oversight

Utica Municipal Housing Housing Authority, Utica, New York; Operational and Administrative Weaknesses Have Resulted in Unsupported and Ineligible Expenditures

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-02-21.

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

       AUDIT REPORT




UTICA MUNICIPAL HOUSING AUTHORITY

          Utica, New York

           2006-NY-1005

          February 21, 2006




           OFFICE OF AUDIT
         NEW YORK/NEW JERSEY
                                                            Issue Date
                                                                 February 21, 2006
                                                            Audit Case Number
                                                                 2006-NY-1005




TO:        Joan Spilman, Director, Public Housing, 2CPH, and
           Rosalinda Lamberty, Director, Multifamily Housing, 2CHM


FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT:   Utica Municipal Housing Authority, Utica, New York; Operational and
           Administrative Weaknesses Have Resulted in Unsupported and Ineligible
           Expenditures

                                   HIGHLIGHTS
What We Audited and Why

           We audited the Utica Municipal Housing Authority (Authority) pertaining to
           selected general operations of its low-rent housing program. We selected the
           Authority based upon the results of an analysis conducted by the region that
           identified operational weaknesses, which have slowed progress and negatively
           impacted the efficiency and effectiveness of the Authority’s administration of its
           programs.

           Our audit objectives were to determine whether the Utica Municipal Housing
           Authority 1) had a financial management system in place to adequately account
           for and safeguard funds received, 2) properly disbursed operational funds for
           health benefits for retired employees, 3) complied with applicable procurement
           requirements, and 4) earned the administrative fees it was paid to perform as
           contract administrator for the Section 8 program.

 What We Found


           The Authority has a financial management system in place to adequately account
           for and safeguard the funds received; however, it did not properly disburse
       operational funds for health benefits for retired employees. From January 1,
       2003, through June 30, 2005, the Authority paid $511,480 for unauthorized
       retiree medical insurance. Not only were these costs not necessary or reasonable
       as required by U.S. Department of Housing and Urban Development (HUD)
       regulations, but they were incurred in direct violation of the Authority’s own
       board-established policy. Since the costs were not authorized, they are
       considered to be ineligible.

       The Authority did not properly comply with applicable procurement and
       contracting requirements. It (1) procured legal services without executing a
       contract, (2) made contract payments without adequate supporting documentation,
       (3) failed to enforce contract provisions for elevator construction services, and (4)
       did not ensure that all procurements were conducted in a manner allowing for full
       and open competition. Therefore, assurance that costs incurred for procured
       contract services were proper and reasonable has been diminished, and the
       Authority has incurred questionable costs of $140,116.

       In addition, the Authority did not completely earn the administrative fees it was
       paid to perform as contract administrator for the Section 8 program. By failing to
       conduct required oversight and on-site management reviews, the Authority did
       not demonstrate that it fully performed its required monitoring responsibilities as
       a contract administrator. The Authority received $279,282 in administrator fees
       from HUD for fiscal years 2003 and 2004.


What We Recommend

       We recommend that HUD require the Authority to establish controls and
       procedures to ensure compliance with all applicable board, procurement, and
       contract administration policies and procedures. We also recommend that the
       Authority be required to submit supporting documentation to justify all
       unsupported costs so that HUD can make an eligibility determination. Further,
       the Authority should be required to reimburse the program from nonfederal funds
       all amounts classified and determined to be ineligible. In addition, the Authority
       should enforce the damage clause of its elevator contract and put all penalty
       income received to better use.

       For each recommendation without a management decision, please respond and
       provide status reports in accordance with HUD Handbook 2000.06, REV-3.
       Please furnish us copies of any correspondence or directives issued because of the
       audit.




                                         2
Auditee Response

      We discussed the results of our review during the audit and at an exit conference held
      on February 1, 2006. Authority officials provided their written comments during the
      exit conference. Appendix B of this report contains the Authority’s comments, along
      with our evaluation of the comments. The Authority’s comments included a number
      of attachments/documents that were too voluminous to be included in our final
      report, but will be provided to your office.




                                        3
                          TABLE OF CONTENTS

Background and Objectives                                                               5

Results of Audit

     Finding 1: The Authority Provided Unauthorized Medical Insurance Benefits to
                Retirees                                                                6

     Finding 2: The Authority’s System for Procuring Contracts Is Deficient             9

     Finding 3: The Authority Did Not Fully Perform Monitoring Responsibilities as a
                Contract Administrator for HUD                                         14


Scope and Methodology                                                                  17

Internal Controls                                                                      18

Appendixes
     A. Schedule of Questioned Costs and Funds to Be Put to Better Use                 20

     B. Auditee Comments and OIG’s Evaluation                                          21




                                            4
                      BACKGROUND AND OBJECTIVES

The Utica Municipal Housing Authority (Authority) was organized pursuant to the Housing Act
of 1937 and the laws of the State of New York. The primary objective of the Authority is to
provide decent, safe, and sanitary housing for eligible low-and moderate-income residents of
Utica, New York. The Authority owns and manages eight federally funded projects with 932
low-rent units. It also administers Section 8 programs consisting of 174 housing choice
vouchers and 515 units relating to seven Section 8 11B projects. In addition, the U.S.
Department of Housing and Urban Development (HUD) awarded the Authority a HOPE VI
grant in the amount of $11,501,039, effective July 3, 2003. The grant funds will be expended for
developing public housing replacement units and other housing units within the city of Utica.

We selected the Authority for audit based on many factors, including indicators from monitoring
reports, media coverage concerning financial difficulties, analysis of Authority data, discussions
with former Authority employees, and our prior knowledge of and experience with the political
structure and business activities in the local area. This analysis identified operational
weaknesses, which slowed progress and negatively impacted the efficiency and effectiveness of
the Authority’s administration of its programs.

The overall objectives of our audit were to determine whether the Authority generally complied
with HUD program regulations, policies, and requirements in administering selected operations
of its low-rent housing program. We determined whether the Authority 1) had a financial
management system in place to adequately account for and safeguard funds received, 2) properly
disbursed operational funds for health benefits for retired employees, 3) complied with
applicable procurement requirements, and 4) earned the administrative fees it was paid to
perform as contract administrator for the Section 8 program.




                                                5
                                RESULTS OF AUDIT

Finding 1: The Authority Provided Unauthorized Medical Insurance
           Benefits to Retirees
Contrary to policy enacted by its board and applicable federal regulations, Authority
management allowed for the payment of certain medical insurance costs provided to retirees that
were not authorized or necessary. The unauthorized costs were incurred because Authority
management did not establish controls to ensure that policies and procedures put into practice
conform to the provisions of enacted board resolutions. Consequently, for the period January 1,
2003, through June 30, 2005, the Authority paid $511,480 for retiree medical insurance costs,
which are considered ineligible.

 History of Board-Adopted
 Policy
              Board Resolution No. MHA040705-12a, adopted on April 7, 2005, addresses
              issues and sets policy regarding retiree medical insurance benefits. The resolution
              clarifies the provisions of previously established board policies, dating back to
              1994, that relate to benefits afforded to various classes of the Authority’s retirees.
              The resolution stated the following:

                  •   As a means of settling certain litigation, by resolution dated December 27,
                      1994, the board authorized the amendment to the collective bargaining
                      agreement between the Authority and the Civil Service Employee
                      Association (CSEA) to provide that, upon a retiree reaching the age of 65,
                      Medicare would become the primary health insurance coverage but that
                      the Authority would pay the full cost of a singular Medicare supplemental
                      policy to Civil Service Employee Association affiliated retirees who had
                      retired on or before December 27, 1994.

                  •   The December 27, 1994, resolution extended the same benefit to non-Civil
                      Service Employee Association affiliated retirees who had retired on or
                      before December 27, 1994, reserving to the Authority the right to alter or
                      delete this benefit regarding non-Civil Service Employee Association
                      retirees.

              The December 27, 1994, board resolution did not authorize the payment of any
              medical insurance benefits to medicare eligible retirees who retired after
              December 27, 1994, nor did it provide that prescription and dental riders would
              be paid for any medicare eligible retirees. The resolution only provided for the
              payment of a singular Medicare supplemental policy for those who retired before
              December 27, 1994. Thus, payment for singular medicare supplement insurance
              for those who retired after December 27, 1994, and the provision of dental and
                                                6
             prescription riders for any medicare eligible retiree before or after the December
             27, 1994, resolution were not authorized.

Unsupported Retiree Health
Insurance Benefits

             Contrary to the above board resolutions, during the period January 1, 2003,
             through June 30, 2005, the Authority paid for the costs of medical insurance
             premiums, including riders for dental benefits and prescription drug coverage, for
             Civil Service Employee Association affiliated and non-Civil Service Employee
             Association affiliated retirees who did not meet the board requirements.

             A summary of the unauthorized costs incurred is shown as follows:

                                                                        January to
                                                                        June 2005
                     Description                2003         2004                       Total
             Pre-Dec. 27, 1994, Retirees’     $104,692     $114,661      $57,631      $276,984
             Dental & Prescription Riders
             Post-Dec. 27, 1994, Retirees’    $43,890       $50,711      $29,776      $124,377
             Dental & Prescription Riders
             Post-Dec. 27, 1994, Retirees’    $39,395       $44,833      $25,891      $110,119
             Medical Insurance Premiums
                        Totals                $187,977     $210,205     $113,298      $511,480


             OMB Circular A-87 and the annual contribution contract require operations to be
             conducted in a manner that promotes economy and efficiency and that requires
             costs to be necessary and reasonable. Since these retirees did not meet the board
             requirements, these payments amounting to $511,480 are not necessary and
             reasonable and should be considered to be ineligible.

Controls Needed


             Although the Authority has taken steps to address the issue of retiree medical
             insurance benefits by trying to clarify its board resolutions going forward,
             notifying retirees that the Authority will no longer pay certain medical insurance,
             dental and prescription riders, significant scarce resources were expended on
             unauthorized items. Accordingly, management needs to establish better controls
             to ensure that board policies and procedures are implemented in a timely manner
             in accordance with stated directives to prevent these types of payments in the
             future.




                                              7
Recommendations

           We recommend that the director of HUD’s Office of Public Housing instruct the
           Authority to

           1A.    Establish controls to ensure that policies enacted by its board are fully
                  implemented in a timely manner.

           1B.    Reimburse the low-income housing program from nonfederal funds the
                  $511,480 in medical benefits paid to Civil Service Employee Association
                  and non-Civil Service Employee Association retirees who did not meet the
                  board requirements for receiving health, dental, and prescription benefits.




                                             8
Finding 2: The Authority’s System for Procuring Contracts Is Deficient
The Authority’s procurement and contract award activities did not always comply with HUD
regulations and requirements. The Authority (1) procured legal services without executing a
contract, (2) made contract payments without adequate supporting documentation, (3) failed to
enforce contract provisions for elevator construction services, and (4) did not procure auditing
services in a manner allowing for full and open competition. These deficiencies can be
attributed to the Authority’s weak system of controls over the processing of procurement actions.
As a result, the Authority incurred questionable costs of $140,116 and could not ensure that costs
incurred for procured contract services were reasonable and necessary.

               Our review of procurement activities focused on actions, which occurred during
               the audit period of January 1, 2003, through April 30, 2005. We selected a
               nonstatistical sample of six contracts and/or procurement activities for review.
               Included in the sample were professional service contracts relating to legal,
               consulting, auditing, and fee accounting services. In addition, one construction
               contract was selected for testing because of deficiencies identified during our
               survey. Our review disclosed that four of the six contracts reviewed did not
               comply with HUD regulations and requirements. The deficiencies and
               noncompliances are discussed below.

 Legal Services Procured
 without A Contract

               The Authority did not execute a contract for legal services; rather, it procured the
               services based on the bid proposal that was accepted in response to the request for
               proposals. On October 29, 2001, the Authority advertised a request for proposals
               for legal services for a period of three years. The scope of legal services
               requested encompassed the ordinary business and management of the Authority.
               The firm proposed to provide general legal services to the Authority on an annual
               basis for the annual sum of $24,000. The proposal included 11 areas of services
               to be provided. However, the Authority never executed a written contract with
               the law firm.

               By not executing a contract, the Authority did not obtain a legally binding
               document that would protect it against nonperformance by the contractor.
               Further, failure to execute a contract precludes the Authority from identifying the
               services expected to be completed and the period of performance.




                                                9
Contract Payments Made
without Adequate Supporting
Documentation

           Review of the supporting documentation for the legal services disclosed that the
           Authority routinely paid for the legal services without obtaining a bill or invoice
           as evidence that the services were provided.

           Office of Management and Budget Circular A-87 provides that to be allowable
           under a grant program, costs must be necessay and reasonable for proper and
           efficient administration of the program. Making payments without consideration
           given to the level and extent of the services provided precludes the Authority
           from assuring that the costs incurred are necessary and reasonable and that the
           services contracted for have been provided.

           Since payments were made for legal services without any bill or invoice to
           indicate that services had been provided, there is no evidence to show which of
           the 11 types of services were provided. Hence, the payments may not represent
           necessary operating expenditures; therefore, the amount paid during the audit
           period of $46,666 is considered to be unsupported.

           Labor Relations Services

           In another instance, the Authority entered into a three-year contract with a law
           firm to provide labor representation services for the Authority’s operations. The
           contract provided for a monthly payment based on the five areas of labor services
           to be provided, such as 1) comprehensive negotiating services for collective
           bargaining units; 2) consultation regarding rights and liabilities; 3) advice and
           representation in connection with contract grievances and matters before the
           Public Employment Relations Board; 4) management training in connection with
           employee corrective action, contract administration, and other agreed upon topics;
           and 5) periodic reports containing public-sector labor relations information.

           The contract was executed on April 6, 2001, while the request for proposal was
           accepted on November 16, 2001; a clear indication of backdating the contract.
           Further, during the audit period, the law firm was paid $62,015 for legal services;
           however, $51,650 of the costs were not adequately supported since the billings
           submitted were unclear as to the actual services provided, merely stating, “For
           labor relations services rendered.”

           Chapter II of Public and Indian Housing Low-Rent Technical Accounting Guide,
           7510.1G, stipulates that the public housing authority must maintain source
           documents and files that support the financial transactions recorded in the books
           of account and provide an adequate audit trail.



                                            10
           Since payments were made for legal costs without adequate documentation as to
           the services provided, the costs may not represent necessary or reasonable
           operating expenditures. Thus, the charges totaling $51,650 are considered to be
           unsupported pending a HUD eligibility determination.

Failure to Enforce Elevator
Contract Terms

           The Authority did not enforce the damage clause of its elevator contract. On June
           4, 2004, it executed a contract for elevator construction services. The contract
           stipulated that all contract work items, including any punch list items, must be
           100 percent complete within 180 calendar days of the notice to proceed or by
           December 1, 2004. It further stated that if the contractor fails to complete all
           work covered under the contract within the established time parameters, the
           contractor will pay the Authority damages in the amount of $150 per day for each
           day beyond the stated completion date that the work remains unusable for its
           intended purpose by the Authority.

           Federal regulations at 24 CFR [Code of Federal Regulations] 85.36(b)(2) require
           public housing authorities to maintain a contract administration system which
           ensures that contractors perform in accordance with the terms, conditions, and
           specifications of their contracts. However, contrary to these requirements, the
           Authority did not enforce the damages clause of the elevator contract.

           Since the contractor had not completed the elevator work by the December 1,
           2004, deadline, the Authority should have assessed penalties on the contractor.
           As a result, the Authority was deprived of $33,150 in penalty income that should
           have been recovered from the elevator contractor and could represent funds to be
           put to better use when collected.

 Auditing Services Improperly
 Procured

           A contract for auditing services was improperly procured. The Authority’s
           ranking/award process seems to preclude full and open competition.
           Documentation in the files shows that the Authority received two bid proposals;
           however, the ranking and rating of the two proposals showed that the contract was
           awarded to the higher bidder.

           Federal regulations at 24 CFR [Code of Federations] 85.36 provide that all
           procurement transactions will be conducted in a manner that provides for full and
           open competition, and Office of Manament and Budget Circular A-87 requires
           costs charged to be necessary and reasonable for efficient operations.

           Both proposals showed that the contractors had similar qualificiations and
           relevant prior work experience. However, the Authority’s ranking scores rated

                                           11
             the high bidder’s proposal as significantly better than that of the low–bidder even
             though the scope of services to be provided was the same for both bidders.
             Therefore, the Authority’s proposal evaluation and analysis of the criteria and
             categories considered in the evaluation process appear to be both inconsistent and
             restrictive to competition. For instance, one of the Authority’s ranking factors is
             based on previous experience with the contractor. Not only is this ranking factor
             unnecessary for the scope of services to be provided, but it also restricts
             competition since bidders that have not had a previous contract with the Authority
             receive a ranking of zero for this factor. A more appropriate factor is the
             Authority’s evaluation category that considers a bidder’s previous experience
             with conducting audits of federal programs and housing authorities. The
             Authority’s rating form also contained a ranking factor that considered cost as it
             relates to contract performance. However, the Authority did not accurately assign
             scores for this factor since the high bidder received a better score for this factor.
             Since the scope of services to be provided was the same for all bidders, it follows
             that the low bidder should have received the best score for this ranking factor.

             Based on the above, the Authority did not properly procure this contract since the
             lower bidder did not win the contract. As a result, the Authority incurred
             unnecessary operating costs contrary to applicable program regulations.
             Consequently, the costs incurred in excess of the low bid amount are considered
             ineligible costs that should be repaid. A summary of the ineligible costs is as
             follows:

             High-bid contract payments             $ 46,750
             Less: low-bid contract proposal         (38,100)
             Ineligible costs incurred              $ 8,650


Conclusion

             The above deficiencies show that the Authority’s controls over procurements
             and/or contract awards did not ensure that costs incurred for procured contract
             services were reasonable and necessary.

Recommendations

             We recommend that the director of HUD’s Office of Public Housing instruct the
             Authority to

             2A.    Establish controls to ensure compliance with all applicable federal, state
                    and local procurement policies and regulations, to include compliance in
                    the areas of (1) performing cost estimates and/or price analyses for all
                    future procurement activities, (2) adequately soliciting and documenting
                    all proposals submitted in response to a request for proposals for

                                               12
      professional services to substantiate the selection, and (3) properly
      executing contracts for all professional services provided.

2B.   Provide documentation to justify the $98,316 in unsupported costs
      ($46,666 for legal services and $51,650 for labor relations services) so
      that HUD can make an eligibility determination.

2C.   Reimburse from nonfederal funds the amount of any unsupported costs
      determined to be ineligible.

2D.   Enforce the damages clause of the elevator contract to ensure that the
      program is not deprived of $33,150 in penalty income, thus resulting in
      funds to be put to better use. The penalty amount should also be increased
      if the work is not completed.

2E.   Reimburse from nonfederal funds the ineligible costs of $8,650 incurred
      from improperly procuring auditing services.




                               13
Finding 3: The Authority Did Not Fully Perform Monitoring
           Responsibilities as a Contract Administrator for HUD
The Authority, acting as a contract administrator for seven HUD-assisted Section 8 11B projects,
did not fully perform the administrator’s responsibilities. It failed to conduct the required
oversight management reviews and on-site management reviews. It believed that the
requirements had changed and the monitoring reviews were no longer necessary. As a result,
there is a lack of assurance that the projects were administered in accordance with HUD Section
8 program requirements. Consequently, the Authority did not demonstrate that it fully earned
the Section 8 administrative fees it was paid.


 Contract Administrator for
 Seven Section 8 11B Projects

              The Authority is the contract administrator for seven Section 8-assisted 11B
              projects consisting of 515 units. As contract administrator, the Authority is
              responsibile for performing a comprehensive examination of the projects’
              operations through annual on-site management reviews and physical inspections
              of the projects. In addition, the Authority is required to conduct annual
              inspections on 25 of every 100 units under contract and on all vacant units. To
              compensate the Authority as contract administrator, HUD has authorized the
              payment of an administrative fee. The Authority received adminstrative fees for
              fiscal years 2003 and 2004 in the amounts of $138,624 and $140,658,
              respectively.

 Contract Administrator
 Responsibilities Not Fully
 Performed

              HUD Handbook 4350.5, paragraph 15-8, provides that the contract administrator
              must perform the following functions: a) assess the project’s operating policies
              and procedures, b) determine known or suspected fraudulent practices, c) ensure
              rent requests are submitted in a timely manner, d) review project operating
              budgets, e) review rent collection procedures, f) conduct vacancy rate
              comparabilities, g) review reserve for replacement withdrawal requests, h) verify
              tenant selection, i) verify that pet ownership rules are established for the elderly
              and handicapped, j) review Section 8 utilization reports, k) verify distributions to
              project owners, l) review utility allowance adjustments, and m) review Section 8
              special claims vouchers.

              The Authority did not perform all of the contract administrator responsibilites as
              required by the handbook. It did not (a) perform on-site reviews during the past
              10 years to review the project’s operating policies and procedures, (b) determine

                                               14
           whether known or suspected fraudulent practices existed, (c) verify whether
           project owner and/or management agents were selecting tenants in accordance
           with program requirements, (d) review project leases to ensure that the house
           rules for pet ownership had been established, and (e) ensure that distributions
           were made to project owners.

           By not performing all of the contract administrator responsibilities, the Authority
           was not assured that the owners and/or management agents understood and
           properly carried out their responsibilities to the projects.

Oversight Management Not
Performed

           HUD Handbook 4350.5, paragraph 15-1, requires contract administrators to
           provide oversight management of project owners and management agents to
           assure compliance with the terms of the Section 8 rental subsidy contract, HUD
           regulatory agreement, applicable HUD regulations, and other administrative
           requirements.

           An Authority official, employed at the Authority since 1988, stated that the
           Authority had not monitored the owners and/or management agents of the seven
           Section 8 11B projects for at least 10 years. The Authority believed that the
           requirements had changed and that monitoring reviews were no longer necessary.
           In addition, the Authority official contended that the Authority did not have the
           resources to perform site monitoring due to the lack of adequate staff.

           By not performing oversight management, the Authority was not assured that the
           projects were managed and maintained in accordance with HUD regulations, the
           subsidy contract, and administrative requirements.

On-Site Reviews Not Conducted

           HUD Handbook 4350.5, paragraph 15-9, requires that on-site reviews of HUD-
           subsidized projects be conducted as an essential aspect of a contract
           administrator’s monitoring. Further, contract administrators are required to
           perform the following types of on-site project reviews: on-site management
           reviews, physical inspections, and unit inspections.

           For the seven projects reviewed, the required annual on-site management reviews
           and physical inspections were not performed. The Authority could not provide
           documentation to indicate the last time an on-site review had been performed at
           any of the seven projects. Consequently, the Authority did not have adequate
           assurance that the projects were being properly maintained and that Section 8
           program assistance was provided to eligible tenants appropriately.



                                            15
             The Authority performed inspections on vacant units, as required; however, no
             unit inspections were performed on occupied units. HUD handbook criteria
             require that the Authority perform annual housing quality standards inspections
             for all vacant units and at a minimum, 25 percent of occupied units. Contrary to
             this requirement, there were no inspections performed on occupied units even
             though the majority of the 515 units under contract were occupied. Without
             adequate housing quality standards inspections, the Authority could not be
             assured that Section 8 assistance was provided only for units that were in decent,
             safe, and sanitary condition.

Conclusion

             The Authority did not fully perform its duties as contract administrator for seven
             HUD-assisted Section 8 projects. The Authority did not perform oversight
             management and on-site reviews during the past 10 years. Since the Authority
             did not visit the projects, interview staff, or evaluate the project’s policies and
             procedures, instances of known or suspected fraudulent practices may have gone
             undetected. In addition, there was no assurance that the owners and/or
             management agents selected tenants in accordance with HUD requirements.
             Further, the Authority did not review project leases to ensure that the house rules
             for pet ownership had been established and did not ensure that distributions were
             made to project owners.

             Since the Authority failed to perform comprehensive examinations of the project
             operations through oversight management, on-site reviews, and physical
             inspections, it lacked assurance that the projects were administered in accordance
             with HUD Section 8 program regulations. Consequently, the Authority did not
             demonstrate that it fully earned the Section 8 administrative fees it was paid.
             Based on our analysis, the Authority did not succeed in performing at least half of
             the duties required of it as contract administrator. Accordingly, HUD should
             consider 50 percent of the administrative fee paid during fiscal years 2003 and
             2004 or $139,641 unsupported pending an eligibility determination.
Recommendations
             We recommend that the director of HUD’s Office of Multifamily Housing
             instruct the Authority to

             3A.    Implement procedures and controls to ensure that all of the contract
                    administrator’s responsibilities are performed and documented.

             3B.    Determine whether the Authority fully earned $139,641 (50 percent) of
                    the $279,282 Section 8 administrative fee paid to it during our review
                    period. If any of the fees are determined to be ineligible, that amount is to
                    be reimbursed to HUD from nonfederal funds.



                                              16
                           SCOPE AND METHODOLOGY

Our review focused on selected general operations of the Authority. To accomplish our
objectives, we

          •   Interviewed HUD field office staff, as well as employees of the Authority.

          •   Reviewed applicable HUD regulations and requirements.

          •   Obtained an understanding of the Authority’s management controls as they
              related to our objectives.

          •   Reviewed financial statements, the general ledger, and procurement contract
              files maintained at HUD and the Authority.

          •   Sampled procurement activities related to six contracts to verify the
              Authority’s compliance with applicable HUD regulations and requirements.

          •   Reviewed program records for the low-rent housing and Section 8 programs.

          •   Reviewed Section 8 11B project files to verify the accuracy and completeness
              of the Authority’s oversight and management.


   The review covered the period between January 1, 2003, and April 30, 2005, and was
   extended when necessary. We performed our audit work from May through December
   2005 at the Authority’s office located at 509 Second Street, Utica, New York. The
   review was conducted in accordance with generally accepted government auditing
   standards.




                                          17
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.




Relevant Internal Controls


       We determined the following internal controls were relevant to our audit objectives:

           •   Program operations – Policies and procedures that management has implemented to
               reasonably ensure that a program meets its objectives.

           •   Controls over the validity and reliability of data – Policies and procedures that
               management has implemented to reasonably ensure that valid and reliable data are
               obtained, maintained, and fairly disclosed in reports.

           •   Compliance with laws and regulations – Policies and procedures that management
               has implemented to reasonably ensure that resource use is consistent with laws and
               regulations.

           •   Safeguarding of resources – Policies and procedures that management has
               implemented to reasonably ensure that resources are safeguarded against waste, loss,
               and misuse.

       We assessed the relevant controls identified above.

       A significant weakness exists if management controls do not provide reasonable assurance
       that the process for planning, organizing, directing, and controlling program operations will
       meet the organization’s objectives.




                                                18
Significant Weaknesses


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

       •   The Authority did not have procedures to ensure that its program operations would meet
           all contract administrator responsibilities (see finding 3).

      •    The Authority did not have an adequate system to ensure compliance with laws and
           regulations relating to the payment of retiree medical insurance, the processing of
           procurement activities, and performing monitoring responsibilities as a Section 8
           contract administrator (see findings 1, 2, and 3).

      •    The Authority did not have an adequate system to ensure that resources were properly
           safeguarded when it paid $511,480 for unsupported retiree medical insurance costs and
           made questionable payments of $140,116 for procurement activities (see findings 1 and
           2).




                                               19
                                       APPENDIXES

Appendix A

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


Recommendation                        Type of questioned cost                Funds to be put
   number                      Ineligible 1/         Unsupported 2/          to better use 3/

1B                             $511,480
2B                                                    $ 98,316
2D                                                                           $33,150
2E                             $ 8,650
3B                                               $139,641
                               ______________________________________________________
Total                          $520,130          $237,957          $33,150


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 when we cannot determine eligibility at the time of audit. Unsupported costs
        require a decision by HUD program officials. This decision, in addition to obtaining
        supporting documentation, might involve a legal interpretation or clarification of
        departmental policies and procedures.

3/      “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
        Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
        expenditures at a later time for the activities in question. This includes costs not
        incurred, deobligation of funds, withdrawal of interest, reductions in outlays, avoidance
        of unnecessary expenditures, loans and guarantees not made, and other savings.




                                                 20
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




                        21
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 1




                        22
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




                        23
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments



Comment 2




Comment 3




                        24
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments



Comment 4




Comment 4




Comment 5




                        25
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 5




                        26
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 5




                        27
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 5




                        28
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 6




Comment 7




                        29
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 7




                        30
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 8




Comment 9




                        31
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 9




Comment 9




                        32
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 9




                        33
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 9




Comment 9




                        34
Appendix B
     AUDITEE COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation        Auditee Comments




Comment 9




Comment 9




                        35
                     OIG Evaluation of Auditee Comments

Comment 1   Officials of the Authority state that all persons who have separated or
            retired from the Authority and now receiving health insurance are over 65
            years of age. All persons not affiliated with the CSEA are eligible only
            for a $500 annual stipend provided that they apply directly for Medicare
            D. All other retirees, all being CSEA affiliated, are not to have health
            insurance altered until the resolution of a Declaratory Judgment as
            directed by legal counsel. Based upon the thorough and conscientious
            action taken by the Authority over the last two years, initiated prior to the
            HUD OIG review, the Authority has made and continues to make
            significant progress at reducing its provision of health insurance assistance
            provided to retirees.

            While the Authority has demonstrated its ability to promote economy and
            efficiency of health insurance coverage for retirees, the Authority is still
            responsible for the actions taken in the past. As such, the Authority is
            therefore liable for reimbursement to the low-income housing program for
            the $511,480 of previous health insurance payments to retirees who did
            not meet the board requirements for receiving health, dental and
            prescription benefits.

Comment 2   The Authority’s actions are responsive to our recommendations.

Comment 3   Officials for the Authority contend that it was an oversight not to prepare
            a general counsel contract based on the assumption that the previous
            agreement with the legal counsel had been extended. As such, the
            Authority has instituted a Board Directives Compliance Book to insure
            proper follow-up of board resolutions including execution of contracts
            following award.

Comment 4   Officials for the Authority were unaware of the requirement to obtain
            detailed invoices for services rendered on a retainer basis. As a result, if
            the supporting documentation cannot be provided, the Authority should
            reimburse HUD the $46,666 paid for legal services and the $51,650 paid
            for labor relations’ services.

Comment 5   Officials for the Authority contend that the imposition of liquidated
            damages may not be warranted or is difficult to establish because the
            actual damages suffered by the Authority was very minimal. The
            Authority admits that a priority determination had been made that
            essentially extended the completion deadline of the elevator contract,
            knowing full well that this decision would negatively impact the schedule
            for the elevator project.


                                      36
            Federal regulations (24 CFR 85.36(b)(2) requires the Authority to
            maintain a contract administration system, which ensures that contractors
            perform in accordance with the terms, conditions, and specifications of
            their contract. As such, the imposition of liquidated damages is not
            difficult to establish; the contract with the contractor provides that
            damages would be assessed in the amount of $150 a day for each day
            beyond the stated completion date that the work is not usable for its
            intended purpose. The purpose of this specific contract clause is to (1)
            protect the legal rights of all parties involved, and (2) clearly detail the
            process for remediation when either party fails to perform as agreed to.
            Since the contractor was well over its time for completion, the Authority
            did not act in the best interests of efficiency and economy of resources by
            not enforcing liquidated damages upon the elevator contractor. Thus, the
            low-income housing program has been deprived of the $33,150 in penalty
            income; therefore we maintain that our recommendation to enforce the
            damage clause of the contract be implemented.

Comment 6   Officials for the Authority contend that the request for proposal factor
            number 6 requiring prior experience as auditor or fee accountant with the
            Authority is valuable in the assessment of bidders and is weighted more,
            in accordance with OMB Circular A-110 Subpart C, Subsection 44 (d).
            However, we disagree that the factor should be weighted so excessively to
            the point that it restricts competition. OMB Circular A-110 Subpart C,
            Subsection 44 provides that all procurement transactions shall be
            conducted in a manner to provide, to the maximum extent practical, open
            and free competition.

Comment 7   Officials for the Authority contend that when evaluating factor number 4
            pertaining to overall cost based on scope of service, the total audit cost
            quoted by the low bidder was not consistent with the hourly rates and
            estimated man hours quoted. The Authority decided it would be fair and
            equitable to compare hourly rates, which we agree is a fair and equitable
            method. However, the Authority misinterpreted the Yellow Book
            standards pertaining to the proper supervision of fieldwork. The
            Authority felt because the low bidder proposed to use staff other than a
            Certified Public Accountant for a portion of the audit process, the quality
            of work proposed would be deficient. This inaccurate interpretation of the
            standards resulted in the high bidder being unjustly awarded the contract.
            Consequently, the costs of $8,650 incurred in excess of the low bidder are
            considered ineligible and should be reimbursed to HUD.

Comment 8   Upon review of our draft audit report, officials for the Authority provided
            a certified cost analysis and documentation from HUD supporting the
            procurement of services provided by a financial consultant. As a result,
            we concluded that the services of the financial consultant were procured


                                     37
            properly and the payment of $2,100 for such services is supported.
            Consequently, this issue has been eliminated from our final report.

Comment 9   Officials for the Authority contend that all of the required contract
            administrator responsibilities as required by the HUD Handbook are either
            now currently being carried out or will be implemented. As such, this
            gives credence to the fact that the Authority did not fully earn at least 50
            percent of the administrative fee paid to it during our review.




                                     38