oversight

The Housing Authority of the County of San Joaquin, Stockton, CA

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-11-18.

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

      AUDIT REPORT




HOUSING AUTHORITY OF THE COUNTY

        OF SAN JOAQUIN

          2005-LA-1001

       NOVEMBER 18, 2004



          OFFICE OF AUDIT
       PACIFIC/HAWAII REGION
      LOS ANGELES, CALIFORNIA
                                                                 Issue Date
                                                                         November 18, 2004
                                                                 Audit Case Number
                                                                         2005-LA-1001




TO:            Rita Robinson, Acting Director, Office of Public Housing, 9APH



FROM:          Joan S. Hobbs, Regional Inspector General for Audit, 9DGA

SUBJECT:       Housing Authority of the County of San Joaquin
               Stockton, CA



We audited the activities of the Housing Authority of the County of San Joaquin (the Authority) to
determine whether the Authority (1) used Low-Rent Housing program funds for non-Low-Rent
Housing program expenses and (2) followed Federal requirements and its own procurement policies
and procedures. In addition, we determined whether allegations received in two complaints were
valid.

Our report contains two findings with recommendations requiring action by your office. In
accordance with U.S. Department of Housing and Urban Development Handbook 2000.06, REV-3,
within 60 days, please provide us for each recommendation without management decisions, 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 the report is issued 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 me at (213) 894-8016, or Clyde
Granderson, Assistant Regional Inspector General for Audit, at (415) 489-6692.
Management Memorandum




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2005-LA-1001              Page ii
Executive Summary
We audited the activities of the Housing Authority of the County of San Joaquin (the Authority) in
Stockton, CA, to determine whether the Authority used U.S. Department of Housing and Urban
Development (HUD) funds for non-HUD projects/programs and whether it followed Federal
requirements and its own procurement policies and procedures. In addition, we determined whether
allegations received in two complaints were valid.



                                     The Authority improperly awarded $3,322,032 in contracts
 The Authority Improperly            for goods and services. We attribute this to the Authority’s
 Awarded More Than $3.3              decentralized procurement process, which allowed
 Million in Contracts                department managers to procure goods and services
                                     without following Federal regulations and its own adopted
                                     policies. We also attribute this to poor management
                                     practices by executive management. As a result, the
                                     Authority spent funds for goods and services that were not
                                     proper and reasonable, increased monetary and legal risks
                                     by conducting business without the benefit of contracts,
                                     failed to ensure free and open competition, and allowed
                                     contracts to contain clauses that solely benefited the
                                     contractor.

                                     The Authority misused $5,545,972 in Low-Rent Housing
 The Authority Misused               program funds to pay for its non-Low-Rent Housing program
 More Than $5.5 Million in           expenses. We attribute the Authority’s misuse of Low-Rent
 Low-Rent Housing                    Housing program funds to poor management decisions, as
 Program Funds                       well as the lack of adequate controls in place to safeguard
                                     Low-Rent Housing funds. As a result, the Authority put
                                     Low-Rent Housing program funds at risk by transferring
                                     them to its non-Low-Rent Housing programs without HUD’s
                                     approval, thereby depriving low-rent housing program
                                     recipients of funds to ensure safe, decent, habitable, and
                                     quality public housing.

                                     We validated the primary allegations in two complaints and
                                     determined that the Authority’s former executive director
                                     awarded consulting contracts to what appeared to be
                                     friends or colleagues. We questioned some of these costs.
                                     In addition, the former executive director was managing the
                                     Authority at the time the decisions were made to
                                     inappropriately use $5.5 million of Low-Rent Housing
                                     program funds for the Authority’s non-Low-Rent Housing
                                     programs.



                                          Page iii                                   2005-LA-1001
Executive Summary



Recommendations             We recommend that the Director, Office of Public Housing,
                            require the Authority to

                            •   Terminate all of its current legal services and security
                                services contracts and issue a new Request for
                                Proposals.

                            •   Establish a centralized procurement department and
                                ensure that all procurement actions are performed in
                                accordance with Federal requirements and the
                                Authority’s own adopted procurement policy to
                                eliminate occurrences such as paying $829,527 for the
                                failed Public Housing Authority Management System.

                            •   Immediately cease the practice of using Low-Rent
                                Housing program funds to pay for non-Low-Rent
                                Housing program-related purchases and expenses.

                            •   Reimburse the Low-Rent Housing program from
                                nonfederal funds $154,171 in accrued interest for using
                                $5,454,349 in Low-Rent Housing program funds to
                                purchase properties for its non-federal programs.

                            •   Reimburse the Low-Rent Housing program $364,388
                                from non-federal funds for ineligible and unsupported
                                costs incurred by its non-Low-Rent Housing programs.

                            •   Establish better controls to ensure that Low-Rent Housing
                                program funds are used only for that program’s related
                                expenditures and ensure that there are no other
                                occurrences of the Low-Rent Housing program funds
                                being used for non-Low-Rent Housing program-related
                                expenses.

                            We discussed the findings with the Authority’s officials
  Audit Results Discussed   during the audit and at an exit conference held on October
  With Auditee              20, 2004. We also provided the Authority and HUD with a
                            copy of the discussion draft report for comments on
                            October 8, 2004. We received the Authority’s written
                            responses on November 8, 2004. The auditee agreed with
                            the majority of the recommendations, however, differed
                            about the frequency and extent of some of the problems.
                            The full text of the Authority’s response is included as
                            Appendix I of this report.
2005-LA-1001                    Page iv
Table of Contents
Management Memorandum                                                      i



Executive Summary                                                      iii



Introduction                                                               1



Findings

1. The Authority Improperly Awarded More Than $3.3 Million in
   Contracts                                                           3

2. The Authority Misspent More Than $5.5 Million in Low-Rent Housing
   Program Funds                                                  17


Management Controls                                                   29


Follow-up on Prior Audits                                             31


Appendices
   A. Schedule of Questioned Costs and Funds Put to Better Use        33

   B. Itemized Questioned Costs and Funds Put to Better Use           35

   C. Schedule of Procurement Review Deficiencies                     37

   D. Schedule of Interest Due – Claremont Manor                      39


                             Page v                           2005-LA-1001
Table of Contents


    E. Schedule of Franco Center Bond Payments Paid by Low-Rent
       Housing Program                                          41

    F. Schedule of Franco Center Monthly Expenses Paid by Low-Rent
       Housing Program                                          43

    G. Schedule of West Park Operating Losses Absorbed by Low-Rent
       Housing Program                                          45

    H. Calculation of Back Interest Due – West Park and RENEW Lodi
       Single-Family Properties                                 47

    I. Auditee Comments                                        49




2005-LA-1001                Page vi
Introduction
Background

The Housing Authority of the County of San Joaquin (the Authority) was established on March 9,
1942, under the State law known as the Housing Authorities Law, which was enacted in 1938 by the
legislature of the State of California. The Authority is responsible for providing decent, safe, and
affordable housing for low-income families, the elderly, and the disabled. The Authority receives
Federal and State funding and is governed through a seven member Board of Commissioners
(Board), locally appointed by the San Joaquin County Board of Supervisors. The Board establishes
policies and appoints the executive director, who is responsible for implementing the Board’s
policies. The former executive director resigned in February 2004 during the early stages of our
fieldwork. The deputy director resigned in March 2004, and the information technology manager
resigned in January 2004.

The ongoing mission of the Authority is to provide and advocate for an affordable, attractive, safe
living environment for persons of very low to moderate income and to provide opportunities for
them to become self-sufficient. As of June 29, 2004, the Authority had 5,040 units with families
receiving rental assistance under the Section 8 program, 205 non-federally aided units, and 1,075
low-rent conventional public housing units, totaling 6,320 units.




                                      The audit objectives were to determine whether the
 Audit Objectives                     Authority (1) used public housing program funds
                                      appropriately and (2) followed Federal procurement
                                      requirements and its own procurement policies and
                                      procedures. Additionally, we determined whether the
                                      following allegations received in the two complaints were
                                      valid: (1) inappropriate use of a credit card, (2) awarding
                                      of contracts to friends and colleagues, (3) inappropriate
                                      payments not related to Authority business, and (4) use of
                                      U.S. Department of Housing and Urban Development
                                      (HUD) funds for non-HUD projects/programs.

                                      We performed on-site audit work from January to July 2004.
 Audit Scope and                      The audit covered the period January 2000 through December
 Methodology                          2003. We extended the audit, when appropriate, to include
                                      other periods.




                                           Page 1                                      2005-LA-1001
Introduction


               The primary audit methodologies included:

               •   Interviews with HUD and Authority management and
                   staff.

               •   Evaluation of the Authority’s management control
                   structure and an assessment of risk.

               •   Review of public records and databases.

               •   Review of applicable HUD regulations, the Authority’s
                   Annual Contribution Contract, the Authority’s written
                   procurement policies and procedures, and other
                   requirements.

               •   Review of various Authority documents including
                   financial statements, general ledgers, bank statements,
                   invoices, vendor payment records, and minutes from
                   Board meetings.

               •   Selection and review of 13 properties and seven
                   procurement actions.

               The audit was conducted in accordance with generally
               accepted government auditing standards.




2005-LA-1001       Page 2
                                                                                           Finding 1


          The Authority Improperly Awarded
          More Than $3.3 Million in Contracts
The Authority improperly awarded $3,322,032 in contracts for goods and services because its
decentralized procurement process allowed department managers to execute contracts and procure
goods and services without following Federal regulations and its own adopted policies and
procedures. As a result, the Authority spent funds for goods and services that were not proper and
reasonable, increased monetary and legal risk by conducting business without the benefit of
contracts, failed to ensure free and open competition, and allowed contracts to contain clauses that
solely benefited the contractor and that did not contain federally required clauses.




                                      According to 24 Code of Federal Regulations 85.36, the
 HUD Rules and                        grantee must
 Regulations
                                          Conduct all procurement transactions in a manner
                                          providing full and open competition.
                                          Maintain and provide any books, documents, papers,
                                          and records of the contractor that are directly pertinent
                                          to that specific contract for the purpose of making
                                          audit, examination, excerpts, and transcriptions.
                                          Procure goods and services by noncompetitive
                                          proposals only when the award of a contract is not
                                          feasible under small purchase procedures, sealed bids,
                                          or competitive proposals.

                                      HUD Handbook 7460.8, “Procurement Handbook for Public
                                      Pricing Arrangements and Contract Options,” chapter 6,
                                      section 1, subsection 6-2, generally states that in many cases,
                                      a housing authority may need to acquire supplies, services, or
                                      construction, which it knows will be required for more than
                                      just its immediate needs. One method of obtaining firm
                                      commitments from contractors is to include an option clause
                                      in the contract. An unpriced option, like a bilateral option, is
                                      considered a new contract, and there must be a finite period
                                      for the contract.

                                      The Authority’s procurement policy and procedures require
                                      all contracts to include the clauses cited in 24 Code of
                                      Federal Regulations 85.36(i), as well as State provisions.
                                      HUD Handbook 7460.8 places a 2-year limit on service

                                           Page 3                                       2005-LA-1001
Finding 1


                             contracts unless HUD approval is obtained. Contracts for
                             services in which the initial period exceeds years and any
                             option, extension, or renewal of a contract for services that
                             makes the total length of the contract as modified exceed 2
                             years must have HUD approval.

                             We reviewed seven procurement actions, totaling more than
    The Authority            $3.3 million, to determine whether the Authority obtained
    Improperly Awarded       goods and services in accordance with applicable Federal
    More Than $3.3 Million   regulations and policies. We determined that each of the
    in Goods and Services    seven procurement actions contained significant deficiencies
                             and that the Authority’s policies and procedures were not
                             adequate to ensure compliance. Among the problems found
                             were (1) a lack of competition for requested goods and
                             services, (2) a lack of independent estimates before receiving
                             bids or proposals and no cost or price analysis, (3) a lack of
                             required Federal contracting clauses such as termination for
                             cause or convenience, (4) the use of vendor-issued contracts
                             and, (5) the decentralized procurement of goods and services
                             that resulted in poorly written contracts or no contracts at all
                             (see appendix C).

                             Decentralized Procurement and Contract Administration

                             The Authority awarded many contracts each year without a
                             designated procurement department. It used its Purchasing
                             Department to procure some of its goods and services, but
                             individual departments handled most of their own
                             procurements.      Since each department procured and
                             administered most of its own contracts, the Authority’s
                             procurement and contracting functions were inconsistent
                             among departments, and critical contract terms and conditions
                             were often missing. Authority staff acknowledged its
                             Purchasing Department was not involved in most of the
                             Authority’s procurements. The Purchasing Department was
                             actively involved in just one of the seven procurement actions
                             we reviewed.

                             Without centralized procurement, the Authority’s managers
                             circumvented Federal and Authority-adopted procurement
                             procedures to obtain goods and services. The effects of the
                             decentralized procurement of goods and services were
                             evident during our review of the seven procurement
                             actions. There was no evidence that the Authority
                             performed the required independent estimates and cost or
                             price analyses for six of the seven procurements; it did not
2005-LA-1001                     Page 4
                                                   Finding 1


competitively bid four of the seven procurement actions to
achieve free and open competition; and for two of the
procurements, it paid for services without the use of
contracts. The Authority also entered into open-ended,
vendor-issued contracts for security and legal services that
included clauses benefiting the vendor at the expense of the
Authority. For instance, the Authority entered into a
security contract with Ad Force Security that included a
clause stating prepayment of security services were
nonrefundable. It also entered into contracts that lacked
required Federal provisions, designed to reduce legal and
financial risks to the Authority, such as termination for
cause and convenience and legal remedies for breach of
contract. We believe these failures to practice proper
contracting exposed the Authority and its resources to
unnecessary monetary and legal risks.

The Authority lacked the necessary monitoring controls to
ensure that vendor payments were consistent with contract
terms. We identified a number of instances in which
vendors were paid based on estimated, not actual, costs
incurred for the services rendered. In some cases, the
vendor billed the Authority for work not performed or for
work that was inconsistent with contract terms. There were
also instances in which department managers did not
provide to the Purchasing Department or Finance
Department such documentation as audit logs for security
services rendered, to support invoices submitted by the
vendor.     As a result, the Finance Department and
Purchasing Department approved billings without adequate
supporting documentation to show that services were
provided.

Video Production Vendor

The Authority entered into an oral agreement without
obtaining price and rate quotations from other qualified
sources, obtaining a formal written agreement, or following
procurement by small purchase procedures (24 Code of
Federal Regulations 85.36 (d)(1)). In May 2000, the
Authority spoke with a video production vendor about
providing a 7-10 minute video presentation for use at a
housing conference. It agreed to pay the vendor $4,500 for
the video presentation. The Authority did not perform a
cost or price analysis, as is required by Federal regulations
and its own policies, to show whether the $4,500 fee was
    Page 5                                      2005-LA-1001
Finding 1


               reasonable. The Authority ignored Federal regulations and
               its own policies and procedures by not soliciting at least
               three offers to provide video services for the Authority.
               The Authority acknowledged that it did not solicit other
               firms to provide video services.         The Purchasing
               Department was not involved in the procurement action.

               The vendor delivered a 30-minute video rather than the 7-
               10-minute presentation requested and orally agreed upon.
               The vendor believed that he was entitled to additional
               compensation for the extra work; however, the Authority
               disagreed and paid the vendor only $4,500. Ultimately, an
               arbitrator intervened and ruled that the vendor was entitled
               to only $4,500 for providing the service, even though the
               results were not what the Authority verbally agreed to
               receive. A centralized Procurement Department, as well as
               a formal written contract, would have protected the
               Authority from monetary and legal risks and executive staff
               time spent on this issue.

               Brown Stove Works

               From December 6, 1999, through June 7, 2002, the
               Authority purchased 1,024 stoves from Brown Stove
               Works of Cleveland, TN, for $272,710 without competitive
               bidding, cost or price analyses, or a written contract.
               During this 2½-year period, the Authority purchased and
               received shipments of large quantities of stoves using
               purchase orders rather than entering into formal written
               contracts, as required by its procurement policies and
               procedures. There was no price or cost analyses, as is
               required by Federal regulations, to show that the costs
               charged for the stoves were reasonable and fair. The
               Purchasing Department was actively involved in the
               purchase of the stoves yet failed to follow Federal
               regulations in obtaining them. The purchasing agent’s
               reason for the sole-source purchases was that the Authority
               had been doing business with the company since 1978 and
               was satisfied with the product, and the Authority’s
               maintenance staff was familiar with the stoves. This action
               does not comply with HUD’s requirements, and this sole-
               source purchase cannot be justified when local vendors and
               building and supply stores carry such a commodity.



2005-LA-1001       Page 6
                                                   Finding 1


Robert Burns Construction Co.

On March 7, 2000, the Authority entered into a
construction contract with Robert Burns Construction Co.
to perform construction work at Conway Homes, an
Authority-owned public housing development. Robert
Burns Construction Co. was paid $1,082,121. Of this
amount, $975,000 was for the original contract, and
$107,121 was for various change orders that occurred
during the construction. The Purchasing Department was
not involved in the procurement of this construction
contract. The Authority’s Capital Fund manager was
involved in the procurement action, and there was no
evidence that the Authority performed the required cost or
price analyses for the original contract amount or its
modifications. Without a cost or price analysis, the
Authority could not determine whether the construction
costs were reasonable and fair.

There was no evidence that a technical evaluation was
performed for the proposals received. Also, there were no
provisions in the contract regarding compliance with the
Davis-Bacon Act, compliance with the Copeland Anti-
Kickback Act, or termination for cause and convenience by
the Authority. Such provisions are required by Federal
regulations to protect housing authorities and their resources
from legal and financial risks. We believe the establishment
of a centralized Procurement Department would have helped
to ensure that the procurement for construction services at
Conway Homes followed Federal regulations and the
Authority’s own policies and procedures.

Signature Systems, Inc.

On August 1, 2001, the Authority contracted with
Signature Systems, Inc., to provide an updated computer
system, Public Housing Authority Management System, to
replace its old management system to meet the reporting
needs of the agency.        The Authority’s Information
Technology Department and executive management
procured the professional services for the data conversion
and implementation of the new system but did not include
the Purchasing Department and sought very little input
from accounting and finance staff in the procurement
process. The Authority did not perform an independent cost
estimate before receiving proposals, nor did it perform a
    Page 7                                      2005-LA-1001
Finding 1


               cost or price analysis, as is required by Federal regulations.
               The Authority did not maintain complete and accurate
               documentation of the procurement process, as required by
               Federal regulations and its own procurement policies and
               procedures.     The following documentation for this
               procurement transaction was not provided to OIG after
               repeated requests: 1) the losing bidders’ proposals, 2)
               bidders scoring/evaluations of the proposals, 3) the scope
               of work, and 4) a pricing summary.

               On May 17, 2001, the deputy director prepared a staff
               report for the Board stating, “Anticipated costs for full
               implementation range to $400,000.” Records provided to
               us showed the Authority entered into a contract with
               Signature Systems, Inc., on August 1, 2001, for $289,516,
               which stated this amount was for Phase I, but the Phase 2
               costs were still to be determined. The costs escalated to
               $829,527 by the time the Authority determined that the
               Public Housing Authority Management System was a
               failure and went back to its previous management system.
               It did not run a backup or parallel system during the data
               transfer from the previous system to the attempted new
               system. We concluded that the Authority did not follow
               Federal procurement requirements, did not retain adequate
               records documenting the history of the procurement, and
               mismanaged resources and Federal funds provided for the
               benefit of its residents.

               Geiger, Rudquist, Nuss, Coon & Keen, LLP

               On February 3, 1999, the Authority awarded Geiger,
               Rudquist, Nuss, Coon & Keen, LLP, an open-ended legal
               services contract, in which the law firm would provide
               various legal services on an as-needed hourly basis.
               Geiger, Rudquist, Nuss, Coon & Keen, LLP, was to
               provide these services to the Authority for 2 years with
               options for 2 additional years. Through additional options
               not specified in the original contract, the Authority
               extended its contract with Geiger, Rudquist, Nuss, Coon &
               Keen, LLP, until September 2007 and added two additional
               2-year options. This would effectively allow the contract
               to continue through September 30, 2011. This contract
               disregards HUD Handbook 7460.8 requirements that limit
               the length of service contracts to 2 years without HUD
               approval. It also disregards Federal regulations requiring
               all procurements to be conducted in a manner providing
2005-LA-1001       Page 8
                                                   Finding 1


free and open competition. Due to problems associated
with the Authority’s failed attempt to upgrade its computer
system, we were only able to determine that Geiger,
Rudquist, Nuss, Coon & Keen, LLP, received $318,491
from June 28, 2001, through June 25, 2004, for legal
services rendered.

The legal services contract did not include required Federal
provisions, such as administrative, contractual, and legal
remedies when the contractor violates or breaches contract
terms. These and other Federal provisions must be
included in all contracts and are designed to protect the
Authority from unnecessary legal and financial risks.

The original contract and options did not cap the maximum
amount to be paid to the law firm. Geiger, Rudquist, Nuss,
Coon & Keen, LLP, unilaterally increased its hourly rates
over the years without the Authority’s formal approval and
without applicable contract modifications. The exercised
contract options were silent on any hourly rate increases
and referred to the February 3, 1999, contract.

Geiger, Rudquist, Nuss, Coon & Keen, LLP did not perform
services for the Authority as agreed upon in a signed contract
dated February 3, 1999. Specifically, Geiger, Rudquist, Nuss,
Coon & Keen, LLP did not ensure contracts and procurement
actions were in compliance with federal rules and regulations.
At $160 an hour, the attorneys were to perform the following
services for the Authority: (1) review formal competitive
bidding documents, information for the solicitation of
materials, equipment and non-professional service
agreements; (2) review request for proposals for architects,
engineer and other consultants and draft professional services
agreement and (3) ensure contracts were in compliance with
federal and state procurement laws. We believe the attorney’
failure to effectively perform contracted services and reviews
added to the problem of the Authority improperly awarding
over $3.3 million in contracts for goods and services and the
resulting unnecessary financial and legal risks.

We attribute the poor execution and administration of this
lengthy, open-ended contract to poor management
practices, compounded by not using a centralized
procurement system to ensure compliance with HUD
requirements.

    Page 9                                      2005-LA-1001
Finding 1


               Ad Force Security

               In June 1993, the Authority awarded Ad Force Security a
               series of open-ended security services contracts without
               competition.     Due to problems associated with the
               Authority’s prior computer system upgrade, we were only
               able to determine that Ad Force received $779,845 from
               June 29, 2001, through July 26, 2004, for security services
               rendered. We limited our procurement review to four of
               Ad Force’s most recent contracts, beginning on February 3,
               2003. Each of the four contracts provided security services
               for the following Authority-owned properties: Sierra Vista,
               Tracy Homes, Administration Building, and Franco Center.
               None of the contracts provided a specific time when Ad
               Force would complete its services for the Authority. The
               Authority entered into the agreements with Ad Force using
               vendor-prepared contracts, which benefited the vendor and
               placed significant legal and financial risks on the Authority
               and its resources. In addition, the executed contracts did
               not specify a maximum contract amount that the Authority
               would pay Ad Force for the security services rendered.

               There were many instances in which the Authority prepaid
               for security services not yet rendered by Ad Force. For
               example, on October 24, 2003, Ad Force billed the
               Authority for security services that were to be provided for
               the period October 24-30, 2003. On October 27, 2003, the
               Authority paid Ad Force before completion of the
               scheduled services. It should be noted that a clause in all
               of the vendor-issued contracts specified that prepaid
               services were nonrefundable. The Authority placed itself
               and its resources at risks by paying for services before
               completion.

               In addition, from October 23, 2003, through July 16, 2004,
               Ad Force overbilled the Authority $3,772 for security
               services provided to Tracy Homes. In one instance, Ad Force
               billed the Authority for 42 hours of security services during
               the week of February 20-26, 2004. However, security logs
               showed the vendor provided only 36 hours of security
               services to the housing development during that week.

               Reorganization Consultant

               The Authority’s former executive director awarded three
               consulting contracts to a reorganization consultant for
2005-LA-1001       Page 10
                                                  Finding 1


reorganization plans without competitively bidding the
services. From April 22, 2002, through May 7, 2003, the
consultant was paid $34,838 for consultant services and
expenses. The payments for preparing a reorganization
plan in April and May 2002 were not associated with a
contract. They were authorized and approved for payment
by the executive director. The consultant was later
awarded three consulting contracts, dated August 2002,
February 2003, and April 2003, to prepare and present a
reorganization plan. Each of the three contracts specified
that the consultant would be paid at a daily rate of $1,000
for rendered services, but the contracts did not specify the
hourly rate for services to be rendered. We followed up
with the former executive director on why he selected the
consultant, and he stated that he believed his personal
knowledge of the consultant’s experience, including prior
work at several other public housing authorities, would
benefit the Authority’s reorganization plans.

According to the Authority’s procurement policies and
procedures, monthly reports disclosing all contracts
awarded between the threshold of $2,500 and $25,000 are
to be submitted to the Board. These monthly reports were
intended to inform the Board of contracts executed within
the specified dollar threshold for the respective month.
There was no evidence that the Authority included the
three consulting contracts in monthly reports to the Board,
as required by its procurement policies and procedures, and
it appears that the former executive director executed the
three consulting contracts without the Board’s full
knowledge.

We questioned $3,911 for the consultant’s services charged
to the Low-Rent Housing program. Of this amount, the
Low-Rent Housing program absorbed $2,810 in ineligible
costs and $1,101 in unsupported costs paid to the
consultant. The ineligible costs are primarily duplicate
reorganization plan costs the consultant charged in April
and May 2002, when he did not have a contract, and again
in August 2002, when he was awarded a sole-source
contract to provide the same services. The unsupported
costs are for rental car expenses incurred by the consultant
in February 2003, for which receipts could not be found.



    Page 11                                    2005-LA-1001
Finding 1




Auditee Comments    Authority officials generally agreed with the
                    recommendations, and are centralizing all of its
                    procurements to ensure consistency among all departments.
                    However, the Authority believed the procurement problems
                    found during the audit were isolated instances. The
                    Authority also believed that no additional savings were
                    anticipated by going through the formal bid process for its
                    purchase of stoves from Brown Stoves Works and having
                    them shipped from Cleveland, Tennessee.

                    The Authority stated that Geiger, Rudquist, Nuss, Coon &
                    Keen, LLP’s experience and efforts from previous
                    relationships warranted the extension of the contract. The
                    Authority claimed HUD Notice PIH 2003-04 (HA)
                    provided it and its counsel the ability to extend the legal
                    services contract. In addition, the Authority cited HUD
                    regulation 24 CFR 85.36(d)(1), procurement by small
                    purchase procedures ($100,000 or less) as being applicable.

                    The Authority is issuing new Requests for Proposal for
                    legal services and security services. Authority officials
                    asked us to provide them a sample contract approved by
                    OIG to assist in the Request for Proposals process for legal
                    counsel and security services.




OIG Evaluation of   The Authority’s comments were generally responsive to the
Auditee Comments    recommendations; however, OIG does not approve
                    contracts, so the Authority should contact HUD program
                    staff for any additional guidance needed in addition to that
                    in HUD regulation 24 CFR 85.36 and HUD Handbooks.

                    We agree with the Authority’s actions to centralize all of its
                    procurements. However, we disagree with the Authority’s
                    claim that the procurement problems were isolated
                    instances. All seven procurements we reviewed had
                    significant problems of which most were directly tied to the
                    Authority’s failure to actively involve its Purchasing
                    Department. If the Authority had maintained centralized
                    procurement, problems such as the ones found during the
                    audit could have been minimized.
2005-LA-1001            Page 12
                                                   Finding 1



The Authority’s claim that no additional cost savings
would have been anticipated by going through a formal bid
process for Brown Stove Works is incorrect and contrary to
HUD’s requirements. According to HUD regulation 24
CFR 85.36(c), the grantee must conduct all procurement
transactions in a manner providing full and open
competition. In the case of Brown Stove Works, we
believe the Authority could have obtained competitive
prices for the purchase of stoves from local vendors such as
Lowe’s, or Home Depot, instead of having them shipped
from a vendor in Cleveland, Tennessee. We believe local
vendors such as the ones previously mentioned could have
offered savings to the Authority based on the volume of
stoves purchased.

We disagree with the Authority’s assertion that Geiger,
Rudquist, Nuss, Coon & Keen, LLP’s experience and
efforts from previous relationships warranted the extension
of the contract. The Authority and its counsel were
incorrect in their interpretation of HUD Notice PIH 2003-
24 (HA). The HUD Notice only repeats what HUD
Handbook 7460.8 and 24 CFR 85.36 state about the
procurement of legal services by Public Housing Agencies
(PHAs). Specifically, HUD Notice PIH 2003-24 (HA)
states, “This Notice is not intended as the primary source of
guidance in this area [Procedures for Procuring
Professional Services], but is provided to remind all HUD
Offices and PHAs of the proper procedures for procuring
legal services and to briefly review areas of common
interest and concern.”

In addition, HUD Notice PIH 2003-24 (HA) does not
reference the Public Housing Authority’s ability to extend
time periods of legal services contracts. HUD Handbook
7460.8, Section 4-27, Part B (Professional Services),
Paragraph 2 states, “The HA shall submit for HUD review
and approval any agreement or contract for professional,
management, fee accountants, legal or other professional
services with any person or firm where the total period or
term of the contract, including any renewal or option
provisions, is in excess of two (2) years… When reviewing
such contracts, HUD should ensure that price competition
was obtained for any renewal or option periods.” The
Authority failed to produce any evidence HUD reviewed or

    Page 13                                     2005-LA-1001
Finding 1


                  approved the legal services contract or any renewals or
                  option provisions exceeding two years.

                  The Authority and its legal counsel incorrectly cited section
                  85.36(d)(1) of HUD Notice PIH 2003-24 (HA) as being
                  applicable criteria for the legal services to be considered a
                  small purchase. The total amount paid to Geiger, Rudquist,
                  Nuss, Coon & Keen, LLP under the legal services contract
                  was well above the $100,000 threshold in HUD regulation
                  24 CFR 85.36 for procurement by small purchase
                  procedures. Thus, the legal services contract would not fall
                  under small purchase procedures and the competitive
                  proposal method of procurement, as required by 24 CFR
                  85.36(d)(3), should have been used. In addition, if the
                  small purchases procurement method had been applicable,
                  the Authority’s own procurement policies and procedures
                  limit it to $50,000 and not $100,000.




Recommendations   We recommend that the Director, Office of Public Housing,
                  require the Authority to:

                  1A.      Establish a centralized procurement department and
                           ensure that all procurement actions are performed in
                           accordance with Federal requirements and the
                           Authority’s own adopted procurement policies and
                           procedures to eliminate such occurrences as paying
                           $829,527 for the failed Public Housing Authority
                           Management System.

                  1B.      Terminate all of its current contracts with Geiger,
                           Rudquist, Nuss, Coon & Keen, LLP, and Ad Force
                           Security and issue a new Request for Proposals for
                           legal services and security services. Ensure that all
                           future contracts follow the requirements in 24 Code
                           of Federal Regulations 85.36 and HUD Handbook
                           7460.8, including all required contract clauses in 24
                           Code of Federal Regulations 85.36 (i).

                  1C.      Reimburse its Low-Rent Housing program $3,772
                           from non-federal funds for the overpayment in
                           security services.


2005-LA-1001            Page 14
                                                Finding 1


1D.      Reimburse its Low-Rent Housing program $2,810
         from non-federal funds for ineligible consulting
         costs.

1E.      Provide adequate documentation for the $1,101 in
         unsupported consulting costs.      If supporting
         evidence is not provided, reimburse its Low-Rent
         Housing program for those costs from non-federal
         funds.




      Page 15                                2005-LA-1001
                   Finding 1




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Page 16          2005-LA-1001
                                                                                           Finding 2




     The Authority Misspent More Than $5.5
      Million in Low-Rent Housing Program
                     Funds
The Authority misused $5,545,972 in Annual Contributions Contract funds for the Low-Rent
Housing program to pay for its non-Low-Rent Housing programs’ expenses. The Authority’s use of
Low-Rent Housing funds toward non-Low-Rent Housing expenses was a result of poor management
decisions, as well as the lack of adequate controls to safeguard Low-Rent Housing program funds.
As a result, the Authority put Low-Rent Housing funds at risk by transferring them to its non-federal
programs without HUD’s approval, thereby depriving Low-Rent Housing program recipients of
funds to ensure safe, decent, habitable, and quality public housing. Further, the Authority’s practice
of using Low-Rent Housing funds enriched its non-federal program accounts by providing interest-
free loans. We determined the non-federal programs owe $154,171 in interest to the Federal Low-
Rent Housing program.




                                       The Authority's Active Annual Contributions Contract for
 Rules and Regulations                 Public Housing, section 9 (C) states

                                       “The housing authority shall maintain records that identify
                                       the source and application of funds in such a manner to
                                       allow HUD to determine that all funds are and have been
                                       expended in accordance with each specific program
                                       regulation and requirement. The housing authority may
                                       withdraw funds from the General Fund only for (1) the
                                       payment of the costs of development and operation of the
                                       projects under the Annual Contributions Contract with
                                       HUD, (2) the purchase of investment securities as approved
                                       by HUD, and (3) such other purposes as may be
                                       specifically approved by HUD.”

                                       Public and Indian Housing Low-Rent Technical
                                       Accounting Guide 7510.1G, chapter 2, “Financial
                                       Operations and Accounting” states:

                                       “Funds provided by HUD are to be used by the housing
                                       authority only for the purposes for which the funds are
                                       authorized.”


                                           Page 17                                      2005-LA-1001
Finding 2


                          From March 2, 2000, to July 31, 2004, the Authority used
 The Authority Misused    $5,545,972 in Low-Rent Housing funds to pay for its non-
 More Than $5.5 Million   Low-Rent Housing programs’ acquisitions and expenses.
 in Low-Rent Housing      Of this amount, $5,454,349 went toward acquiring and
 Program Funds            operating properties for the Authority’s non-federal
                          programs, $86,890 went toward paying for non-Low-Rent
                          Housing program expenses, and $4,733 were questioned
                          costs for expenses incurred (see appendix B).

                          The Authority used its Low-Rent Housing program’s bank
                          account as its designated check-writing account to pay for all
                          of its program expenses. It used Low-Rent Housing’s bank
                          account to make interest-free loans to customers who had no
                          funds on deposit and no attached assets. The Authority’s
                          general practice was to pay non-Low-Rent Housing
                          expenditures from Low-Rent Housing’s bank account and
                          have each program reimburse the Low-Rent Housing
                          program the following month. However, this did not always
                          occur because some of the programs did not have sufficient
                          funds available to reimburse the Low-Rent Housing fund.
                          Although the Authority was aware that certain programs did
                          not have sufficient funds available, it disregarded HUD
                          regulations and continued to advance funds to these
                          programs. The use of these funds in this manner put the
                          Low-Rent Housing program at unnecessary risk, since the
                          loans were unsecured.

                          In addition, the Low-Rent Housing program and its recipients
                          were deprived of funds to ensure safe, decent, habitable, and
                          quality housing. The Authority could have used these funds
                          to make repairs to the crumbling facades of the units at Sierra
                          Vista and other developments to address the housing needs of
                          Low-Rent Housing program recipients (see picture below).
                          Instead, the Authority enriched its non-Low-Rent Housing
                          programs at the expense of the Low-Rent Housing program,
                          its recipients, and housing developments.




2005-LA-1001                  Page 18
                                                                                Finding 2




                   Unit # Unmarked & 1526 – Sierra Vista




                             The Authority used $3,429,206 in Low Income Housing
Non-federal Programs         funds to purchase properties for its non-federal program. If
Were Enriched at the         the Authority had obtained financing from a financial
Expense of the Low-          institution to purchase Claremont Manor, West Park, and
Rent Housing program         RENEW Lodi for its non-federal programs, we determined
                             that it would have had to pay a lender approximately
                             $142,800 ($114,333 + $25,956 + $2,511) in fair-market rate
                             interest for the period in which the funds were used (see
                             appendices D and H).

                             In addition, if the Authority had placed $2,011,270 in 6-
                             month treasury bills at the reported Federal Reserve rate,
                             instead of paying Franco Center’s bond payments and
                             monthly expenses, we determined it would have earned
                             $11,371 ($3,513 + $7,858) in interest for the period in which
                             the Low-Rent Housing program funds were used (see
                             appendices E and F).

                             Overall, we determined the Low-Rent Housing program
                             could have earned $154,171 in interest for the period in
                             which the Authority used Low-Rent Housing program funds
                             for its non-federal programs.




                                 Page 19                                     2005-LA-1001
Finding 2



                          In October and November 2003, the Authority commingled
 More Than $2.9 Million   $2,980,328 in Low-Rent Housing funds with its Operation
 Spent To Purchase        Reserves, unrestricted non-federal account, to purchase non-
 Claremont Manor for      Low-Rent Housing program properties. Of this amount, the
 Nonfederal Program       Authority used $2,200,551 to purchase Claremont Manor,
                          and $779,777 remained in its non-federal Operation Reserves
                          bank account, earning interest. The Authority’s inappropriate
                          use of Low-Rent Housing funds with its Operation Reserves
                          account to purchase non-Low-Rent Housing program
                          properties, such as Claremont Manor, violated its Annual
                          Contribution Contract and HUD rules and regulations.

                          During the period from November 2003 to July 2004,
                          Claremont Manor generated $102,733 in net income for the
                          Authority’s non-federal Operation Reserves account.
                          During this period, none of the $102,733 in net income
                          generated from Claremont Manor benefited the Low-Rent
                          Housing program or its recipients. Instead, the Authority
                          enriched its non-federal Operation Reserves account at the
                          expense of the Low-Rent Housing program and its
                          recipients. The Authority would not have had this extra net
                          income had it not used Low-Rent Housing funds as an
                          interest-free loan to acquire Claremont Manor. Claremont
                          Manor has 52 units, and houses both market rent and
                          Section 8 program recipients.

                          In June 2004, the Bank of Agriculture and Commerce
                          offered the Authority a loan at a 6.1-percent interest rate to
                          refinance Claremont Manor. As of July 31, 2004, the
                          Authority was still in the process of obtaining the
                          refinancing for the property. If the Authority had obtained
                          $2,980,328 in financing from a bank at an interest rate of
                          6.1 percent to purchase Claremont Manor, we determined it
                          would have had to pay a lender $114,333 in interest for the
                          period October 2003 through August 2004 (see appendix
                          D).

                          When we initiated our audit in January 2004, we
                          questioned the funds used for the purchase of Claremont
                          Manor. During that same month, the Authority made its
                          first installment payment toward reimbursing the Low-Rent
                          Housing program. On August 3, 2004, the Authority
                          provided evidence to us that the Low-Rent Housing
                          program received its final repayment from the Authority’s
                          non-federal account as reimbursement for the $2,980,328 in
2005-LA-1001                  Page 20
                                                                           Finding 2


                         loan principal taken. However, this amount does not
                         include the $114,333 in interest due the Low-Rent Housing
                         program for the principal amount loaned to its non-federal
                         Operation Reserves account. We concluded that its non-
                         federal programs were enriched by generating $102,733 in
                         net income and another $114,333 for using interest-free
                         Low-Rent Housing program funds.

                         The Authority used Low-Rent Housing funds to pay for its
More Than $2 Million     non-federal and non-Low-Rent Housing program operating
Spent in Low-Rent        expenses. In some cases, the programs that received
Housing Funds Used for   advances from the Low-Rent Housing program did not
Franco Center’s          repay the funds in a timely manner. Franco Center, an
Operating Expenses       Authority-owned Section 8 project-based property, had the
                         most significant problems regarding the use and untimely
                         repayments of Low-Rent Housing funds.

                         The Authority continuously and routinely advanced Low-
                         Rent Housing funds to cover the Franco Center’s operating
                         expenses. The Authority used Low-Rent Housing funds to
                         pay for Franco Center’s monthly bond payments and
                         monthly expenses. It continued the practice of using these
                         funds to pay for Franco Center’s expenses, even though the
                         property routinely failed to make timely repayments to the
                         Low-Rent Housing program. For example, the Authority
                         used Low-Rent Housing funds to pay for Franco Center’s
                         August 2003 bond payment, but Franco Center did not
                         repay these funds until February 2004, nearly 6 months
                         after the initial payment. The Authority used Low-Rent
                         Housing funds to pay for Franco Center’s monthly
                         expenses, and there were instances in which Franco Center
                         did not reimburse the Low-Rent Housing program until 11
                         months after the initial advancement of funds.

                         During the period from October 2002 to July 2004, the
                         Authority advanced at least $2,011,270 in Low-Rent
                         Housing funds to pay for Franco Center’s monthly
                         expenses and bond payments. Of that amount, $1,320,103
                         was paid for its operating expenses, and $691,167 was paid
                         for its bond payments. If the Authority had placed
                         $2,011,270 in 6-month treasury bills at the reported Federal
                         Reserve rate, we determined it would have earned $11,371
                         in interest for the period October 2002 through July 2004
                         (see appendices E and F).


                             Page 21                                    2005-LA-1001
Finding 2


                            As of July 31, 2004, the Authority provided evidence to us
                            that the Low-Rent Housing program had been reimbursed
                            $1,760,061 but has a remaining outstanding balance of
                            $251,209. The outstanding balance did not include the
                            $11,371 in lost interest due the Low-Rent Housing program
                            for the principal amount loaned to Franco Center.

                            From July 2000 through September 2001, the Authority used
  Used More Than            $462,751 in Low-Rent Housing funds to purchase properties
  $460,000 in Low-Rent      and absorb losses for its non-federal programs. Of this
  Housing Funds To          amount, it used $367,100 to purchase West Park and $81,778
  Purchase Properties and   to purchase three single-family lots in Lodi, CA. In addition,
  Absorb Losses for West    from July 2000 to September 2001, the Authority used
  Park and RENEW Lodi       $13,873 in Low-Rent Housing funds to absorb West Park’s
                            operating losses.

                            West Park

                            In July 2000, the Authority used $367,100 of Low-Rent
                            Housing funds to purchase a 12-unit apartment complex
                            called West Park for its non-federal program. During the
                            period from July 2000 to September 2001, West Park
                            incurred $13,873 in operating losses, and the Low-Rent
                            Housing program absorbed all of this loss. In our opinion,
                            the Low-Rent Housing program would not have incurred
                            this loss had the Authority not used Low-Rent Housing
                            funds as an interest-free loan to acquire and operate West
                            Park at the expense of its Low-Rent Housing program
                            recipients. West Park has 12 units and houses both market
                            rate and Section 8 program recipients (see appendix G).

                            In September 2001, 14 months after the original acquisition,
                            the Authority used monies from its non-federal Operation
                            Reserves account to reimburse its Low-Rent Housing
                            program for West Park at the original acquisition price of
                            $367,100 but provided no compensation for using the funds
                            interest-free.

                            In June 2004, the Bank of Agriculture and Commerce
                            offered the Authority a loan at 6.1 percent interest to
                            refinance another Authority-owned apartment building,
                            Claremont Manor. If the Authority had obtained $367,100
                            in financing from a bank at an interest rate of 6.1 percent to
                            purchase West Park, we determined it would have had to
                            pay a lender $25,956 in interest for the period July 2000
                            through September 2001. We believe our computed
2005-LA-1001                    Page 22
                                                                             Finding 2


                         interest rate to be generous and lower than what the interest
                         rates were in 2000 and 2001 (see appendix H).

                         Revitalizing Existing Neighborhoods and Extending the
                         Workforce Project (RENEW) Lodi Properties

                         In December 2000, the Authority used $81,778 of its Low-
                         Rent Housing program funds to purchase vacant lots for
                         three single-family properties for its non-federal program
                         called the RENEW Lodi program. In May 2001, the
                         Authority used non-federal program funds to reimburse its
                         Low-Rent Housing program the original acquisition price
                         of $81,778, but once again, it provided no compensation
                         for using the funds interest-free.

                         In December 2000, the Federal Reserve’s reported 30-year
                         conventional mortgage rate for a single-family home was
                         7.38 percent. If the Authority had obtained $81,778 in
                         financing from a bank or financial institution at an interest
                         rate of 7.38 percent to purchase the three single-family
                         properties, we determined it would have had to pay a lender
                         $2,511 in interest for the period December 2000 through
                         May 2001. The Authority’s use of Low-Rent Housing
                         program funds allowed it to construct a house on one of the
                         vacant lots and sell it in September 2003 for a net gain of
                         $20,161 (see appendix H).

                         From October 1998 through January 2003, the Authority
More Than $33,000 Used
                         used Low-Rent Housing funds to incur $33,542 in
Toward Unnecessary and
                         questioned costs. Of this amount, $1,633 was spent to pay
Non-related Low-Rent
                         the Authority executive director’s friend to perform
Housing Expenses
                         unnecessary consultant services; $28,809 was advanced to
                         a resident council for Resident Opportunity and Self-
                         Sufficiency grant expenses it incurred, and $3,100 was for
                         unsupported credit card charges.

                         Payment of $1,633           for   Unnecessary      Personnel
                         Consulting Services

                         On May 23, 2002, a Contra Costa Housing Authority
                         commissioner was paid $1,633 to provide the following
                         services related to the hiring of two administrative assistants
                         for the Authority: 1) reading, reviewing and evaluating the
                         13 candidates’ employment applications, resumes, letters of
                         recommendation, and supplemental questionnaires; and 2)
                         participating on the interview panel. According to the
                             Page 23                                      2005-LA-1001
Finding 2


               Authority, the above tasks are to be performed by the
               Authority’s Human Resources Department and a volunteer
               interview panel, not performed through a paid consultant.

               Loan of Low-Rent Housing Funds To Pay for Resident
               Council’s Resident Opportunity and Self-Sufficiency
               Grant Expenditures

               From May 10, 2002, through January 23, 2003, the Authority
               advanced the Sierra Vista Resident Council $28,809 to pay
               for expenses that the Council incurred before drawing down
               funds from HUD for its Resident Opportunity and Self-
               Sufficiency Grant. The Authority loaned money to the
               Council for its grant expenses, with the intention that the
               Council would acquire its grant fund through HUD’s Line of
               Credit Control System and reimburse the Authority.
               However, the Council did not draw down any of the $100,000
               for which it had been approved and did not submit required
               financial statements and progress reports. The grant expired
               on September 21, 2003, and on June 8, 2004, HUD sent a
               letter to the Council and a copy to the Authority stating that
               the grant was being recaptured in its entirety. In our opinion,
               the advances were improper and not a necessary and
               reasonable expense for the Authority’s Low-Rent Housing
               funds. We did not do a detailed review of the purpose of the
               expenditures since we considered them to be ineligible loan
               expenditures; however, we did note that more than half of the
               amount spent went to a consultant that the Council hired and
               terminated.

               The Authority Incurred $3,100 in Unsupported Credit
               Card Costs

               We reviewed payments made on the Authority’s Visa credit
               card account between October 6, 1998, and October 1, 2001.
               The credit card account was used by Authority personnel
               including executives and the Board, for various expenses
               including travel. There were eight instances of unsupported
               costs totaling $3,100, which the Authority charged for yet
               failed to maintain records. Among the unsupported costs
               were $2,085 in hotel expenses, $127 in food expenses, and
               $888 in airline tickets. Without accurate documentation of
               the questioned costs, the Authority was unable to determine
               whether the charges were business-related or personal.


2005-LA-1001       Page 24
                                                                               Finding 2



                             From July 28, 2000, to April 24, 2003, the Authority used
More Than $49,000 Used       $49,996 in Low-Rent Housing funds to pay for security
To Pay for State-Funded      services for the State of California Migrant Housing
Program Expenses             program, a State of California-funded program.

                             The Migrant Housing program did not have the funds to
                             pay for security services at its Migrant Housing Center.
                             Although the Authority knew the Migrant Housing
                             program was a State-funded activity, it ignored HUD rules
                             and regulations and used Low-Rent Housing funds, instead
                             of its non-federal funds, to absorb the security services’
                             expenses incurred for its Migrant Housing program.

                             On March 2, 2000, Brown-Stove Works billed the Authority
More Than $8,000 Used To     $8,085 for 31 stoves to be delivered to Mokelumne Manor, a
Pay for U.S. Department of   Low-Rent Housing program-funded development owned by
Agriculture Program          the Authority. Instead, the shipment of stoves was delivered
Purchases                    to Sartini Manor, a U.S. Department of Agriculture-funded
                             housing development owned by the Authority. The Authority
                             approved the use of Low-Rent Housing funds, instead of
                             funds from the U.S. Department of Agriculture’s Rural
                             Development Program, to pay Brown-Stove Works for the
                             stoves shipped to Sartini Manor. On March 24, 2000, the
                             Authority paid Brown-Stove Works $8,085 in Low-Rent
                             Housing funds for 31 stoves delivered to Sartini Manor.

                             On May 25, 2004, we discussed the issue with Authority
                             executives. They agreed with our assessment that U.S.
                             Department of Agriculture funds, not Low-Rent Housing
                             funds, should have been used to pay for the purchases at
                             Sartini Manor and provided evidence to us on July 13,
                             2004, that the Low-Rent Housing program has been
                             reimbursed $8,085.




Auditee Comments             The Authority generally agreed with the finding and
                             recommendations. Additionally, Authority officials stated
                             corrective actions would be taken.

                             The Authority asked OIG to reconsider the 6.1 percent
                             interest rate used to compute the $114,333 interest owed
                             for using $2.2 million in Low-Rent Housing program funds
                             to purchase Claremont Manor, a multifamily property. The
                                 Page 25                                    2005-LA-1001
Finding 2


                    Authority also asked OIG to reconsider the 6.1 percent
                    interest rate used to compute the $25,956 in interest owed
                    for using $367,100 in Low-Rent Housing program funds to
                    purchase West Park, another multifamily property.

                    Additionally, the Authority asked OIG to reconsider the
                    7.38 percent interest rate used to compute the $2,511 in
                    interest owed for using $81,778 in Low-Rent Housing
                    program funds to purchase single-family lots in Lodi,
                    California.

                    Instead, the Authority suggested we use the 6-month
                    Treasury bill, or T-bill, to calculate the interest owed for
                    using Low-Rent Housing program funds to finance and
                    purchase properties for its other programs.




OIG Evaluation of   The Authority’s comments were generally responsive to the
Auditee Comments    finding and recommendations.

                    OIG disagreed with the Authority’s suggestion to use the
                    T-bill interest rate to compute the interest owed to the Low-
                    Rent Housing program for use of its funds to purchase
                    Claremont Manor, West Park and the Lodi, California
                    single-family lots. We used the interest rate of 6.1 percent
                    quoted by the Bank of Agriculture and Commerce in
                    Stockton, California in June 2004 when the Authority
                    applied to refinance $2.2 million of the $2.9 million it had
                    misused for Claremont Manor. We used the 6.1 percent
                    interest rate to compute the $140,289 in interest owed to
                    the Low-Rent Housing program for using $3,347,428 of the
                    HUD program’s funds to purchase Claremont Manor and
                    West Park, both multifamily properties. Of the $140,289 in
                    interest owed to the Low-Rent Housing program, $114,333
                    was for using $2,980,328 to purchase Claremont Manor
                    and the remaining $25,956 was for using $367,100 to
                    purchase West Park. We used the interest rate of 7.38
                    percent quoted by the Federal Reserve’s reported 30-year
                    conventional mortgage rate for a single-family home. The
                    Federal Reserve’s rate was for December 2000, the same
                    time period the Authority used $81,778 in Low-Rent
                    Housing program funds to purchase the three single-family
                    lots in Lodi, California. As a result, we used the 7.38
                    percent interest rate to compute the $2,511 in interest owed
2005-LA-1001            Page 26
                                                                     Finding 2


                  to the Low-Rent Housing program for purchasing the
                  single-family lots in Lodi, California.

                  If the Authority had obtained financing from a bank or
                  financial institution to purchase the multifamily properties
                  and single-family properties, it would have been charged
                  the prevailing interest rates during the period in which the
                  funds were used. We believe the interest rates we used in
                  the computations were generous and fair and did not
                  include any bank fees the Authority would have had to pay
                  a lender.



Recommendations   We recommend that the Director, Office of Public Housing,
                  require the Authority to:

                  2A.      Immediately cease the practice of using Low-Rent
                           Housing program funds to pay for non-Low-Rent
                           Housing program purchases and expenses and
                           establish procedures to ensure that HUD approval is
                           obtained before using funds for non-federal
                           purposes.

                  2B.      Reimburse its Low-Rent Housing program from
                           non-federal funds $114,333 in accrued interest at an
                           interest rate of 6.1 percent for using $2,980,328 in
                           Low-Rent Housing program funds to purchase
                           Claremont Manor.

                  2C.      Reimburse its Low-Rent Housing program for the
                           $251,209 remaining balance of the bond payments
                           expenses paid for the Franco Center and $11,371 in
                           back interest at the Federal Reserve’s reported 6-
                           month treasury bill rate for the use of $2,011,270.

                  2D.      Reimburse the Low-Rent Housing program $13,873
                           from non-federal funds for using Low-Rent
                           Housing program funds to absorb West Park
                           apartments’ operating loss and $25,956 in back
                           interest from non-federal funds for using $367,100
                           in Low-Rent Housing program funds to purchase
                           West Park apartments.

                  2E.      Reimburse the Low-Rent Housing program $2,511
                           in back interest from non-federal funds for using
                        Page 27                                   2005-LA-1001
Finding 2


                        $81,778 in Low-Rent Housing program funds to
                        purchase single-family properties for its RENEW
                        Lodi program.

               2F.      Reimburse its Low-Rent Housing program $1,633
                        in ineligible costs paid to the reorganization
                        consultant from non-federal funds.

               2G.      Reimburse its Low-Rent Housing program $28,809
                        in ineligible advances to the Sierra Vista Resident
                        Council from non-federal funds.

               2H.      Provide adequate documentation for the $3,100 in
                        unsupported credit card charges.       Otherwise,
                        reimburse its Low-Rent Housing program from
                        non-federal funds for those costs in which
                        supporting documentation could not be obtained.

               2I.      Reimburse its Low-Rent Housing program $49,996
                        from non-federal funds for security services
                        provided to the State of California Migrant Housing
                        program.

               2J.      Establish better controls to ensure that Low-Rent
                        Housing program funds are used only for that
                        program’s related expenditures and eliminate such
                        occurrences as using $8,085 to pay for U.S.
                        Department of Agriculture program-funded assets.




2005-LA-1001         Page 28
Management Controls
In planning and performing our audit, we considered the management controls of the Authority to
determine our auditing procedures, not to provide assurance on the 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 its business operations. They include systems for measuring, reporting, and monitoring
business performance.



                                     We determined the following management controls were
 Relevant Management
                                     relevant to our audit objectives:
 Controls
                                     •   Validity and Reliability of Data - Policies and
                                         procedures that management has implemented to
                                         reasonably ensure that valid and reliable data are
                                         obtained, maintained, and fairly disclosed in reports.

                                     •   Compliance with Laws and Regulations - Policies and
                                         procedures that management has implemented to
                                         reasonably ensure that resource use is consistent with
                                         laws and regulations and provisions of contracts or
                                         grant agreements.

                                     •   Safeguarding of Resources - Policies and procedures
                                         that management has implemented to reasonably
                                         prevent or promptly detect unauthorized acquisition,
                                         use, or disposition of resources.

                                     We assessed all of the relevant controls identified above.

                                     It is a significant weakness if management controls do not
 Significant Weaknesses              provide reasonable assurance that the process for planning,
                                     organizing, directing, and controlling program operations will
                                     meet an organization’s objectives.

                                     Based on our review, we believe the following items are
                                     significant weaknesses:

                                         •   Validity and Reliability of Data – The Authority did
                                             not maintain complete and accurate records to
                                             ensure that services and goods were provided to the
                                             benefit of the entity and its recipients. (Finding 1)

                                         Page 29                                     2005-LA-1001
Management Controls


                      •   Compliance with Laws and Regulations – The
                          Authority management inappropriately used federal
                          funds, violating the Annual Contributions Contract.
                          The Authority did not comply with HUD Handbook
                          and Code of Federal Regulations standards over
                          procurement and contracting. (Findings 1 & 2)

                      •   Safeguarding of Resources – The Authority
                          incurred excessive, unnecessary, unsupported, and
                          ineligible costs. The Authority used public housing
                          funds for unauthorized activities, depriving the
                          Authority’s public housing developments of HUD
                          funding intended to provide decent, safe, habitable,
                          and quality public housing. (Finding 2)




2005-LA-1001          Page 30
Follow-up on Prior Audits
The HUD Office of Inspector General (OIG) previously audited the Authority’s purchase of
properties in 1994 and 1995. The audit memo (number 97-SF-203-1801) was issued November
21, 1996.

                                 The review was conducted because the former Director of the
 Issues Raised During the
                                 Office of Public Housing, Sacramento Office, raised the
 Review
                                 following issues:

                                     •   Hiring of architectural services.

                                     •   Identity of interest issues concerning properties
                                         purchased in 1994 and 1995 using excess Section 8
                                         funds.

                                 OIG found no violation of HUD regulations; therefore, no
 OIG Results                     recommendations were made to the Authority.




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2005-LA-1001                 Page 32
                                                                                 Appendix A

Schedule of Questioned Costs and Funds
Put to Better Use
Recommendation                         Type of Questioned Cost                Funds Put to
   Number                       Ineligible 1/         Unsupported 2/           Better Use 3/

         1C                         $3,772
         1D                         $2,810
         1E                                                 $1,101
         2B                                                                  $2,980,328
         2B                       $114,333
         2C                       $251,209
         2C                        $11,371
         2D                        $13,873
         2D                        $25,956
         2E                         $2,511
         2F                         $1,633
         2G                        $28,809
         2H                                                $3,100
         2I                        $49,996
         2J                         $8,085

Totals                            $514,358                 $4,201            $2,980,328


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 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.

3/       Funds Put to Better Use are costs that will not be expended in the future if our
         recommendations are implemented. This includes:

         Costs not incurred, de-obligation of funds, withdrawal of interest, reductions in
         outlays, avoidance of unnecessary expenditures, loans and guarantees not made,
         and other savings




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2005-LA-1001    Page 34
        Appendix B

        Itemized Questioned Costs and Funds Put to Better Use


                            Item Description                                       Amount                           Purpose of Funds                           Type of Questioned Costs/Funds Put to
                                                                                                                                                                     Better Use (Finding 1 or 2)
Ad Force over billings to Tracy Homes Development                                    $3,772 Incurred public housing authority expenditure                    Questioned costs: ineligible (finding 1)
Consultant’s compensation and travel expenses                                        $2,810 Incurred public housing authority expenditure                    Questioned costs: ineligible (finding 1)
Consultant’s travel expenses                                                         $1,101 Incurred public housing authority expenditure                    Questioned costs: unsupported (finding 1)
Purchase of Claremont Manor                                                     $2,200,551 Property acquisition & operation                                  Funds put to better use (finding 2)
Low-Rent funds combined with Operation Reserves                                   $779,777 Property acquisition & operation                                  Funds put to better use (finding 2)
Back interest due – Claremont Manor                                               $114,333 Interest due Low-Rent Housing program                             Questioned costs: ineligible (finding 2)
Franco Center monthly expenses (portion not reimbursed)                           $149,142 Property acquisition & operation                                  Questioned costs: ineligible (finding 2)
Franco Center bond payments (portion not reimbursed)                              $102,067 Property acquisition & operation                                  Questioned costs: ineligible (finding 2)
Back interest due - Franco Center                                                  $11,371 Interest due Low-Rent Housing program                             Questioned costs: ineligible (finding 2)
Operating loss – West Park                                                         $13,873 Property acquisition & operation                                  Questioned costs: ineligible (finding 2)
Back interest due - West Park                                                      $25,956 Interest due Low-Rent Housing program                             Questioned costs: ineligible (finding 2)
Back interest due - RENEW Lodi                                                       $2,511 Interest due Low-Rent Housing program                            Questioned costs: ineligible (finding 2)
Consultant compensation for interview panel                                          $1,633 Incurred public housing authority expenditure                    Questioned costs: ineligible (finding 2)
Resident Opportunity and Self-Sufficiency grant expenditures                       $28,809 Non-Low-Rent Housing program expenditure                          Questioned costs: ineligible (finding 2)
Travel expenses charged to the Authority credit card                                 $3,100 Incurred public housing authority expenditure                    Questioned costs: unsupported (finding 2)
Ad Force security: Migrant Housing Centers                                         $49,996 Non-Low-Rent Housing program expenditure                          Questioned costs: ineligible (finding 2)
Stoves purchased for the U.S. Department of Agriculture program                      $8,085 Non-Low-Rent Housing program expenditure                         Questioned costs: ineligible (finding 2)
Total                                                                           $3,498,887
                                                                                               Summary
                                                                          Purpose of Funds                    Finding 1      Finding 2
                                                           Property acquisition & operation                                     $3,245,410
                                                           Interest due Low-Rent Housing program                                 $154,171
                                                           Incurred public housing authority expenditures          $7,683           $4,733
                                                           Non-Low-Rent Housing program expenditures                               $86,890
                                                           Total                                                   $7,683      $3,491,2041
        1
            This amount does not include $2,208,939 in Low-Rent Housing program funds the Authority misused to pay for Franco Center’s monthly expenses and bond payments, but paid back prior to the audit.


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2005-LA-1001      Page 36
Appendix C

Schedule of Procurement Review
Deficiencies
      Contractor                           1           2          3        4        5
                                                   No formal
      Brown Stove Works                             contract      X                 X
                                                   No formal
      Video production vendor              X        contract      X                 X
      Robert Burns Construction Co.        X           X                            X
      Signature Systems, Inc.              X                                        X
      Geiger, Rudquist, Coon et al         X          X                    X
      Ad Force Security                    X          X           X        X        X
      Reorganization consultant            X                      X                 X
      Totals                               6          5           4        2        6

Legend: 1 - Decentralized procurement and contracting (Purchasing Department not involved).
        2 - Contract lacked Federal provisions.
        3 - Goods or services awarded without competition.
        4 - Open-ended, vendor-issued contracts.
        5 - Missing cost or price analysis




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2005-LA-1001    Page 38
Appendix D

Schedule of Interest Due –
Claremont Manor


               Month      Principal Balance Owed Reimbursements Interest Owed
                         to the Low-Rent Housing to the Low-Rent to the Low-
                                 Program             Housing      Rent Housing
                                                     Program       Program1
              Oct. 03                     $112,500                         $572
              Nov. 03                   $1,930,263                       $9,812
              Dec. 03                   $2,980,328                      $15,140
               Jan. 04                  $2,867,828       $112,500       $15,125
              Feb. 04                   $2,867,828                      $14,540
              Mar. 04                   $2,867,828                      $14,526
              Apr. 04                   $2,400,000       $467,828       $14,512
              May 04                    $1,849,934       $550,066       $12,174
              June 04                   $1,000,000       $849,934        $9,372
              July 04                     $684,218       $315,782        $5,083
              Aug. 04                           $0       $684,218        $3,477
             Total2                                                    $114,333


1
    Amount as of August 3, 2004. Interest has not been reimbursed and continues to accumulate at an
    annual rate of 6.1 percent.
2
    Balance includes $2.2 million used for purchase of Claremont Manor and more than $700,000
    transferred to its non-federal Operation Reserves bank account.




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 Page 40         2005-LA-1001
Appendix E

Schedule of Franco Center Bond Payments Paid
by Low-Rent Housing Program
        Record Date     Repaid     Months     Amount   Interest Rate    Back
                         Date       Late                on Record      Interest
                                                           Date
            7/31/2004     N/A            0     $33,968         1.66%          $0
            6/30/2004     N/A            1     $34,022         1.60%         $45
            5/31/2004     N/A            2     $34,077         1.31%         $74
            4/30/2004 7/31/2004          3     $29,102         1.09%         $79
            3/31/2004 5/31/2004          2     $29,132         0.99%         $48
            2/29/2004 5/31/2004          3     $29,158         0.99%         $72
            1/31/2004 5/31/2004          4     $29,185         0.97%         $94
           12/31/2003 4/30/2004          4     $29,211         0.99%         $96
           11/30/2003 4/30/2004          5     $29,239         1.02%       $124
           10/31/2003 3/31/2004          5     $34,293         1.00%       $143
            9/30/2003 3/31/2004          6     $34,347         1.01%       $173
            8/31/2003 2/29/2004          6     $34,402         1.03%       $177
            7/31/2003 1/31/2004          6     $34,455         0.95%       $164
            6/30/2003 1/31/2004          7     $34,509         0.92%       $185
            5/31/2003 12/31/2003         7     $29,537         1.08%       $186
            4/30/2003 12/31/2003         8     $29,562         1.14%       $225
            3/31/2003 12/31/2003         9     $29,590         1.13%       $251
            2/28/2003 10/31/2003         8     $29,617         1.18%       $233
            1/31/2003 8/31/2003          7     $29,643         1.20%       $208
           12/31/2002 8/31/2003          8     $29,672         1.24%       $245
           11/30/2002 8/31/2003          9     $29,697         1.27%       $283
           10/31/2002 7/31/2003          9     $34,748         1.56%       $407
        Total interest Franco Center owes on the bond payments as of      $3,513
        7/31/04*

* Limited to review period of October 2002-July 2004.




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2005-LA-1001    Page 42
Appendix F

Schedule of Franco Center Monthly Expenses
Paid by Low-Rent Housing Program
        Record Date     Repaid Months Amount Interest Rate             Back
                         Date     Late               on Record Date   Interest
           7/31/2004 N/A                0     $9,504         1.66%           $0
           6/30/2004 N/A                1        $27         1.60%           $0
           6/30/2004 N/A                1     $1,037         1.60%           $1
           6/30/2004 N/A                1    $83,973         1.60%        $112
           5/31/2004 N/A                2    $54,600         1.31%        $119
           4/30/2004 7/31/2004          3     $8,104         1.09%          $22
           3/31/2004 7/13/2004          3    $98,049         0.99%        $243
           2/29/2004 6/30/2004          4    $12,036         0.99%          $40
           2/29/2004 4/30/2004          2    $34,347         0.99%          $57
           1/31/2004 5/31/2004          4    $14,741         0.97%          $48
           1/31/2004 5/31/2004          4      $398          0.97%           $1
          12/31/2003 4/30/2004          4    $73,567         0.99%        $243
          11/30/2003 4/30/2004          5    $16,398         1.02%          $70
          10/31/2003 4/30/2004          6    $24,182         1.00%        $121
           9/30/2003 3/31/2004          6 $100,000           1.01%        $505
           9/30/2003 4/30/2004          7    $51,036         1.01%        $301
           8/31/2003 3/31/2004          7    $47,404         1.03%        $285
           7/31/2003 2/29/2004          7    $62,753         0.95%        $348
           6/30/2003 2/29/2004          8     $9,164         0.92%          $56
           6/30/2003 2/29/2004          8 $130,211           0.92%        $799
           5/31/2003 12/31/2003         7    $60,968         1.08%        $384
           4/30/2003 12/31/2003         8    $39,425         1.14%        $300
           3/31/2003 12/31/2003         9    $12,154         1.13%        $103
           3/31/2003 12/31/2003         9 $112,171           1.13%        $951
           2/28/2003 12/31/2003        10    $45,061         1.18%        $443
           1/31/2003 9/30/2003          8    $37,427         1.20%        $299
          12/31/2002 11/30/2003        11    $83,754         1.24%        $952
          12/31/2002 9/30/2003          9     $5,964         1.24%          $55
          11/30/2002 8/31/2003          9    $54,669         1.27%        $521
          10/31/2002 8/31/2003         10    $36,979         1.56%        $481
        Total interest Franco Center owes on monthly expenses as of      $7,858
        7/31/04*


* Limited to review period of October 2002-July 2004.


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2005-LA-1001     Page 44
Appendix G

Schedule of West Park Operating Losses
Absorbed by Low-Rent Housing Program
                                     Fiscal Year Fiscal Year
                                        2000*       2001*       Total
                   Income                 $1,470     $26,733     $28,203
                   Expenses               $9,546     $32,531     $42,077
                   Net loss             ($8,076)     ($5,798)   ($13,873)

*Fiscal years ending September 30.




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2005-LA-1001    Page 46
Appendix H

Calculation of Back Interest Due –
West Park and RENEW Lodi Single-Family
Properties

                                            West Park
                                    Month      Interest Due1
                                    Aug. 00             $1,866
                                    Sept. 00            $1,864
                                    Oct. 00             $1,862
                                    Nov. 00             $1,861
                                    Dec. 00             $1,859
                                    Jan. 01             $1,857
                                    Feb. 01             $1,855
                                    Mar. 01             $1,853
                                    Apr. 01             $1,851
                                    May 01              $1,849
                                    June 01             $1,847
                                    July 01             $1,846
                                    Aug. 01             $1,844
                                    Sept. 01            $1,842
                                     Total             $25,956

                                   RENEW Lodi Single-Family
                                            Properties
                                    Month      Interest Due2
                                    Jan. 01               $503
                                    Feb. 01               $503
                                    Mar. 01               $502
                                    Apr. 01               $502
                                    May 01                $501
                                     Total              $2,511


1
Paid off over a 14-month period, with principal balance of $367,100 reimbursed to Low-Rent
Housing program.
2
    Paid off over a 5-month period, with principal balance of $81,778 reimbursed to Low-Rent
    Housing program.


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2005-LA-1001     Page 48
Appendix I

Auditee Comments




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Comments not received, report issued without them.



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