oversight

Housing Authority of the City of Houston, Housing Choice Voucher Tenants and Units, Houston, TX

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-27.

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

                                                                   Issue Date
                                                                            September 27, 2005
                                                                   Audit Report Number
                                                                                2005-FW-1018




TO:         Dan Rodriguez
            Program Center Coordinator, Office of Public Housing, 6EPH


FROM:       Frank E. Baca
            Regional Inspector General for Audit, 6AGA

SUBJECT: The Housing Authority of the City of Houston, Houston, Texas, Violated HUD
           Regulations Concerning Section 8 Housing Choice Voucher Tenants and
           Units


                                    HIGHLIGHTS

 What We Audited and Why

             As part of our strategic audit plan, we audited the Section 8 Housing Choice
             Voucher program administered by the Housing Authority of the City of Houston
             (Authority). We performed the audit to determine whether the Authority
             complied with U.S. Department of Housing and Urban Development (HUD)
             regulations concerning the overhousing of tenants, correctly calculating housing
             assistance payments, and ensuring that tenants resided in decent, safe, and
             sanitary housing.

 What We Found


             The Authority did not comply with HUD regulations because it did not effectively
             monitor the contractor it hired to manage its Section 8 programs. The Authority
             overhoused tenants, incorrectly calculated housing assistance payments, and paid
             assistance for tenants to reside in units that did not meet minimal decent, safe, and
             sanitary standards for at least one year.

             The Authority terminated its contract with the contractor in October 2004 and
             resumed operating its Section 8 programs. It took some steps to correct
           weaknesses in its inspections and assistance calculation processes. However, it
           must implement effective controls and a monitoring system to ensure that it
           complies with HUD’s regulations.

What We Recommend


           We recommend that HUD require the Authority to repay $7.44 million, including
           $2.4 million that it retained from its administrative fees and $5.04 million that it
           paid to the contractor for which it did not receive adequate service. We also
           recommend HUD require the Authority to implement internal controls, and
           establish monitoring systems to ensure compliance with its contributions contract,
           which will result in more than $7.9 million in funds being put to better use.

           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 disagreed with the methodology, finding, and recommendations.
           The complete text of their response, along with our evaluation of that response,
           can be found in Appendix B of this report.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                    4

Results of Audit
      Finding: The Authority Violated HUD Regulations Concerning Section 8   5
      Housing Choice Voucher Tenants and Units

Scope and Methodology                                                        10

Internal Controls                                                            11

Follow up on Prior Audits                                                    12

Appendixes
   A. Schedule of Questioned Costs and Funds to be Put to Better Use         13
   B. Auditee Comments and OIG’s Evaluation                                  14




                                            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. The U.S.
Department of Housing and Urban Development (HUD) and the Authority entered into a
consolidated annual contribution contract (contributions contract) which governs HUD’s
provision of funds under the Housing Choice Voucher program. During our audit period,
October 1, 2002, through October 31, 2004, the Authority administered more than 13,000
housing choice vouchers. During that time, HUD paid the Authority $208 million to fund its
Housing Choice Voucher program, including $15.5 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 contract
called for the Authority to pay the contractor 85 percent of its administration fee. The Authority
calculated that its contractor earned $13,093,500 for administering the Housing Choice Voucher
program during the audit period.

This audit is the final in a series of Section 8 Housing Choice Voucher program reviews of the
Authority. Previous audits in the series measured how well the contractor performed two core
functions, tenant functions and unit functions, called for by Section 2.02 of the Authority’s initial
contract with the contractor. Those functions included:

    •   Tenant residency in appropriately sized units 1 ;

    •   Accuracy in tenant files supporting assistance payments 2 ; and

    •   Tenant residency in units that met or exceeded the minimum standards for decent, safe, and
        sanitary housing 3 .

This audit determined how much HUD paid the Authority to administer its Section 8 Housing
Choice Voucher program, and whether the Authority complied with HUD regulations regarding
overhousing of tenants, correctly calculating housing assistance payments, and ensuring that tenants
resided in decent, safe, and sanitary housing. The Authority terminated the contractor’s contract in
October 2004 based, in part, on our earlier audit of overhoused tenants4 .

1
    Report number 2004-FW-1010, Housing Choice Voucher Subsidy Standards, Housing Authority of the City of
    Houston, Houston, Texas, issued September 29, 2004.
2
    Report number 2005-FW-1006, Housing Authority of the City of Houston, Section 8 Housing Assistance
    Payments, Houston, Texas, issued March 25, 2005.
3
    Report number 2005-FW-1007, Housing Authority of the City of Houston, Section 8 Housing Quality
    Standards, Houston, Texas, issued March 29, 2005.
4
    Ibid. 1.


                                                    4
                                 RESULTS OF AUDIT

Finding: The Authority Violated HUD Regulations Concerning Section
8 Housing Choice Voucher Tenants and Units
The Authority violated HUD regulations when it did not effectively monitor its contractor to
ensure the contractor provided an acceptable level of service. Section 8 tenants lived in
oversized units, overpaid or underpaid their shares of the rents, and lived in units that failed to
meet minimal health and safety standards. As a result, HUD-subsidized families did not receive
adequate services for the $15.5 million HUD gave the Authority to manage its Section 8 Housing
Choice Voucher program.



 The Authority Did Not Ensure the
 Contractor Provided Good Service

               The results of our three previous Section 8 Housing Choice Voucher program
               audits showed that the Authority did not ensure that its contractor provided an
               acceptable level of service because it did not effectively monitor the contractor.
               The contractor made numerous errors in managing the Authority’s Section 8
               Housing Choice Voucher program. The errors included overhoused tenants,
               erroneous assistance payments, and payments for housing units that did not meet
               minimal health and safety standards. Based on the prior audit work, we project
               that the Authority’s failure to monitor the contractor effectively caused the
               Authority to:

               1.     Overpay at least $797,000 for tenants to live in units larger than the
                      Authority’s policies allowed because the contractor chose not to follow the
                      Authority’s policies to avoid increasing its workload;
               2.     Overpay and underpay at least $1.2 million in assistance payments for
                      tenants because the contractor did not correctly perform or support
                      assistance payment calculations in at least 52 percent of the Authority’s
                      more than 13,000 tenant files; and
               3.     Pay at least $26.1 million for no less than 3,500 housing units that had not
                      met the minimal health and safety standards for a year or more because the
                      contractor passed units which should have failed inspection. The 3,500
                      units were 25 percent of the more than 13,000 assisted units during fiscal
                      years 2003 and 2004.

 The Authority’s Initial Contract
 Lacked Controls

               The Authority’s initial contract with the contractor lacked some critical controls
               over tenant functions and unit functions described in its contract. The contract did
               not provide a method for the Authority to determine whether the contractor
               adequately performed the tenant and unit functions. It also did not provide


                                                5
           penalties for poor performance or requirements for the contractor to be financially
           responsible for its errors.

           Although the initial contract established performance standards and linked them
           to HUD’s Section 8 Management Assessment Program performance levels, it did
           not require the contractor to report specific data showing its progress in meeting
           the standards nor did it specify how the Authority would verify that the contractor
           met them. It required the contractor to manage the program in accordance with
           HUD’s rules and regulations and to provide the Authority with monthly updates
           on the contractor’s activities. However, the Authority did not independently
           verify that the contractor performed its tenant functions and unit functions
           appropriately. Since the Section 8 Management Assessment Program is a self-
           certification system, the Authority should have conducted an independent review
           of the contractor’s performance to confirm the self-certification.

           In late April 2004, after we began reviewing the Authority’s Housing Choice
           Voucher program, the Authority extended the contract and improved it by
           including penalties for some types of poor performance. While the Authority
           recognized and improved some of the deficiencies in the original contract, its
           modified contract did not provide for independent monitoring of the contractor’s
           performance.

The Authority’s Monitoring


           During the audit period, the Authority stated that it conducted monitoring of the
           contractor’s performance. In a letter to auditors, the Authority stated that it used
           the following six methods to monitor the performance:

           1.     “Appointment of a capable contract administrator” to oversee the
                  contractor’s performance;
           2.     “Regular reporting procedures” which included requirements for the
                  contractor to submit monthly performance reports to the contract
                  administrator who reviewed them and forwarded the information to the
                  executive director;
           3.     “Regular bi-weekly conference call with local (contractor) management”
                  to address current issues;
           4.     “Regular quarterly meetings with (contractor) management” to discuss
                  issues relating to Contractor performance;
           5.     “Formation of an Advisory Task Force” to meet and discuss Section 8
                  program issues and propose solutions to problem areas; and
           6.     “Monthly financial review,” in which the Authority’s finance department
                  conducted reviews of payments, utilization, and bank reconciliations.




                                             6
The Authority’s Monitoring
Was Insufficient.


           Although, the Authority did some monitoring, it did not monitor the contractor
           sufficiently to detect the contractor’s poor performance in carrying out tenant
           functions and unit functions. The Authority did not require sufficiently detailed
           or complete tenant function or unit function data from the contractor. Further, the
           Authority did not verify the data that it received. Instead, the Authority relied on
           the contractor’s self-assessed performance which did not fully disclose the
           contractor’s problems in operating the program.

           The Authority did not know the extent of the tenant function errors or the severity
           of the file error rate because it did not require the contractor to report specific or
           complete data and did not independently monitor the tenant files. For example, in
           its July 2003 monthly report, the contractor reported that it detected 3,118 errors
           out of 20,171 items in 489 files that it reviewed, but it did not state the nature of
           the errors, or how many files contained errors. The nature of the errors covered
           more than 40 tested items that ranged from whether the file was neat and orderly
           to whether the assistance payment was calculated correctly. However, the
           Authority did not require this level of detail from the contractor.

           The Authority should have known that the file errors were extensive because
           HUD reported a 100 percent error rate in the 93 sample files that it tested as part
           of its rental integrity monitoring in late 2002. HUD provided the report to the
           Authority on January 22, 2003. The contractor told the Authority that it found
           errors in 15.5 percent of the items that it reviewed between February 2003 and
           July 2003, but did not specify the nature of those errors or the number of files that
           contained the errors. Our review of a statistical sample of tenant files from
           October 2003 through October 2004 projected that at least 52 percent of the total
           tenant files contained errors that could affect assistance payments.

           The Authority also did not verify the data reported by the contractor because it
           inappropriately relied on the contractor’s self-assessed performance. For
           example, we found a high incidence of the contractor’s inspectors passing units
           that should have failed their housing quality standards inspections. Our review
           showed that the Authority paid subsidies for more than 3,500 units that had not
           met the minimal health and safety standards for a year or more. To be aware of
           this problem, the Authority or a third party would have had to review a sample of
           the units.

           In a letter to auditors, the Authority said that it “…reasonably relied on (the
           contractor’s) expertise to effectively manage the program on a day-to-day basis to
           meet its contractual obligations.” Our audit results show that relying on the
           contractor without independently verifying its performance resulted in a poorly
           operated Section 8 Housing Choice Voucher program.




                                             7
     HUD Had Recommended That
     the Authority Exercise More
     Control Over the Contractor


                  The Authority received several monitoring reviews from HUD’s local Office of
                  Public and Indian Housing during 2003 and 2004. In a May 16, 2003 report to the
                  Authority, HUD said that the Authority should exercise continuous supervisory
                  quality control of its contractor. The report further stated that the Authority
                  should exercise “Hands-on managerial and executive oversight of the Contractor
                  with written internal reports…” Despite the recommendations, the Authority did
                  not implement independent reviews.

    HUD Paid the Authority $15.5
    Million and Did Not Receive an
    Appropriate Level of Services


                  Due to the Authority’s poor performance, HUD did not receive an appropriate
                  level of services for the $15,501,265 it provided the Authority to administer its
                  Section 8 Housing Choice Voucher program. According to the contributions
                  contract, the Authority was to ensure that qualified tenants received an
                  appropriate amount of HUD assistance to reside in housing that met the minimal
                  health and safety standards. The contributions contract requires the Authority to
                  comply with HUD requirements, its administrative plan, and its approved
                  program funding applications. It also requires the Authority to certify that it made
                  assistance payments and conducted housing unit inspections in accordance with
                  HUD regulations. The results of our prior audits showed that the Authority did
                  not fulfill the terms of the contributions contract.

                  The Authority retained $2,407,765 of the $15,501,265 to oversee its contractor’s
                  operation of its Section 8 Housing Choice Voucher program and paid or accrued
                  $13,093,500 to the contractor to operate the program, which HUD reclassified as
                  “troubled” after the contractor’s departure. Despite the contractor’s poor
                  performance, the Authority is ultimately responsible for the proper administration
                  of its Section 8 program under the terms of the contributions contract. Since the
                  Authority should have known of the contractor’s poor performance, but did not
                  use the $2.4 million of administrative fees that it retained to effectively monitor
                  its contractor, those funds should be repaid to HUD. Further, HUD should
                  recover from the Authority funds paid to the contractor for services it failed to
                  provide, which we estimate to be at least $5,040,997. 5




5
      See Scope and Methodology section on page 10 for an explanation of how we determined the amount of
      unsupported costs.


                                                        8
The Authority Fired the
Contractor and Resumed
Operating Its Section 8 program.


            The Authority fired its contractor in October 2004, hired many of the contractor’s
            employees, and resumed operating its Housing Choice Voucher program. As a
            result, the Authority will have more control over the $7.9 million that it will have
            received in administrative fees between October 2004, and the scheduled contract
            termination date of November 30, 2005, because it has resumed full operation of
            its program. The $7.9 million will be funds put to better use if the Authority
            implements controls and establishes a monitoring system to ensure its
            performance complies with its contributions contract.

Recommendations

            We recommend that HUD require the Authority to:

            1A. Reimburse HUD $7,448,762, including $2,407,765 that it should have used to
                properly monitor its contractor, and $5,040,997 for inadequate contractor
                services due to the Authority’s lack of monitoring.

            1B. Implement internal controls and establish monitoring systems, including
                monitoring systems for future contractors that it might use to manage the
                Section 8 programs, to ensure compliance with its contributions contract,
                which will result in more than $7.9 in funding being put to better use.




                                              9
                         SCOPE AND METHODOLOGY

Our audit objective was to determine whether the Authority complied with HUD regulations
regarding the overhousing of tenants, correctly calculating housing assistance payments, and
ensuring that tenants resided in decent, safe, and sanitary housing. To accomplish the objectives,
we obtained and reviewed:

       •   The consolidated annual contributions contract governing the funds that HUD
           provides the Authority to operate its Section 8 program;

       •   The contract between the Authority and its contractor;

       •   The results of previous Section 8 audits of the Authority;

       •   Various quality control documents, and queried appropriate Authority and HUD
           personnel regarding the contactor’s performance; and

       •   Various financial documents related to the amounts that HUD paid the Authority to
           administer its Section 8 program and that the Authority paid to its contractor to
           manage the program.

 Methodology


We did not use any samples in our audit. We reviewed the results of our previous Section 8 audits
of the Authority, contracts, financial documents, and quality control documents that related to the
contractor’s performance.

We determined $5,040,997 to be the minimum amount that HUD should recover from the Authority
because the contractor did not fulfill its part of the contract properly and, therefore, should not
have received the full amount of the contracted fee. The Authority calculated that the contractor
earned $13,093,500; however, the contractor’s performance only merited a portion of that
amount. To arrive at an estimate of what the contractor owed, we averaged the error rates for our
prior audits in housing assistance payments and housing quality standards. Since 52 percent of
tenants had errors in their files and 25 percent of units were unfit for tenant occupancy for a year
or more, the average, a minimum of 38.5 percent, or $5,040,997of the funds that the Authority
paid or accrued to the contractor were ineligible costs.

We conducted our fieldwork during March and April 2005 at the Authority’s offices in Houston,
Texas. Our audit period was October 1, 2002, through October 31, 2004; however, we extended
the period as necessary.

We conducted the audit in accordance with generally accepted government auditing standards.




                                                 10
                             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 Authority put into place to reasonably
                      ensure that the contractor calculated assistance payments accurately and
                      properly supported the calculations and

                  •   Policies and procedures that the Authority put into place to reasonably
                      ensure that assisted units met or exceeded the minimal standards for
                      decent, safe, and sanitary housing.

 Significant Weaknesses


              Based on our review, we believe the following item was a significant weakness:

                  •   The Authority did not have adequate internal controls or monitoring
                      systems to ensure it complied with Section 8 requirements and its
                      contributions contract.




                                               11
                       FOLLOW UP ON PRIOR AUDITS

There are three audits of the Authority with open recommendations that have a bearing on the
objectives of this audit.

 Housing Choice Voucher Subsidy
 Standards (2004-FW-1010)

               The Authority is required to implement internal controls to avoid future
               overpayments projected to be at least $3,232,953 resulting from overhousing
               tenants during the next four years. The Authority is supposed to have this
               requirement completed by October 31, 2005.

 The Housing Authority of the City of Houston’s
 Contractor, Houston, Texas, Did Not Correctly
 Calculate or Support Its Section 8 Housing
 Assistance Payments (2005-FW-1006)

               The Authority is required to review 100 percent of tenant files and identify and
               repay HUD any ineligible housing payments, projected to be at least $1,140,915.
               Further, the Authority is required to identify and reimburse tenants for any
               underpaid housing assistance, projected to be at least $113,680. The Authority is
               also required to implement controls to prevent future housing assistance payment
               errors, projected to be at least $1 million per year. The Authority is supposed to
               have these requirements completed by February 28, 2006.

 The Housing Authority of the City of Houston’s
 Contractor, Houston, Texas, Did Not Ensure Section
 8-Assisted Units Were Decent, Safe, and Sanitary
 (2005-FW-1007)


               The Authority is required to ensure that the 88 failed units identified during the
               audit meet housing quality standards, and if the units cannot be made decent, safe,
               and sanitary, to either abate the rent or terminate the tenant’s voucher. The
               Authority is supposed to have this requirement completed by September 30, 2005.
               Additionally, the Authority is required to inspect all of its Section 8 Housing
               Choice Voucher-assisted units within the 12 months following the audit report
               and ensure the units meet the housing quality standards. The Authority is also
               required to ensure that it implements controls and procedures to prevent assisting
               units that would not meet housing quality standards during the year following the
               audit. Such spending is projected to be at least $26.1 million. The Authority is
               supposed to have these requirements completed by February 28, 2006.




                                                12
                                    APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE



     Recommendation Number Unsupported 1/ Funds to be Put to Better Use 2/
                 1A                    $7,448,762
                 1B                                                 $7,939,494

                Totals                 $7,448,762                   $7,939,494




1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     reporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

2/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (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.




                                              13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         14
Comment 1




Comment 1




            15
Comment 2




            16
Comment 3




            17
Comment 4




Comment 5




            18
Comment 6




Comment 6




            19
                         OIG Evaluation of Auditee Comments


Comment 1   In its response, the Authority claimed that its efforts to monitor the contractor and
            enforce the contract were reasonable and prudent. We disagree. The Authority
            failed to perform independent verifications of the contractor’s performance
            regarding tenant and unit functions. Consequently, the results of the previous
            audits showed that the Authority’s monitoring efforts were ineffective. The
            Authority allowed the contractor to over-house tenants, make errors in at least 52
            percent of the total tenant files resulting in erroneous payments, and house at least
            25 percent of its tenants in units that failed to meet the minimum decent, safe, and
            sanitary standards for a year or more.

            In addition, the Authority argued the contractor was fully qualified to administer
            the Authority’s Section 8 program. However, regardless of the contractor’s
            qualifications, the Authority needed to independently monitor and verify the
            contractor’s performance instead of relying on representations made by the
            contractor regarding its performance.

Comment 2   The Authority claimed that it learned of problems in rent calculations and
            inspections through its own monitoring. However, during the audit, the Authority
            was never able to provide any evidence to support this statement. For example,
            the Authority did not independently verify any inspection results that the
            contractor reported. Thus, we question how the Authority could have detected
            problems in areas it was not testing or verifying.

Comment 3   The Authority believes that its monitoring was appropriate because it improved its
            SEMAP scores. The Authority did improve its SEMAP scores. However, our
            audit objective was not to validate SEMAP scores, but to determine whether the
            Authority complied with HUD regulations regarding the overhousing of tenants,
            correctly calculating housing assistance payments, and ensuring that tenants
            resided in decent, safe, and sanitary housing. As the report states, we found a
            significant level of errors in the tenant and unit functions that the Authority hired
            its contractor to perform. Since the Authority could not show that it monitored
            the contractor sufficiently to be aware of the extent of the tenant or unit function
            errors, its monitoring was not appropriate or effective.

Comment 4   The Authority states that OIG’s recommendation they should repay their entire
            amount of administrative fee is an extremely onerous and unjustified penalty. We
            disagree. Ultimate responsibility for the operation of its Section 8 program lay
            with the Authority and the Authority did not ensure that its contractor provided an
            adequate level of service. Also, we questioned the funds as unsupported costs so
            that HUD can make its own determination as to the amount that should be
            disallowed.

Comment 5   The Authority disagreed with our methodology used to determine 38.5 percent of
            the funds paid to the contractor that should be repaid to HUD. The Authority also
            argued that the 25 percent of units not fit for occupancy was based on


                                             20
            questionable OIG inspection methodologies. We used conservative estimates
            when we determined the amount of inappropriate service. For example, over 70
            percent of the Authority’s units failed our housing quality standards inspections.
            However, we only used those units with significant problems that obviously
            existed for a year or more and/or were fail items on the previous inspection by the
            Authority’s contractor to estimate the amount HUD should recover.

Comment 6   The Authority stated that repaying all of the funds would seriously degrade future
            program services provided by the Authority. We agree such a repayment could
            have a negative impact on the Authority. However, HUD has the authority to
            determine the amount the Authority should repay, and how it should repay its
            misspent funds. We urge the Authority to work with HUD to resolve questioned
            amounts, and to improve the quality of its services.




                                            21