oversight

The Lackawanna Municipal Housing Authority, Lackawanna, New York, Needs to Improve Controls and Operational Procedures Regarding Its Capital Fund Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-31.

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

                                                                    Issue Date
                                                                        July 31, 2009
                                                                    Audit Report Number
                                                                          2009-NY-1014




TO:         Joan K. Spilman, Director, Public Housing Division, 2CPH



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


SUBJECT: The Lackawanna Municipal Housing Authority, Lackawanna, New York, Needs to
         Improve Controls and Operational Procedures regarding Its Capital Fund Program

                                    HIGHLIGHTS

 What We Audited and Why

             We audited the Lackawanna Municipal Housing Authority’s (Authority)
             administration of its capital fund program. We selected this auditee based on the
             fact that the Authority pledged its future capital fund appropriations, as part of the
             Capital Fund Financing Program, and incurred a $4.25 million long-term liability
             to perform lead abatement and modernization work in 90 project units. The
             objectives of this audit were to determine whether the Authority disbursed capital
             funds and procured contracts in accordance with U.S. Department of Housing and
             Urban Development (HUD) requirements.

 What We Found


             The Authority disbursed capital funds for questionable expenditures.
             Specifically, the Authority had no basis for charging management improvement
             expenditures to its capital fund program, charged the same expenses for multiple
             capital fund drawdowns, and could not support the eligibility of charges for
             inspection costs, force account labor, and audit costs. As a result, it lacked
             assurance that $195,046 in expenditures was necessary or reasonable.
           The Authority did not follow HUD requirements, its own procurement policy, and
           New York State General Municipal Law when awarding contracts. Specifically, the
           Authority (1) accepted a sealed bid with a known mistake, (2) failed to properly
           procure competitive proposal contracts, (3) failed to properly execute a
           noncompetitive contract, and (4) failed to follow small purchase and sealed bid
           procedures when obtaining general contracting services. As a result, more than $3
           million in capital funds was used for questionable procurement expenditures, and the
           Authority lacked assurance that the services contracted for were provided as
           intended.


What We Recommend


           We recommend that the Director of HUD’s Buffalo Office of Public Housing
           instruct the Authority to (1) reimburse the capital fund program from nonfederal
           funds the $7,535 in excess drawdowns and the more than $2.6 million in costs
           associated with the lead abatement/modernization contract; (2) provide supporting
           documentation to justify the eligibility of $676,301 in questionable capital fund
           expenditures or reimburse the program from nonfederal funds any amounts not
           supported; (3) seek legal advice on whether the lead abatement/modernization
           contract should be rescinded in the best interest of the Authority; and (4) review
           and if appropriate disapprove any future change orders associated with the lead
           abatement/ modernization contract.

           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 discussed the results of our review during the audit, provided a copy of the
           draft report to Authority officials, and requested their comments on June 19,
           2009. Authority officials generally agreed with the findings and provided their
           written comments during the exit conference held on June 29, 2009. The
           complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding 1: The Authority Charged Questionable Expenditures to Its Capital   5
                 Fund Program

      Finding 2: The Authority Improperly Procured Contracts and Professional     9
                 Services

Scope and Methodology                                                             14

Internal Controls                                                                 15

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use              17
   B. Auditee Comments and OIG’s Evaluation                                       18




                                            3
                      BACKGROUND AND OBJECTIVES

The Lackawanna Municipal Housing Authority (Authority) is a public corporation providing 491
low-rent housing units at three housing projects located in Lackawanna, New York. The
Authority received capital fund program formula grant subsidies from the U.S. Department of
Housing and Urban Development (HUD) in 2007 and 2008 of $1.1 million and $1.2 million,
respectively. It also received an operating subsidy of more than $1.8 million in 2007 and
approximately $1.4 million in 2008. The Authority has been allocated an additional $1.5 million
in capital funds under the American Recovery and Reinvestment Act of 2009.

In September 2006, the Authority incurred a $4.25 million long-term liability as part of the
Capital Fund Financing Program to perform lead abatement and modernization work in 90 units
in one of its projects. HUD regulations allow housing authorities to participate in this financing
element of the capital fund program. Under the program, HUD recognizes that some authorities
may not have enough funds in a single year to make all of the improvements necessary to
adequately maintain their public housing. It allows an authority to borrow private capital to
make improvements and pledge, subject to the availability of appropriations, a portion of its
future-year annual capital funds to make debt service payments for either a bond or conventional
bank loan transaction. The Authority’s semiannual interest payments have already begun, and
annual principal payments are to commence in September 2009. Both payments offset capital
fund program grants.

Based on its last Public Housing Assessment System score, the Authority was found to be
substandard physical; thus, it is subjected to HUD’s extended oversight. The Real Estate
Assessment Center performed two physical assessments for fiscal year 2007. For the inspection
performed in February 2008, the Authority received a Physical Assessment Subsystem score of
17 and failed the reinspection in July 2008 with a score of 15. As a result, HUD’s Recovery and
Prevention Corps is planning a comprehensive review of the Authority’s operations scheduled
for June 2009.

The objectives of this audit were to determine whether the Authority disbursed capital funds and
procured contracts in accordance with HUD requirements.




                                                 4
                                RESULTS OF AUDIT

Finding 1: The Authority Charged Questionable Expenditures to Its
           Capital Fund Program
The Authority disbursed capital funds for questionable expenditures. Specifically, the Authority
failed to prepare a management needs assessment; charged the same expenses for multiple
capital fund drawdowns; and could not support the eligibility of charges for inspection costs,
force account labor, and audit costs. As a result, it lacked assurance that $195,046 in
expenditures was necessary or reasonable. We attribute these deficiencies to the Authority’s
failure to establish and implement accounting controls over disbursements that were sufficient to
ensure compliance with applicable regulations.


 Failed to Prepare a
 Management Needs Assessment


               The Authority had no basis for charging management improvement expenditures
               to its capital fund program grants since it failed to prepare a management needs
               assessment. Regulations at 24 CFR [Code of Federal Regulations] 968.315(e)
               provide that a comprehensive plan shall identify all of the physical and
               management improvements needed for an authority. The plan should include a
               comprehensive assessment of the improvements needed to upgrade the
               management and operations of the authority so that decent, safe, and sanitary
               living conditions will be provided.

               The management needs assessment should include an identification of the most
               current needs. Items identified should include management, financial, and
               accounting control systems of the authority; the adequacy and qualifications of
               personnel employed by the Authority in its management and operations; and the
               adequacy and efficacy of resident programs and services. In addition, the
               management needs assessment should include a preliminary cost estimate for
               addressing all the needs identified without regard to the availability of funds.

               The Authority was unable to provide us with such an assessment. Thus, it did not
               have the framework for charging management improvement expenditures to its
               capital fund program.

               The Authority charged $127,137 in management improvements to its 2005, 2006,
               and 2007 capital fund program grants from the sample expenditures reviewed.
               The expenditures represented costs pertaining to the salary and expenses of a
               recreational leader, resident activities, and nonresident services. The Authority
               was unable to provide sufficient documentation to support that the charges met



                                                5
            the eligibility requirements for management improvements. Since the Authority
            failed to prepare a management needs assessment and was unable to provide
            evidence that the charges were allowable, we consider the $127,137 in
            management improvement charges to the program to be unsupported pending an
            eligibility determination by HUD.

Charged the Same Expenses to
Support Multiple Drawdowns

            The Authority charged the same expenses to support multiple drawdowns to the
            capital fund program. A review of capital fund drawdowns during the period July
            2005 through June 2008 disclosed six excess drawdowns totaling $7,535. For
            example, an invoice in the amount of $3,850, dated September 21, 2007, for
            electrical work was charged to a capital fund drawdown on February 29 and May
            13, 2008. Regulations at 24 CFR 85.20 require that fiscal control and accounting
            procedures be sufficient to permit the tracing of funds to a level of expenditures
            adequate to establish that such funds have not been used in violation of the
            restrictions and prohibitions of applicable statutes. Auditee officials
            acknowledged that their accounting procedures at the time made them susceptible
            to weaknesses in this area. We attribute the multiple drawdowns to inadequate
            accounting controls. Accordingly, we consider the disbursement of $7,535 in
            capital funds to be ineligible.


Eligibility of Expenditures Not
Supported

            The Authority charged $60,374 in expenditures to the capital fund program that
            were not supported. For the sample of capital fund drawdowns reviewed, the
            Authority did not provide adequate support that inspection costs, force account
            labor costs, and audit costs were eligible. For example, the Authority charged
            $38,998 for the total salary of the clerk of the works to architectural/engineering
            and consultant fees. The supplement to HUD Handbook 7475.1 provides that
            construction supervisory and inspection costs incurred during construction are
            considered front-line costs. For those authorities that use their own personnel to
            carry out this function, a time sheet will be required to substantiate the
            construction supervisor’s time. Only actual documented costs pertaining to
            construction supervision activities, such as inspections incurred during the
            construction phase, can be charged directly. However, the Authority did not
            maintain time sheets to substantiate the clerk of the works’ time.

            In addition, the Authority charged $18,961 in force account labor to its capital
            fund program without adequate support. The support did not provide that the
            costs were reasonable or eligible to be charged to the program. For example, in
            relation to ineligible costs, the support provided, such as contractor cost estimates



                                              6
             and timesheets of the Authority’s maintenance staff, did not distinguish whether
             the costs were for routine maintenance or capital improvements. OMB [Office of
             Management and Budget] Circular A-87 defines reasonable cost as cost that does
             not exceed that which would be incurred by a prudent person under the
             circumstances prevailing at the time the decision was made to incur the cost.

             Also, the Authority charged $2,415 for auditing services that did not relate
             directly to capital fund program grant audits but, instead, related to routine
             operational accounting services. Regulations at 24 CFR 968.112(k) provide that
             eligible costs are limited to the portion of the audit costs that are attributable to
             the modernization program.


Conclusion

             The Authority did not establish and implement adequate accounting controls to
             ensure that capital fund expenditures complied with applicable regulations. As a
             result, $195,046 in questioned costs was charged to the capital fund program
             without assurance that the costs were necessary and reasonable. We attribute
             these deficiencies to the Authority’s failure to establish and implement accounting
             controls over disbursements that were sufficient to ensure compliance with
             applicable regulations.

Recommendations

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

             1A.    Provide documentation to justify the $127,137 in management
                    improvement expenditures so that HUD can make an eligibility
                    determination. Any unsupported costs determined to be ineligible should
                    be reimbursed to the capital fund program from nonfederal funds.

             1B.    Prepare and maintain a management needs assessment identifying the
                    Authority’s most current needs including but not limited to management,
                    financial and accounting control systems of the Authority, and the
                    adequacy and efficacy of resident programs and services. The
                    management needs assessment should include a cost estimate for
                    addressing all identified needs without regard to the availability of funds.

             1C.    Identify in its annual statements and performance and evaluation reports
                    management improvement expenditures in relation to the Authority’s
                    needs assessed so that HUD can make a determination of eligibility.




                                               7
1D.   Reimburse the capital fund program from nonfederal funds the $7,535 in
      excess drawdowns pertaining to electrical work, accounting services, and
      tenant employment and recreational activities.

1E.   Establish and implement written accounting procedures that address the
      roles and responsibilities of accounting staff, including performing
      monthly reconciliation of capital funds and reviewing drawdown requests
      to ensure compliance with applicable program regulations.

1F.   Provide documentation to justify the $60,374 in inspection costs, force
      account labor, and audit costs charged to the program so that HUD can
      make an eligibility determination. Any unsupported costs determined to
      be ineligible should be reimbursed to the capital fund program from
      nonfederal funds.

1G.   Provide continuing education to ensure that all Authority staff and board
      members involved with the capital fund program grants are familiar with
      laws and regulations, thus strengthening the controls to ensure that only
      eligible and supported costs are charged to the capital fund program grants.




                                8
Finding 2: The Authority Improperly Procured Contracts and
           Professional Services
The Authority did not follow HUD requirements, its own procurement policy, and New York State
General Municipal Law when awarding contracts. Specifically, the Authority (a) accepted a sealed
bid with a known mistake, (b) failed to properly procure competitive proposal contracts, (c) failed to
properly execute a noncompetitive contract, and (d) failed to follow small purchase and sealed bid
procedures when obtaining general contracting services. As a result, more than $3 million in capital
funds was used for questionable procurement expenditures, and the Authority lacked assurance that
the services contracted for were provided as intended. We attribute these deficiencies to the
Authority’s not establishing operational procedures to implement its procurement policy to ensure
compliance with applicable regulations.


 Sealed Bid Accepted with
 Known Mistake


               As part of HUD’s Capital Funds Financing Program, the Authority received $4.25
               million in bond proceeds for lead-based paint abatement and modernization of 90
               units at one of its projects. Review of the Authority’s contract award and
               administration process determined that the Authority accepted a sealed bid for the
               lead abatement/modernization work with a known mistake pertaining to $400,000 in
               additional plumbing work. Specifically, the contractor did not include the cost of
               installing toilets, sinks, tubs, faucets, cleaning drains, and other plumbing-related
               work in its bid for work pertaining to the lead abatement/modernization project.
               Although the mistake 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 lead
               abatement/modernization contract.

               Section 103 of the New York State General Municipal Law requires the withdrawal
               and rebid of bids containing mistakes; however, the Authority accepted the bid and
               awarded the $3.4 million contract. Rather than withdrawing the bid and initiating
               the bid process again, the Authority opted arbitrarily to go against the advice of its
               own legal counsel and awarded the bid containing the mistake. In doing so, it
               inappropriately restricted competition.

               At the time of this report, the Authority had paid more than $2.2 million for the
               contracted abatement/modernization work. In addition, it did not maintain
               documentation, including cost analyses, to justify $406,324 in change orders to the
               contract. The Authority had increased the original contract amount by
               approximately 13 percent and significantly modified the scope of services to be
               provided, which may have been an attempt for the contractor to compensate for the



                                                  9
           bid mistake. Accordingly, we consider the use of more than $2.6 million in capital
           funds to be ineligible. Further, the Authority should be prohibited from using
           program funds for the remaining contract balance of nearly $1.2 million for
           unfinished work, $26,686 for unfinished change order work, and $532,262 for
           projected future change orders, thereby realizing a total cost savings of more than
           $1.7 million. The Authority should be instructed to seek legal advice on whether the
           contract should be rescinded.


Improper Procurement of
Competitive Proposal Contracts

           The Authority failed to properly procure a competitive proposal contract for
           architectural/engineering work. It did not provide evidence to support the
           reasonableness of an architectural and engineering contract and failed to
           administer the terms of the contract totaling $227,260. Contrary to regulations at
           24 CFR 85.36, the Authority failed to maintain records sufficient to detail the
           significant history of the procurement action. Specifically, the Authority did not
           perform a cost analysis, which is required when the elements of estimated cost are
           part of the evaluation to select the service contract. In addition, the Authority was
           not able to provide evidence of a negotiation of price. Its procurement policy
           provides that negotiations shall be conducted with offerors who submit proposals
           determined to have a reasonable chance of being selected for award. There was a
           large discrepancy between the proposed fee and the awarded fee.

           Also, the Authority did not properly execute the terms of the contract.
           Specifically the Authority did not (1) define the scope of work in writing and
           request that the architect provide a detailed cost breakdown to perform the work,
           (2) perform a cost analysis to document the cost reasonableness of the
           architectural and engineering cost breakdown, (3) develop a finding of fact to
           document the rationale for award of the work, (4) issue purchase orders for most
           of the work, (5) ensure that something of value would be received for the services
           paid, and/or (6) pay the vendor based on the terms of the contract. The lack of a
           defined written scope of services to be performed prevented the Authority from
           determining whether the contractor performed according to the Authority’s
           intentions. Further, the Authority was unable to determine whether the most
           economical approach was used in procuring the services since it did not perform
           an analysis of the cost reasonableness. Consequently, we consider the use of
           $227,260 in capital funds to be unsupported pending a HUD eligibility
           determination.

           In addition, the Authority failed to properly procure a competitive proposal
           contract for auditing services. Contrary to regulations at 24 CFR 85.36, the
           Authority did not advertise for the auditing services and did not identify the
           relative value of the evaluation factors. Thus, the Authority’s evaluation and
           award process appeared to preclude open and free competition. When



                                            10
           professional services can be obtained by competitive conditions, proposals should
           be obtained from an adequate number of qualified sources to permit open and free
           competition and to ensure that adequate information is available to evaluate
           significant factors, such as the price of the contract and the contractor’s ability to
           perform the services. Accordingly, we consider the use of $1,500 in capital funds
           for auditing services to be unsupported pending a HUD eligibility determination.

Improper Execution of
Noncompetitive Proposal
Contract

           The Authority failed to properly execute a noncompetitive contract for accounting
           services performed during 2006 through 2007. By not executing a contract, the
           Authority did not obtain a legally binding document that would protect it against
           nonperformance by the accounting firm. Further, failure to execute a contract
           precluded the Authority from identifying the actual services expected to be
           completed. Although the Authority executed a contract in 2008 with the same
           firm, it did not maintain evidence to support the basis of sole source contracting.
           In 2008, the Authority failed to meet the requirements for procuring
           noncompetitive contracts in accordance with its own procurement policy and
           regulations at 24 CFR 85.36, which require written documentation to justify the
           Authority’s rationale for its method of procurement and that cost analyses be
           performed. As a result, we consider the use of $32,929 in capital funds for
           accounting services to be unsupported pending a HUD eligibility determination.


Failure to Follow Small
Purchase and Sealed Bid
Procedures

           The Authority failed to follow the procedures for small purchases and sealed
           bidding when procuring general contracting work. Although the Authority
           remained within its small purchase procurement policy threshold limitation of
           $50,000 for eight payments made to a general contractor, it did not obtain price or
           rate quotations from three qualified sources for five payments totaling $30,550 in
           accordance with 24 CFR 85.36. In addition, it appeared that the Authority
           circumvented the appropriate procurement process when procuring roofing work.
           Specifically, the Authority paid $71,190 under three invoices for the same scope
           of work performed during July 2007. The inclusion of identical work under three
           invoices raises the question as to whether the sealed bid process was
           circumvented by splitting the work within the confines of the small purchase
           threshold limitations. Accordingly, we consider the use of $101,740 in capital
           funds for general contracting work as unsupported pending an eligibility
           determination by HUD.




                                             11
             In addition, the Authority did not maintain adequate procurement documentation
             to support the solicitation of bids or its method of bid solicitation for $125,361 in
             appliance purchases contrary to 24 CFR 85.36. Further, contrary to requirements
             in HUD Handbook 7460.8, the Authority failed to enter into a contract for the
             recurring appliance purchases. As a result, we consider the $125,361 in
             appliances purchases as unsupported costs pending an eligibility determination by
             HUD.


Conclusion

             The Authority had not established the operational procedures to implement its
             procurement policy to ensure compliance with all applicable regulations. As a
             result, it lacked assurance that more than $3 million in capital fund expenditures
             was necessary or reasonable and that the services contracted for were provided as
             intended. This lack of oversight by the Authority to ensure that capital fund
             contracts were awarded in a prompt, fair, and reasonable manner is a major
             concern in light of the Authority’s having received an additional $1.5 million in
             capital funds under the American Recovery and Reinvestment Act of 2009. Thus,
             the Authority should seek legal advice on whether the lead abatement /
             modernization contract should be rescinded, and review and disapprove any
             future change orders related to this contract, thus resulting in a realized program
             cost savings.


Recommendations

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

             2A.    Reimburse the capital fund program from nonfederal funds for the
                    $2,608,258 in ineligible lead abatement/modernization contract costs.

             2B.    Seek legal advice on whether the lead abatement/ modernization contract
                    should be rescinded in the best interest of the Authority, thus resulting in a
                    cost savings of $1,224,652 for the remaining contract balance.

             2C.    Review and if appropriate disapprove any future change orders associated
                    with the lead abatement/modernization contract. By rejecting the future
                    change orders, a projected cost savings of $532,262 will be realized.

             2D.    Provide documentation to justify the $488,790 in unsupported contract
                    costs ($227,260 for architectural/engineering services, $1,500 for audit
                    services, $32,929 for accounting services, $101,740 for general
                    contracting work, and $125,361 for appliance purchases) so that HUD can
                    make an eligibility determination. Any unsupported costs determined to



                                              12
be ineligible should be reimbursed from nonfederal funds. If the
accounting services are determined to be ineligible, HUD should instruct
the Authority to terminate the contract.




                        13
                         SCOPE AND METHODOLOGY

Our review focused on whether the Authority disbursed capital funds and procured contracts in
accordance with HUD requirements. To accomplish our audit objectives, we reviewed relevant
HUD regulations, program requirements, and applicable laws. In addition, we analyzed the
Authority’s obligation and disbursement of capital funds in HUD’s Line of Credit Control System.
We reviewed HUD’s administrative files and monitoring reports for the Authority’s capital fund
program. We conducted interviews with the Authority’s staff to gain an understanding of the
internal controls related to the administration of the capital fund program. We also reviewed the
Authority’s program policies and procedures, five-year and annual plan, annual audited financial
statements, board of commissioners minutes, budgets, general ledgers, and Line of Credit
Control System drawdown vouchers related to the capital fund program.

For fiscal years 2006 through 2008, we selected a nonstatistical sample of six contracts to
perform a thorough review of procurement documentation including the award process and
administration. For the periods June 2006 through August 2006 and December 2007 through
February 2008, we selected a nonstatistical sample of 20 capital fund drawdowns totaling
$863,520 and representing about 28 percent of the Authority’s capital fund program to review
the eligibility and support of the expenditures.

The review covered the period July 2005 through June 2008 and was extended as necessary. We
performed audit work from October 2008 through May 2009 at the Authority’s office located at
135 Odell Street, Lackawanna, New York.

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 and 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.




                                                14
                              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:

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

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

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

                      Safeguarding 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.




                                                15
Significant Weaknesses


           Based on our review, we believe that the following item is a significant weakness:

                  The Authority did not have adequate controls over its program operations
                  and compliance with laws and regulations when it did not establish adequate
                  accounting controls to ensure that costs charged to the capital fund program
                  were eligible and when it did not establish operational procedures for
                  implementing its procurement policy to ensure compliance with applicable
                  regulations and HUD program requirements (see findings 1 and 2).




                                            16
                                   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                              $127,137
             1D               $7,535
             1F                                $60,374
             2A           $2,608,258
             2B                                                $1,224,652
             2C                                                  $532,262
             2D           _________          $488,790          _________
           Total          $2,615,793         $676,301          $1,756,914


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     policies or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the 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 be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (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. If the Authority implements our recommendations for
     rescinding the lead abatement/modernization contract and disallowing any future change
     orders associated with the contract, it will ensure a cost savings to its capital fund
     program.




                                             17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2



Comment 3


Comment 4




                         19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 5


Comment 6




Comment 7




Comment 8




Comment 9



Comment 10




                         20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 10



Comment 11




Comment 12




                         21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         22
                         OIG Evaluation of Auditee Comments

Comment 1   Officials for the Authority agree that an updated management needs assessment
            was not prepared, but contend that HUD’s Regional Office approved the budget
            each year reflecting the salaries and other expenses with no request for an updated
            management needs assessment. HUD’s approval of the budget would be based on
            the assumption that the items in the budget were in agreement with the
            management needs assessment. Since an amendment to the comprehensive
            annual plan, which includes the management needs assessment, was not submitted
            by the Authority, HUD would not have been aware that the items in question (that
            may have been in the budget) were not in the management needs assessment. The
            Authority is required to maintain an updated management needs assessment on-
            site and have it available for HUD review. Nevertheless, the Authority could not
            provide a management needs assessment that identified the items in question
            during the review.

Comment 2   Officials for the Authority agree that clerical errors were made, but state that the
            errors were subsequently corrected and the Authority did not draw funds for the
            same expenses more than once. We were not provided with evidence that all of
            the multiple drawdown errors were subsequently corrected. However, capital
            funds were indeed drawn for the same expenses more than once. As such, the
            $7,535 is still questioned.

Comment 3   Officials for the Authority state that the allocation of the clerk of the works’ time
            was appropriate and the expenses were approved by HUD. Although the HUD
            approved annual plan included a sub-item called inspection services in the “Fees
            and Costs” budget line item, to which this employee’s salary was charged, the
            Authority has not maintained time sheets to substantiate that the clerk of the
            works’ time pertained only to construction supervisory activities, such as
            inspections, to warrant being allocated to the capital fund program.

Comment 4   Officials for the Authority contend that the $18,961 in force account labor
            charged to the program, consisting of overtime costs for unit painting and patch
            work, represents properly categorized capital improvements. HUD Handbook
            7485.3 G permits the use of capital funds for force account labor to perform
            modernization activities. However, the support provided was not adequate to
            determine whether the clean up and painting of vacated units is a normal
            operating activity or a capital improvement, thus, the $18,961 charged to the
            program is considered unsupported.

Comment 5   Officials for the Authority agree that the $2,415 for auditing services charged to
            the capital fund lacks adequate supporting documentation. Thus, the Authority
            needs to provide supporting documentation to justify the auditing services to
            HUD during the audit resolution process so that HUD can determine its
            eligibility.




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Comment 6     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 officials interpretation of its legal
              counsel’s advice, the opinion issued by its counsel and Section 103 of New York
              State General Municipal Law require the withdrawal and re-bid of proposals
              containing mistakes.

Comment 7     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. However, in response to repeated requests,
              Authority officials failed to provide the 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. Further, it should be noted that 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. Nevertheless, if any additional documentation exists it should be
              submitted to HUD’s field office officials for review during the audit resolution
              process.

Comment 8     Officials for the Authority question the $1.7 million in cost savings contending
              that aside from the cost of obtaining a legal opinion resulting in possible
              litigation, the lead abatement and renovation work would still have to be
              completed by another contractor. The fact remains that, contrary to New York
              State Law, the Authority awarded the contract with a known bid mistake and in
              doing so, inappropriately restricted competition. The best course of action going
              forward is for the Authority is to seek legal advice to determine the appropriate
              remedy for the remaining contracted work. While we acknowledge that the
              Authority will incur costs to complete the lead abatement and modernization
              work, if a legal opinion indicates that the current contract should cease, a new
              contract competitively bid may reduce the costs.

Comment 9     Officials for the Authority agree that the contract with the Authority’s
              architectural and engineering firm was not procured in accordance with its own
              procurement policy. Officials intend to seek advice from HUD on how to revise
              and administer their procurement policy more efficiently in the future. As such,
              the Authority needs to maintain records sufficient to detail the significant history
              of future procurement actions, and provide supporting documentation to justify
              the unsupported costs to HUD during the audit resolution process.

Comment 10 Officials for the Authority agree that the contract for auditing and accounting
           services was not procured in accordance with procurement regulations. As such,
           officials acknowledge the need to comply with procurement regulations



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              pertaining to competitive and noncompetitive proposals, and agree to be more
              diligent in the future. Thus, Authority officials need to provide documentation to
              support that the costs for the auditing and accounting services are eligible to HUD
              during the audit resolution process.


Comment 11 Officials for the Authority state that one of the five questioned payments totaling
           $30,550 represented payment of an invoice that covered several flooring jobs,
           each of which was under $2,000 and pertained to unit turn over. Officials contend
           that the second payment, representing required code compliance work discovered
           in the process of performing repairs resulting from a fire, was covered by
           insurance proceeds and did not involve federal funds. The three remaining
           payments were for emergency repairs. However, no supporting documentation
           pertaining to the flooring jobs, code compliance work, and the emergency repairs
           was provided. Further, all five payments were made with capital funds. Thus, we
           consider the $30,550 as unsupported pending an eligibility determination by
           HUD.

Comment 12 Officials for the Authority state that the roof repairs for two of the roofs included
           in the $71,109 contractor payment were for emergency repairs and two were for
           non-emergency repairs. However, a review of the supporting documentation
           suggests that the same repair work was conducted on the four roofs
           simultaneously. Thus, the officials should have procured the roof repair work
           under one sealed bid process. In addition, there was no documentation provided
           to support the use of non-competitive proposal contract procurement for the
           emergency repairs.




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