U. S. Department of Housing and Urban Development
Office of Inspector General
New York/New Jersey Office
26 Federal Plaza – Room 3430
New York, NY 10278-0068
MEMORANDUM NO. 2009-NY-0802
July 24, 2009
MEMORANDUM FOR: Joan Spilman, Director, Office of Public Housing, 2CPH
// signed //
FROM: for Edgar Moore, Regional Inspector General for Audit, 2AGA
SUBJECT: Significant Flaws Identified at the Lackawanna Municipal Housing Authority may
affect its Capacity to Administer American Recovery and Reinvestment Act Funds
INTRODUCTION
We are conducting an audit of the Lackawanna Municipal Housing Authority’s (Authority)
administration of its capital fund program. We selected this auditee because the Authority
pledged its future capital fund appropriations to perform a special project as part of the Capital
Fund Financing Program. Specifically, the Authority incurred a $4.25 million long-term liability
to perform lead abatement and modernization work at 90 project units. The objectives of our
review are to determine whether the Authority is (1) disbursing capital funds and (2) procuring
contracts in accordance with U.S. Department of Housing and Urban Development (HUD)
requirements. To date, this review has raised an issue of concern that we wish to bring to your
attention, related to the Authority’s capacity to fairly and reasonably administer its capital fund
program in light of its receiving an additional $1.5 million in capital funds under the American
Recovery and Reinvestment Act of 2009.
In accordance with HUD Handbook 2000.06, REV-3, within 60 days, please provide us, for each
recommendation in this memorandum, a status report on (1) the corrective action taken, (2) the
proposed corrective action and the date to be completed, or (3) why action is considered
unnecessary. Additional status reports are required 90 days and 120 days after this memorandum
is issued for any recommendation without a management decision. Also, please furnish us
copies of any correspondence or directives issued because of this review.
Should you or your staff have any questions, please contact Karen Campbell, Assistant Regional
Inspector General for Audit, at (212) 542-7977.
Visit the Office of Inspector General on the World Wide Web at http://www.hud.gov/oig/oigindex.html
METHODOLOGY AND SCOPE
To gain an understanding of the Authority’s administration of the capital fund program, we
reviewed applicable laws, regulations, and HUD program requirements. In addition, we
reviewed the Authority’s procurement policy, conducted interviews with Authority personnel to
gain an understanding of the internal controls, and tested the system of controls to determine
whether the controls are functioning as intended. We also, analyzed contract files and
disbursement records for the period July 2005 through June 2008.
We performed our on-site work from October 2008 through May 2009 at the Authority’s office
located in Lackawanna, New York. Although our tests of contract files and disbursement
records were through June 2008, our observations made through May 2009 found that the
Authority has not mitigated the risks. For this interim capacity report, our work was not
conducted in accordance with generally accepted government auditing standards. Under the
American Recovery and Reinvestment Act of 2009, inspectors general are expected to be
proactive and focus on prevention; thus, this interim report is significantly reduced in scope.
BACKGROUND
On February 17, 2009, the President signed the American Recovery and Reinvestment Act of
2009 (Recovery Act). This legislation includes a $4 billion appropriation of capital funds to carry
out capital and management activities for public housing agencies as authorized under section 9
of the United States Housing Act of 1937. The Recovery Act requires that $3 billion of these
funds be distributed as formula funds and the remaining $1 billion be distributed through a
competitive process.
The Office of Management and Budget provided guidance establishing requirements for various
aspects of Recovery Act planning and implementation. These requirements are intended to meet
crucial accountability objectives; specifically,
Funds are to be awarded and distributed in a prompt, fair, and reasonable manner;
The recipients and uses of all funds are to be transparent to the public, and the public
benefits of these funds are to be reported clearly, accurately, and in a timely manner;
Funds shall be used for authorized purposes, and instances of fraud, waste, error, and
abuse are to be mitigated;
Projects funded under this Act should avoid unnecessary delays and cost overruns; and
Program goals are to be achieved, including specific program outcomes and improved
results on broader economic indicators.
The Authority received a Public Housing Assessment System score of 73 for its fiscal year 2007.
Based on this score, the Authority was found to be in a “substandard physical” category. Thus, it
is subjected to HUD’s extended oversight.
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RESULTS OF REVIEW
The Authority’s current management did not follow its own procurement policy, HUD
regulations, and New York State General Municipal Law when awarding a lead-based paint
abatement and modernization contract. Specifically, the Authority accepted a proposal for lead
abatement/modernization work in July 2007 with a known omission pertaining to $400,000 in
plumbing work that was excluded from the proposal documents. We attribute this deficiency to
the Authority’s not establishing operational procedures to implement its procurement policy to
ensure compliance with all applicable regulations. As a result, capital funds were used for
questionable expenditures, and the Authority lacks assurance that the contract price was
reasonable and that services contracted for were provided as intended.
The contractor did not include the cost of installing toilets, sinks, tubs, faucets, cleaning drains,
and other plumbing related work in its proposal for work pertaining to the lead
abatement/modernization project. Although the omission was acknowledged by the contractor in
correspondence with the architect/engineer and officials for the project, the Authority did not
follow New York State General Municipal Law when awarding the contract. Section 103 of the
New York State General Municipal Law requires the rejection of proposals containing mistakes;
however, the Authority accepted the proposal and awarded the $3.4 million contract. Moreover,
the Authority opted to go against the advice of its own legal counsel and awarded the contract in
spite of the omission of the plumbing related work. In doing so, it inappropriately restricted
competition. As of May 2009, the Authority has paid more than $1.9 million for contracted
abatement work. In addition, it did not maintain documentation, including cost analyses, to
justify $285,380 in change orders to the contract. The Authority has increased the original
contract amount by approximately 13 percent and significantly modified the scope of services to
be provided. Accordingly, we consider the use of more than $2.2 million in capital funds to be
ineligible. The Authority should be prohibited from using program funds for the remaining
contract balance for unfinished work and projected future change orders.
In addition to the above, our on-going audit has identified other capital fund deficiencies
pertaining to competitive and noncompetitive proposal contracts and small purchases that will be
addressed in our final audit report planned for issuance subsequent to this report. These
deficiencies provide additional concerns with the Authority’s capacity to administer Recovery
Act funds.
CONCLUSION
The Authority has not established the operational procedures to implement its procurement
policy to ensure compliance with all applicable regulations. As a result, it lacks assurance that
capital fund expenditures were necessary or reasonable and that services contracted for were
provided as intended. This lack of oversight by the Authority to ensure that capital fund contracts
are awarded in a prompt, fair, and reasonable manner is a major concern in light of the Authority’s
receiving an additional $1.5 million in capital funds under the American Recovery and
Reinvestment Act of 2009. Specifically, the Authority has budgeted $600,000 in Recovery Act
funds to complete change orders to the lead-based paint abatement and modernization contract at
one of its projects.
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RECOMMENDATIONS
We recommend that the Director of HUD’s Buffalo Office of Public Housing
1A. Review the content of the change order and, if appropriate, prohibit the Authority from
using recovery funds for change orders associated with the lead abatement and
modernization contract.
1B. Certify that the Authority’s new procedures established meet the federal procurement
requirements as required by 24 CFR Part 85.
We also recommend that the Director of HUD’s Buffalo Office of Public Housing, instruct the
Authority to
1C. Establish and implement operational procedures to ensure compliance with all applicable
federal, state, and local procurement policies and regulations for all future procurement
activities when obtaining goods and services.
1D. Obtain HUD approval for all procurement activities including (1) performing cost
estimates and/or price analyses, (2) adequately soliciting and documenting all proposals
submitted in response to a request for proposals for professional services to substantiate
the selection, (3) properly executing contracts for professional services provided, and (4)
adhering to small purchase threshold limitations.
1E. Establish and implement a training program on procurement procedures for all Authority
staff and board members involved in the contracting process.
1F. Establish performance measurements as a method to evaluate that the requirements of the
procurement process are met.
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AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
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AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
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OIG Evaluation of Auditee Comments
Comment 1 Officials for the Authority state that the Authority’s counsel advised that they
could permit the contractor to withdraw its bid and then rebid the lead-based paint
and modernization project, but they could not modify the bid to correct the
plumbing mistake. Officials contend that since the successful bidder was willing
to stand by its original bid, without modification, the Authority had the right
under law to accept that bid. Regardless of the official’s interpretation of its
counsel advice, the opinion issued by its counsel and Section 103 of New York
State General Municipal Law requires the withdrawal and re-bid of proposals
containing mistakes. Accordingly as recommended, any change orders should be
reviewed by HUD, and if appropriate, the Authority should be prohibited from
using Recovery funds to pay them.
Comment 2 Officials for the Authority contend that the change order documentation, which
was reviewed, approved and maintained by its architectural/engineering firm, was
not requested by the auditors. In accordance with HUD regulations, the
Authority’s contract officer, and not the architectural/engineering firm, is
responsible for reviewing and approving change order documentation including
cost analyses. Further, in response to repeated requests, Authority officials failed
to provide documentation to support the cost reasonableness of the change orders.
The absence of these documents was discussed during our review, at the end of
our onsite fieldwork, and at the exit conference. As such, any additional
documentation obtained should be submitted to HUD officials for review during
the audit resolution process.
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Significant Flaws Identified at the Lackawanna Municipal Housing Authority May Affects Its Capacity to Administer American Recovery and Reinvestment Act Funds
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)