the Authority only had check request
                       invoices, we determined that this was not adequate since
                       daily hours—by location and officer—were not provided.
                       Additionally, without a formal contract we did not know
                       what specific services were to be provided or the locations
                       to be covered by the off duty police officers.

                       We did not misquote 24 CFR Part 85.20(b)(6) in our report.
                       In the report we stated that 24 CFR Part 85.20(b)(6)
                       requires that accounting records be supported with source
                       documentation, such as cancelled checks, paid bills,
                       payrolls, time and attendance records, contract and sub
                       grant award documents. In 24 CFR Part 85.20(b)(6) under
                       the section Source Documentation, it states that accounting
                       records must be supported by such source documentation
                       as cancelled checks, paid bills, payrolls, time and
                       attendance records, contract and sub grant award
                       documents, etc."

                       The Authority indicated that it based its payments on
                       Knight Security’s proposal. However, as stated in Knight’s
                       deposition, there were several items in its proposal that
                       were never performed such as monitoring all the buildings
                       listed in the proposal, or performing all of the listed tasks.
                       As such, the proposal contained suggestions that were
                       never formalized in a written contract.

                       The Authority said we concluded that "summary
                       timesheets" were mandatory "to substantiate the amounts
                       claimed or hours worked." We interpreted the timesheets
                       to be synonymous with time and attendance records. The
                       Authority indicated that they produced cancelled checks
                       and paid bills, items that are clearly listed in the CFR as
                       adequate documentation. The Authority also said that these
                       paid bills were made up of weekly invoices showing the
                       number of hours worked each week by each officer; and
                       that the invoices were similar to a weekly timesheet. We
                       could not rely solely on the paid invoices and cancelled
                       checks alone because in several instances we found that

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                   hours shown as worked on paid invoices did not match the
                   hours listed on the timesheets that were available to review.
                   We didn't find evidence where the Authority reconciled the
                   differences between the timesheets and the invoices.

                   In addition, as indicated by the Authority, the invoices
                   showed total hours worked by location and the total hours
                   worked by each officer. However, the invoices didn't show
                   the hours that each officer worked at each location, by date.
                   The timesheets had this information, and is the reason why
                   we considered timesheets as needed documentation to
                   support the amounts billed as reasonable and necessary
                   expenses. Unless the Authority can provide further
                   documentation, we recommend that it reimburse its Public
                   Housing Program the $1,119,274 in unsupported costs.

                   The Authority has complied with the recommendation to
Auditee Comments
                   execute professional contracts for services in excess of
                   $25,000.     The Authority’s Procurement Policy and
                   Procedures require a written contract for professional
                   services in excess of $25,000. This is an internal policy
                   established by the Authority and is not required by state or
                   Federal law. On occasion, the Authority has obtained
                   professional services in excess of $25,000 by purchase
                   order to cover periods between formal written contracts and
                   when sole source police services were obtained.

                   The Authority’s use of purchase orders resulted in funds
                   being used in an efficient manner. Without any basis or
                   explanation the report concludes that the use of a purchase
                   order results in funds not being used in an efficient manner.
                   While the Authority agrees that it should have had formal
                   contracts for some of the supplemental police services, the
                   use of a formal contract has nothing to do with whether the
                   expenditure would have been incurred. Also, awards to the
                   private security companies resulted from a formal
                   competitive process. In addition, contracts with the
                   Minneapolis Police Department and off duty police officers
                   were sole source. Clearly, the purchase orders were an
                   efficient use of funds.

                   In the future, the Authority’s Procurement Department will
                   more closely monitor the procurement of professional
                   services to require a written contract. Also, by April 2004,
                   the Authority intends to have procedures in place so that

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                        contract awards are reviewed by the Contracting Officer
                        before going to the Board of Commissioners for approval.

    OIG Evaluation Of   The Authority’s willingness to more closely monitor the use
                        of written contracts for professional services in excess of
    Auditee Comments    $25,000 should help to improve this area. Also, the
                        Authority’s proposal to have procedures in place by April
                        2004 to address reviews by the Contracting Officer is
                        responsive to our recommendation. However, the use of
                        purchase orders for procuring professional services in excess
                        of $25,000 is not in accordance with its own procurement
                        policies. We look to the use of formal contracts in these
                        instances to provide greater assurance of receiving the best
                        possible price for the services obtained.




    Recommendations     We recommend that HUD’s Director of Public Housing Hub,
                        Minneapolis Field Office, assure the Minneapolis Public
                        Housing Authority:

                        1A.      Provides documentation to support the $1,119,274 in
                                 unsupported supplemental police services cited in
                                 this finding. If adequate documentation cannot be
                                 provided, then the Authority should reimburse its
                                 appropriate Programs from non-Federal funds for the
                                 applicable amount.

                        1B.      Executes written contracts for all professional
                                 services exceeding $25,000 as required by HUD’s
                                 regulations and the Authority’s Procurement Policies
                                 and Procedures.




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                                                                                      Finding 2


     The Administration Of Supplemental Police
      Services Contracts Needed Improvement
The Minneapolis Public Housing Authority needed to improve its administration of
supplemental police services. Specifically, the Authority failed to: (1) execute contracts or
renew contracts on time; (2) obtain Board approvals for procuring professional services over
$25,000; (3) ensure its contract award recommendations were independently reviewed; (4)
prepare independent cost estimates to determine the type of contract needed; and (5) ensure
funds were reserved and obligated before obtaining services. Problems occurred because the
Authority did not adequately monitor and evaluate supplemental police services contractors’
performance for compliance with contract terms. Additionally, the Authority’s Procurement
Department lacked adequate procedures and controls for processing and administering
supplemental police services contracts. As a result, the Authority was not assured that
supplemental police services were consistently obtained in the most efficient and effective
manner.


                                   Section 5 of the Annual Contributions Contract between
 HUD’s Regulations
       Requirements                the Housing Authority and HUD requires the Authority to
                                   develop and operate all projects in compliance with the
                                   applicable statutes, executive orders, and regulations issued
                                   by HUD, including Part 85 of Title 24 of the Code of
                                   Federal Regulations.

                                   24 CFR Part 85.36(b)(2) requires grantees and sub grantees
                                   to maintain a contract administration system that ensures
                                   contractors perform in accordance with the terms,
                                   conditions, and specifications of their contracts or purchase
                                   orders. Additionally, Part 85.36(f) states grantees and sub
                                   grantees must perform a cost or price analysis in
                                   connection with every procurement action—including
                                   contract modifications—before receiving bids or proposals.

                                   The Authority’s Procurement Policy, dated October 26,
 The Authority’s                   2000, requires the Authority to obtain Board approval for
 Procurement                       procurement of professional services over $25,000. Prior
 Requirements                      to October 26, 2000, Board approval was required for these
                                   type contracts over $10,000.           Paragraph 8 of the
                                   Authority’s Procurement Policy also requires Board
                                   approval when change orders exceed 25 percent of the
                                   initial contract in excess of $10,000.



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                          Section C of the Authority’s Procurement Procedures
                          Manual, dated March 22, 1995 (revised January 9, 2003)
                          states after collecting all completed evaluations, a written
                          memorandum must then be prepared by the contract
                          administrator specifying the recommended selection. Such
                          memorandum will include a copy of the Request for
                          Proposal document and a copy of each evaluation, and will
                          be sent to the Contracting Officer for review and approval.

                          Between August 1996 and March 2002, the Authority
 Funding Sources          disbursed $14,977,271 for 11 contracts and $1,136,287 for 14
                          purchase orders to obtain supplemental police services. The
                          funding of $16,113,558 included $5,245,456 in Public
                          Housing Drug Elimination Program funds, $5,019,398 in
                          Operating Funds, and $459,428 in Capital Fund Program
                          funds (formerly Comprehensive Grant Program). The City of
                          Minneapolis provided the remaining $5,389,276.

                          The Authority did not timely execute or renew contracts for
 Contracts Were Not       supplemental police services resulting in the use of purchase
 Executed Or Renewed On   orders for 14 of 25 requests for services. The contract value
 Time                     of the purchase orders we reviewed ranged from $45,064 to
                          $322,779.

                          The Authority failed to execute a 2001 Minneapolis Police
                          Department contract resulting in the issuance of 11
                          purchase orders. The Authority’s Director of Resident
                          Initiatives said analyzing the contracts was a tedious
                          process. The Authority had to make sure that the language
                          of the contract allowed it to make immediate decisions
                          based on various situations that can arise, such as changes
                          in the level of crime.

                          In 2000, the Authority also failed to renew three guard
                          contracts (contract numbers 20.25A, 20.25B and 01.42) on
                          time. In these instances, except Guard Contract Number
                          01.42, the Authority used purchase orders to cover the
                          periods without a contract after the previous contract
                          expired. The Authority did not execute Contract Number
                          01.42 until February 2002, eight months after the Board
                          approved the contract award recommendation in June 2001.
                          The Assistant Director of Property Management said the
                          contractor’s union got involved—thereby delaying the
                          contract in Legal Services.


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                       The Authority’s Procurement Officer said the untimely
                       renewal of contracts was an ongoing problem. The Officer
                       attributed some of the delays to the Authority’s Legal
                       Department, and to the lack of urgency on the part of the
                       Procurement Department since they knew that services
                       could continue with the issuance of purchase orders.

                       In July 2003, HUD’s Public Housing staff at the
                       Minneapolis Field Office questioned the validity of using
                       purchase orders in lieu of having a contract in place, where
                       a contract was required. In HUD’s opinion, services should
                       have ceased until a contract was in place. The Authority
                       lacked procedures and controls to alert them when a
                       contract was approaching the point where it needed to be
                       renewed so that ample time was available. 24 CFR Part
                       761.15(b)(1)(i), Subpart B—Use of Grant Funds, prohibits
                       the expenditure of HUD funds without executing a written
                       agreement. The timely renewal of contracts will prevent
                       any potential service interruptions and preclude the need
                       for using purchase orders in place of contracts.

                       The Authority did not obtain Board approvals for 22 of 25
Board Approvals Were   requests for supplemental police services reviewed. As
Not Obtained           previously mentioned, 14 were purchase orders instead of
                       contracts because the Authority either failed to execute a
                       contract or renew existing contracts timely. The remaining
                       eight items were contracts. Five contracts had a contract
                       term of one year that was renewable for another year.
                       Board approval was not obtained on these five contracts
                       because the Authority’s Contracting Officer said it was not
                       necessary to obtain the Board's approval to renew the
                       contracts for a second year. The Purchasing Supervisor
                       was unable to explain the reason why Board approval was
                       not obtained on the remaining three contracts.

                       The Authority’s Contracting Officer said the Board's initial
                       authorization gave the Authority permission to renew a
                       vendor's contract after the first year to complete the two-
                       year term. However, the contracts each had change orders
                       in excess of 25 percent of their initial contract price
                       exceeding $10,000.       Therefore, Board approval was
                       required for the second year of each of these contracts, in
                       accordance with the Authority’s Procurement Policy.



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                        The Authority did not follow its contracting procedures
 Contract Award         requiring the Contracting Officer to review the Selection
 Recommendations Were   Committee’s award recommendations before sending them
 Not Independently      to the Board for approval.
 Reviewed
                        The Authority’s Contract Administrator submitted
                        recommendations directly to the Board on all seven
                        security guard contracts reviewed rather than to the
                        Contracting Officer. The Contracting Officer said the
                        Authority was not following its contracting procedures and
                        said the Purchasing Supervisor reviewed the evaluation
                        documentation after it went to the Board. The Contracting
                        Officer also said the Authority was taking action to change
                        its process to ensure that evaluation documentation is
                        reviewed first before being sent to the Board for approval.

                        The Authority did not maintain documentation to support
 Independent Cost       its basis for estimating contract costs to determine whether
 Estimates Were Not     bid prices were reasonable—in accordance with 24 CFR
 Properly Documented    Part 85.36(f). An independent cost estimate is a required
                        contracting procedure because it will determine the type of
                        procurement method to be used, and will help to determine
                        the reasonableness of bids or proposals received. It is also
                        useful in ensuring an appropriate amount of funds are
                        obligated for budget purposes.

                        The Authority entered into 11 security contracts between
                        August 1996 and March 2002 at a cost of $16,695,340.
                        The Authority could not provide a basis to show how it
                        assessed the reasonableness of the contractor’s bid price on
                        any of these contracts.      For instance, although the
                        Authority’s records indicated the total projected hours on
                        seven guard contracts, we could not determine how the
                        projected hours were estimated. The Assistant Director of
                        Property Management and Security Guard Contract
                        Administrator indicated the Authority had cost estimates,
                        but could not explain how the estimated costs were arrived
                        at.

                        Moreover, the Authority had four police contracts that
                        required a cost analysis according to 24 CFR 85.36(f) since
                        they were procured non-competitively. Although the
                        contract files contained budget information verifying the
                        contract price, a cost analysis was not done to determine if
                        the Authority obtained theses services at a reasonable price.

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                        The Authority did not properly reserve and obligate
HUD Funds Were Not      $989,829 of its HUD funds to ensure sufficient funds were
Properly Reserved And   available to cover the expenses before obtaining the
Obligated               services.

                        The Authority did not follow HUD’s procedures because it
                        disbursed its grant funds as expenses were incurred. HUD
                        Handbook 7460.8, Procurement Handbook for Public and
                        Indian Housing Authorities, requires Housing Authorities
                        to have a process for setting aside funds prior to making
                        purchases—to assure that funds are available. Of the 25
                        items reviewed, 11 purchase orders were issued to pay for
                        services already rendered. For example, the Authority’s
                        Contracting Officer approved purchase order 94337 on
                        September 10, 2001, 48 days after the vendor’s invoice
                        date of July 24, 2001. Purchase order number 94337 was
                        for services rendered in June 2001. Based on this payment
                        arrangement, funds were not set-aside before the expenses
                        were incurred as required by HUD.

                        The Authority’s Director of Legal Services said the reason
                        the purchase orders were used was to continue security
                        services while the 2001 contract with the Minneapolis
                        Police Department was being renewed. However, the
                        Authority should have ensured that appropriate funds for
                        the services were reserved and obligated before issuing the
                        purchase orders. Without appropriately reserving and
                        obligating funds before incurring an expense, the Authority
                        could potentially obligate itself to pay for services without
                        having the required funds. The following table shows the
                        purchase order number, invoice date, and the dates the 11
                        purchase orders were obligated.




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                                                               Difference
                         Purchase                  Purchase     Between
                                       Invoice
                          Order                     Order    Purchase Order            Remarks
                                        Date
                         Number                   Issue Date  and Invoice
                                                                 Dates
                                                                               January & February 2001
                          93853A       03/30/01    04/05/01          6 days    Services
                           94165*      06/14/01    06/18/01          4 days    May 2001 Services
                           94176*      05/09/01    06/19/01          41 days   March 2001 Services
                           94177*      05/15/01    06/19/01          35 days   April 2001 Services
                           94337       07/24/01    09/10/01          48 days   June 2001 Services
                           94341       08/22/01    09/12/01          21 days   July 2001 Services
                           94469*      09/27/01    10/17/01          20 days   August 2001 Services
                           94530*      10/17/01    10/30/01          13 days   September 2001 Services
                           94625*      11/14/01    12/04/01          20 days   October 2001 Services
                           94750*      12/24/01    01/14/02          21 days   November 2001 Services
                           94911       02/04/02    03/13/02          37 days   December 2001 Services
                         Legend: *Confirming Purchase Order - a purchase order issued before a
                                     requisition form is approved.


                            The Authority did not effectively monitor its security guard
 Security Guard             contractors and evaluate their performance to ensure
 Contractors Were Not       compliance with contract terms as required by 24 CFR
 Effectively Monitored      85.36(b)(2).

                            According to the Authority’s Assistant Director of Property
                            Management and the Security Guard Contract
                            Administrator, the Authority conducted regular meetings
                            with its security guard contractors as its primary method of
                            monitoring. The Contract Administrator said that issues
                            and concerns about guard performance were addressed
                            during these meetings. However, the meetings were not a
                            sufficient means of monitoring whether the contractors
                            complied with the terms and requirements listed in their
                            contracts. The meeting minutes did not indicate how the
                            Authority evaluated the security contractors’ overall
                            performance.

                            Supplemental police services contractors were required by
                            their contracts to submit daily and weekly reports, and ensure
                            their guards had criminal background/history checks and
                            were properly trained before reporting for duty.
                            Documentation furnished by the Authority did not adequately
                            support that the contractors completed required reports,

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                    background checks, and training in accordance with contract
                    specifications.   The Authority’s Assistant Director of
                    Property Management and the Security Guard Contract
                    Administrator said the Authority lacked a formal process for
                    evaluating contractor performance, and had not done a good
                    job in documenting problems with the security contractors.



Auditee Comments    [Excerpts paraphrased from the Housing Authority’s
                    comments on our draft finding follow. Appendix B, pages
                    10, 12, and 17 to 21 contain the complete text of the
                    Authority’s comments for this finding.]

                    Federal requirements allow discretion on the method and
                    degree of analysis in performing a cost or price analysis. The
                    report states that the Authority did not have supporting
                    documentation on how the projected hours for private
                    security guard vendors were estimated, or how the
                    corresponding dollar amounts were determined.              The
                    Authority estimated the number of hours based upon the
                    hours incurred at the time of the request for proposal plus
                    some additional hours to allow for discretion in increasing the
                    number of hours. The estimated number of hours was then
                    multiplied by the hourly rate. In addition, the cost of police
                    officers and off-duty police services are a sole source and are
                    dependent upon the established hourly rates of the officers.
                    Based upon this information and taking inflation into
                    consideration, the Authority had the basis for a cost or price
                    analysis.

                    In response to the report, the Authority has modified its
                    Request for Solicitation form to formally document the cost
                    estimate for goods and services prior to the solicitation of a
                    formal contract. Also, the Authority will continue to
                    evaluate its processes and forms for informal procurement.

OIG Evaluation Of   The Authority’s proposed actions appear to be responsive to
                    our recommendation for conducting independent cost
Auditee Comments
                    estimates prior to bid solicitation on all future contracts. For
                    the private security guard and police services contracts we
                    reviewed, the Authority was unable to support how they
                    arrived at the number of hours required per contract, other
                    than to use the hours already incurred from existing contracts.
                    This assumes that those contracts were using resources in the
                    most efficient manner. By modifying its Request for
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                        Solicitation form to formally document the cost estimate prior
                        to solicitation, this should serve as a good basis for making
                        comparisons to bids received.

   Auditee Comments     The Authority has taken and will take action to timely
                        execute and renew contracts. The Authority denied that the
                        delays in signing and renewing contracts were due to the
                        Legal Department or lack of urgency on the part of the
                        Procurement Department. Also, the Authority clarifies that
                        the Director of Resident Initiatives did not state that
                        contracting is tedious and may have said extensive.

                        The Authority agrees that some less needed services may be
                        temporarily halted until a written contract is signed. But
                        supplemental police services are extremely important and
                        should not be temporarily halted. It is poor management and
                        a narrow-sighted interpretation of Federal regulation to
                        require every Public Housing Authority in every instance to
                        discontinue a service because a written contract is not in
                        place. The Minneapolis Public Housing Authority has
                        improved its procurement procedures and respectfully
                        requests the option to use purchase orders in some cases.

                        The Authority is reorganizing its Procurement Department.
                        As a result of the reorganization, it has instituted a procedure
                        whereby the Procurement Department provides a monthly
                        report to the Deputy Executive Director on the upcoming
                        deadlines to extend contract dates, or limits of authority, or to
                        re-solicit. The Authority’s goal is to have new contracts in
                        place by the time the old contract expires, and to reduce the
                        use of purchase orders between contracts.

    OIG Evaluation Of   The Authority’s proposed corrective actions to alert its
    Auditee Comments    Deputy Executive Director on upcoming deadlines so that
                        new contracts can be put in place in a timely manner will help
                        to improve this condition. And, we recognize that there are
                        some circumstances that warrant the use of a purchase order
                        to ensure continuity of services when a contract cannot be
                        executed in time. However, this should only occur in rare
                        situations.

   Auditee Comments     The Authority is confident with the reorganization of the
                        Procurement Department that in the future the Board will
                        approve all professional service contracts in excess of
                        $25,000.

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                    The Authority revised its Procurement Policy on April 24,
                    2002 and intended that a change order increasing the first
                    year of the contract up to 25 percent would not require Board
                    approval. The Authority also intended that such a change
                    order would not require it to obtain Board approval to extend
                    the contract for a second year if the Board’s initial
                    authorization permitted the Authority to renew a contract for
                    a second year. Also, the Authority intended that it could
                    increase the second year of the contract up to 25 percent
                    without Board approval. The Authority will amend its
                    Procurement Policy and Procedures and Attachment A to
                    reflect the intent described above.

                    The Authority also estimates that by April 2004, it will have
                    procedures in place so that contract awards are reviewed by
                    the Contracting Officer before going to the Board of
                    Commissioners for approval.

                    The Authority has procedures to reserve and obligate funds
                    prior to expenditure, and retrained staff in April 2003 to
                    improve compliance with the procedures. The Authority has
                    taken steps to reserve and obligate funds prior to expenditure.
                    The report states that the purpose of obligating funds prior to
                    incurring an expense is to make sure that the Authority has
                    sufficient funds to pay for the services. The Authority notes
                    that it has consistently balanced the budget, receives
                    outstanding scores under the financial indicator according to
                    HUD’s Public Housing Assessment System, and is fiscally
                    sound.

OIG Evaluation Of   The Authority’s proposed improvements to its procurement
Auditee Comments    procedures should help to alleviate many of the weaknesses
                    identified during the audit. HUD should ensure that the new
                    procedures are implemented as planned.

Auditee Comments    The Authority effectively monitored the performance of
                    supplemental police service contracts. 24 CFR 85.36(b)(2)
                    states that a Public Housing Authority will maintain a
                    contract administration system which ensures that contractors
                    perform in accordance with the terms, conditions and
                    specifications of their contracts. The Minneapolis Public
                    Housing Authority’s contract administration system for
                    security guard vendors included daily sign in logs, daily
                    activity logs, and incident reports that its staff reviewed daily.
                    If there were insufficiencies in the reports, these matters were
                    immediately resolved. The Authority determined whether a
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                        guard was properly trained by the way the guard completed
                        the various logs and reports.

                        The Authority attended monthly Security Advisory
                        Committee meetings with staff, tenants, members of the
                        Minneapolis Public High Rise Resident Council, and vendors
                        to discuss and resolve security issues. The Council prepared
                        the minutes of the meetings. In addition, the Authority
                        communicated with the vendors in person, by phone and e-
                        mail on a daily basis; and routinely met with each vendor on a
                        weekly basis except for several months towards the end of the
                        2000 contract with Reco Security and Safety Consultants,
                        Incorporated.

                        The Authority reviewed videotapes of guards on duty to
                        determine whether they were on post or attending to duties
                        while on post. On several occasions when the Authority
                        determined that a guard was not performing, it asked the
                        vendor to remove the guard from the Authority’s account.

                        The Authority also reviewed invoices and subtracted time for
                        missed or late shifts. Staff, residents, and guests also
                        completed Security Guard Complaint Forms that the
                        Authority reviewed, investigated, and resolved. Taken as a
                        whole, these activities were a very efficient and cost effective
                        administration system. The report’s conclusion that this
                        administration system was faulty merely because the minutes
                        to the monthly security advisory meetings did not state how
                        the Authority evaluated the vendor’s overall performance is
                        baseless and unreasonable.

    OIG Evaluation Of   The Authority engaged in several methods of monitoring
    Auditee Comments    contractor’s performance, as stated in their comments.
                        However, we also recognized that improvements were needed
                        to ensure that contractors were meeting all of the contract
                        terms. For example, in the motion for summary judgment
                        between the Authority and Reco Security and Safety
                        Consultants, Incorporated, the Authority alleged that Reco
                        failed to: 1) obtain background checks on its employees; 2)
                        obtain mandatory training; and 3) properly supervise its
                        employees. However, the motion was not granted because
                        the Authority was not able to prove damages. By specifically
                        tying performance to the terms of a contract, it becomes
                        easier to assess damages. We want the Authority to be able
                        to protect itself in the event of contractor nonperformance so

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                  that compensatory damages, if needed, can be assessed and
                  potentially recovered.




Recommendations   We recommend that HUD’s Director of Public Housing Hub,
                  Minneapolis Field Office, assure the Minneapolis Public
                  Housing Authority:

                  2A.      Provides    documentation      to    support      the
                           reasonableness of the security services cited in this
                           finding. If documentation cannot be provided, the
                           Authority should reimburse the applicable Program
                           (Public Housing Operating Subsidy, Public Housing
                           Drug Elimination Program, and Capital Fund
                           Program) the appropriate amount from non-Federal
                           funds.

                  2B.      Implements adequate procedures and controls to
                           ensure that its contracts are administered as
                           required by HUD’s regulations and its Procurement
                           Policy. At a minimum, ensure that contracts have: 1)
                           timely awards; 2) Board approvals when required; 3)
                           independent reviews of award recommendations; 4)
                           bids evaluated against independent cost estimates; 5)
                           sufficient funds reserved and obligated before
                           services are obtained; and 6) documentation of
                           performance related to the terms of the contract.




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    Controls Over Contractor Payments Needed
                  Improvement
The Minneapolis Public Housing Authority inappropriately spent $268,349 of HUD funds for
sales taxes ($260,923) and duplicate payments of invoices ($7,426). The Authority needed to
improve controls over its contractor payments for supplemental police services. Specifically, the
Authority did not ensure: (1) payments were made in accordance with contract terms; (2)
contract administrators’ duties were properly segregated; (3) check requests were properly used;
and (4) contract obligations were sufficient to cover invoice payments. The problems occurred
because the Authority did not ensure payment requests were consistent with its policies and
procedures, and with agreed-upon contract terms before approving invoices for payment. As a
result, HUD funds were not used efficiently and effectively.


                                     24 CFR 85.20(b)(3) states effective control and
 Federal Requirements                accountability must be maintained for all grant and sub
                                     grant cash and other assets.

                                     General Accounting Office’s Assessing Internal Controls in
                                     Performance Audits, Chapter 1, Specific Standards, dated
                                     September 1990, states key duties in authorizing,
                                     processing, recording, and reviewing transactions should be
                                     separated among individuals.

                                     Section 5 of the Annual Contributions Contract between
                                     the Housing Authority and HUD requires the Authority to
                                     develop and operate all projects in compliance with
                                     applicable statutes, executive orders, and regulations issued
                                     by HUD, including 24 CFR Part 85.

                                     The Authority’s Procurement Procedures Manual, dated
 The Authority’s                     March 22, 1995 and revised January 9, 2003, Section VI
 Procurement Policies And            A.2. states a check request should be initiated in lieu of
 Procedures                          other methods of procurement when such is deemed most
                                     prudent and approved by the Executive Director or Director
                                     of Finance. Examples of expenditures deemed appropriate
                                     are: (1) attendance at meetings as approved in advance by
                                     the Executive Director; (2) purchase of certain
                                     subscriptions (such as newspapers, magazines and
                                     publications that include intermittent updates); (3) out-of-
                                     town travel as approved, in advance, by the Executive
                                     Director; (4) mileage/parking cost reimbursement; (5)
                                     stipends for the Authority’s Commissioners and its

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                         resident’s participation at meetings; and (6) payment of
                         certain permits and taxes.

                         Section II of the Procedures Manual states the Executive
                         Director is authorized to make purchases in accordance
                         with the provisions of the Authority’s procurement policies
                         provided that sufficient budgetary authority exists to
                         accommodate such purchases.

                         Contract number 96.108, between the Authority and Reco
 Security Contractors’   Security and Safety Consultants, Incorporated, dated
 Agreements              August 30, 1996, item G, states the Authority will
                         compensate the contractor at an hourly rate of $11.74 per
                         hour inclusive of all services to be provided. Item U of the
                         contract further states payment will be inclusive of all costs
                         and other expenses including 6.5 percent Minnesota sales
                         tax as applicable.

                         Contract number 97.74 A, between the Authority and
                         Avalon Security Corporation, dated May 8, 1998, item IV,
                         states the Authority will compensate the contractor at an
                         hourly rate of $16.67 inclusive of all costs and expenses
                         including Minnesota sales tax.

                         Contract Number 97.74 B, between the Authority and Reco
                         Security and Safety Consultants, Inc., dated May 11, 1998,
                         item IV states the Authority agrees to compensate the
                         contractor for services required, performed and accepted,
                         inclusive of all costs and expenses, including 6.5 percent
                         Minnesota sales tax as applicable, at an hourly rate of
                         $16.67 per hour, pursuant to the Fee Schedule attached in
                         Exhibit A.

                         The Authority inappropriately paid $260,923 to two
 Payments Were Not       security guard contractors who billed for Minnesota State
 According
 Made In Accordance
           To Contract   sales taxes as separate line items on the invoices.
 TermsContract Terms
 With
                         We first identified the error in the overpayment of sales tax
                         after randomly selecting 20 of 811 stratified invoice
                         payments made to the Minneapolis Police Department and
                         three private security guard contractors for the period of
                         August 1996 through December 2002. The invoice dates
                         of the samples selected ranged between September 1997
                         and April 2000.


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          Based on the results of our sample, we determined that
          eight of 20 invoices had 6.5 percent Minnesota sales taxes
          added to the hourly rate charged by two of the three private
          guard contractors.     We did not find any sales tax
          discrepancy on the other guard contractor or the
          Minneapolis Police Department. The total amount of
          overpaid sales taxes based on our sample review was
          $11,396. The following table lists the contract number,
          invoice number, invoice date, amount paid, billed amount,
          and the amount of overpaid sales tax.


                                                                         Amount
       Contract    Invoice      Invoice       Amount        Billed         Of
       Number      Number        Date          Paid        Amount       Overpaid
                                                                        Sales Tax
        97.74B          1009       12/07/98     $14,380      $13,503           $878
        97.74B          1034       01/25/99      14,522       13,636            886
        97.74B          1161       08/30/99       9,161        8,602            559
        96.108          None       09/02/97      26,950       25,305          1,645
        96.108          None       11/17/97      53,722       50,443          3,279
        96.108          None       10/12/98      28,654       26,905          1,749
        97.74A       6282699       06/28/99      19,760       18,554          1,206
        97.74A       9073599       09/07/99      19,564       18,370          1,194
                               Totals          $186,714     $175,318       $11,396

          Based on this sample, we extrapolated our results to
          include the entire universe of payments made to the two
          contractors between August 1996 and April 2000. We
          were able to determine that the Authority paid a total of
          $260,923 in sales taxes on three contracts based on total
          payments of $4,014,200 times the sales tax rate of 6.5
          percent (4,014,200 x .065).

          The Authority paid $55,356 and $70,208 in sales taxes to
          Reco Security and Safety Consultants, Incorporated on
          invoices for Contract 96.108 and Contract 97.74B,
          respectively. The Authority paid an additional $135,359 to
          Avalon Security Corporation for sales taxes on Contract
          97.74A. However, the three contracts already included
          Minnesota sales taxes in the hourly rates to be paid to the
          two contractors.

          The Authority’s Director of Legal Services said the
          Authority paid the contractors sales taxes separately on
          their invoices by mistake.       The contractors were
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                            inappropriately paid because the Authority’s contract
                            administrators did not follow the contracts’ terms when
                            approving the invoices for payment. In April 2000, upon
                            discovering the error, the Authority took corrective action
                            by denying all future contractor claims for sales tax as a
                            separate line item in their invoices.

                            The payment of these sales taxes could have been avoided
                            if the Authority placed more emphasis in reviewing the
                            terms of the contracts before approving the invoices for
                            payment.

                            The Authority did not properly segregate duties over its
 Duties Were Not Properly   procurement process. When procuring goods or services by
 Segregated                 purchase order, the Authority’s contract administrators were
                            allowed to: (1) prepare or approve purchase requisition forms;
                            (2) determine the contractors to solicit; (3) certify the receipt
                            of goods or services; (4) review contractors’ invoices; and (5)
                            authorize invoice payments. The contract administrators’
                            performance of these functions provided the opportunity for
                            the Administrators to certify the receipt of services and
                            authorize the payment for those services. Proper accounting
                            procedures require the adequate segregation of duties in order
                            to provide control and assign accountability over the
                            procurement process. The Authority appeared to have an
                            adequate number of employees to segregate duties so that no
                            one individual had complete control over the procurement
                            payment process.

                            Twenty-five percent ($61,271,426) of the total value of the
                            Authority’s procurement activities—from 1992 to January
                            28, 2003—was procured through the use of purchase
                            orders. This represents a significant amount of funds in the
                            control of the contract administrators—supporting the need
                            to properly segregate their functions. The use of purchase
                            orders represents a weakness that the Authority needs to
                            address to assure its funds are used in the most efficient
                            manner (See Finding 2).

                            The Authority’s Executive Director and its management
 Improper Use Of Check      approved and paid $1,259,209 in expenses by check
 Requests                   requests between February 1999 and December 2000. The
                            former Housing Police Team Supervisor, operating as
                            Knight Security, submitted check requests to the Authority
                            on a weekly basis without a written agreement (See Finding

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                                  1). The payments to the off-duty officers by check requests
                                  continued until March 2003. This type of activity should
                                  have been processed as a formal contract to ensure proper
                                  authorization and accountability over the use of funds. The
                                  Authority’s current Director of Finance knew about the
                                  check requests being made to the off-duty officers.
                                  However, it did not occur to the Director that this was a
                                  problem because the Authority made these payments for
                                  years and the Authority’s Procurement policy was unclear
                                  in this area.

                                  Through the use of the check requests, the Authority
Duplicate Payments                inappropriately made seven duplicate payments of $7,426
                                  to the off-duty officers. The duplicate payments included
                                  either two invoices submitted for the same amounts for
                                  services performed the same day, or two invoices with
                                  different amounts for services performed the same day (we
                                  averaged these together to determine a duplicate amount).
                                  According to the Authority’s Director of Finance, contract
                                  administrators were responsible for tracking payments to
                                  the officers, and the Finance Department controlled the
                                  invoice payments by invoice number. However, this
                                  system had a weakness since the Authority consecutively
                                  numbered each invoice with a stamp as they were received.

                                  For example, invoice number 53386 for $950 was approved
                                  for payment on June 14, 1999. On June 22, 1999, a
                                  duplicate payment request was submitted and it was
                                  stamped with a different invoice number. The Authority
                                  paid both invoices because of the different invoice
                                  numbers. The following table lists the pay period dates,
                                  invoice numbers, and the amount of the duplicate invoice
                                  payments made to the off-duty officers.

                                  Pay Period                     Invoice Number
                                                                First      Duplicate
                        From                     To           Payment      Payment      Amount
                     06/05/1999              06/11/1999      53386        53460          $950
                     06/12/1999              06/18/1999      53462        53461           833
                     08/23/1999              08/27/1999      54323        54241           690
                     09/27/1999              10/01/1999      54718        54851           633
                     11/06/1999              11/12/1999      55359        55432         2,139
                     12/11/1999              12/17/1999      55745        55829         2,020
                     05/06/2000              05/06/2000      57655        57655           161
                                       Total Duplicate Payments                        $7,426



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                      Although the duplicate amounts we found were minimal,
                      one remedy would be to assign a unique identifier as the
                      invoice number, such as a date. For example, an invoice
                      received for services performed on January 7, 2004 could
                      be assigned as invoice number 20040107. Following this
                      procedure would flag any duplicates for further research.

                      The Authority did not ensure that contract obligations were
 Payments Exceeded    sufficient to cover all invoice payments, as prescribed in
 Contract Authority   Section II, page 4 of its Procurement Procedures Manual.

                      The Authority’s contract register contained 9,179
                      transactions valued at $244,772,453. The Authority paid
                      invoices totaling $817,898 for 32 transactions with a
                      contract value of $771,853. The Authority’s payments
                      exceeded the contract authority by $46,045. Although the
                      amount we identified is minimal, this condition should not
                      occur since all expenditures should be covered by an
                      obligation to protect the Authority from spending more
                      than it has. The Authority’s Director of Finance initially
                      thought the automated system used by the Authority would
                      not allow payments to be made if the invoice exceeded the
                      contract amount. However, the Director said the problem
                      occurred because of an improper system configuration
                      when the Oracle-based Automated Data Processing System
                      was initially set up.

                      The Authority’s purchases are entered into its Oracle
                      system either as a standard or blanket purchase. During our
                      audit, the Authority’s Director of Finance implemented
                      corrective action for the standard purchases and was
                      researching corrective action for blanket purchases.



   Auditee Comments   [Excerpts paraphrased from the Housing Authority’s
                      comments on our draft finding follow. Appendix B, pages
                      4 to 6, 7 to 12, and 21 to 23 contain the complete text of the
                      Authority’s comments for this finding.]

                      Procurement under Federal law is very complex. The
                      drafting of contract documents in order to eliminate
                      ambiguity and to meet Federal guidelines is also very
                      complex. Counsel approved the Authority’s contracts as to
                      content and form. The Authority reasonably believed that

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                    its contracts were in good form because it had successfully
                    avoided litigation arising out of a contract until March
                    2001 when Reco Security and Safety Consultants,
                    Incorporated sued the Authority. The language in the 1996
                    and 1998 contracts with private security guard vendors
                    created an ambiguity as to whether the hourly rate included
                    sales tax.     The alleged overpayment resulted from
                    ambiguous contract language. To correct the ambiguity,
                    the Authority revised its contract language to: a) more
                    clearly provide for the payment of sales tax; and b) state
                    that if there is a conflict between the contract and the
                    proposal, the contract prevails.

                    In addition, the Authority addressed this issue in its
                    supervisory training. Prior to June 2002 and the audit, the
                    Authority was planning supervisory training for all
                    supervisors who are also contract administrators. The
                    supervisory training occurs almost on a monthly basis and
                    covers a variety of topics including procurement. The
                    supervisory training will be repeated each year for new
                    supervisors and others as needed. In April 2003, the
                    Authority’s Procurement Department conducted a training
                    session on procurement policy and procedures. In this
                    training session, staff was instructed to read contracts and
                    to know the terms of the contracts. Hopefully, this ongoing
                    training and the revision in the contract language will help
                    to reduce the ambiguity in contract administration.

                    The Authority believes that its limited and dwindling
                    resources are best used to implement the changes that the
                    Office of Inspector General has recommended and to
                    continue to provide quality housing for low-income
                    persons. The Authority respectfully requests that the
                    recommendation that it reimburse the appropriate program
                    from non-Federal funds in the amount of $260,923 be
                    deleted from the report because these payments are
                    adequately documented and are eligible Federal costs.

OIG Evaluation Of   In our review of the private security guard contracts, we
                    found the contract language in the Requests for Proposals
Auditee Comments
                    and in some of the final contracts to be ambiguous. It was
                    for this reason that we only cited the two contracts with
                    Reco Security and Safety Consultants, Incorporated, and
                    the one contract with Avalon Security Corporation. For the
                    1996 contract, Reco Security was clear in their proposal
                    that their hourly rate included sales tax. The Authority
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                      accepted their proposal by awarding them the contract, and
                      admitted that they erroneously paid $55,356 in sales taxes
                      to Reco Security. The Authority sought repayment of the
                      overpaid sales taxes in its counterclaim to Reco’s suit
                      against them in 2003, but later dropped the claim in order
                      to satisfy the outstanding sales tax obligation to the State of
                      Minnesota.

                      In the 1998 contracts, the Authority was clearer in its
                      contract language stating that it would compensate the
                      contractor for services required, performed and accepted
                      hereunder, inclusive of all costs and expenses, including
                      Minnesota Sales Tax.         However, it continued to
                      erroneously pay sales taxes to Reco Security and Safety
                      Consultants, Incorporated, and to Avalon Security
                      Corporation, in the amounts of $70,208 and $135,359,
                      respectively. The Authority realized its error in April
                      2000, and discontinued paying sales taxes as a separate line
                      item on the invoices. The payments for sales taxes are
                      ineligible costs.

                      The Authority segregated contract administrator’s duties
   Auditee Comments   and increased the segregation of some functions. The
                      reason for segregating contract administrator’s duties is to
                      guard against impropriety. It should be noted that the
                      Office of Inspector General acknowledged that there is no
                      evidence of fraud or other misconduct and there is no
                      suggestion of fraud or impropriety in the report. The report
                      states that the Authority did not properly segregate duties
                      over its procurement process. The Authority agrees that
                      the procurement process should provide for an adequate
                      segregation of duties and claims that it has always had
                      procedures in place to do so. The report states what
                      contract administrators may do in the procurement process,
                      but does not explain all of the steps in the Authority’s
                      procurement process. The report does not state the critical
                      steps that provide control and accountability over the
                      process.

                      Although a contract administrator may prepare the
                      requisition form and determine the vendors to solicit, this
                      form is merely a request to create a purchase order and is
                      not provided to the vendor. The Contracting Officer
                      reviews and approves the requisition form for compliance
                      with procurement requirements, including but not limited

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                    to the number and type of vendors to solicit. Only after the
                    Contracting Officer approves the purchase order by signing
                    it is the purchase order sent to the vendor.

                    Also, the contract administrator reviews invoices and
                    certifies that the goods and/or services have been received
                    before approving the invoice for payment. Contrary to
                    what is stated in the report, payment is not authorized at
                    this point. The accounting manager reviews the invoice for
                    adequate documentation, the accounting staff records the
                    transaction and the accounting manager approves the
                    invoice for payment by check. Clearly, no one person has
                    complete control over the procurement and payment
                    process as alleged in the report.

                    Taking into consideration cost, time and the level of risk,
                    the Authority will continue to evaluate the procurement
                    process to increase segregation or introduce compensating
                    controls as warranted. The Authority increased the
                    segregation by requiring the signature of the solicitor and
                    the solicitor’s supervisor on the Request for Solicitation
                    form.

OIG Evaluation Of   Contract administrators were permitted to certify that goods
Auditee Comments    and/or services were received, and to approve invoices for
                    payment. These two functions are incompatible with good
                    internal controls. The Authority states that the accounting
                    manager approves the invoice for payment by check. As
                    long as the accounting manager does not rely on the
                    approval from the contract administrator, this would
                    represent an acceptable segregation of duties, and meets the
                    intent of our recommendation.

Auditee Comments    During the audit, the Authority agreed to improve
                    procedures for paying by check. As the report indicates,
                    the Authority revised its check request procedures in April
                    2003. The Authority has implemented and follows this
                    procedure. As such, the check request procedure in the
                    Authority’s Procurement Procedures Manual, revised
                    January 9, 2003, is outdated. The Authority believes that
                    its current check request procedures comply with Federal
                    regulation and should mitigate the risk of paying by check
                    when a contract should be executed.



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   OIG Evaluation Of    We agree with the Authority’s suggested actions for
                        correcting our condition regarding the use of check
   Auditee Comments     requests when a contract should be executed.

   Auditee Comments     The Authority has controls against duplicate payments.
                        The contract administrator reviews and approves the
                        invoice. It is reasonable to assume that the contract
                        administrator will recognize duplicate invoices. Also, the
                        financial software system will not allow an invoice to be
                        entered if the same invoice number has already been
                        entered for the vendor. In addition, if the invoice does not
                        have a number, the Authority stamps a number on the
                        invoice.

                        The duplicate payments in the amount of $7,426 are
                        eligible Federal costs. The Authority’s policies and
                        procedures give reasonable assurance of avoiding duplicate
                        payments because in payments of over $17 million, only
                        $7,426 resulted in over payments that represented 0.04
                        percent of the payments. These errors occurred because the
                        contract administrator did not recognize the invoice as a
                        duplicate and the invoice number was different. The
                        supporting documentation showed the amount of
                        overpayment, to whom payment was made and the basis for
                        the overpayment. The Authority respectfully requests that
                        the recommendation that it reimburse the appropriate
                        program from non-Federal funds in the amount of $7,426
                        be deleted from the Report.

                        Based upon the supporting documentation, the Authority
                        will take steps to recover the overpayment from the police
                        officers. Also, the Authority will perform a self-audit using
                        a representative sample of payments. If the audit reveals
                        that duplicate payments are occurring in a frequency or in
                        an amount that warrants other controls, the Authority will
                        implement the controls.

    OIG Evaluation Of   Actions proposed by the Authority appear reasonable in
    Auditee Comments    determining if other duplicate payments have occurred. In
                        the finding, we also suggest an alternative method for
                        numbering invoices to more easily identify duplicates in
                        the future. We also commend the Authority for taking the
                        initiative to recover the overpayments. However, we
                        disagree with the Authority’s assessment that these
                        duplicate payments represented eligible Federal costs.

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                    They are ineligible because they were duplicate payments,
                    and should be reimbursed into its Public Housing Program
                    using non-Federal funds.

                    Since 1996, the Authority made payments of $46,045 that
Auditee Comments    exceeded the contract authority in 32 of 9,179 transactions
                    valued at $244,772,453. This represents less than 0.02
                    percent of the total funds contracted. To improve on this
                    already very high percentage, the Authority has modified
                    Oracle, its financial software, to hold a payment if it would
                    exceed the contract authority until the authority is
                    increased.     This change should eliminate payments
                    exceeding contract authority. In addition, the April 2003
                    procurement training informed contract administrators that
                    purchases must be within available contract authority.

OIG Evaluation Of   The Authority’s actions adequately address the condition
Auditee Comments    found during the audit where payments had exceeded the
                    available contract authority. We agree that these amounts
                    were immaterial to the total transactions incurred, but we
                    identified this condition because the Oracle system should
                    have precluded it from occurring at all.



Recommendations     We recommend that HUD’s Director of Public Housing Hub,
                    Minneapolis Field Office, assure the Minneapolis Public
                    Housing Authority:

                    3A.      Reimburses its Public Housing Program $260,923
                             from non-Federal funds for the ineligible payment
                             of sales taxes cited in this finding.

                    3B.      Requests the reimbursement of $7,426 in duplicate
                             invoice payments from the appropriate vendor(s).
                             If the Authority is unable to collect the duplicate
                             payments from the vendor(s), then the Authority
                             should reimburse its Public Housing Program
                             $7,426 from non-Federal funds.

                    3C.      Segregates the duties of its employees so that no
                             employee has complete control over all phases of any
                             significant transaction.

                    3D.      Implements adequate procedures and controls to
                             ensure payments to contractors are made in
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                        accordance with contract terms, and check requests
                        are used in accordance with the Authority’s
                        Procurement Procedures Manual.

               3E.      Implements adequate procedures and controls to its
                        contract authority system to prevent payments from
                        exceeding contract amounts.




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Management Controls
Management controls include the plan of organization, methods, and procedures adopted by
management to ensure that its goals are being met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They include systems for
measuring, reporting, and monitoring program performance.



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

                                    •   Compliance with Laws and Regulations - Policies and
                                        procedures that management has implemented to
                                        reasonably ensure that resource use is consistent with
                                        laws and regulations.

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

                                    We assessed all of the relevant controls identified above
                                    during our audit of the Minneapolis Public Housing
                                    Authority’s supplemental police services contracts.

                                    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:




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                      •   Program Operations.

                      The Authority did not properly administer its supplemental
                      police services contracts according to Federal requirements
                      and the Authority’s Procurement Policies and Procedures.
                      Specifically, the Authority did not: adequately execute or
                      renew contracts on time; obtain Board approvals when
                      required; ensure contract award recommendations were
                      independently reviewed; ensure funds were obligated
                      before incurring an expense; and ensure contractors were
                      adequately monitored and their performance evaluated for
                      compliance with contract terms (See Findings 1, 2, and 3).

                      •   Compliance with Laws and Regulations

                      The Authority did not follow HUD’s regulations and/or
                      Office of Management and Budget Circular A-87 regarding
                      the procurement of supplemental police services,
                      preparation of independent cost estimates for evaluating
                      quotes received, and proper administration of security
                      contracts (See Findings 1 and 2).

                      •   Safeguarding Resources

                      The Authority failed to: (1) adequately support $1,119,274
                      in payments to the off-duty police officers; and (2)
                      implement an effective system of controls to prevent
                      $268,349 in misspent HUD funds consisting of $260,923 in
                      estimated overpaid Minnesota sales taxes and $7,426 in
                      duplicate invoice payments (See Findings 1 and 3).




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Follow-Up On Prior Audits
This is the first audit of Minneapolis Public Housing Authority’s Supplemental Police Services
by HUD’s Office of Inspector General. In 1993, we issued a report on the Authority’s
Comprehensive Improvement Assistance Program, report number 93-CH-201-1028, dated
August 20, 1993. The report included issues related to noncompliance with procurement
procedures for issuing professional service contracts, overpayments to contractors, internal
control weaknesses, and improper spending of Comprehensive Improvement Assistance Program
funds. The report contained three findings. Two of the findings were repeated in this report.
The latest Independent Auditor’s Report for the Authority (obtained during the audit) covered
the period ending September 30, 2002. The report contained no findings.

                    Audit Report
                                                              This Report
                 #93-CH-201-1028
      Procurement of Professional Services Was    The Administration of Supplemental
       Not According To Regulations (Finding       Police Services Contracts Needed
                         1)                            Improvement (Finding 2)
         Contractors Were Overpaid $28,300        Controls Over Contractor Payments
                     (Finding 2)                   Needed Improvement (Finding 3)




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                                                                                           Appendix A

Schedule Of Questioned Costs

     Recommendation                     Type of Questioned Costs
        Number                  Ineligible Costs 1/   Unsupported Costs 2/
         1A                                                $1,119,274
         3A                         $260,923
          3B                            7,426
        Totals                      $268,349               $1,119,274


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

2/          Unsupported costs are costs charged to a HUD-financed or insured program or activity
            and eligibility cannot be determined at the time of the audit. The costs are not supported
            by adequate documentation or there is a need for a legal or administrative determination
            on the eligibility of the cost. Unsupported costs require a future decision by HUD
            program officials. This decision, in addition to obtaining supporting documentation,
            might involve a legal interpretation or clarification of Departmental policies and
            procedures.




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