Issue Date December 24 , 2008 Audit Report Number 2009-FW-1003 TO: Justin R. Ormsby Director, Office of Public and Indian Housing, 6APH FROM: Gerald R. Kirkland Regional Inspector General for Audit, Fort Worth Region, 6AGA SUBJECT: Housing Authority of the City of El Paso, El Paso Texas, Did Not Follow Procurement and Other Requirements HIGHLIGHTS What We Audited and Why Based on a congressional request, we performed an audit of the Housing Authority City of El Paso’s (Authority) procurement process and board of commissioners (board) activities. Our objectives were to determine whether the Authority properly followed procurement requirements and whether the executive director was selected in accordance with applicable procedures. What We Found The Authority did not follow its procurement policies or the U. S. Department of Housing and Urban Development’s (HUD) procurement requirements. Specifically, it inappropriately paid more than $700,000 because it did not properly administer its procurements. Also, a former board member and a former employee created conflicts of interest. Further, the Authority did not establish written procedures for the selection of its executive director, and its board members did not always file ethics questionnaires in a timely manner. What We Recommend Our recommendations include requiring the Authority to Repay from nonfederal funds $661,5801 to its restricted operating reserve for locally owned properties account, $12,697 to HUD, and $31,640 to its capital fund account. Implement procedures to ensure that it complies with its procurement policies and HUD regulations and requirements. Ensure that its executive director and its contracting department employees attend HUD-approved procurement training. Seek filing of ethics questionnaires from all board members in a timely manner. We also recommend that the Director, Office of Public and Indian Housing, Fort Worth, take administrative or other actions regarding the conflicts of interest created by a former board vice-chair and a former employee. 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 a draft to the Authority on November 18, 2008, and held an exit conference on December 3, 2008. The Authority provided written comments on December 12, 2008. 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 Authority also provided documents as attachments to the response that are not included in appendix B but are available upon request. 1 $647,252 in excess of contract limits, plus $13,717 in ineligible expenses and $611 in late fees. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The Authority Inappropriately Paid More Than $700,000 Because It Did Not 5 Properly Administer Its Procurements Finding 2: A Former Board Vice-Chair and a Former Employee Created Conflicts of 10 Interest Finding 3: The Authority Did Not Have Written Procedures for Selecting its 12 Executive Directors Finding 4: Board Members Did Not Always Complete Ethics Questionnaires in 14 a Timely Manner Scope and Methodology 15 Internal Controls 16 Appendixes A. Schedule of Questioned Costs 17 B. Auditee Comments and OIG’s Evaluation 18 3 BACKGROUND AND OBJECTIVES The Housing Authority of the City of El Paso (Authority), Texas, was created in February 1938. The Authority’s mission is to provide safe, decent, sanitary housing for assisted families at or below 80 percent of median income. The Authority owns and operates approximately 6,028 units and provides rent subsidies for another 4,000 families through the U. S. Department of Housing and Development’s (HUD) Housing Choice Voucher rental assistance programs and 495 Section 8 new construction units. The Authority also provides a variety of other programs, including education, recreation, antidrug, job training, small business development, and community organization, that are designed to help the residents of public housing achieve self-sufficiency and economic independence. Based on information on the Authority’s Web site, it has a workforce of approximately 488 regular, temporary, and part-time employees in 18 sections/departments. The Authority is located at 5300 East Paisano, El Paso, Texas. An executive director2 administers the Authority’s programs and is responsible for its day-to-day operations. The executive director is overseen by a board of commissioners (board) comprised of five individuals appointed by the mayor of the City of El Paso (mayor). On March 14, 2008, the mayor appointed several members of the Authority’s board including the board chair, who has since resigned, and the board vice-chair. Based on a congressional request, we performed an audit of the Authority. Our objectives were to determine whether the Authority properly followed procurement requirements and whether the executive director was selected in accordance with applicable procedures. 2 Before the current executive director, the Authority used the title, “president,” rather than “executive director.” 4 RESULTS OF AUDIT Finding 1: The Authority Inappropriately Paid More Than $700,000 Because It Did Not Properly Administer Its Procurements The Authority did not follow its procurement policies or HUD’s procurement requirements. For example, it exceeded contractual amounts, made ineligible payments, evaluated proposals on criteria not known to all contractors, and used a contractor’s price list as a statement of work. This condition occurred because the Authority did not adequately monitor contracts, abide by its contracting authority, or follow contract award requirements. Further, it lacked the necessary expertise to properly administer its contracting activities. As a result, the Authority inappropriately paid $705,9173 from HUD funds. The Authority Inappropriately Paid More Than $700,000 In violation of its procurement policies and HUD requirements, the Authority inappropriately paid $859,072, of which $705,917 was from HUD funds. Of the 47 contracts reviewed, the Authority did not follow requirements for 19. Violations included payments without valid contracts, payments for employees of the Authority’s affiliate, duplicate payments, and other ineligible payments. Further, in violation of requirements, the Authority modified the scope of several contracts after the contracts expired.4 It also did not properly monitor one contractor’s work, which resulted in shoddy workmanship. This condition occurred because the Authority lacked the expertise or did not understand the importance of properly administering contracts. Inappropriate Payments for a Resident Employee Training Program One example of the Authority’s violation of contracting requirements involved a resident employee training program. Two months after the program began, the Authority determined that continuing the program under the contractor would result in higher costs than it expected; thus, it terminated the contract. However, the Authority did not want to terminate the employee training program, so in November 2006, it transferred the costs to an existing temporary services contract with a firm that provided temporary employees to the Authority. Although the Authority charged the costs of the resident employee training program to the temporary services contract, it did not properly increase the contract total or revise the contract scope. 3 $661,580 in operating subsidies/rent receipts funds, $12,697 in expired capital grant funds, and $31,640 in current capital grant funds. 4 HUD Handbook 7460.8, section 1.9. 5 Inappropriate Increase in a Contract Amount In October 2006, two weeks before a temporary services contract expired, the former president increased the contract by $297,231. At the time of the contract increase, the president only had authority to approve contract modifications up to $25,000 without board approval.5 The contract increase created a cardinal change6 to the contract because it increased the cost of the contract by 158 percent. Later the Authority executed another contract with the contractor discussed above. In total, from November 2005 to April 2008, the Authority paid $364,561 in excess of contract amounts from operating subsidies/rent receipts funds for the temporary services contracts.7 Payments Made after a Contract Expired The Authority also paid $11,189 from operating subsidies/rent receipts funds on a contract for pager services after the contract expired. The initial contract period was from March 1, 2004, through February 28, 2005. The Authority extended the contract annually through February 28, 2007. However, it continued to pay the contractor through March 2008, one year after the contract expired. Other Ineligible Payments The Authority paid $13,717 from operating subsidies/rent receipts funds under a temporary services contract for employees that were employed by its non-HUD property or its tax credit property. It also paid $2,296 in duplicate payments to a contractor that provided support services to families. Further, without HUD approval,8 the Authority paid $611 in late fees. The Authority Did Not Properly Evaluate Proposals for One Contract Contrary to requirements, for one contract award, the Authority did not properly document the files and evaluated proposals using criteria that were not known to all bidders. The Authority’s risk manager evaluated the proposed fee schedules before awarding a contract for indemnity claims. Although the proposal submitted by the firm that was awarded the contract included a higher fee for indemnity claims than the other proposals, the risk manager determined that the higher fee would be offset by a lower annual administration fee. However, the contract file did not contain evidence that a comparison of the bids occurred. 5 According to a board resolution, the executive director had the authority to authorize expenditures on goods and services and enter into contracts valued at up to $25,000 without approval by the board. 6 A cardinal contract change is defined as a change that is beyond the scope of the contract. 7 The previously discussed addition of the resident employees to the temporary services contract contributed to these excess costs. 8 HUD Handbook 7460.8, section 3.4. 6 In addition, although the statement of work did not include a local preference, a letter prepared by the Authority’s risk manager stated that the winning contractor “. . . is the only vendor that submitted a fee schedule that has a local presence which would enhance communication and make meeting much easier to organize and less costly.” Procurement requirements9 stated that the evaluation of proposals was to be based on the evaluation factors set forth in the request for proposal. Factors not specified in the request for proposal were not to be considered. Further, the records were required to document the complete history of the procurement.10 Also, the Authority’s contracting manual11 states, “If non- price factors are used, they shall be made known to all those solicited.” Since a local preference was not in the scope of work provided to prospective bidders, the Authority should not have used a local preference as a factor in awarding the contract. The Authority Used a Contractor’s Price List to Develop the Statement of Work On a small contract, the Authority’s public information officer requested procurement of a professional photographer to take pictures of Authority events on December 16, 2003. The contract was not to exceed $5,000. Before the contract was awarded, the public information officer requested that the winning contractor be considered “. . . as this vendor performed work for the Authority well in the past.” The Authority’s contracting department used a price list faxed from the selected contractor to establish the scope of work. The contract was a one-year firm-fixed-price contract not to exceed $4,995. However, the contract stated: “. . . unless extended/renewed or modified in writing by both parties.” The contract file contained a memorandum, dated April 7, 2005, stating that the contract would be extended for 12 months until April 11, 2006. The contract was reawarded to the contractor on November 15, 2006, for the period November 22, 2006, through November 22, 2007. The Authority renewed the contract again to November 21, 2008. 9 24 CFR (Code of Federal Regulations) 85.36(d)(3). 10 24 CFR 85.36(b)(9). 11 The Authority’s procurement manual, D.1.d. 7 The Authority Modified Contracts after They Expired The Authority also modified several contracts after the contract terms had expired or after the contract amounts had been exceeded. For example, two months after a cell phone contract expired, the Authority modified the contract to extend the expiration date and increase the contract amount. HUD regulations required that changes to contracts occur within the contract scope. Additionally, less than two weeks before the expiration of a temporary services contract, the Authority increased the contract amount by more than 158 percent to cover contract overages as previously discussed. The Authority Did Not Oversee a Sprinkler System Installation Contract The Authority did not properly oversee a contract for the installation of a sprinkler system. It paid a contractor $29,344 from its capital grant funds to install the sprinkler system and connect it to the water supply. However, as demonstrated by the following photograph, the contractor’s work was shoddy. The picture shows that the water lines for the sprinkler system protruded above the ground. 8 If the Authority had properly monitored the contractor’s work, it would have known that the workmanship was unacceptable. The Authority concluded that it would not be cost beneficial to try to correct the work. Thus, the Authority unnecessarily spent $29,344. Further, since the system was unusable, the Authority’s maintenance staff watered the area with a water hose. Conclusion Because the Authority lacked the necessary expertise to properly administer its contracting activities, it inappropriately paid $705,917 from HUD funds. This amount included $661,580 in operating subsidies/rent receipts funds and $44,337 in capital grant funds that should be repaid. Further, payments from capital grant funds included $42,04112 paid from grants that are now closed. Thus, the $42,041 must be repaid to HUD. Recommendations We recommend that the Director, Office of Public and Indian Housing, Fort Worth, require the Authority to 1A. Repay $661,580 from nonfederal funds to its restricted operating reserve for locally owned properties account. 1B. Repay $12,697 from nonfederal funds to HUD for ineligible payments from capital grants that are closed. 1C. Repay $2,296 from nonfederal funds to its 2006 capital fund grant account. 1D. Repay $29,344 from nonfederal funds to HUD for unnecessary costs paid from capital grants that are closed. 1E. Implement procedures to ensure that it complies with its procurement policies and HUD regulations and requirements. 1F. Provide HUD-approved procurement training to Authority’s executive director and its contracting department employees. 12 $12,697 + $29,344 = $42,041. 9 Finding 2: A Former Board Vice-Chair and a Former Employee Created Conflicts of Interest A former board vice-chair obtained an employment position with New Beginnings of Texas, Inc. (New Beginnings), before the owner of New Beginnings received a contract award from the Authority. Also, a former director of the Authority’s technical services division accepted an employment position with an Authority contractor after terminating his employment with the Authority. Neither the former board vice-chair nor the former director of technical services believed they had done anything wrong by accepting the positions. As a result of accepting the position with New Beginnings, the vice-chair created a conflict of interest that violated HUD rules. Also, HUD regulations require a one-year moratorium between the employment of an Authority employee actively involved in procurement and the employment of that employee with a contractor. A Former Board Vice-Chair Had a Conflict of Interest A former board vice-chair obtained a paid employment position with New Beginnings, a company owned by the president of Aliviane, Inc. (Aliviane). At the time the former board vice-chair obtained the position, the owner of New Beginnings and president of the nonprofit Aliviane was in the process of obtaining a contract to provide services to Authority residents. The former board vice-chair did not notify the Authority board of his position with New Beginnings. Section 19 of the annual contributions contract and HUD Handbook 7460.8 preclude the Authority, its officers, and employees from entering into a contract with a real or apparent conflict of interest. Further, the former board vice-chair pushed for the Authority to award the contract noncompetitively to Aliviane because no other vendors in the El Paso area provided the parenting services using the Dando de la Familia program that Aliviane provided. The Authority’s president and its director of public housing expressed concern about the services Aliviane wanted to provide because the concept was new and experimental. However, in October 2006, the former board vice-chair made a motion and voted to award Aliviane a $300,000 contract over the objections of Authority staff. In December 2006, he sent a statement of work for Alivaine’s contract to the Authority’s legal counsel for review. The Authority awarded the contract to Aliviane on May 7, 2007. Between May 2007 and February 2008, the Authority paid Aliviane $240,000 for services under this contract. New Beginnings hired the former board vice-chair on April 16, 2007, about three weeks before the Authority awarded Aliviane the contract. The employment continued until August 8, 2007. New Beginnings paid the former board 10 vice-chair $10,407 during the employment period. He repeatedly denied to HUD and the Authority that he worked for Aliviane. Finally, during a December 2007 Authority board meeting, he admitted to his employment with New Beginnings. On February 19, 2008, Aliviane terminated its contract with the Authority due to the “unforeseen, unexpected, and unusual circumstances” of a drop in parenting session attendance by Authority residents. A Former Authority Employee Worked for an Authority Contractor A former director of technical services resigned from the Authority and immediately began working as an architect for the architecture and engineering contractor for the Authority’s HOPE VI project. The former Authority employee developed the scope of work and sat on the committee that reviewed and scored the contractors’ proposals for architectural and engineering services on the HOPE VI project. The acceptance of the position with the architectural and engineering contractor violated both the federal conflict-of-interest requirements and the HOPE VI grant agreement. After the Office of Inspector General (OIG) brought this matter to the executive director’s attention on May 21, 2008, he requested that the contractor remove the former employee from all Authority work. Recommendation We recommend that the Director, Office of Public and Indian Housing, Fort Worth, 2A. Take administrative or other appropriate actions regarding the former board vice-chair and former Authority employee involved in the potential conflicts of interest. 11 Finding 3: The Authority Did Not Have Written Procedures for Selecting an Executive Director Although the Authority has had eight executive directors/presidents since 2000, it did not have written procedures governing its selection process. The Authority did not believe it was necessary to have written procedures because its outside legal counsel had used the same procedures for recommending past candidates to the board. Given the recent history of turnover of key personnel and questionable activities by some board members, the Authority, as a matter of good business practice and to improve transparency in the selection process, should establish written procedures for selecting key personnel. Without written procedures, the Authority cannot ensure that it will consistently apply established procedures. The Authority Did Not Have Written Procedures Governing its Selection Process According to the Authority’s outside legal counsel, the Authority has had eight executive directors/presidents since 2000. Despite the frequent turnover of executive directors/presidents, the Authority did not have written procedures governing its selection process. Rather, at the board’s instruction, its outside legal counsel designed and oversaw the search process. In seeking qualified candidates for the most recent hiring, the Authority used the same process that it had used in the past. Its outside legal counsel received the applications and determined which candidates were qualified. The board members then selected the finalists and interviewed them. Although the selection of the executive director was placed on the board agenda several times in November 2007, without discussion or a vote, the board voted to hire the present executive director after the board chair left the November 28, 2007, general board meeting. The board chair, knowing that she would not be able to attend the entire board meeting, asked that all important matters be moved to the beginning of the meeting so that they could be attended to before her departure. However, after the board chair left the meeting, the board vice-chair13 introduced a motion to hire the present executive director. The board did not go into executive session to discuss the matter before voting. Although HUD allowed local governing bodies to determine their criteria for selecting an executive director, the Authority should have formalized its process by developing written procedures as a matter of good management practices, 13 The same board vice-chair discussed in finding 2. 12 especially given the recent history of turnover of key personnel and questionable activities by some board members. Recommendation We recommend that the Director, Office of Public and Indian Housing, Fort Worth, 3A. Require the Authority to develop and implement written procedures for the selection of key personnel. 13 Finding 4: Board Members Did Not Always Complete Ethics Questionnaires in a Timely Manner Three former board members and one current board member did not complete their ethics questionnaires in a timely manner. Board members did not understand the importance of the timely completion of the ethics questionnaire, and Authority staff was reluctant to pursue the issue with the board members. The Authority’s code of ethics required that board members complete the ethics questionnaire within 30 days of their appointment. As a result of the board members’ not completing the ethics questionnaire, the Authority could not determine whether conflicts of interest existed. Staff Was Reluctant to Push Compliance The Authority’s code of ethics for the board stated that within 30 days of appointment to the board or taking office, a signed ethics questionnaire was to be filed with the executive director. According to Authority staff, although the executive director’s office informed board members of their responsibility to complete the form, they sometimes did not complete the form in a timely manner. Staff members also said that due to their position as staff, they found it difficult to push the board to comply. As a result, potential financial or other conflicts of interest may have not been readily disclosed. Recommendation We recommend that the Director, Office of Public and Indian Housing, Fort Worth, 4A. Require the executive director to obtain the ethics questionnaires from the board members. 14 SCOPE AND METHODOLOGY Our objectives were to determine whether the Authority properly followed procurement requirements and whether the executive director was selected in accordance with applicable procedures. To accomplish our objectives, we Reviewed applicable HUD regulations and the Authority’s procurement manual. Reviewed the Authority board minutes and transcripts. Reviewed 47 contracts. Conducted an impromptu inventory count. Attended a bid opening. Conducted an impromptu cash count. Interviewed the Authority’s current and former employees, former board members, and a contractor. We conducted our audit from March through September 2008 at the Authority’s office located at 5300 East Paisano, El Paso, Texas, and our office in Fort Worth, Texas. Our audit period was January 2006 to March 2008. We expanded our scope as necessary to accomplish our objectives. We performed our review in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 15 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following controls are achieved: Program operations, Relevance and reliability of information, Compliance with applicable laws and regulations, and Safeguarding of assets and resources. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. They include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: 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 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. Significant Weaknesses Based on our review, we believe that the following items are significant weaknesses: Controls over compliance with applicable procurement laws and regulations were ineffective. Policies and procedures regarding safeguarding of resources were ineffective. 16 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Ineligible 1/ Unreasonable/ number unnecessary2/ 1A $661,580 1B 12,697 1C 2,296 1D _______ $29,344 Totals $676,573 $29,344 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/ Unreasonable/unnecessary costs are those costs not generally recognized as ordinary, prudent, relevant, and/or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 17 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 18 Comment 1 19 20 21 Comment 2 Comment 3 22 23 Comment 4 24 Comment 5 Comment 6 Comment 7 25 Comment 4 Comment 8 26 Comment 9 27 Comment 10 28 29 Comment 10 30 OIG Evaluation of Auditee Comments Comment 1 We acknowledge the actions of the present board, including implementing the “Blue Ribbon Committee’s” recommendations to correct past deficiencies with the Authority. Comment 2 As agreed to at the exit conference, we revised the finding heading to include procurement administration and changed the term “overpayment” to the phrase “paid in excess of contract terms.” Comment 3 We disagree with the Authority that it simply used the wrong “contract vehicle.” The contract that the Authority entered into for temporary services contained a not to exceed amount of $115,000.14 The primary purpose of the contract was to provide temporary services in the area of administrative, office support, handlers, and inspectors. The Authority president modified the contract amount by $297,231, or 158 percent, when the Authority expanded the scope to include the resident employee trainees. Thus, the Authority exceeded the scope and created a cardinal change.15 Further, the Authority’s argument leads to irresponsible conclusions that could allow the executive director to enter into a contract of less than $25,000 without board consent and then modify the cost and contract scope to any extent without board approval. HUD regulations require that any contract change order/modification be within the contract scope and a cost or price analysis be performed.16 As the Authority did not anticipate the inclusion of the resident employee trainees in the original contract, its argument regarding the “contract vehicle” appears invalid. We maintain that the Authority paid $297,231 in excess of the contract terms.17 The Authority should have procured these services rather than adding the cost to another contract. We added clarifying language to the body of the finding. Comment 4 We appreciate the changes made to prevent future occurrences of this error. However, for one year after the pager contract ended, the Authority continued to make payments. The Authority should repay to its programs amounts spent in excess of contractual amounts. Comment 5 The Authority agreed with the recommendation. 14 The Authority modified this contract on October 20, 2005, to add $65,000, increasing the original contract price of $50,000 to $115,000. 15 A cardinal contract change is defined as a change that is beyond the scope of the contract. 16 24 CFR 84.36(f). 17 Before July 26, 2007, with board resolution 1451, the Authority president did not have the authority to approve contracts above $25,000. 31 Comment 6 We acknowledge the Authority’s efforts to improve its contracting department and procedures. Comment 7 We considered the Authority’s comments but did not change our conclusions. In addition to the conditions cited in the report, an internal electronic message listed the photographer as the contractor in the solicitation before being sent to others. We maintain our conclusion that the Authority’s action gave the appearance that the photographer was preselected. Comment 8 We appreciate the Authority’s willingness to consider “low-water use landscaping” in its projects and its acknowledgment of lack of workmanship. Comment 9 We included a statement in the body of the finding that the former board member admitted to his involvement at a December 2007 board meeting. Comment 10 We disagree with many of the inferences in the Authority’s response. The process used to hire the present executive director was also the process used to hire previous people to that position. These former presidents were not at the Authority for a significant period and were part of the history of turmoil at the Authority that necessitated the Blue Ribbon Committee referred to in the Authority’s response. We did not conclude whether the current executive director was the best candidate or how well he performed. The current executive director was not in charge during the majority of our audit scope. Our finding noted the process as determined by the various documentation reviewed. We concluded that the Authority did not have and was not required to have a written process for selecting its key personnel. We recommended that the Authority establish a written procedure before selecting key personnel. The Blue Ribbon Committee report stated in part: The committee drafted a template of suggested Standard Operating Procedures for use by the Board of Commissioners and made recommendations regarding overall governance and operational procedures for use by the Board. Our finding and recommendation are consistent with this report. The Authority should have standard procedures for selecting key personnel. We revised the finding to stress the importance of written policies and procedures as a matter of good business practice to help ensure consistency and improve the transparency of the selection. 32
Housing Authority of the City of El Paso, El Paso, Texas, Did Not Follow Procurement and Other Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-12-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)