Issue Date March 29, 2005 Audit Report Number 2005-FW-1007 TO: Dan Rodriguez Program Center Coordinator, Office of Public Housing, 6EPH FROM: James D. McKay Acting Regional Inspector General, 6AGA SUBJECT: The Housing Authority of the City of Houston’s Contractor, Houston, TX, Did Not Ensure Section 8 Assisted Units were Decent, Safe, and Sanitary. HIGHLIGHTS What We Audited and Why As part of the Office of Inspector General’s (OIG) Annual Audit Plan focus on Section 8 Rental Assistance Programs, we audited the Housing Authority of the City of Houston (Authority’s) Section 8 Housing Choice Voucher Program. Our audit objective was to determine whether the Authority’s Contractor was performing inspections to ensure Section 8 Housing Choice Voucher assisted units were decent, safe, and sanitary before tenants moved in and annually thereafter as U.S. Department of Housing and Urban Development (HUD) and Authority policies required. What We Found In most cases, the Authority’s Contractor performed annual and initial inspections as required. However, since a majority, 88 out of 118 units, failed our Housing Quality Standards inspections, the Contractor’s inspections did not ensure the units were decent, safe, and sanitary. The significant failure rate occurred because the Contractor appeared to be more focused on performing a large quantity of inspections than on the quality of those inspections. Projecting the results of the statistical sample to the population indicates at least 9,088 of the Authority’s 13,524 units do not meet standards. In addition, our inspections showed that 39 of the 88 units had either uncorrected items from previous inspections or conditions that had existed for more than a year. Thus, our results indicate the Authority expended $26.1 million on 3,503 units, which have failed items that have existed for a year or more. Further, since the Authority’s Contractor did not ensure the units met standards, its tenants lived in units that were not decent, safe, or sanitary. What We Recommend We recommend that the Program Center Coordinator, Houston Office of Public Housing (HUD) require the Authority to ensure all 88 failed units we identified meet standards. Further, the Authority needs to inspect all of its remaining units within the next 12 months to ensure those units also meet standards since our results indicated at least 67 percent will not. If the units cannot be made decent, safe, and sanitary, the Authority should either abate the rent or terminate the tenant’s voucher. If the Authority corrects its inspection program, it will avoid paying an estimated $26.1 million on indecent, unsafe, and unsanitary units in the next year. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response The Authority’s Executive Director generally agreed with the findings and indicated the Authority is taking action to correct the problems. The complete text of the auditee’s response, along with our evaluation of that response, can be found in Appendix B of this report. However, we did not include the attachments because they were voluminous and contained tenant personal identification information. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding A Majority of the Authority’s Section 8 Units Failed Housing Quality 5 Standards Inspections Scope and Methodology 13 Internal Controls 15 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 16 B. Auditee Comments and OIG’s Evaluation 17 C. Criteria 23 D. Units with Previous Failed Items Not Repaired and/or Failed Item Existed for 24 More Than a Year 3 BACKGROUND AND OBJECTIVES The City of Houston established the Housing Authority of the City of Houston (Authority) in 1938. The Mayor appoints a five-member Board of Commissioners (Board) to govern the Authority. The Board hires an Executive Director to manage the Authority’s day-to-day operations. The Authority keeps its records at its central office at 2640 Fountainview, Houston, Texas. The Authority has operated its Section 8 Rental Assistance Program since 1975. For June 2004, the Authority paid for 13,524 Section 8 units in the Housing Choice Voucher Program. For fiscal years 2003 and 2004, the U.S. Department of Housing and Urban Development (HUD) paid the Authority $202 million to fund its Housing Choice Voucher Program, including $14.9 million for administrative expenses. During 2001, HUD designated the Authority “troubled” and gave it a low Section 8 Management Assessment Program score. The Authority contracted with Quadel Consulting (Contractor) in December 2001 to manage and improve its Section 8 Program performance. The Contractor formed a subsidiary, Houston Housing Assistance Partnership, to perform the contract work. The Contractor improved the Authority’s score, taking it out of the “troubled” category. The Authority paid the Contractor 85 percent of its administration fee to operate the Section 8 Program. It paid its Contractor more than $12.6 million to administer the Authority’s Section 8 Program during 2003 and 2004. This audit is part of an ongoing review of the Authority. This audit reviewed whether the Authority’s Contractor was performing inspections to ensure Section 8 assisted units were decent, safe, and sanitary. We did not review the Authority’s controls over the Contractor for ensuring the units met standards. The Authority’s controls will be reviewed as part of another audit. The Authority terminated the Contractor’s contract in October 2004 based, in part, on our audit of overhoused tenants. Additional audits are underway. 4 RESULTS OF AUDIT Finding: A Majority of the Authority’s Section 8 Units Failed Housing Quality Standards Inspections Our inspections showed the Authority’s Section 8 units contained numerous health and safety violations. A majority, 88 out of 118 (75 percent) of the Authority’s Section 8 units did not meet HUD’s Housing Quality Standards. This significant failure rate occurred because the Contractor appeared to be more focused on performing a large quantity of inspections than on the quality of those inspections. Projecting the result of the statistical sample to the population of 13,524 units indicates that at least 9,088 Section 8 units do not meet Housing Quality Standards. Consequently, the Authority made housing assistance payments for units that did not meet Housing Quality Standards. Additionally, the Authority’s tenants lived in units that were not decent, safe, or sanitary. Authority’s Units are Unsafe and Unsanitary Due to Numerous Violations Our inspections found a total of 665 Housing Quality Standards violations in 88 of the 118 Section 8 units we inspected with the Contractor’s inspectors. The following table shows the number of violations found per unit. Some units contained an excessively high number of violations. Number of Total Number of Violations Failed Units 20-51 6 10-19 14 5-9 28 1-4 40 In addition, the inspection results showed that not only did 88 units fail HUD’s Housing Quality Standards, but also 39 units had violations that had existed for more than a year or had previous failed items that were not repaired. The table at Appendix D details these results. 5 The photographs below illustrate some of the conditions we found in the Authority’s units. Leaking garbage disposal and rotted cabinet. Wall damage and buckled tiles in a unit’s bathroom. 6 Inspectors Did Not Ensure Failed Items Were Properly Corrected The Contractor’s inspectors did not ensure items that failed to meet Housing Quality Standards were properly corrected. In some cases, the failed items were never corrected. However, the inspectors passed these failed items during later inspections. For example, one inspector failed the unit pictured below because a tripping hazard existed in the main entryway hall. Another inspector later passed the failed item. Our inspection found the hazard, pictured below, still existed. Inspectors Did Not Ensure Underlying Problems Were Repaired The Contractor’s inspectors did not ensure underlying conditions were repaired. Instead, they allowed cosmetic repairs that did not correct the problem. For example, the owners of one unit in our sample made cosmetic repairs by painting over mold in the unit instead of addressing the underlying moisture issue that was causing the mold to grow. As the following photograph shows, at the time of our inspection, the mold was growing above and through the new paint. 7 Bedroom has mold growing above and through new paint because the owner did not correct the underlying moisture cause. Inspectors Did Not Fail Long- Term Exterior Hazards The Contractor’s inspectors did not fail units that had exterior hazards that had apparently existed for some time. The following photographs contain some examples of exterior hazards. We also identified other exterior hazards such as low-hanging electrical wires, electrical wires entangled in tree limbs, and outdoor electrical boxes unsecured or without covers. 8 Improperly supported main sewer drain line leaking under the house. Sewage had been leaking out so long it was pooling under the house, in the backyard and affecting the house’s foundation. Unsafe stairs to a unit, which contained risers that were rotted and rusted free from the supports. 9 Water damaged and rotted porch ceiling. Further, the support column, shown in the lower left, has slipped forward and is not properly supporting the weight of the porch. Inspectors Did Not Fail Obvious Defects The Contractor’s inspectors did not fail units with obvious defects. We saw instances in which an inspector would comment on an issue rather than fail it. For example, the inspector commented on the inspection report for the unit below that the shower wall was missing the soap dish. However, the inspector passed the unit. We found the soap dish was still missing, and we failed the unit because water from the shower was penetrating behind the tiles and damaging the wall. 10 Contractor Emphasized Quantity Over Quality in the Inspection Process Although the Contractor performed initial and annual inspections as required, the inspections were of a poor quality. A majority of the Contractor’s inspectors believed the quality of the inspection was sacrificed due to the quantity of inspections required. One inspector stated that the Contractor was more focused on quantity than quality, and the penalty for a poor quality inspection was “a slap on the hand.” The Contractor was focused on performing a large quantity of inspections because it only had ten inspectors performing inspections and two quality control inspectors, a number that was apparently not sufficient based on our results, the inspector’s comments, and the fact that more inspectors and quality control inspectors have been hired. Authority Has Taken Steps to Correct the Problems The Authority terminated its Contractor in October 2004, 2 months after our joint inspections, and assumed responsibility for the inspection process. As a result of the significant Housing Quality Standards inspection failure rate noted in this audit, the Authority’s Executive Director reorganized the inspection department, hired additional inspectors, doubled inspection quality control reviews, and placed an emphasis on quality inspections, including adding stiff penalties for poor quality inspections. Conclusion Because the Contractor did not perform quality inspections, the Authority’s Section 8 tenants were forced to live in units that were not decent, safe, and sanitary. Further, we estimated the Authority paid housing assistance payments totaling more than $26.1 million on 3,503 units, which had failed items that had existed for a year or more. The Authority has taken corrective steps and should be commended for taking prompt action. However, HUD needs to ensure that the Authority’s new procedures, policies, and controls are implemented and consistently followed to prevent additional Section 8 housing assistance payments being spent on units that do not meet HUD standards. 11 Recommendations We recommend that the Program Center Coordinator, Houston Office of Public Housing: 1A. Require the Authority to ensure all 88 failed units meet Housing Quality Standards. If the units cannot be made decent, safe, and sanitary, either abate the rent or terminate the tenant’s voucher. 1B. Require the Authority to inspect all of its Section 8 Housing Choice Voucher assisted units in the next 12 months and ensure the units meet Housing Quality Standards. 1C. Monitor the Authority to ensure it has implemented controls and procedures to prevent spending at least $26.1 million for units that do not meet standards in the next year. 12 SCOPE AND METHODOLOGY Our audit objective was to determine whether the Authority’s Contractor was performing inspections to ensure Section 8 assisted units were decent, safe, and sanitary before tenants moved in and annually thereafter as HUD and Authority policies required. To accomplish the objective, we: • Obtained and reviewed relevant HUD regulations and Authority guidelines contained in the Authority’s Administrative Plan. See Appendix C. • Selected a statistical sample of units from the Authority’s June 2004 Housing Assistance Payment Register. See statistical sample selection and methodology below. • Obtained and reviewed the Contractor’s previous 118 inspection reports to ensure the unit had been inspected within the last 12 months and passed its last inspection. Further, we researched HUD’s Multifamily Tenant Characteristic System to determine whether the Contractor inspected eight units for which it could not provide an inspection report. • Inspected 118 units with the HUD-Office of Inspector General (OIG) inspector and the Contractor’s inspector to determine whether the units met Housing Quality Standards. HUD-OIG inspected the 118 units from July 19 through August 16, 2004. • Interviewed the Authority’s Inspection Manager and ten inspectors to discuss the inspection results and determine the cause of the failures since the Authority retained the majority of the Contractor’s staff when the Authority terminated the Contractor in October 2004. Statistical Sample Selection and Methodology We obtained a download of all of the Authority’s current tenants’ units from the Housing Assistance Payment Register for the month of June 2004. The universe size showed there were 13,524 current tenants’ units as of June 2004. We used the Defense Contract Audit Agency’s EZ- Quant software to select a simple random statistical sample from the 13,524 current tenants’ units. Based on a confidence level of 90 percent, a precision level of 10 percent, and an assumed error rate of 10 percent, the EZ Quant software returned a statistical sample of 118 current tenants’ units with a random selection start. We also used EZ-Quant to generate 82 additional samples for replacements in case we did not have access to the units or the tenants moved out. We inspected 11 of the replacement samples (numbers 119 through 129) because we found that 11 tenants out of the original 118 had moved out of their units. 13 Projecting the results of the 88 failed units in our statistical sample to the population indicates: The lower limit is 67.2 percent X 13,524 = 9,088 units not meeting HQS The point estimate is 74.58 percent X13,524 = 10,086 units not meeting HQS The upper limit is 81.0 percent X 13,524 = 10,954 units not meeting HQS Projecting the results of the 39 failed units that had violations that had existed for more than a year or had previous failed items that were not repaired, to the population indicates: The lower limit is 25.9 percent X 13,524 = 3,503 units not meeting HQS The point estimate is 33.05 percent X 13,524 = 4,470 units not meeting HQS The upper limit is 40.8 percent X 13,524 = 5,518 units not meeting HQS We conducted our fieldwork between July and December 2004 at the Authority’s offices in Houston, Texas. Our audit work concerns the period from June 1, 2003, to June 30, 2004. We conducted the audit in accordance with generally accepted governmental auditing standards. 14 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations; • Reliability of financial reporting; and • Compliance with applicable laws and regulations. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined the following internal controls were relevant to our audit objectives: Policies and procedures that the Contractor put into place to reasonably ensure that Section 8 assisted units were decent, safe, and sanitary before tenants moved in and annually thereafter as HUD and Authority policies required. We did not review the Authority’s controls over the Contractor for ensuring the units met standards as they were outside the scope of this audit objective. The Authority’s controls will be reviewed as part of another audit. Significant Weaknesses Based on our review, we believe the following item was a significant weakness: • The Authority’s Contractor did not establish effective internal controls to ensure that tenants’ units met HUD’s Housing Quality Standards. 15 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds To Be Put Number To Better Use 1/ 1C $26,132,380 1/ “Funds To Be Put To Better Use” are quantifiable savings that are anticipated to occur if an OIG recommendation is implemented, resulting in reduced expenditures at a later time for the activities in question. This includes costs not incurred, deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures, loans and guarantees not made, and other savings. 16 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 17 Comment 1 Comment 2 Comment 3 18 19 Comment 1 20 21 OIG Evaluation of Auditee Comments The Authority’s Executive Director generally agreed with the findings. Comment 1 The Authority agreed it did not detect that its Contractor was not conducting inspections utilizing sound and consistent judgment and indicated the Authority is taking action to correct the problems. We appreciate the Authority admitted problems existed and is taking action to correct them. Comment 2 The Executive Director noted the Authority recognizes the highly subjective and judgmental nature of the inspection process and the underlying regulations. Although we agree the inspection process involves the judgment and opinion of the inspector, the Contractor’s inspectors participated in the inspections performed by the OIG Inspector and were present when the OIG Inspector passed or failed those units. Comment 3 The Authority requested all of OIG’s inspection reports. However, we have already provided the Authority detailed summary information and photos of all failed units. 22 Appendix C CRITERIA 24 CFR [Code of Federal Regulations] 982.401(3), “Section 8 Tenant Based Assistance: Housing Choice Voucher Program, Housing Quality Standards.” All program housing must meet the Housing Quality Standards performance requirements both at commencement of assisted occupancy and throughout the assisted tenancy. 24 CFR [Code of Federal Regulations] 982.405(a), “Section 8 Tenant Based Assistance: Housing Choice Voucher Program, PHA [public housing authority] Initial and Periodic Unit Inspection.” The public housing authority must inspect the unit leased to a family before the initial term of the lease, at least annually during assisted occupancy, and at other times as needed, to determine whether the unit meets the Housing Quality Standards. The Housing Authority of the City of Houston, Administrative Plan for Section 8 Housing Programs, “Housing Quality Standards and Inspections.” The Authority is required by HUD regulations to inspect the unit to ensure it meets Housing Quality Standards. No unit shall be initially placed under the contract in the Housing Choice Voucher Program unless the standards are met. Units must also continue to meet Housing Quality Standards as long as the family continues to receive housing assistance in the assisted unit. 23 Appendix D Units with Previous Failed Items Not Repaired and/or Failed Item Existed for More Than a Year Previous Failed Previous Items Items Existed Inspection Not More Than a Sample Failed Repaired Year 1 2 Y X 2 4 Y X 3 10 N X 4 11 N X 5 23 N X X 6 24 Y X 7 28 N X 8 31 N X 9 38 Y X 10 39 Y X 11 40 Y X 12 121 N X 13 44 Y X 14 51 Y X X 15 56 N X 16 59 Y X 17 60 Y X 18 64 Y X 19 66 N X 20 69 N X 21 123 Y X X 22 71 Y X 23 124 Y X 24 75 N X 25 76 N X 26 78 Y X 27 80 Y X 28 82 N X 29 83 N/A X 30 86 Y X 31 91 Y X X 32 126 Y X X 33 103 Y X 34 104 N X 35 106 Y X 36 109 Y X 37 112 Y X 38 115 Y X 39 118 N X 24
Housing Authority of the City of Houston's Contractor, Houston, TX, Did Not Ensure Section 8 Assisted Units were Decent, Safe, and Sanitary
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)