oversight

The Housing Authority of the City of Eloy Lacked Capacity to Administer Its Recovery Act Capital Fund Grant Without Outside Assistance

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-25.

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

                                                                  Issue Date
                                                                        September 25, 2009
                                                                  Audit Report Number
                                                                           2009-LA-1021




TO:         K.J. Brockington, Director, Los Angeles 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 Eloy Lacked Capacity to Administer Its
         Recovery Act Capital Fund Grant Without Outside Assistance


                                    HIGHLIGHTS

 What We Audited and Why

      We performed a capital fund administrative capacity review of the Housing Authority of
      the City of Eloy (Authority) because, despite the Authority’s persistent management
      problems, the U.S. Department of Housing and Urban Development (HUD) awarded it a
      Public Housing Capital Fund grant of $113,672 under the American Recovery and
      Reinvestment Act of 2009 (Recovery Act). Our objective was to determine whether the
      Authority had sufficient capacity to administer its Recovery Act Public Housing Capital
      Fund grant in accordance with applicable rules and regulations.

 What We Found
      The Authority did not, by itself, have the capacity to administer its Recovery Act Public
      Housing Capital Fund grant in accordance with applicable rules and regulations. HUD’s
      Office of Public Housing had rated the Authority as troubled for years, and despite
      intensive technical assistance from HUD, the Authority had been unable to establish
      sound operational and financial management.

      To address the Authority’s inability to recover from its troubled status, HUD sought to
      establish an agreement for management assistance between the Authority and the
      Housing and Community Development Department for the City of Tucson (Tucson
      housing department). The Tucson housing department tentatively agreed, but in mid
     September, 2009, HUD notified OIG that the Tucson housing department planned to
     decline participation due to staff changes. In addition to its effort to augment the
     Authority’s overall management capacity, HUD was facilitating a partnership between
     the Authority and a nonprofit organization to provide needed capacity to administer
     Recovery Act projects. Without the proposed additional capacity that would be provided
     by the management agreement and the nonprofit partnership, the Recovery Act capital
     fund grant for the Authority would be at risk for waste, fraud, and abuse.


What We Recommend

     We recommend that HUD approve a management assistance agreement for the Authority
     as quickly as possible, require a partnership agreement or contract that would provide
     additional capacity to manage the Recovery Act grant, and closely monitor all Recovery
     Act expenditures and deadlines.

     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 discussion draft report on September 03, 2009, and an exit
     conference with the appropriate officials was waived on September 24, 2009. A response
     to the report was not provided by the City of Eloy.

     We provided the auditee the final report on September 25, 2009.




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                            TABLE OF CONTENTS

Background and Objective                                                    4

Results of Audit
      Finding: The Authority Lacked Management Capacity to Administer Its   5
               Recovery Act Capital Fund Grant Without Outside Assistance

Scope and Methodology                                                       8

Internal Controls                                                           9

Follow-up on Prior Audits                                                   10

Appendices

    A. Schedule of Funds to Be Put to Better Use                            11
    B. Criteria                                                             12




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                      BACKGROUND AND OBJECTIVE

The Housing Authority of the City of Eloy (Authority) is a small public housing authority with
50 public housing units, 159 Section 8 vouchers, and an operating staff of four. For fiscal year
2008, the Authority was funded as shown in the following table.

                      Public housing operating subsidy         $163,210
                      Housing Choice Voucher program           $742,322
                      Public Housing Capital Fund program      $ 89,803
                      Total                                    $995,335

The Public Housing Capital Fund program began in fiscal year 2000 and distributes funds
annually based on a formula to all public housing authorities regardless of size. The purpose of
the program is for the development, financing, and modernization of public housing
developments and for management improvements. The funds may not be used for luxury
improvements, direct social services, costs funded by other U.S. Department of Housing and
Urban Development (HUD) programs, and ineligible activities as determined by HUD on a case-
by-case basis.

For fiscal year 2009, the Authority was one of 15 Arizona public housing authorities that
received additional capital grant funds under the American Recovery and Reinvestment Act of
2009 (Recovery Act). On March 18, 2009, HUD informed the Authority that it had approved the
Recovery Act capital fund grant in the amount of $113,672.

The Authority has a long history of mismanagement, and HUD’s Office of Public Housing has
rated one or more of the Authority’s programs as troubled since 2002. Among other monitoring
efforts, since June 2007 HUD has required the Authority to obtain HUD approval before all
expenditures—excluding items involving emergency repairs that may affect the health and safety
of the residents.

As a result of the long-standing troubled rating, problems with financial management, and the
termination of the former executive director, HUD’s Office of Inspector General (OIG) opened
an audit of the Authority in 2007. The audit report (number 2008-LA-1009, issued May 5, 2008)
found that the Authority did not have adequate internal controls to safeguard assets and ensure
compliance with HUD’s requirements and made five recommendations. As of August 2009,
recommendation 1C of the audit report remained open. The original recommendation required
HUD to conduct on-site monitoring until it determined that (1) the Authority was operating with
adequate management and financial controls, (2) the board of commissioners was fully
performing its fiduciary responsibilities, and (3) the Authority’s financial condition was sound.

Our objective was to determine whether the Authority had sufficient capacity to administer the
Public Housing Capital Fund grant it will receive under the Recovery Act.




                                                4
                                 RESULTS OF AUDIT

Finding 1: The Authority Lacked Management Capacity to Administer
           Its Recovery Act Capital Fund Grant Without Outside
           Assistance
The Authority had not resolved long-standing management problems despite intensive
monitoring and technical assistance by HUD’s Office of Public Housing. At the time of our
review, the position of executive director was vacant, and the newly appointed board of
commissioners was not functioning effectively. In July 2009, HUD officials sought to establish
a management agreement with the Housing and Community Development Department for the
City of Tucson (Tucson housing department). Under such an agreement, the Tucson housing
department would provide management oversight to ensure effective internal controls and
operations at the Authority; however, in mid September, 2009, HUD notified OIG that the
Tucson housing department was unable to participate due to staff changes. Without the
additional management capacity, the Recovery Act capital fund grant of $113,672 awarded to the
Authority would be at risk for waste, fraud, and abuse.


 The Authority Was Unable to
 Resolve Management Problems


       HUD’s Office of Public Housing rated the Authority troubled for the fiscal years 2002
       through 2007 because of low scores under the financial and management sections of
       HUD’s Public Housing Assessment System. In addition, HUD rated the Authority
       ―capital fund troubled‖ because it routinely used its capital grant funds to cover ineligible
       expenses.

       OIG issued an audit report in May 2008 that recommended major management
       improvements. Later that year, a new board of commissioners (board) took over, and all
       Authority staff was replaced. Despite good intentions, technical assistance from HUD,
       and some improvement in operations, the new board continued to experience problems.
       Specifically, the new board was unable to recruit and retain a qualified executive director
       and, with the director position vacant, it could not manage day-to-day operations
       regarding maintenance and upkeep of its public housing units, let alone manage the
       capital fund program. For example, the board delayed its approval of purchase orders
       needed for rehabilitation of five public housing units that had been vacant since May
       2009. Further, the Authority’s staff did not have the knowledge or experience needed to
       create a scope of work for a large capital fund project. Finally, revisions to the
       Authority’s procurement policy to conform with Recovery Act requirements had not yet
       been approved by the board. All of these issues raised questions regarding the
       Authority’s ability to manage additional capital fund projects with its Recovery Act
       grant.

                                                 5
    During our review, HUD determined that it was unable to close OIG’s 2008
    recommendation to conduct on-site monitoring until the management problems were
    fully resolved by the target date. On the July 31, 2009, target date, HUD and OIG agreed
    to revise recommendation 1C and moved the deadline to October 9, 2009. The revised
    management decision stated that, due to recent management and board changes, HUD
    and the Authority had agreed that the Authority would be better served if it was managed
    by another housing agency. The Authority would provide documentation in the form of a
    written statement that its programs would be administered by another housing agency
    with an acceptable performance record as determined by HUD. This change would
    ensure that adequate management and financial controls would be established for the
    Authority’s programs and the board would exercise appropriate oversight of financial and
    program decisions.

The Authority Was in Transition

    To address the revised OIG audit recommendation, HUD proposed that the Authority
    establish a management agreement with the Tucson housing department, which operates
    public housing and Housing Choice Voucher programs for the City of Tucson. The
    Tucson housing department tentatively agreed; however, as of September, 2009, HUD
    notified OIG that the Tucson housing department was unable to participate due to staff
    changes. Meanwhile, the Authority’s board members resigned or were terminated in
    July, and the City of Eloy council members were temporarily appointed to serve on the
    Authority’s board. The Eloy city manager was temporarily appointed as interim
    executive director. The Mayor of the City of Eloy has agreed to let another public
    housing agency manage the Authority.

    The Recovery Act gave the Secretary of HUD discretion regarding the allocation of the
    capital fund grant funds to troubled housing authorities. Accordingly, HUD issued
    guidance stipulating that public housing authorities that are troubled under the Public
    Housing Assessment System and receive Recovery Act capital fund grants are subject to
    additional monitoring and oversight by HUD and its agents/contractors as deemed
    appropriate and necessary to ensure the proper use of Recovery Act grant funds (see
    criteria in appendix C).

A Proposed Partnership Would
Provide Additional Oversight
for Recovery Act Projects

    Without additional management expertise, the Authority did not have the capacity to
    manage or administer the Recovery Act funds in accordance with applicable HUD rules
    and regulations. In recognition of the Authority’s challenges to effective use of its
    Recovery Act grant, HUD officials sought to facilitate a partnership between the
    Authority and a nonprofit organization to manage Recovery Act projects. As of July
    2009, the Authority was working to establish a partnership with the nonprofit agency

                                           6
        Community Action Human Resources Agency (Community Action) to use the
        Authority’s Recovery Act capital fund grant for the upgrade and weatherization of 26
        public housing units. Community Action received U.S. Department of Energy Recovery
        Act funds1 that could also be used to weatherize the public housing units. HUD and the
        U.S. Department of Energy entered into a memorandum of understanding that would
        streamline the eligibility process for the recipients of the weatherization grants.

        The partnership would benefit the Authority because Community Action could assist
        with the project management and also help to ensure that HUD and Recovery Act
        requirements would be met. Moreover, Community Action successfully partnered with
        another Arizona housing authority for a similar project that was recently completed.
        Although each agency would be responsible for its portion of the upgrade and/or
        weatherization work, Community Action had taken the lead for completing the
        administrative tasks, including writing the scope of work and administering all bidding
        and contracting functions. In addition, Community Action planned to provide the
        oversight of all rehabilitation work.

    Conclusion

        Unless the Authority enters into a documented agreement with another housing authority
        that can provide administrative capacity, the Authority’s Recovery Act capital fund grant
        will be at risk for waste, fraud, and abuse. In addition, the Authority could have
        difficulty meeting the requirements and goals of the Recovery Act without the proposed
        partnership with a nonprofit that would provide administrative expertise for the proposed
        project. HUD will need to closely monitor the Authority to ensure that the proposed
        additional capacity is effectively implemented.

    Recommendations


        We recommend that the Director, Los Angeles Office of Public Housing,

             1A. Review and, if appropriate, approve a management agreement with another
                 housing authority or management entity as quickly as possible and if such an
                 arrangement cannot be achieved, identify an alternative source of outside
                 management assistance for the Authority.

             1B. Require the Authority to partner or solicit for contractual services with another
                 entity that will provide administrative expertise for the Recovery Act projects.

             1C. Closely monitor the Authority and/or its responsible entity to ensure compliance
                 with Recovery Act deadline and expenditure requirements.


1
 The U.S. Department of Energy provided the funds to the State of Arizona, which, in turn, approved the allocation
of Recovery Act funds to Community Action through the State’s Department of Commerce.

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                        SCOPE AND METHODOLOGY

The period covered by the audit was March 1 through August 30, 2009. Our review was
performed at the Authority’s office at 100 West Phoenix Avenue in Eloy, Arizona, and at the
HUD Phoenix Field Office. We performed our audit work from May 28 through
August 12, 2009.

To perform our audit, we

       Reviewed applicable laws and regulations, other guidance issued by HUD, and Office of
       Management and Budget circulars;

       Reviewed the Authority’s procurement policies and procedures;

       Reviewed HUD monitoring reports;

       Inspected five vacant public housing units;

       Interviewed staff from HUD’s Office of Public Housing – Phoenix, Authority staff
       members, the Authority’s board chair and one other board member, and a representative
       of Community Action; and

       Reviewed a prior HUD OIG audit report.

We limited our review to an understanding of the Authority’s administrative capacity for
procurement and capital project planning/oversight and examined a few procurement
transactions to determine whether policies and controls were followed.

We conducted the audit 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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               8
                              INTERNAL CONTROLS

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

              Administering the program’s operations in compliance with applicable laws and
              regulations.

       We assessed the relevant controls identified above.

       A significant weakness exists if internal 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 item is a significant weakness:

              The Authority did not have adequate internal controls to reasonably ensure
              compliance with the Public Housing Capital Fund grant program requirements.




                                                 9
                    FOLLOW-UP ON PRIOR AUDITS


Housing Authority of the City of Eloy
HUD OIG Report 2008-LA-1009

     HUD OIG issued an audit report on the Authority (2008-LA-1009) in May 2008. The
     audit found that the Authority did not have adequate internal controls to safeguard assets
     and ensure compliance with HUD’s public housing and Section 8 program requirements.
     As of August 2009, recommendation 1C, addressed to the Director of HUD’s Los
     Angeles Office of Public Housing, remained open.

        1C Conduct on-site monitoring of the Authority’s operations until HUD determines
           that
               The Authority is operating with adequate management and financial controls,

                The members of the board of commissioners are fully performing their
                fiduciary responsibilities, and

                The Authority’s financial condition is sound.

     In its management decision, HUD established a target date of July 31, 2009, for
     completion of the corrective action for recommendation 1C. During the past few months,
     it became apparent to HUD that the Authority would not achieve the goals under
     recommendation 1C by the deadline. On July 31, 2009, HUD and OIG agreed to revise
     the recommendation and moved the action target date from July 31 to October 9, 2009.
     The revised recommendation stated that due to recent management and board changes,
     both HUD and the Authority had agreed that the Authority would be better served if it
     was managed by another housing agency. The Authority will provide documentation in
     the form of a written statement that its programs will be administered by another public
     housing agency with an acceptable performance record as determined by HUD. This
     change will ensure that adequate management and financial controls will be established
     for the Authority’s programs and the board of commissioners will exercise appropriate
     oversight of financial and program decisions.




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                                    APPENDICES

Appendix A

                         SCHEDULE OF
                 FUNDS TO BE PUT TO BETTER USE

        Recommendation                            Funds to be put
            number                                to better use 1/
               1A                                       $113,672


1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified.




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Appendix B
                                         CRITERIA
1. Office of Management and Budget M-09-15: Updated Implementing Guidance for the
American Recovery and Reinvestment Act of 2009

Section 6.4 states that the terms and conditions, beyond standard practice, that must be included
in contract agreements under the Recovery Act include buy American requirements for
construction material, reporting requirements, U.S. Government Accountability Office/Office of
Inspector General access, and whistleblower protection.

Section 6.5 states that agencies already have in place processes and procedures to continuously
monitor and improve the effectiveness of internal controls associated with their programs. In
light of the Administration’s commitment to high levels of accountability and transparency,
special attention should be given to maintaining strong internal controls over the Recovery Act
program funds.

2. American Recovery and Reinvestment Act [ARRA] - Appendix A: ARRA Funding and
Requirements

―The purpose of the [Recovery] Act with regard to the Public Housing Capital Fund is to carry
out capital and management activities for Public Housing agencies.

Public Housing agencies shall obligate 100 percent within one year, expend at least 60 percent
within two years, and expend 100 percent within three years.‖

3. American Recovery and Reinvestment Act: Department of Housing and Urban Development:
Draft Program Recovery Plan Public Housing Capital Fund (Formula)

―PHAs [public housing agency] will give priority consideration to the rehabilitation of vacant
rental units and prioritize projects that are already underway or included in the five year Capital
Fund plans. Specific activities are those eligible under the Capital Fund, which include physical
improvements such as new building systems (heat, water and electrical), structural systems
(roofs and exteriors) and other renovation and rehabilitation work that corrects building
deficiencies and improves living conditions for public housing residents.

―PHAs are expected to also undertake activities resulting in improved energy efficiency, reduced
energy costs, and a lower carbon footprint. Activities include the use of Energy Star labeled
appliances, weatherization, and the use of fuel efficient heating and air conditioning systems.‖

4. HUD Public and Indian Housing Notice 2009-12 (HA), March 18, 2009

VI. Important Recovery Act Requirements




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Use of Funds

―PHAs must use these funds on Capital Fund eligible activities currently identified in either their
Annual Statement or Five-Year Action Plan. These funds are available to address deferred
maintenance needs, including … replacement of obsolete and equipment with energy efficient
systems and equipment that reduces consumption.‖

Troubled PHAs

―PHAs that are PHAS troubled under the Public Housing Assessment System (PHAS) will be
subject to additional monitoring and oversight by HUD as deemed necessary to ensure proper
use of the Capital Funds received under the Recovery Act….‖




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