oversight

San Antonio Housing Authority, HOPE VI Program, San Antonio, Texas

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-04-26.

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

                                                           Issue Date
                                                                  April 26, 2004
                                                           Audit Case Number
                                                                  2004-FW-1006




TO:          Milan Ozdinec
             Deputy Assistant Secretary for Public Housing Investments, PI

             Diana Armstrong
             Director, Office of Public Housing, 6JPH



FROM:        D. Michael Beard
             Regional Inspector General for Audit, 6AGA

SUBJECT: San Antonio Housing Authority
         HOPE VI Program
         San Antonio, Texas


                                  INTRODUCTION

In response to a Congressional request, we have completed an audit of the HOPE VI
Programs of the San Antonio Housing Authority (SAHA). Our objectives were to
determine: (1) whether inferior workmanship and substandard materials were used in
construction of Mirasol Homes (Mirasol) single family homes; (2) whether the land on
which Mirasol is built contains pollutants and caused residents' illnesses; (3) how SAHA
awarded the single family contract for Mirasol; and (4) whether SAHA properly
accounted for Mirasol and Springview expenditures.

Congressman Charles Gonzalez received many complaints regarding inferior
workmanship and substandard materials, as well as concerns regarding the land on which
Mirasol Homes were built. Specifically, the complaints alleged:

   •   Particle board being used instead of real wood in the cabinets;
   •   Door hinges placed on the outside of doors, making them susceptible to criminal
       entry;
   •   Light switches placed on a wall so the switch is blocked when a door opens;
   •   The placement of water heaters and air conditioning units in the same closet;
   •    Homes with no back windows and doors; and
   •    Residents attributing their illnesses to pollution from a former landfill on which
        the homes were built.

Congressman Gonzalez also indicated his concern over the management of the project
and requested a financial audit of two HOPE VI housing projects, Mirasol and
Springview. We designed our objectives based on his request.

To accomplish our objectives, we interviewed:

    •   Current and former SAHA employees;
    •   The Mayor of San Antonio;
    •   The SAHA’s environmental contractor;
    •   Employees of the Texas Commission on Environmental Quality;
    •   Architects that designed the day care center and administration building on
        Mirasol;
    •   Alamo Area Council of Government employees;
    •   Fee attorneys for SAHA;
    •   Former employees of Mirasol Joint Venture Team (Joint Venture) and its
        subcontractors;
    •   Inspectors with the Corps of Engineers who conducted inspections on behalf of
        HUD throughout the construction of the project;
    •   SAHA’s project manager for Mirasol; and
    •   Department of Housing and Urban Development employees.

Further, we reviewed:

        Texas Administrative Code regarding environmental issues;
        Legal documents regarding a potential lawsuit;
        Invoices for architectural designs on the old landfill;
        Environmental Assessment Reports prepared by SAHA environmental
        contractors;
        Construction documentation, including inspection reports and follow-up
        inspection reports, prepared throughout construction by the project manager,
        Heery International, and the Corps of Engineers who did the inspections for
        HUD;
        An independent report on the quality of construction; and
        A statistical sample of accounting records maintained by SAHA on the
        expenditures for the Mirasol and Springview HOPE VI projects. We used the
        monetary unit statistical sample method with a 95 percent confidence level to
        project the results of our test. Further explanation of the test is contained in our
        finding.

We also conducted on-site visits of Mirasol. Our scope included SAHA activities related
to the construction of the single family homes from January 1995 to July 2003. We
expanded the scope as necessary to include the buildings that SAHA originally planned


                                              2
to construct on the old landfill site. Further, we reviewed the contracting process
between SAHA and the Joint Venture from contract award in July 1999 through
execution of the contract in December 1999. We conducted the audit in accordance with
Generally Accepted Government Auditing Standards.

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, Assistant Regional Inspector
General, Jerry R. Thompson or me at 817-978-9309.


                                            SUMMARY

Congressman Charles A. Gonzalez and Congressman Barney Frank requested the
Inspector General to review allegations concerning the quality of construction,
workmanship, and materials used for Mirasol and whether the expenditures for the
Mirasol and Springview HOPE VI projects were accounted for adequately. Specifically,
our objectives were to determine: (1) whether inferior workmanship and substandard
materials were used in construction of Mirasol single family homes; (2) whether the land
on which Mirasol is built contains pollutants and caused residents' illnesses; (3) how
SAHA awarded the single family contract for Mirasol; and (4) whether SAHA properly
accounted for Mirasol and Springview expenditures.

Regarding some of the Congressmen’s specific concerns, our review disclosed that the
SAHA value-engineered1 the use of particle board cabinet doors instead of real wood
doors as required in the Request for Qualifications, placed certain door hinges on the
outside of doors, place water heaters and air conditioning units in the same closet, and
constructed certain homes without back windows and doors. We found that although
these construction methods may sound substandard, they meet San Antonio building
codes and are consistent with acceptable industry practice in the area.

Further, SAHA placed non-removable hinges in the outside doors. The back doors and
windows were placed on the side of the homes to afford better furniture placement. The
placement of the air conditioner and water heater in the same closet is a method used in
other non-government related subdivisions in the City by the contractor. We could not


1
    Value Engineering is a function-oriented, systematic team approach to provide value in a product,
    system, or service. Often, this improvement is focused on cost reduction; however, other
    improvements such as customer perceived quality and performance are also paramount in the value
    equation.



                                                   3
find an instance where the contractor placed the light switches so the switches were
blocked when a door is opened.

The single family contractor has recently agreed to install windows in the back of the
houses and place a bilingual maintenance person on-site at Mirasol for 3 years at no cost
to SAHA.

The Authority had planned to build on a former landfill but after testing the site the
Authority officials decided to change their plans. SAHA entered into a Voluntary
Cleanup Agreement with the State of Texas. The Texas Commission on Environmental
Quality (Commission) has investigated and is continuing to investigate the landfill
pollutants. Also, the Commission is monitoring the action to clean up the landfill.
According to Commission officials, tests showed that most of the contamination is in or
near the landfill footprint. They further said, based on tests to date, the residents of the
project are not threatened as long as they use City water and do not use ground water.

SAHA officials limited competition when awarding the contract for the Mirasol
development. Further, SAHA unnecessarily spent, or cannot support $3,895,441 in
HOPE VI funds. Specifically, SAHA inappropriately incurred $1,861,852 in HOPE VI
funds to design part of the Mirasol development on land that had previously been used as
a public landfill; cannot support $2,022,977 in payroll expenses; and overpaid the Joint
Venture $10,612 in overhead and profit on change orders. SAHA officials were either
unaware of or ignored federal and State environmental requirements, made mistakes in
calculating payments, and did not require retention of adequate expense documentation.
As a result, almost $4 million in HOPE VI expenditures is ineligible or unsupported.

We provided a copy of our draft report to SAHA officials on March 23, 2004. We had an
exit conference and they provided their written comments on April 2, 2004. They
concurred with part of the report and did not concur with other parts of the report. They
provided additional documentation on the unsupported costs. We reviewed the
documentation and made adjustments to the draft where necessary. We recognize their
comments and provide our evaluation beginning on page 11 in the finding. We have
included their complete written comments without the attachment, which contained
employee personal information, as Appendix B.


                                     BACKGROUND

The City of San Antonio established SAHA under Texas statute in 1937. The Authority
administers 6,363 units of public housing and 11,505 Section 8 vouchers. In June 2003,
at the request of the San Antonio Mayor, the 11-member SAHA Board of Commissioners
disbanded. From June until August 2003 the Board consisted of five interim members.
On August 27, 2003, the San Antonio Mayor announced a permanent seven-member
Board for SAHA. The President/Chief Executive Officer is in charge of day-to-day
operations. SAHA is located at 818 South Flores in San Antonio, Texas.




                                              4
On February 1, 1995, HUD awarded SAHA $48,285,500 to rebuild Mirasol under the
HOPE VI Program. Previously Mirasol consisted of 500 units constructed in 1952.
SAHA demolished these 500 units in 1998. The redevelopment of Mirasol is comprised
of 87 single family houses, 20 cottages, 67 townhomes, administration and multipurpose
building, health center, and day care center. Off-site is comprised of 56 elderly
apartments and 160 single family houses.

SAHA prepared and issued a Request for Qualifications for a design builder contract to
construct single family homes in May 1999. SAHA required responses back on June 3,
1999. Only two firms responded with proposals. SAHA conducted interviews on
June 16, 1999. SAHA’s Board approved the proposal of Mirasol Joint Venture Team
comprised of Magi Realty, KB Homes, East West Designs,2 and Qzuna & Associates
Consulting Engineers.

On September 7, 1994, HUD awarded SAHA $48,810,294 to rebuild Springview under
the HOPE VI Program. Previously Springview consisted of 421 units. SAHA
constructed 108 public housing apartments, 40 senior apartments, and 25 assisted living
units on the Convent property. In addition Springview consists of 46 market rate single
family houses, as well as 10 Public Housing single family houses. Phase II and III of the
single family subdivision is not completed. Additionally, there were 21 houses built at
scattered sites and 59 senior resident units.


                                            FINDING

          $4 Million in HOPE VI Expenditures is Ineligible or Unsupported.

SAHA unnecessarily spent or cannot support $3,895,441 in expenditures of HOPE VI
funds. Specifically, SAHA used $1,861,852 in HOPE VI funds to (contrary to State law)
design part of the Mirasol development on land that had previously been used as a public
landfill; cannot support $2,022,977 in payroll expenses; and overpaid the Joint Venture
$10,612 in overhead and profit on change orders. Also, SAHA officials limited
competition awarding the contract for the Mirasol development. SAHA officials were
either unaware of or ignored federal and State environmental and contracting
requirements, made mistakes in calculating payments, and did not require retention of
adequate expense documentation. As a result, almost $4 million in HOPE VI
expenditures is ineligible or unsupported.

The Grant Agreement Article IV 11(d) requires SAHA to follow requirements of Office
of Management and Budget (OMB) Circular A-87.3 Further, Article VI of the Grant
Agreement states: “The Grantee will not carry out activities with respect to development
under this Grant Agreement, except for activities described in 24 CFR 50.19 (b) – (h) or

2
    On July 7, 1999, WestEast Designs resigned and the Joint Venture replaced them with Bartholomew &
    Associates Architects.
3
    Cost Principles for State, Local, and Indian Tribal Governments.



                                                 5
50.20, until written approval under the applicable environmental requirements of 24 CFR
part 50 is received from HUD.” The grant agreement also stipulates standard
procurement requirements that include full and open competition when awarding
contracts.

OMB Circular A-87, Attachment A, Section C. 1 provides factors affecting allowability
of costs. To be allowable under federal awards, costs must, among other things:

•   Be necessary and reasonable for proper and efficient performance and administration
    of federal awards;
•   Be allocable to federal awards under the provisions of this Circular;
•   Be authorized and not prohibited under State or local laws or regulations;
•   Conform to any limitations or exclusions set forth in these principles, federal laws,
    terms and conditions of the federal award, or other governing regulations as to types
    or amounts of costs items; and
•   Be adequately documented.

Texas Administrative Code §330.953 states that a person may not undertake the
development of a track of land that is greater than 1 acre in area unless the person
conducts a soil test prior to or during development and construction. The soil test is
intended to determine whether a landfill exists on the property planned for development.
Section 330.951 defines “development” as any activity on or related to real property that
is intended to lead to the construction or alteration of an enclosed structure for the use
and/or occupation of people for an industrial, commercial, or public purpose or to the
construction of residences for three or more families, including subdivisions that will
include single family homes and duplexes.

SAHA unnecessarily spent over $1.8 million due to plans to build on the landfill.

SAHA unnecessarily spent HOPE VI funds to plan part of the Mirasol development on
land known as Parcel B that had previously been used as a public landfill. The
development never reached the construction phase. The landfill was sufficiently
hazardous to prevent construction on top of it. Although contrary to environmental laws,
SAHA developed and pursued plans to build on land without investigating the land’s
previous use. This occurred because SAHA was either unaware of or ignored federal and
State environmental requirements. As a result, SAHA incurred and charged the HOPE
VI Program $1,861,852 in costs that were not allowable under the program and may incur
additional costs for methane testing and mitigation.

SAHA officials should have known about the landfill in January 1995 and, at that time,
should have taken appropriate measures to complete environmental testing or changed
their plans to build on it. The Housing Authority had tests done on the land to determine
the type of foundation required for the buildings. The tests determined there was a
landfill with unknown material and recommended additional tests be performed to
determine the contents of the landfill.



                                             6
It was not until 1999 when the Housing Authority had tests done on the landfill contents.
The contents consisted mainly of glass, nylon hosiery, aluminum scrap, wire, PVC pipe,
copper scrap, socks, rubber, and nails. Through a consultant, the Housing Authority
contacted the Texas Commission on Environmental Quality (Commission). The
Commission recommended the landfill be capped and not be used to build on. The
Commission has investigated and is continuing to investigate the landfill pollutants.
Also, the Commission is monitoring the action to clean up the landfill. According to
Commission officials, tests showed that most of the contamination is in or near the
landfill footprint. They further said, based on tests to date, the residents of the project are
not threatened as long as they use City water and do not use ground water. They still
plan to require further soil and ground water tests and tests for methane gas.

The Authority officials changed their plans to build on Parcel B in 2000 and entered into
a voluntary cleanup program agreement with the Commission. By this time they had
unnecessarily spent or had committed to spend HOPE VI funds shown in the following
table.


                           Ineligible Expenses
               Project Manager Contract    $1,037,000
               Extension
               Parcel B Design                340,255
               Stockpiled Soil                243,976
               Delay Claim                    207,574
               Rezoning and Replatting         33,047
                          Total            $1,861,852

SAHA did not submit an environmental assessment to HUD until November 2001. HUD
did not approve it until January 2003 because of processing requirements according to
HUD. This was after SAHA had changed its plans to build on Parcel B.

SAHA spent $1,037,000 to extend the project manager’s contract.

In December 2000 and again in May 2002, SAHA extended its project manager’s
contract because of delays related to the old landfill. SAHA paid $1,037,000 in these
contract extensions. Specifically, SAHA paid $850,000 in December 2000 and $187,000
in May 2002. SAHA would not have incurred these contract extension costs if it had
performed the environmental testing timely.

SAHA spent $340,255 for designing buildings on the landfill.

From January 1995 through August 2000, architects under contract with SAHA kept
designing buildings to be built on Parcel B. Texas State code states that all activity
including designing must cease once a potential landfill is discovered. SAHA incurred
$340,255 of these types of expenses.



                                               7
Specifically, according to the architect that designed the townhomes and administration
building the actual design of the structures did not change from its design on Parcel B to
where SAHA eventually constructed it. However, civil, structural, mechanical, electrical,
and plumbing engineering and landscape architecture did change. SAHA expended
$32,220 and $22,500 on these types of expenses for the townhomes and administrative
building, respectively.

SAHA did not construct the Avance childcare center because of mounting environmental
expenses. SAHA paid the architect designing the Avance childcare center $63,706 in
expenses that should not have been paid.

SAHA did construct a day care center for Parent Child Inc. at Mirasol across the street
from Parcel B that it originally planned to construct on Parcel B. SAHA incurred
$58,910 of architectural design costs while planning to construct this day care on Parcel
B.

SAHA amended the medical center architect’s contract by $40,560 to coordinate civil
engineering between the medical center and administrative building. Further, SAHA
paid the medical center contractor an additional $122,359 to construct the interface site
work. SAHA would never have incurred these costs if the proper environmental studies
had been done timely and the medical center had not been planned for Parcel B.

SAHA spent $243,976 to fence in and test stockpiled soil.

During demolition and excavation, and before the Authority entered the voluntary
cleanup program agreement, contractors stockpiled soil on Parcel B. The Texas
Commission on Environmental Quality required SAHA to fence in and test the stockpiled
soil. SAHA used $243,976 in HOPE VI funds to fence in Parcel B and test the stockpiled
soil for contaminates. This should not have been a HOPE VI expense.

SAHA paid the Joint Venture $207,574 in a delay claim.

The Joint Venture submitted a delay claim to SAHA as a result of delays caused by not
building on Parcel B. In Change Order 13, SAHA gave the Joint Venture an additional
171 working days to complete construction. However, the Joint Venture also wanted
overhead and lost wages. After months of discussion, SAHA’s Board agreed to pay the
Joint Venture $207,574. SAHA would never have incurred this cost if it had completed
the environmental testing in a timely manner, as required.

SAHA spent additional $33,047 for rezoning and replatting expenses.

In 1999 SAHA received a waiver from the City of San Antonio for zoning and platting
fees. However, SAHA changed its plans to build on Parcel B because of environmental
concerns. If SAHA had included the final plans in its original zoning and platting
request, the fees may have been waived. However, SAHA paid $33,047 for rezoning and




                                            8
replatting at a later date and incurred additional expenses that SAHA paid from the
HOPE VI grant.

SAHA cannot support expenses.

SAHA cannot support payroll expenses for Springview and Mirasol. SAHA is unable to
locate the supporting documentation. OMB Circular A-874 states that in order for costs
to be allowable, they must be adequately documented. Based on projecting the error rate
to the universe, we estimate SAHA cannot support about $2,022,977. SAHA needs to
provide adequate support to HUD for all of its payroll expenses or repay the HOPE VI
grants $2,022,977 from non-federal funds.

We examined a statistical sample of expenditures using the monetary unit sample method
with a 95 percent confidence level. The monetary unit sampling method biases higher
valued items for selection. A million-dollar item is more likely to be selected for review
than a hundred-dollar item. The chance of an item being selected is directly proportional
to its size.


                                 Universe and Sample Data
Sample Type             Universe          Selected       Unsupported         Error Rate
                        Amount          Sample Size        Amount            Percentage
Mirasol              $43,822,903      $23,828,523      $2,209                Less than 1
Non-Payroll                                                                  percent
Expenses
Mirasol Payroll      $1,583,798            $66,718             $25,817       39 percent
Expenses
Springview           $42,901,252           $10,342,378         $0            None
Non-Payroll
Expenses
Springview           $2,342,160            $100,282            $60,606       60 percent
Payroll
Expenses

SAHA cannot support Springview and Mirasol payroll amounts, totaling $60,606 and
$25,817, respectively. These amounts exceed the expected error rate of 5 percent of the
statistically selected sample. Thus, the projected error amount to the total universe is
$1,405,296 for Springview and $617,681 for Mirasol. This totals $2,022,977.

SAHA limited competition on the Mirasol development contract.

SAHA limited competition when awarding the Mirasol development contract. This was
apparently due to the lack of contracting experience or actions of responsible personnel.
The Request for Qualifications referred to financing by the successful bidder. The

4
    In Attachment A, Part C "Basic Guidelines", Subpart 1.j.


                                                   9
Request attracted only two bidders. Other contractors we contacted stated they would
have bid on Mirasol if the financing requirement had not been included.

In 1997, SAHA’s Vice President of Investment Initiatives5 contacted KB Homes and
initiated a standing commitment to construct homes at Menchaca. At the time SAHA
sought another HOPE VI grant to construct these homes. SAHA did not receive this
grant, but the Menchaca homes were included in the Mirasol HOPE VI grant.

In 1999, SAHA issued a Request for Qualifications for a design builder to construct 258
single family homes for the Mirasol HOPE VI grant. One of the largest evaluation and
ranking criteria included the bidders’ financial approach. The Request for Qualifications
stated that highest consideration would be given to the proposal with the best overall
response including financing.

In the Joint Venture’s proposal it stated one of its joint venture team members (KB
Homes) financed over $1 billion in homes in 1998. The Joint Venture relied upon KB
Homes’ financial ability to win the Mirasol contract. In its proposal it stated that the
Joint Venture has the capability and intention of providing up to 100 percent interim
financing. However, after SAHA selected the Joint Venture, it did not sustain this level
of financing.

SAHA allowed the Joint Venture to draft the single family construction contract. The
contract signed by SAHA and the Joint Venture contained a clause requiring a payment
for each house only after substantial completion for the 160 off-site houses. The Request
for Qualifications stated that houses constructed on the Mirasol site would be paid with
progress payments. This meant the Joint Venture funded off-site construction until
SAHA agreed that the houses were substantially complete. However, the contract did not
define the term "substantial completion." Although the Joint Venture originally agreed to
the financing clause in the contract, this changed during construction to progress
payments for off-site houses.

Because SAHA could not construct on Parcel B, the Joint Venture began construction of
the off-site properties first. This meant the Joint Venture received no payments until
construction completion. Because it took so long for SAHA and the Joint Venture to
agree to what substantial completion meant and for the Joint Venture to begin receiving
payments, SAHA and the Joint Venture amended the contract to allow progress payment
for the off-site houses. We contacted other contractors who picked up Request for
Qualifications packages to find out why they did not respond to the Request. They stated
they would have responded if the financing requirement had not been included.
Therefore, the financing clause contributed to the limited competition.

SAHA did not adhere to contract terms.

SAHA paid the Joint Venture $10,612 in excessive overhead and profit related to change
orders. This amount paid included 30 percent overhead and profit but the contract only
5
    At this time Investment Initiatives oversaw the HOPE VI grants.


                                                  10
allowed for 20 percent. Therefore, SAHA needs to request repayment from the Joint
Venture and repay the Mirasol HOPE VI grant account $10,612 for the overpayments.
The following table summarizes the change orders and the overpayments related to each.

                            Ineligible Change Order Payments
Change Orders         Total Amount         Amount Invoiced with       Ineligible Amount8
                      Invoiced6            20 Percent Overhead        Due to Over
                                           and Profit7                payments
         1                  $42,821               $40,819                    $2,002
         2                  $18,628               $17,195                     1,433
         3                  $20,901               $19,293                     1,608
         4                  $14,454               $13,342                     1,112
         5                  $22,250               $20,160                     2,090
         6                  $14,300               $12,960                     1,340
         7                  $24,000               $23,790                       210
         8                  $20,800               $20,387                       413
         9                  $19,200               $19,032                       168
        12                     $867                   $840                       27
        19                   $2,730                $2,520                       210
Total                                                                       $10,612


                                    AUDITEE COMMENTS

SAHA officials concurred with the draft finding except in regard to the following
matters:

SAHA officials said they acknowledge the lack of action in response to early indications
of an environmental concern but disagree with OIG labeling the $1,861,852 as ineligible
payments. They said if the impact study had been done in 1995 – 1997, many of the
Mirasol-related hardships, delays, and expenses would have been avoided. The impact of
these events led to the unanticipated expenditure of more than $2 million to-date. They
said after other SAHA officials discovered the environmental conditions in 1999, SAHA
and HUD had only two options: to abandon the project and walk away from the
community; or to take the necessary action to move the project forward. All parties
involved decided to serve the community. They monitored the environmental impact,
revised the master plan to relocate buildings, extended contracts, and ultimately built
apartments and homes.

SAHA officials stated the part of the finding stating that payroll costs for Springview and
Mirasol cannot be supported is incorrect because, due to their short deadlines, the
auditors were unable to review all available support documentation. Also, they said the
sampling and projection technique used may not have been appropriate.

6
    Amounts rounded to nearest dollar.
7
    Ibid.
8
    Ibid.


                                            11
SAHA officials said the audit occurred during a peak work period for SAHA. Finance
and Accounting personnel were simultaneously working on the OIG audit, the annual
external audit, an FDS data submission, and yearend payroll reporting. The audit covered
a 10-year period and SAHA personnel attempted to provide all requested documentation.
SAHA was unable to provide all requested data prior to the day the auditors completed
the fieldwork. SAHA officials said they subsequently found additional payroll
documentation they feel would support the transactions questioned. They also indicated
independent auditors have audited these accounts and were satisfied with the
documentation.

SAHA questioned the sampling process, indicating the sample may not have been
representative of the population of payroll records, so it would be difficult to draw
conclusions from the sample. Also, the projection of an error rate may have included
individually significant items that should not be projected to the population when using
accepted audit procedures. SAHA officials said the larger the sample, the more closely it
depicts the population; however, the monetary unit sample method tends to focus on a
smaller sample size and has a bias toward large but infrequent errors. They said audit
procedures normally require removal of individually significant items prior to projecting
the sample results to a population and they do not believe this was done.

SAHA officials said one employee whose salary was included in the questioned cost
spent all of his time on HOPE VI projects. They also said the auditors questioned a
payroll item that they have now determined is not related to HOPE VI and should be
removed from the audit sample.

SAHA officials disagreed with the finding that they limited competition when awarding
the Mirasol development contract. They said the finding makes unsubstantiated
assumptions that are wholly unrelated to the facts and scope of this audit, and should
therefore be deleted. SAHA officials said it needed to procure a builder with the
financial and organizational resources to produce 247 single family homes in a short
amount of time. The financial requirements were sound and well within procurement
policies. SAHA officials said they acknowledge that the requirement to demonstrate a
strong financial capacity may have led to the decision on the part of some builders not to
respond to the Request For Qualifications but it did not violate any procurement laws. It
was not the intent to discourage bidder participation. SAHA officials remain convinced it
was a necessary and responsible requirement.

SAHA officials said they are still researching the $10,612 payments to the Joint Venture
in excess overhead and profit but if they verify the payments were in excess of the
contract terms, they will seek repayment.

SAHA officials provided information regarding a part of the draft finding that questioned
$4,581 of HOPE VI funds to pay expenses of another project. The information provided
showed the project was originally being considered as part of Mirasol but was later
deleted.



                                           12
                  OIG EVALUATION OF AUDITEE COMMENTS

As stated in the finding, OMB Circular A-87 requires costs to be necessary and
reasonable for proper and efficient performance and administration of federal awards, to
be allocable to federal awards under provisions of this circular, be authorized and not
prohibited under State or local laws or regulations, and be adequately documented.
Texas State law requires soil tests to be conducted before any development of a track of
land larger than 1 acre.

SAHA officials’ comments on the costs incurred as a result of their delayed action on the
environmental problem do not change our conclusions. They charged costs to the HOPE
VI grant that were contrary to OMB Circular A-87 and Texas State law. Therefore, the
costs are ineligible. HUD did not agree to having unnecessary or ineligible costs charged
to the HOPE VI grant.

At the exit conference, we obtained the additional payroll documentation SAHA indicates
would support the questioned payroll costs. Some of the documentation was adequate
and we changed the amount we questioned. However, much of the documentation is still
inadequate. Although one employee may work only on HOPE VI projects, if there are
two or more grants, the employee costs must be charged based on actual time spent on
each grant. The timesheets provided by SAHA did not show the projects on which the
employees worked. When an employee worked on two or three projects with different
cost accounts, SAHA officials charged the costs to the projects based on a predetermined
budgeted percentage and not on the basis of the actual amount of time spent working on
the project. This is contrary to OMB Circular A-87 that provides that budget estimates or
other distribution percentages determined before the services are performed do not
qualify as support for charges to federal awards.

We believe our sample is reliable. The comments by SAHA officials did not change our
opinion on the sample. We did not include any transaction that had not been charged to
the HOPE VI grants. The Office of Inspector General uses computer software for
monetary unit sampling and it does bias selections of transactions with a higher unit
value. We obtained all HOPE VI grant transactions from SAHA electronically and
applied the software to select our sample. Such a sample provides a high level of
assurance that significant items in the population are subject to testing. This also
provides an adequate confidence level that the sample is representative of the universe as
a whole.

We made minor revisions to the part of the draft finding indicating SAHA officials
limited competition when awarding the Mirasol development contract; however, our
conclusion remains much the same. Title 24, CFR, part 85.36 states that all procurement
transactions will be conducted in a manner providing full and open competition
consistent with standards. The fact remains the Request For Qualifications attracted only
two responses. The Request indicated the successful contractor would possibly be



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required to finance the construction until substantial completion. This reduced the
number of responses. However, SAHA and the successful bidder agreed on progress
payments before substantial completion of the project.

In response to SAHA’s comments and the addition information provided, we deleted the
part of the draft finding that questions $4,581 in HOPE VI funds used on the Christ the
King development.


                               RECOMMENDATIONS

We recommend HUD require SAHA to:

1A.    Implement procedures to ensure compliance with all environmental requirements
       for any future grants.

1B.    Ensure the proper contracting procedures are followed to ensure full and open
       competition.

1C.    Reimburse the HOPE VI grant account $1,861,852 for ineligible payments made
       with HOPE VI grant funds.

1D.    Support with adequate documentation all of its payroll expenses charged to the
       HOPE VI grants or reimburse the HOPE VI grant funds $2,022,977 ($1,405,296
       for Springview and $617,681 for Mirasol) for unsupported payroll charged as
       HOPE VI grant expenses.

1E.    Reimburse the Mirasol HOPE VI grant account $10,612 for ineligible change
       order payments paid with HOPE VI grant funds.




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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 met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.

Relevant Management Controls

We determined that the following management controls were relevant to our objectives:

   •   Grant Agreements
   •   Environmental requirements
   •   Contracting procedures

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.

Significant Weaknesses

Based on our review, we believe the following items are significant weaknesses, which
are covered in our finding.

   •   The Authority failed to follow the grant agreement and environmental
       requirements.
   •   The Authority charged ineligible and unsupported costs to the Grant.
   •   The Authority limited competition when contracting for the development Mirasol.




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                                                                                               Appendix A

                            SCHEDULE OF QUESTIONED COSTS



Recommendation                             Type of Questioned Cost
   Number                           Ineligible1           Unsupported2

     1C                             $1,861,852
     1D                                                         $2,022,977
     1E                                   10,612

Totals                              $1,872,464                  $2,022,977




1
    Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the
    auditor believes are not allowable by law, contract or Federal, State or local policies or regulations.
2
    Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and
    eligibility cannot be determined at the time of 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
    costs. 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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                   Appendix B

AUDITEE COMMENTS




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