AUDIT REPORT MINNEAPOLIS PUBLIC HOUSING AUTHORITY SUPPLEMENTAL POLICE SERVICES MINNEAPOLIS, MINNESOTA 2004-CH-1003 APRIL 14, 2004 OFFICE OF AUDIT, REGION V CHICAGO, ILLINOIS Exit Table Of Contents 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. Exit Table Of Contents Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1003 Page ii Exit Table Of Contents 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 Page iii 2004-CH-1003 Exit Table Of Contents 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. 2004-CH-1003 Page iv Exit Table Of Contents 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 Page v 2004-CH-1003 Exit Table Of Contents THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1003 Page vi Exit 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 Page 1 2004-CH-1003 Exit Table Of Contents Introduction 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 2004-CH-1003 Page 2 Exit Table Of Contents Introduction 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. Page 3 2004-CH-1003 Exit Table Of Contents Introduction THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1003 Page 4 Exit Table Of Contents 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 Page 5 2004-CH-1003 Exit Table Of Contents Finding 1 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 2004-CH-1003 Page 6 Exit Table Of Contents Finding 1 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 Page 7 2004-CH-1003 Exit Table Of Contents 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 2004-CH-1003 Page 8 Exit Table Of Contents Finding 1 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. Page 9 2004-CH-1003 Exit Table Of Contents Finding 1 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 2004-CH-1003 Page 10 Exit Table Of Contents Finding 1 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 Page 11 2004-CH-1003 Exit Table Of Contents Finding 1 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. 2004-CH-1003 Page 12 Exit Table Of Contents 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. Page 13 2004-CH-1003 Exit Table Of Contents Finding 2 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. 2004-CH-1003 Page 14 Exit Table Of Contents Finding 2 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. Page 15 2004-CH-1003 Exit Table Of Contents Finding 2 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. 2004-CH-1003 Page 16 Exit Table Of Contents Finding 2 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. Page 17 2004-CH-1003 Exit Table Of Contents Finding 2 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, 2004-CH-1003 Page 18 Exit Table Of Contents Finding 2 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 Page 19 2004-CH-1003 Exit Table Of Contents Finding 2 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. 2004-CH-1003 Page 20 Exit Table Of Contents Finding 2 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 Page 21 2004-CH-1003 Exit Table Of Contents Finding 2 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 2004-CH-1003 Page 22 Exit Table Of Contents Finding 2 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. Page 23 2004-CH-1003 Exit Table Of Contents Finding 2 THIS PAGE LEFT BLANK INTENTIONALLY Page 24 2004-CH-1003 Exit Table Of Contents Finding 3 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 Page 25 2004-CH-1003 Exit Table Of Contents Finding 3 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. 2004-CH-1003 Page 26 Exit Table Of Contents Finding 3 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 Page 27 2004-CH-1003 Exit Table Of Contents Finding 3 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 2004-CH-1003 Page 28 Exit Table Of Contents Finding 3 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 Page 29 2004-CH-1003 Exit Table Of Contents Finding 3 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 2004-CH-1003 Page 30 Exit Table Of Contents Finding 3 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 Page 31 2004-CH-1003 Exit Table Of Contents Finding 3 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 2004-CH-1003 Page 32 Exit Table Of Contents Finding 3 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. Page 33 2004-CH-1003 Exit Table Of Contents Finding 3 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. 2004-CH-1003 Page 34 Exit Table Of Contents Finding 3 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 Page 35 2004-CH-1003 Exit Table Of Contents Finding 3 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. 2004-CH-1003 Page 36 Exit Table Of Contents 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: Page 37 2004-CH-1003 Exit Table Of Contents Management Controls • 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). 2004-CH-1003 Page 38 Exit Table Of Contents 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) Page 39 2004-CH-1003 Exit Table Of Contents Follow- Up On Prior Audits THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1003 Page 40 Exit Table Of Contents 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. Page 41 2004-CH-1003 Exit Table Of Contents Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1003 Page 42 Exit Table Of Contents Appendix B Auditee Comments Page 43 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 44 Exit Table Of Contents Appendix B Page 45 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 46 Exit Table Of Contents Appendix B Page 47 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 48 Exit Table Of Contents Appendix B Page 49 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 50 Exit Table Of Contents Appendix B Page 51 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 52 Exit Table Of Contents Appendix B Page 53 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 54 Exit Table Of Contents Appendix B Page 55 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 56 Exit Table Of Contents Appendix B Page 57 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 58 Exit Table Of Contents Appendix B Page 59 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 60 Exit Table Of Contents Appendix B Page 61 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 62 Exit Table Of Contents Appendix B Page 63 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 64 Exit Table Of Contents Appendix B Page 65 2004-CH-1003 Exit Table Of Contents Appendix B 2004-CH-1003 Page 66 Exit Table Of Contents Appendix C HUD Comments Page 67 2004-CH-1003 Exit Table Of Contents Appendix C 2004-CH-1003 Page 68 Exit Table Of Contents Appendix C Page 69 2004-CH-1003 Exit Table Of Contents Appendix C THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1003 Page 70 Exit Table Of Contents
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)