oversight

The Housing Authority of the City of Calexico, Calexico, California, Did Not Comply with Public Housing Program Rules and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-07-01.

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

                                                                 Issue Date
                                                                          July 1, 2008
                                                                 Audit Report Number
                                                                              2008-LA-1012




TO:         K.J. Brockington Director, Office of Public Housing, 9DPH



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

SUBJECT: The Housing Authority of the City of Calexico, Calexico, California, Did Not
           Comply with Public Housing Program Rules and Regulations


                                   HIGHLIGHTS

 What We Audited and Why

      We audited the Housing Authority of the City of Calexico (Authority) in response to a
      request from the Office of Inspector General’s (OIG) Office of Investigation and the
      Federal Bureau of Investigation (FBI). Our objective was to determine whether the
      Authority complied with the U.S. Department of Housing and Urban Development’s
      (HUD) rules and regulations with respect to its public housing program. Specifically, we
      wanted to determine whether allegations brought forward from the Office of
      Investigation and the FBI regarding the Authority’s improprieties with the 2003 purchase
      of the 1230 and 1250 Second Street Apartments had merit. We wanted to determine
      whether the Authority (1) used its public housing and Section 5(h) program funds to pay
      for unauthorized activities or in a manner consistent with HUD rules, regulations, and
      Authority policies and procedures; (2) provided replacement housing for the Section 5(h)
      units it sold; (3) followed proper procurement procedures; (4) made eligible and
      appropriately supported expenditures; (5) had an effective accounting system; and (6)
      followed proper procedures with regard to tenant application processing.
What We Found


     The Authority improperly used Section 5(h) program funds for the acquisition and
     operation of the Second Street Apartments. In addition, it (1) did not provide
     replacement housing for the 37 Section 5(h) units it sold, (2) incorrectly reported three of
     the six grants reviewed as fully obligated in HUD’s electronic Line of Credit Control
     System, (3) undertook force account activity without HUD’s written approval, and (4)
     undertook five inappropriate procurement actions. The expenses we reviewed were
     eligible and appropriately supported, no public housing funds were used to pay
     unauthorized activities, the accounting system was effective, and the Authority followed
     proper procedures with regard to tenant application processing.

What We Recommend


     We recommend that HUD require the Authority to repay Section 5(h) program $174,044
     from nonfederal sources for the inappropriate acquisition and operation of the Second
     Street Apartments. Additionally, we recommend that HUD require the Authority to
     create and implement a new timeline for replacement of the Section 5(h) units and if the
     Authority does not follow this new timeline, recapture the $1.2 million available in its
     program bank account as of January 2008. We also recommend that HUD's Los Angeles
     Office of Public Housing require the Authority to recapture $247,101 in grant funds that
     the Authority did not fully obligate by the required deadline for grant years 2001, 2003,
     and 2005; require the Authority to provide supporting documentation for $827,756 in
     unsupported procurement actions or repay HUD from nonfederal sources; and require the
     Authority to repay HUD $184,588 from nonfederal sources for ineligible force account
     labor costs.

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

Auditee’s Response


     We provided the Authority a draft report on May 20, 2008, and held an exit conference
     with the Authority’s officials on May 30, 2008. The Authority provided written
     comments on June 13, 2008. It partially agreed with our comments in the audit report but
     had some explanatory comments.

     The complete text of the auditee’s response, along with our evaluation of that response,
     can be found in appendix B of this report. The exhibits are too voluminous to include in
     this report. However, the documents are available upon request.




                                              2
                             TABLE OF CONTENTS

Background and Objectives                                                               4

Results of Audit
   Finding 1: The Authority Inappropriately Used $174,044 in Section 5(h) Program       6
              Funds for the Acquisition of the Second Street Apartments
   Finding 2: The Authority Did Not Provide Replacement Units for Units Sold            8
   Finding 3: The Authority Incorrectly Reported Its Grants in the Electronic Line of   10
              Credit Control System as Fully Obligated
   Finding 4: The Authority Undertook a Force Account Activity without HUD’s            14
              Written Approval
   Finding 5: The Authority Did Not Follow Federal Requirements for Procurement         16
              and Spent $1,012,344 on Unsupported and Ineligible Costs

Scope and Methodology                                                                   20

Internal Controls                                                                       21

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                    23
   B. Auditee Comments and OIG’s Evaluation                                             24
   C. Criteria                                                                          37




                                               3
                      BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Calexico (Authority) was established in 1945 under the
Housing Authority Law of the State of California. The Authority entered into its most recent
annual contributions contract with the U.S. Department of Housing and Urban Development
(HUD) on October 11, 2001. The Authority is governed by a board of commissioners (board)
made up of seven individuals who must be appointed. Currently the Authority does not have a
permanent executive director. Its last executive director’s employment was terminated in August
2007, and the Authority currently has its second interim executive director since the start of this
audit.

The Authority currently operates the following programs:

   1. Public housing – 265 units; a combination of single-family homes, multiplexes, and a 98-
      unit apartment building.
   2. Housing Choice Voucher program – 244 vouchers.
   3. Multifamily – Calexico Gardens; a two-story apartment building with 39 units.

We reviewed the Authority’s public housing program; however, our emphasis was on the capital
fund program. Specifically, we reviewed the program grants received between 2001 and 2005.
The table below shows the grants reviewed.

Capital fund program grants reviewed

Count      Grant number             Grant year           Grant amount
  1       CA16P03950101               2001                 $739,301
  2       CA16P03950102               2002                 $554,657
  3       CA16P03950103               2003                 $544,936
  4       CA16P03950203               2003                 $115,097
  5       CA16P03950104               2004                 $668,822
  6       CA16P03950105               2005                 $578,189
                                      Total               $3,201,002

Section 5(h) Program
The Quality Housing and Work Responsibility Act permits public housing agencies, through
Section 32 of the United States Housing Act of 1937, to make public housing dwelling units
available for purchase by low-income families as their principal residences. Under Section 32, a
public housing agency may sell all or a portion of a public housing development to eligible low-
income applicants. These applicants may or may not be public housing residents. The Authority
participated in this program by selling single-family homes from its Casas del Sol development.
As of March 2008, the Authority had sold 37 of the 50 single-family homes in the Casas del Sol
development.




                                                 4
Second Street Apartments
The Authority purchased the Second Street Apartments with the intention that they would be the
replacement housing for its Section 5(h) program Casas del Sol units that it sold to low-income
families. The Second Street Apartments are preexisting buildings located at 1230 Second Street
and 1250 Second Street. Each apartment building has two stories. The building at 1230 Second
Street contains 17 units, and the building at 1250 Second Street contains 14 units.

The Authority operated the property for eight months before the purchase as though it was an
approved public housing project and paid $168,257 in rents assigned to the former owner during
that time. The Authority’s board signed a resolution on September 9, 2004, stating that it
intended to borrow nearly $1.7 million from Federal Home Loans at 12.5 percent interest over
120 months with interest-only payments in the amount of $17,680 per month. The total purchase
price was $2.2 million. During the time the Authority operated these apartments, it paid at least
$380,080 for mortgage and other expenses. The property was sold in 2006 when the Authority
did not receive the anticipated tax credits or funding commitment. The sales price of the
property was $2.5 million.

Force Account Labor
Force account labor is defined as “labor employed directly by the PHA [public housing
authority] on either a permanent or a temporary basis” by 24 CFR [Code of Federal Regulations]
968.105. In this case, the Authority either used maintenance personnel already on the
Authority’s payroll to perform force account labor or employed individuals from a temporary
staffing agency.

Audit Objectives
Our objective was to determine whether the Authority complied with HUD’s rules and
regulations with respect to its public housing program. More specifically, we wanted to
determine whether allegations brought forward from the Office of Inspector General’s (OIG)
Office of Investigation and the Federal Bureau of Investigation (FBI) regarding the Authority’s
improprieties with the 2004 purchase of the 1230 and 1250 Second Street Apartments had merit.
We wanted to determine whether the Authority (1) used its public housing and Section 5(h)
program funds to pay for unauthorized activities or in a manner consistent with HUD rules,
regulations, and Authority policies and procedures; (2) provided replacement housing for the
Section 5(h) units it sold; (3) followed proper procurement procedures; (4) made eligible and
appropriately supported expenditures; (5) had an effective accounting system; and (6) followed
proper procedures with regard to tenant application processing.




                                               5
                                 RESULTS OF AUDIT

Finding 1: The Authority Inappropriately Used $174,044 in Section 5(h)
Program Funds for the Acquisition of the Second Street Apartments
The Authority inappropriately used $174,044 in Section 5(h) program funds from the sale of the
Casas del Sol homes for its purchase of the Second Street Apartments. This condition occurred
because its board did not ensure that the Authority obtained the required funding commitment
before its purchase and found that it could not afford to operate the project without this funding
commitment. Consequently, this inappropriate use diverted funds, which should have been used
to provide more affordable housing to the area’s low-income population.



 The Authority Entered into a
 Section 5(h) Implementing
 Agreement


       In May 2001, HUD and the Authority entered into a Section 5(h) implementing
       agreement to participate in the Section 5(h) homeownership program for public housing,
       which involved selling its Casas del Sol development. The objective of this program was
       to allow public housing authorities to sell some housing inventory to residents and/or
       other eligible low-income buyers. A stipulation of this agreement was that the
       Authority’s board would be responsible for implementing the plan and for all phases of
       any program developed under the plan.

       Federal regulations at 24 CFR [Code of Federal Regulations] 906.16 state, “as a
       condition for transfer of ownership under a HUD-approved homeownership plan, the
       PHA [public housing authority] must obtain a funding commitment, from HUD or
       another source, for the replacement of each of the dwellings to be sold under the plan.”
       The Authority attempted to replace the units it sold with the purchase of the Second
       Street Apartments. However, it did not receive approval from HUD for the purchase of
       these two apartment buildings and did not receive the required funding commitment from
       HUD or from any other source.




                                                6
The Authority Used Ineligible
Section 5(h) Program Funds

     Our review of the purchase of the Second Street Apartments found that the Authority
     used $913,035 in Section 5(h) funds from the sales of the Casas del Sol homes for (1)
     appraisals, (2) part of the downpayment, (3) operating and various other expenses, and
     (4) repayment to its public housing program, all related to the Second Street Apartments.

     To pay the operating expenses of the Second Street Apartments, the Authority obtained
     funds from the project’s operating revenue as well as from Section 5(h) program funds.
     Soon after the purchase, the Authority began defaulting on its $17,680 monthly mortgage
     payments and eventually sold the property. This condition occurred because the
     Authority’s board did not ensure that the Authority obtained the required funding
     commitment before purchasing the property.

     The Authority reimbursed the Section 5(h) account $543,550 with proceeds received
     from the sale of the Second Street Apartments; $64,500 with funds remaining in the
     Second Street Apartments’ bank account once the property had been sold; $69,906, a
     reimbursement from its public housing program for an overpayment received; and
     $61,035, a reimbursement to its public housing program for Section 5(h) Program
     consulting expenses. Nonetheless, the purchase and operation of the Second Street
     Apartments resulted in net ineligible costs to the Authority’s Section 5(h) program of
     $174,044 ($913,035 - $738,991).

Recommendations



     We recommend that HUD's Los Angeles Office of Public Housing require the Authority
     to

     1A.    Repay its Section 5(h) program $174,044 from nonfederal sources for ineligible
            expenses.




                                             7
Finding 2: The Authority Did Not Provide Replacement Units for Units
Sold
Between March 2004 and September 2006, the Authority sold 37 units from its Casas del Sol
public housing stock and did not provide the required replacement units. We attribute this
deficiency to a lack of leadership from the Authority’s board, which was responsible for
implementing the Authority’s Section 5(h) homeownership plan and for all phases of any
program developed under the plan. As a result, $1.2 million is available but restricted in an
Authority bank account, while more than 1,000 individuals or families remained on the
Authority’s waiting lists for housing.



 The Authority Planned for
 Replacement Units


       The Authority planned for its purchase of the Second Street Apartments to satisfy its
       requirement for replacement housing for the Casas del Sol units it sold through its
       Section 5(h) homeownership program. However, the purchase was not approved by
       HUD, and when the Authority began defaulting on its loan as the result of not being able
       to obtain the required funding commitment, it sold the project.

       The Authority next planned to build a senior housing complex near the river on an empty
       lot that it already owned. This land was part of the original Casas del Sol project that the
       Authority had not developed with single-family units because it thought the property
       would be a good place for a one-bedroom apartment complex. The Authority had already
       paid the $2,500 application fee to have the land rezoned. This process started in 2006
       and was completed in July 2007. At its November 8, 2007, board meeting, the Authority
       discussed building a senior housing project and determined that “the cost to build this
       development is approximately $2.5 to $3 million.” It planned to ask HUD to approve the
       project as replacement housing for units sold under the Casas del Sol development.

       In October 2007, the financial director told us that the Authority realized that it had been
       three years since the first sale in 2004. However, HUD had not given it a timeframe for
       completing the process. In its draft to HUD of the Section 5(h) homeownership plan, the
       Authority stated that it should take 10 years to complete, and HUD officials had the
       Authority take the time limit out of the plan. The financial director also told us that the
       Authority understood that there was no timeframe for replacement housing completion.

       The implementing agreement entered into by HUD and the Authority states that the
       Authority must obtain HUD approval to modify any of the provisions of the Casas del
       Sol Section 5(h) plan, and the plan states that sales proceeds shall be obligated in a timely
       fashion. In addition, in an attachment to its year 2000 plan, the Authority included a


                                                 8
    timeline for the entire process. This timeline was approved as part of the plan. The
    Authority expected the sales process to take six months, ending with the lender approval.
    However, this process took much longer than expected, with the Authority selling its first
    house in March 2004 and its 37th house in September 2006, two and one-half years later.
    In addition, as of March 2008, all the original 50 homes had not been sold.

    Although the Authority submitted a revised plan to HUD that was approved in November
    2005, the plan no longer had any information regarding the timing of the replacement
    housing. A timetable is required by 24 [Code of Federal Regulations] 906.39(m). The
    Authority also submitted a letter to HUD on November 8, 2007, stating that it was
    submitting its proposal application for mixed finance operating subsidy on replacement
    housing for the Section 5(h) units it had sold. However, it did not attach the proposal as
    the letter stated and as of April 2008, had not submitted the proposal. Contrary to the
    requirements of the implementing agreement entered into between the Authority and
    HUD, the Authority did not obligate the sale proceeds from the Section 5(h) program in a
    timely manner.

    As a result, the Authority’s public housing waiting list for one-bedroom units as of
    January 2007 had 283 names on it. However, since the Authority did not have many one-
    bedroom units, many of these tenants were put into two-bedroom or three-bedroom units
    that were available at the time. In addition, there are more than 1,000 individuals or
    families on the Authority’s waiting lists. The Authority’s board should have worked with
    HUD to modify the plan’s timeline to adjust for the delays. Therefore, HUD should
    require the Authority to create and implement a new timeline for the completion of
    replacement housing. If the Authority fails to meet this timeline, HUD should recapture
    the sales proceeds collected thus far in accordance with the provisions of the Section 5(h)
    implementing agreement. This would put funds totaling more than $1.2 million to better
    use by either providing replacement housing or having HUD recapture the sales proceeds
    and reprogram the funds rather than allowing the funds to sit idle in a bank account.


Recommendation


    We recommend that HUD's Los Angeles Office of Public Housing

    2A.    Require the Authority to create and implement a new timeline for completing
           replacement housing and if the Authority does not meet this timeline, with
           exceptions for delays beyond the control of the Authority, recapture the
           $1,210,852 available but restricted in the Section 5(h) program bank account as of
           January 2008 and put these funds to better use.




                                             9
Finding 3: The Authority Incorrectly Reported Its Grants in the
Electronic Line of Credit Control System as Fully Obligated
The Authority incorrectly reported in HUD’s electronic Line of Credit Control System three of
the six grants we reviewed as having been fully obligated by the obligation deadline. The
deficiency occurred because the Authority did not have policies and procedures in place for
processing electronic Line of Credit Control System obligations. We also attribute the
deficiency to the late start of the Authority’s procurement process. As a result, the Authority
received $247,101 for funding that was not obligated in a timely manner.



 Obligations Must Be Made
 within 24 Months of Receiving
 Funds


       The Quality Housing and Work Responsibility Act of 1998 (Act) states that a public
       housing agency shall obligate any assistance received under this section not later than 24
       months after the date on which the funds become available to the agency for
       modernization purposes or the date on which the agency accumulates adequate funds to
       undertake modernization, substantial rehabilitation, or new construction of units. In
       addition, federal regulations at 24 CFR [Code of Federal Regulations] 905.120(b)(3)
       state that this is material if more than 10 percent remains unobligated after the end of the
       period (applicable only to fiscal year 2004 and later). Funds are obligated under a grant
       when a contract is signed or in the case of force account activity, when the first penny is
       spent on force account labor.

       The Act also states that HUD has the right to recapture any obligation entered into by a
       housing authority for a violation by the housing authority of the requirements of the Act.
       This would include any failure of the housing authority to obligate funds in a timely
       manner. Further, HUD’s Notice: Public and Indian Housing 2003-19 (Public Housing
       Authorities) states, “any amounts made available under the public housing Capital Fund
       for fiscal years 1999, 2000, 2001, 2002, or 2003 that remains unobligated in violation of
       paragraphs (1) of such section 9(j)… the Secretary shall recapture any such amounts...”
       This notice also states, “…the Appropriations Act [of 2003] requires HUD to recapture
       any amounts not obligated or expended by the deadline. Since this change is statutory,
       the Department has no authority to waive the implementation of this provision.”




                                                10
Funds Not Obligated

     We reviewed a total of six capital fund program grants received by the Authority to
     determine whether the funds were properly obligated in a timely manner. We determined
     that grants received in 2001, 2003, and 2005 were not obligated within the required 24-
     month timeframe as noted in the table below.

                                                      Obligation year       Obligation
    Grant number        Grant amount     Grant year    (two years)      requirements met
   CA16P03950101          $739,301         2001            2003                 No
   CA16P03950102          $554,657         2002            2004                Yes
   CA16P03950103          $544,936         2003            2005                 No
   CA16P03950203          $115,097         2003            2005                Yes
   CA16P03950104          $668,822         2004            2006                Yes
   CA16P03950105          $578,189         2005            2007                 No

     2001

     In July 2001, the Authority received grant CA16P03950101. It had two contracts for
     major work planned that were appropriately signed and dated by the obligation deadline
     of June 30, 2003, using these grant funds. However, for other contracts paid with
     funding from this grant, the contract date and/or the first force account labor activity
     expense was dated more than six months after the obligation deadline. Supporting
     documents showed that at least $69,310 of this grant was entered into HUD’s electronic
     Line of Credit Control System as fully obligated when it was not.

     2003

     In September 2003, the Authority received grant CA16P03950103. It had purchase
     orders and supporting invoices for three of its major work projects that were obligated by
     the deadline of September 16, 2005. Two of these projects were obligated in August
     2005, and the third one was obligated on September 15, 2005, one day before the
     obligation deadline.

     The Authority ultimately spent less than it had budgeted so it started another project from
     its five-year plan. This is allowable by 24 CFR [Code of Federal Regulations] Part 968,
     subpart C. However, this project used force account labor, and the first expense for the
     project was dated September 2006, while the obligation deadline was September 2005.
     Clearly, this project started one year after the obligation deadline; thus, the funds were
     not truly obligated as the Authority claimed in HUD’s electronic Line of Credit Control
     System. As a result, at least $134,660 was identified in HUD’s system as having been
     fully obligated when it was not.




                                             11
    2005

    In August 2005, the Authority received grant CA16P03950105. As part of the
    obligations for this grant, the Authority signed a contract for $329,960 in September
    2007, after the obligation deadline. However, it incorrectly reported this grant as having
    been fully obligated as of August 2007. HUD relies on the accuracy of the information
    entered by public housing authorities to determine whether funds were obligated on time.
    The Authority did not run its first advertisement for this contract until June 29, 2007, 22
    months after receiving access to the grant funds, giving the Authority less than two
    months to complete the procurement process. This contract totaled 57 percent of the
    Authority’s total grant funds; therefore, the grant was not 90 percent obligated by the
    Authority’s obligation deadline of August 17, 2007.

    Unlike in earlier years, for fiscal year 2005, HUD’s Appropriations Act did not require
    HUD to recapture capital funds that did not meet the obligation deadline. HUD identified
    an alternative sanction in its Notice: Public and Indian Housing 2005-22 (Public Housing
    Authorities) which states, “The Act and the regulation provide sanctions for PHAs
    [public housing authorities] that do not obligate in a timely manner. Specifically, HUD is
    to withhold a PHA’s next Capital Fund grant(s) until the PHA obligates 90 percent of its
    past due grant. If the PHA cures its failure to comply with the obligation requirement
    during the year, HUD will release the new Capital Fund grant(s). The penalty for
    noncompliance will be to reduce the new Capital Fund grant(s) by 1/12 for every month
    the PHA was in noncompliance.” As a result, if HUD had known that the Authority did
    not obligate at least 90 percent of its grant by the deadline, HUD would have reduced the
    Authority’s next grant funds received in 2007 and authorized a reduction of the $517,578
    by 1/12th, or $43,131, for the one month that exceeded the 90 percent obligation
    requirement.

Recommendations

    We recommend that HUD's Los Angeles Office of Public Housing

    3A.    Recapture $247,101 in grant funds from the Authority for funding that was not
           fully obligated by the required obligation deadline for grant years 2001, 2003, and
           2005.

    3B.    Require the Authority to create and implement policies and procedures to ensure
           that entries into HUD’s electronic Line of Credit Control System are correct
           entries, and obligations are not entered before the funds are actually obligated.

    3C.    Require the Authority to provide copies of executed contracts, regardless of the
           amount, to the Los Angeles field office as support for all future funds that the
           Authority obligates.




                                            12
3D.   Require the Authority to begin its procurement process in a more timely manner,
      allowing it more time to complete its procurement process and, thus, more
      consistently meet its obligation deadlines.




                                     13
Finding 4: The Authority Undertook a Force Account Activity without
HUD’s Written Approval
The Authority undertook a force account labor activity without receiving written permission
from HUD, as required. It did not obtain HUD’s permission because it incorrectly believed it
was a high performer and as such, was not required to obtain HUD’s permission. As a result, the
Authority inappropriately spent at least $12,830 on force account labor for the installation of air
conditioners.



 Air Conditioner Installation


       24 CFR [Code of Federal Regulations] 968.120 states, “a Public Housing Authority may
       undertake the activities using force account labor, only where specifically approved by
       HUD in the CIAP [comprehensive improvement assistance program] budget or CGP
       [comprehensive grant program] Annual Statement, except no prior HUD approval is
       required where the PHA [public housing agency] is designated as both an overall high
       performer and Modernization high performer under the PHMAP [public housing
       management assessment program].” In September 1998, this assessment system was
       replaced with the public housing assessment system. The new assessment system was
       effective for all public housing authorities with fiscal years ending on September 30,
       1999, and after. One rule of the new assessment system was a requirement that a public
       housing authority put force account labor (FA) by projects in its annual plan to indicate
       that the project would be performed with force account labor. This would notify HUD of
       the housing authority’s intentions. However, our review of the Authority’s 2001 and
       2005 five-year plans covering years 1997-2005 determined that it never made this
       indication.

       The Authority undertook the installation of air conditioners at development 39-9 using
       force account labor without approval from HUD or being designated as a high performer.
       The air conditioners cost $47,472. They were properly procured and purchased in 2005,
       while the labor was performed in 2006. However, the Authority was not designated as a
       high performer in 2005 or 2006. Further, although the Authority stated that it asked for
       the Los Angeles field office’s approval to do a force account project and was told that it
       was a high performer and did not need HUD’s permission, it could not document this
       discussion, which may have occurred during fiscal year 2003 or 2004 when the Authority
       was designated a high performer. As a result, the Authority spent at least $64,386 on this
       project, $12,830 of which was for force account labor, which HUD cannot be assured
       was reasonable.




                                                14
Recommendations



    We recommend that HUD's Los Angeles Office of Public Housing require the Authority
    to

    4A.   Provide supporting documentation to show that $12,830 was reasonable for force
          account work or repay HUD for undertaking an unapproved force account labor
          activity.

    4B.   Obtain written approval from HUD for all future force account projects.




                                          15
Finding 5: The Authority Did Not Follow Federal Requirements for
Procurement and Spent $1,012,344 on Unsupported and Ineligible Costs
The Authority did not comply with HUD’s rules and regulations for procurement. It undertook
five separate procurement activities without first preparing the required cost or price analysis.
This condition occurred because the Authority either ignored or did not understand federal law
and standards identified in 24 CFR [Code of Federal Regulations] 85.36 and ignored its own
policies for procurement. In addition, the executive director overrode procurement regulations
and policies. As a result, the Authority spent $1,012,344 in capital fund program funding on
unsupported or ineligible costs.



 Lack of Cost/Price Estimates


       Federal regulations at 24 CFR [Code of Federal Regulations] 85.36(f)(1) state, “grantees
       and subgrantees must perform a cost or price analysis in connection with every
       procurement action,” and the Authority’s procurement policy states, “a cost or price
       analysis shall be performed for all procurement actions, including contract
       modifications.” The Authority undertook at least 15 projects that involved either the
       procurement of materials only or a combination of both materials and labor. Of these 15
       projects, five (33-percent) lacked cost or price analyses. The modernization director said
       that cost or price analyses were always prepared before bids were advertised; however, he
       was unable to locate the missing cost or price analyses. As of April 2008, he had not
       provided the missing documentation.


 Unsupported Costs


       Contract Activities

       The Authority procured three major contracts for air conditioning replacement and
       roofing work. Our review of Authority files showed the first contract was to replace the
       air conditioning at developments 39-1 and 39-2. There was no cost or price analysis. As
       a result, the Authority budgeted only $82,087 but the contract was awarded for $170,000.
       The second contract was to replace the air conditioning and roofing at development 39-9.
       Again, there was no cost or price analysis. As a result, the Authority budgeted only
       $167,132, but the contract was awarded for $360,991. The third contract was to replace
       the roofing at development 39-2. Again, there was no cost or price analysis. As a result,
       the Authority budgeted only $95,000, but the contract was awarded for $217,000. With
       all three contracts, the Authority underbudgeted the projects by more than 200 percent.
       Cost estimates are important because without the price or cost analysis, it is difficult for


                                                16
    the Authority to reasonably budget for projects, and HUD cannot be assured that the
    Authority received a fair or reasonable price for the materials and labor procured.

    Force Account Labor Activities

    The Authority undertook two activities in which it used force account labor and did not
    first prepare cost or price analyses. The first activity was for painting. The Authority
    advertised bids for painting services and only received one bid, which the Authority felt
    was too high. It did not know whether this was a fair price since it did not have a cost or
    price analysis. There were quotes in the file from various vendors for one can of paint
    but no estimates regarding how many cans of paint, what additional materials, or how
    much time and labor would be needed. Ultimately, the Authority spent at least $47,290
    on this activity. However, because it did not keep complete records of force account
    activities, we were unable to determine whether the force account activity included all
    aspects included in the requests for proposal for painting services or whether the force
    account services were more cost effective than services provided by a contractor.

    The second activity was the replacement of 100 water heaters. The Authority spent
    $32,475 on the purchase of the water heaters but did not have any rate quotations.
    Further, the budget it prepared assumed that the water heaters would cost as much as
    $90,000. As shown, rate quotations are important because without them it is difficult to
    determine whether the Authority paid a fair and reasonable price for the materials it
    procured or whether it was cost effective for these jobs to be undertaken with force
    account labor. In addition, in instances in which the Authority did have a cost or price
    analysis, only one included a date. Thus, HUD had no way to determine whether the
    estimates were prepared before the procurement as required.

Procurement Procedures Not
Used


    The Authority undertook a force account labor activity for concrete/exterior work at
    development 39-3. A review of two folders labeled 39-3/Concrete and 39-3/Concrete
    July ’04 revealed no evidence of bid advertisements or bids received for concrete or
    exterior work for development 39-3. While this activity was included in the Authority’s
    annual statement/performance and evaluation report, it did not have the force account
    designation in parenthesis next to it as required. The Authority’s procurement policies
    state “sealed bidding is the preferred method for construction procurement. For
    procurements under the Capital Fund Program (CFP)/Comprehensive Grant Program
    (CGP), sealed bidding shall be used for all construction and equipment contracts
    exceeding the small purchase limitation.” However, the executive director abandoned
    this policy and instructed the modernization director to move forward and undertake the
    project as a force account labor activity. Overall, this development consisted of 50 units,
    and the activity cost the Authority at least $184,588 ($80,039 for materials and $104,549
    for labor), which is more than 200 percent more than the budgeted amount of $79,157.



                                             17
       Further, the Authority’s cost estimate was only for three of the fifty units and totaled
       $9,068 (materials and labor) plus $1,200 for an eight-month portable restroom rental. As
       a result, the executive director not only violated federal laws for procurement but also
       ignored the Authority’s own procurement policies and procedures. The Authority also
       believed the regulations stated that if it was in the best interest of the Authority, it could
       move forward with a force account labor project. As a result, HUD cannot be assured
       that the cost of this project was reasonable.

Cost/price analysis table
                                                                                 Cost/price
          Grant                           Project                   Force         analysis
Count    number                            name                   account        performed
  1   CA16P03950101               Air conditioning work              No              No
                                 projects 39-1 and 39-2
  2     CA16P03950101        Roofing & air conditioning work         No              No
                                       project 39-9
  3     CA16P03950101        Dwelling improvements - paint           Yes             No*
                                       project 39-7
  4     CA16P03950101              Concrete mowstrips                Yes             No
                                       project 39-9
  5     CA16P03950102 Site dwelling improvements - roofing           No              No
                                       project 39-2
  6     CA16P03950102                 Water heaters                  Yes             No
                                       project 39-3
  7     CA16P03950102            Concrete/exterior work              Yes           Partial
                                       project 39-3
  8     CA16P03950103             Stove & refrigerators              Yes            Yes**
                               projects 39-1, 39-5 & 39-9
  9     CA16P03950103         Air conditioning replacement           Yes            Yes**
                                       project 39-9
  10 CA16P03950104                      Sewer lines                  Yes            Yes**
                                       project 39-2
  11 CA16P03950104                    Shut-off valves                Yes            Yes**
                                       project 39-7
  12 CA16P03950104               Restroom accessibility              Yes            Yes**
                                       project 39-9
  13 CA16P03950104                 Water heater doors                Yes            Yes**
                                       project 39-1
  14 CA16P03950104                   Kitchen cabinets                Yes            Yes**
                                       project 39-3
  15 CA16P03950105                 Site improvements                 No              Yes
                                       project 39-2
   * There are quotes for a one-gallon can of oil-based paint from three vendors but no estimates for
     how many cans of paint needed, additional materials, or labor.
   ** Analysis does not have a date.




                                                  18
Conclusion



     The Authority violated federal procurement requirements and its own procurement
     policies for five procurement activities that required cost or price analysis and did not
     follow other procurement procedures. This condition occurred because the executive
     director ignored HUD rules and regulations and its procurement policies and procedures.
     As a result, the Authority spent at least $827,756 without knowing whether the price was
     reasonable. It also spent at least $184,588 on an activity for which it did not use the
     required sealed-bid method of procurement for construction contracts.

Recommendations



     We recommend that HUD's Los Angeles of Public Housing require the Authority to

     5A.     Provide supporting documentation for $827,756 or repay HUD from nonfederal
             funds for unsupported procurement activities.

     5B.     Repay HUD $184,588 from nonfederal funds because the Authority did not use
             the required sealed-bid method for a construction contract over the simplified
             acquisition threshold.

     5C.     Follow HUD’s and its own procurement requirements by preparing cost or price
             analyses before the Authority starts the procurement process for all future
             projects.

     5D.     Follow HUD’s and its own procurement requirements by obtaining price or rate
             quotes from an adequate number of qualified sources or bid advertisements for all
             projects under the simplified acquisition threshold.

     5E.     Prepare justifications when force account labor is used for Authority projects and
             include more detailed documentation in its records showing that this method of
             providing the services is cost effective.

     5F.     Obtain written approval from HUD for all future force account projects.




                                             19
                         SCOPE AND METHODOLOGY

We performed the audit between September 2007 and April 2008. The audit generally covered
the period January 2001 through June 2007. To accomplish our objectives, we reviewed the
effectiveness and efficiency of the Authority’s operations, determined the reliability of its
financial reporting, and reviewed its compliance with applicable laws and HUD regulations. Our
primary methodologies included

   ¾ Reviewing the Quality Housing and Work Responsibility Act of 1998; applicable HUD
     regulations at 24 CFR [Code of Federal Regulations] Parts 85, 903, 906, 941, and 968;
     and HUD Guidebook 7485.3 G.

   ¾ Interviewing appropriate HUD personnel and relevant grant files to obtain an
     understanding of the public housing program requirements and identify HUD’s concerns
     with the grantee’s operations.

   ¾ Reviewing the Authority’s policies, procedures, and practices in addition to interviewing
     the Authority’s key personnel.

   ¾ Reviewing past OIG reports, independent public accountants’ reports, and prior HUD
     monitoring reports.

   ¾ Reviewing bank statements, deposits, payment vouchers, and payroll.

   ¾ Reviewing tenant files, procurement files, general ledgers, and escrow documents.

Each of our tests conducted consisted of 100 percent of the universe since it was small.
Specifically, we reviewed all of the funding used for the acquisition and operation of the Second
Street Apartments. We also reviewed all the capital fund program grants received between 2001
and 2005. This review included all procurement contracts and force account labor activities.
Lastly, we reviewed all of the tenant files for tenants currently participating in the Authority’s
public housing or Section 8 programs who once lived in the Second Street Apartments.

We conducted our audit in accordance with generally accepted government auditing standards
and included tests of management controls that we considered necessary under the
circumstances.




                                                20
                              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:

              •   Authority policies and procedures put in place to ensure that the Authority
                  follows Section 5(h) program requirements.

              •   Authority policies and procedures put in place to ensure that the Authority
                  follows public housing program regulations.

              •   Authority policies and procedures put in place to ensure that the Authority
                  complies with federal procurement requirements.

              •   Authority policies and procedures put in place to ensure that reliable data are
                  entered into HUD’s electronic Line of Credit Control System.

       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.




                                                21
Significant Weaknesses


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

            •   The Authority’s controls were not adequate to ensure that it complied with its
                policies and procedures and Section 5(h) program policies for the use of
                program funds (see findings 1 and 2).

            •   The Authority’s controls were not adequate to ensure that it complied with its
                policies and procedures and public housing program regulations as established
                by HUD (see findings 3 and 5).

            •   The Authority did not have policies and procedures in place to ensure that it
                entered reliable data into HUD’s electronic Line of Credit Control System
                (see finding 3).

            •   The Authority’s controls were not adequate to ensure that it complied with its
                policies and procedures and federal and state regulations for procurement (see
                findings 4 and 5).




                                             22
                                   APPENDIXES

Appendix A

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

        Recommendation          Ineligible 1/        Unsupported   Funds to be put
            number                                       2/        to better use 3/
               1A                     $174,044
               2A                                                       $1,210,852
               3A                     $247,101
               4A                                        $12,830
               5A                                       $827,756
               5B                     $184,588
              Total                   $605,733          $840,586        $1,210,852

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
     polices or regulations.

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

3/   Recommendations that funds to be put to better use are estimates of amounts that could
     be used more efficiently if an OIG recommendation is implemented. The $1.2 million
     comes from the money the Authority collected from 37 low-income families who
     purchased a single-family home within the Casas del Sol development. The
     implementation of our recommendation would put these funds to better use by either
     providing replacement housing or having HUD recapture the sales proceeds and
     reprogram the funds rather than allowing the funds to sit idle in a bank account.




                                                23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         24
Comment 1




Comment 2


Comment 3
Comment 4
Comment 8



Comment 4
Comment 5
Comment 6
Comment 7
Comment 8




            25
Comment 5
Comment 6
Comment 9




Comment 10




             26
Comment 10
Comment 11




Comment 12




             27
Comment 13




             28
Comment 14




Comment 15




Comment 16




             29
30
                         OIG Evaluation of Auditee Comments

Comment 1   We agree that these costs were eligible 5(h) program expenses since these costs
            were for consulting fees related to the Authority’s Section 5(h) implementing
            agreement. We also agree that the $61,035.48 was paid out in 2001, thus it was
            not related to the acquisition of the Second Street Apartments. Therefore, we
            removed these questioned costs from the audit report.

Comment 2   We disagree. The Authority’s 5(h) Implementing Agreement and
            Homeownership Plan was approved in May 2001. The 24 [Code of Federal
            Regulations] 906.16 in effect at the time of the Authority’s approval, with a
            revision date of April 1, 2001 states, “(a) Replacement requirement. As a
            condition for transfer of ownership under a HUD-approved homeownership plan,
            the PHA must obtain a funding commitment, from HUD or another source, for the
            replacement of each of the dwellings to be sold under the plan. Replacement
            housing may be provided by one or any combination of the following methods:

                   (1) Development by the PHA of additional public housing under 24 CFR
                   part 941 (by new construction or acquisition).
                   (2) rehabilitation of vacant public housing owned by the PHA.
                   (3) Use of five-year, tenant-based certificate or voucher assistance under
                   Section 8 of the Act.
                   (4) If the homeownership plan is submitted by the PHA for sale to
                   residents through an RMC, resident organization or cooperative
                   association which is otherwise eligible to participate under this part,
                   acquisition of nonpublicly-owned housing units, which the RMC, resident
                   organization or cooperative association will operate as rental housing,
                   comparable to public housing as to term of assistance, housing standards,
                   eligibility, and contribution to rent.
                   (5) Any other Federal, State, or local housing program that is comparable,
                   as to housing standards, eligibility and contribution to rent, to the
                   programs referred to in paragraphs (a) (1) through (a) (3) of this section,
                   and provides a term of assistance of not less than five years.”

            By the Authority’s own admission, assistance was provided “for a period of
            approximately 24 months”. Based on the information in bold up above, the
            $300/unit that was subsidized by the Authority does not qualify.

Comment 3   We disagree. In addition to the criteria in Comment 2 above, the Implementation
            Agreement states under definitions, “low-income families – This term has the
            meaning ascribed to it in section 3 of the Act”. Also, the Implementation
            Agreement states in Section 3.1, “The HA [housing authority] agrees that sale
            proceeds shall be used only in accordance with the Plan, and the requirements and
            provisions of this Agreement, and certifies that the Plan complies with 24 CFR
            [Code of Federal Regulation] 906.15, governing the use of sales proceeds”. The
            24 [Code of Federal Regulation] 906.15 states, “(a) General authority for use.



                                            31
            Sale proceeds may, after provision for sale and administrative costs that are
            necessary and reasonable for carrying out the homeownership plan, be retained by
            the PHA and used for housing assistance to low-income families (as such families
            are defined under the Act”. The Quality Housing and Work Responsibility Act
            states in Section 3 (5)(C)(b)(2) “When used in this Act: The term “low-income
            families” means those families whose income does not exceed 80 per centum of
            the median income for the area, as determined by the Secretary with adjustments
            for smaller and larger families, except that that Secretary may establish income
            ceilings higher or lower than 80 per centum of the median for the area on the basis
            of the Secretary’s findings that such variations are necessary because of
            prevailing levels of construction costs or unusually high or low family
            incomes…”

            Also, Section 3 (a)(1) of the Quality Housing and Work Responsibility Act states,
            “Dwelling units assisted under this act shall be rented only to families who are
            low-income at the time of their initial occupancy of such units. Reviews of
            family income shall be made at least annually. Except as provided in paragraph
            (2) and subject to the requirement under paragraph (3), a family shall pay as rent
            for a dwelling unit assisted under this Act (other than a family under section 8(o)
            or (y) or paying rent under section 8(c)(3)(B) the highest of the following
            amounts, rounded to the nearest dollar….”

Comment 4   In addition to comment 3 above, the Authority did not provide us with files on all
            of the tenants whose rents were subsidized $300 per month and we had no
            evidence that reviews of family income was done at least annually. Additionally,
            the Second Street Apartments were not units assisted under this Act. Finally,
            many of the families who moved into the Second Street Apartments ultimately
            had to move because of their inability to afford the $400 flat rate that they were
            charged.

Comment 5   We disagree. The 24 [Code of Federal Regulations] 906.15 in effect at the time
            of the Authority’s 5(h) Plan approval, with a revision date of April 1, 2001 states,
            “(a) General authority for use. Sale proceeds may, after provision for sale and
            administrative costs that are necessary and reasonable for carrying out the
            homeownership plan, be retained by the PHA and used for housing assistance to
            low-income families (as such families are defined under the Act)…” (b)
            Permissible uses. Sale proceeds may be used for any one or more of the
            following forms of housing assistance for low-income families, at the discretion
            of the PHA and as stated in the HUD-approved homeownership plan: (3) In
            connection with a State or local homeownership program for low-income
            families, as described in the homeownership plan, for assistance to purchasers and
            for reasonable planning and implementation costs. Under such programs, sales
            proceeds may be used to construct or acquire additional dwellings for sale to low-
            income families, or to assist such families in purchasing other dwellings from
            public or private owners. (4) In connection with the PHA’s [Public Housing
            Authority] other public housing that remains under ACC, for any purposes



                                             32
            authorized for the use of operating funds under the ACC and applicable
            provisions of the Act and Federal regulations, as included in the HUD-approved
            operating budgets. Examples include maintenance and modernization,
            augmentation of operating reserves, protective services, and resident services.
            Such use shall not result in the reduction of the operating subsidy otherwise
            payable to the PHA under 24 CFR part 990”. (5) In connection with any other
            type of Federal, State, or local housing program for low-income families, as
            described in the homeownership plan.

            The $174,043.52 that was absorbed by the 5(h) sales proceeds account, was not an
            eligible activity based on both the 24 [Code of Federal Regulation] 906.15 and
            the HUD-approved homeownership plan.

Comment 6   We disagree. The Authority stated in section 5.0 of its approved 5(h) Plan “…
            The Authority will use these funds for two primary purposes, including (1) new
            development replacement housing; and (2) Casas del Sol homebuyers’
            assistance…” Section 5.1 states, “After using proceeds of sale to cover
            homebuyer assistance needs and any necessary repairs to bring all units to
            required standards, the Authority will use the balance of funds to facilitate the
            development of replacement units, combining these funds with proceeds from the
            sale of tax credits derived from the new development…”

            The portion of the $174,043.52 that was absorbed by the 5(h) sales proceeds for
            supplementing rents for tenants was not covered by the 5(h) Plan.

Comment 7   The Second Street Apartments does not qualify under the Quality Housing and
            Work Responsibility Act, which states the following in Section 3, (5)(C)(b)(1)
            “When used in this Act: The term “low-income housing” means decent, safe, and
            sanitary housing, and all necessary appurtenances thereto, assisted under this Act
            other than under Section 8. The term “public housing” includes dwelling units in
            a mixed finance project that are assisted by a public housing agency with capital
            or operating assistance”. Therefore, it was not an eligible activity.

Comment 8   We disagree. Section 3 (2)(B)(i) of the Quality Housing and Work Responsibility
            Act states the following in regards to Flat Rents, “Allowable Rent Structures. –
            Flat Rents. – Except as otherwise provided under this clause, each public housing
            agency shall establish, for each dwelling unit in public housing owned or operated
            by the agency, a flat rental amount for the dwelling unit, which shall (I) be based
            on the rental value of the unit, as determined by the public housing agency; and
            (II) be designed in accordance with subparagraph (D) so that the rent structures do
            not create a disincentive for continued residency in public housing by families
            who are attempting to become economically self-sufficient through employment
            or who have attained a level of self-sufficiency though their own efforts.

            The rental amount for a dwelling unit shall be considered to comply with the
            requirements of this clause if such amount does not exceed the actual monthly



                                            33
              costs to the public housing agency attributable to providing and operating the
              dwelling unit. The preceding sentence may not be construed to require
              establishment of rental amounts equal to or based on operating costs or to prevent
              public housing agencies from developing flat rents required under this clause in
              any other matter that may comply with this clause”.

              In this case, the rent structure did create a disincentive for continued residency at
              the Second Street Apartments because the OIG determined many of the tenants
              moved out due to their inability to afford the flat rate charged.

Comment 9     We disagree. While the Authority may have been told by the Special
              Applications Center in Chicago “proceeds from the sale can be used for
              replacement units at the PHA’s discretion”, the 5(h) Implementing Agreement
              signed by the Authority states in Section 3.3, “ The HA shall obligate sales
              proceeds in a timely fashion, in accordance with the project implementation
              schedule set forth in the Plan”. Therefore, the Authority should have provided the
              required replacement units. Also see Comments 5 and 6.

Comment 10 We disagree with the Authority and contend that the funds should be recaptured.
           Notice: PIH [Public and Indian Housing] 2003-19 (PHA) [Public Housing
           Authority] (9)(A) states, “The HUD FY 2003 Appropriations Act was signed on
           February 20, 2003. The Appropriations Act provides new requirements with
           regard to funds not obligated by the deadline. Specifically, the Appropriations
           Act provides that:

              Notice: PIH [Public and Indian Housing] 2003-19 (PHA) [Public Housing
              Authority] (9)(A) also states, “any amounts made available under the public
              housing Capital Fund for fiscal years 1999, 2000, 2001, 2002, or 2003 that remain
              unobligated in violation of paragraphs (1) of such section 9(j) or unexpended in
              violation of paragraph (5)(A) of such section 9(j), the Secretary shall recapture
              any such amounts…” This Notice specifically says any amounts that remain
              unobligated will be recaptured.

              In addition, the auditee was still in the process of establishing and implementing
              its new procedures; thus, we were unable to review them and determine their
              adequacy during our audit fieldwork.

Comment 11 In this case, the Authority did not inform the Field Office (FO) and therefore, a
           revised obligation end date was not entered into the Line of Credit Control
           System. Additionally, no post-review by the field office was conducted in order
           to determine if Authority had the continuing capacity to carry out its
           Comprehensive Plan in a timely manner. Furthermore, HUD had the right to take
           other appropriate actions.

              The HUD handbook 7485.3G Chapter 6-10 Part III Implementation Schedule
              states, “No Prior HUD Approval. The HA may extend the target dates for fund



                                                34
              obligation or expenditure in the approved Annual Statement without prior HUD
              approval whenever any delay outside of the HA's control occurs. Where the HA
              revises its implementation schedule, the HA shall inform the FO so that the FO
              may enter a revised Obligation End Date in LOCCS. Such revision is subject to
              post-review by the FO in determining whether the HA has a continuing capacity
              to carry out its Comprehensive Plan in a timely manner (see paragraph 12-8). In
              addition, HUD may take other appropriate action as set forth in paragraph 12-9.
              Examples of delay outside of the HA's control include:

                   a. Need to use unobligated funds which are left over after
                   completion of all planned work under an Annual
                   Statement for additional work included in the Five-Year
                   Action Plan;

                   b. Unforeseen delays in contracting or contract
                   administration, such as the need to rebid due to no bids
                   received or bids received over budget, hidden conditions,
                   etc;

                   c. Litigation, where approved by HUD; and

                   d. HUD or other institutional delay, excluding delay by the HA itself (i.e.,
                   HA staff, Executive Director or Board of Commissioners)”.

              Also, see Comment 10.

Comment 12 As discussed at the exit conference, we view the date the contract was executed as
           the obligation date, not the date the Board of Commissioners agreed to the
           contract. Additionally, while the Board of Commissioners may have met and
           discussed this contract on August 16, 2007 the minutes state, the attorney
           “announced that at the time of the bid submission the lowest bidder failed to
           submit certificates required. He has reviewed the information and he is satisfied
           to award the contract to the lowest bidder, 3D Construction with the condition that
           he submits the required documents by no later than 1:00 PM, if not able to comply
           to proceed and award contract to the second lowest bidder whish is Trademark
           Construction after the deductive.” Clearly, by the close of this Board meeting, the
           Authority had neither a contractor nor a signed contract.

Comment 13 We acknowledge that the Authority submitted a cost estimate based on the
           HomeTech Remodeling and Renovation Cost Estimator/California/2005.
           However, this estimate was not prepared until after the fact, in June 2008.
           Additionally, according to 24 [Code of Federal Regulations] 85.36(f)(1),
           independent estimates are supposed to be made before the bids or proposals are
           received. Therefore, if the Authority cannot show it performed these estimates
           before the bids were received, the costs would become questioned. Any estimate
           performed in 2008, or after-the-fact is not acceptable.



                                              35
Comment 14 The OIG reviewed the contracts submitted in exhibits “F” through “J” during the
           audit, therefore, the OIG’s comments were about the lack of price or cost
           estimates. We acknowledge that the Authority submitted cost estimates based on
           the HomeTech Remodeling and Renovation Cost Estimator/California/2005.
           However, these estimates were not prepared until after the fact, in June 2008.
           Also, see Comment 13.

Comment 15 We agree that based on the Authority’s prepared cost estimates that were done
           after the fact, in June 2008, the actual expenses appear to be less than the cost
           estimates. However, 2005 costs were used to estimate the cost of work contracted
           in 2002, 2003, and 2004. In addition, as stated in Comment 13, independent
           estimates are supposed to be made before the bids or proposals are received.
           Therefore, if the Authority cannot show it performed these estimates before the
           bids were received, the costs would become questioned. Any estimate performed
           in 2008, or after-the-fact is not acceptable. Also, see Comment 10.

Comment 16 After reviewing the newly prepared cost estimates, we disagree that the estimated
           amount is more than 80 percent of the $184,588 that the Authority spent.
           Actually, this cost estimate of $224,550 is only about 18 percent (($224,550 -
           $184,588)/$224,550) more than what the Authority actually spent. In addition,
           the auditee was still in the process of establishing and implementing its new
           procedures; thus, we were unable to review them and determine their adequacy
           during our audit fieldwork. Also, see Comment 10.




                                             36
Appendix C
                                      CRITERIA
  1. Quality Housing and Work Responsibility Act of 1998, Section 32(a) (42 United
     States Code 1437g(j)(1)), states, “a public housing agency may carry out a
     homeownership program in accordance with this section and the public housing agency
     plan of the agency to make public housing projects available for purchase by low-income
     families for use only as principal residences for such families. An agency may transfer a
     unit pursuant to a homeownership program only if the program is authorized under this
     section and approved by the Secretary.”

  2. Quality Housing and Work Responsibility Act of 1998, Section 32(b) (42 United
     States Code 1437g(j)(1)), states, “a program under this section may cover any existing
     public housing dwelling units or projects, and may include other dwelling units and
     housing owned, assisted, or operated by the public housing agency.”

  3. Quality Housing and Work Responsibility Act of 1998, Section 32(c) (42 United
     States Code 1437g(j)(1)), states, “only low-income families assisted by a public housing
     agency, other low-income families, and entities formed to facilitate such sales by
     purchasing housing under a homeownership program under this section.”

  4. 24 CFR [Code of Federal Regulations] 968.105 states, “Force account labor. Labor
     employed directly by the PHA [public housing authority] on either a permanent or a
     temporary basis.”

  5. Section 5(h) Implementing Agreement, section (3.1), states, “the HA [housing
     authority] agrees that sale proceeds shall be used only in accordance with the Plan, and
     the requirements and provisions of this Agreement, and certifies that the Plan complies
     with 24 CFR 906.15, governing the use of sale proceeds.”

  6. Quality Housing and Work Responsibility Act of 1998, Section 32(j) (42 United
     States Code 1437z-4(a)), states, “the net proceeds of any sales under a homeownership
     program under this section remaining after payment of all costs of the sale shall be used
     for purposes relating to low-income housing and in accordance with the public housing
     agency plan of the agency carrying out the program.”

  7. Section 5(h) Implementing Agreement, section (3.5), states, “the HA’s Board of
     Commissioners shall be responsible for implementing the Plan and ensuring that sale
     proceeds are used in accordance with the requirements of this Agreement. The Board of
     Commissioners also shall be responsible for all phases of any program developed under
     the Plan.”

  8. 24 CFR [Code of Federal Regulations] 906.16(a) states, “Replacement requirement. As
     a condition for transfer of ownership under a HUD-approved homeownership plan, the
     PHA must obtain a funding commitment, from HUD or another source, for the



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   replacement of each of the dwellings to be sold under the plan. Replacement housing
   may be provided by one or any combination of the following methods…”

9. Annual Contributions Contract, section (9)(C), states, “the HA shall maintain records
   that identify the source and application of funds in such a manner as to allow HUD to
   determine that all funds are and have been expended in accordance with each specific
   program regulation and requirement. The HA may withdraw funds from the General
   Fund only for: (1) the payment of the costs of development and operation of the projects
   under the ACC [annual contributions contract] with HUD; (2) the purchase of investment
   securities as approved by HUD; and (3) such other purposes as maybe specifically
   approved by HUD. Program funds are not fungible; withdrawals shall not be made for a
   specific program in excess of the funds available on deposit for that program.”

10. Annual Contributions Contract, section (10)(C), states, “the HA shall not withdraw
    from any of the funds or accounts authorized under this section amounts for the projects
    under ACC, or for the other projects or enterprises, in excess of the amount then on
    deposit in respect thereto.”

11. 24 CFR [Code of Federal Regulations] 906.19 states, “Upon HUD notification to the
    PHA that the homeownership plan is approvable (in final form that satisfies all applicable
    requirements of this part), the PHA and HUD will execute a written implementing
    agreement, in a form prescribed by HUD, to evidence HUD approval and authorization
    for implementation. The plan itself, as approved by HUD, shall be incorporated in the
    implementing agreement. Any of the items of supporting documentation may also be
    incorporated, if agreeable to the PHA and HUD. The PHA shall be obligated to carry out
    the approved homeownership plan and other provisions of the implementing agreement
    without modification, except with written approval by HUD.”

12. 24 CFR [Code of Federal Regulations] 906.20 states, “The homeownership plan must
    address the following matters, as applicable to the particular factual situation:
    (n) An estimated timetable for the major steps required to carry out the plan.”

13. Quality Housing and Work Responsibility Act of 1998 (42 United States Code
    1437g(j)(1)) states, “Except as provided in paragraph (4) and subject to paragraph (2), a
    public housing agency shall obligate any assistance received under this section not later
    than 24 months after, as applicable—

       (A) The date on which the funds become available to the agency for obligation in the
       case of modernization; or

       (B) The date on which the agency accumulates adequate funds to undertake
           modernization, substantial rehabilitation, or new construction of units.”

14. Quality Housing and Work Responsibility Act of 1998 (42 United States Code
    1437g(j)(6)) states, “Right of Recapture. Any obligation entered into by a public housing




                                            38
   agency shall be subject to the right of the Secretary to recapture the obligated amounts for
   violation by the public housing agency of the requirements of this subsection.”

15. 24 CFR [Code of Federal Regulations] 905.120(b)(3) states, “Disregard of minimal
    unobligated amounts. HUD will disregard the requirements of paragraph (a) of this
    section with respect to any unobligated amounts made available to a PHA, to the extent
    that the total of such amounts does not exceed 10 percent of the original amount made
    available to the PHA.”

16. Notice: PIH [Public and Indian Housing] 2003-19 (PHA) [Public Housing
    Authority] (9)(A) states, “any amounts made available under the public housing Capital
    Fund for fiscal years 1999, 2000, 2001, 2002, or 2003 that remain unobligated in
    violation of paragraphs (1) of such section 9(j) or unexpended in violation of paragraph
    (5)(A) of such section 9(j), the Secretary shall recapture any such amounts…”

17. Notice: PIH [Public and Indian Housing] 2005-22(11) states, “the Act and the
    regulation provide sanctions for PHAs that do not obligate in a timely manner.
    Specifically, HUD is to withhold a PHA’s next Capital Fund grant(s) until the PHA
    obligates 90 percent of its past due grant. If the PHA cures its failure to comply with the
    obligation requirement during the year, HUD will release the new Capital Fund grant(s).
    The penalty for noncompliance will be to reduce the new Capital Fund grant(s) by 1/12
    for every month the PHA was in noncompliance.”

18. 24 CFR [Code of Federal Regulations] 968.305 states, “fungibility is a concept which
    permits a PHA to substitute any work item from the latest approved Five-Year Action
    Plan to any previously approved CIAP [comprehensive improvement assistance program]
    budget or CGP [comprehensive grant program] Annual Statement and to move work
    items among approved budgets without prior HUD approval.”

19. 24 CFR [Code of Federal Regulations] 968.120(a) states, “for both CIAP and CGP, a
    PHA may undertake the activities using force account labor, only where specifically
    approved by HUD in the CIAP budget or CGP Annual Statement, except no prior HUD
    approval is required where the PHA is designated as both an overall high performer and
    Modernization high performer under the PHMAP [public housing management
    assessment program].”

20. 24 CFR [Code of Federal Regulations] 902.67(a)(1) states, “a PHA that achieves a
    score of at least 60 percent of the points available under each of the four PHAS [public
    housing assessment system] Indicators (addressed in subparts B through E of this part)
    and achieves an overall PHAS score of 90 percent or greater of the total available points
    under PHAS shall be designated a high performer.”

21. 24 CFR [Code of Federal Regulations] 902.67(a)(2) states, “a PHA shall not be
    designated a high performer if it scores below the threshold established for any
    indicator.”




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22. 24 CFR [Code of Federal Regulations] 85.36(b)(1) states, “grantees and subgrantees
    will use their own procurement procedures which reflect applicable State and local laws
    and regulations, provided that the procurements conform to applicable Federal law and
    the standards identified in this section.”

23. 24 CFR [Code of Federal Regulations] 85.36(b)(9) states, “grantees and subgrantees
    will maintain records sufficient to detail the significant history of a procurement. These
    records will include, but are not necessarily limited to the following: rationale for the
    method of procurement, selection of contract type, contractor selection or rejection, and
    the basis for the contract price.”

24. 24 CFR [Code of Federal Regulations] 85.36(c)(1) states, “all procurement transactions
    will be conducted in a manner providing full and open competition consistent with the
    standards of Sec. 85.36.”

25. 24 CFR [Code of Federal Regulations] 85.36(d)(1) states, “procurement by small
    purchase procedures. Small purchase procedures are those relatively simple and informal
    procurement methods for securing services, supplies, or other property that do not cost
    more than the simplified acquisition threshold fixed at 41 U.S.C. 403(11) (currently set at
    $100,000). If small purchase procedures are used, price or rate quotations shall be
    obtained from an adequate number of qualified sources.”

26. 24 CFR [Code of Federal Regulations] 85.36(f)(1), states, “grantees and subgrantees
    must perform a cost or price analysis in connection with every procurement action
    including contract modifications. The method and degree of analysis is dependent on the
    facts surrounding the particular procurement situation, but as a starting point, grantees
    must make independent estimates before receiving bids or proposals. A cost analysis
    must be performed when the offeror is required to submit the elements of his estimated
    cost, e.g., under professional, consulting, and architectural engineering services contracts.
    A cost analysis will be necessary when adequate price competition is lacking, and for
    sole source procurements, including contract modifications or change orders, unless price
    reasonableness can be established on the basis of a catalog or market price of a
    commercial product sold in substantial quantities to the general public or based on prices
    set by law or regulation. A price analysis will be used in all other instances to determine
    the reasonableness of the proposed contract price.”




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