Issue Date August 13, 2010 Audit Report Number 2010-AT-1009 TO: Olga I Sáez, Director, Public and Indian Housing, San Juan Field Office, 4NPH //signed// FROM: James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA SUBJECT: The Puerto Rico Public Housing Administration, San Juan, PR, Needs To Improve Its Procurement Procedures HIGHLIGHTS What We Audited and Why We completed an audit of the Puerto Rico Public Housing Administration (authority) central office procurement system. This was an Office of Inspector General (OIG)-initiated assignment. We selected the authority for review as part of our strategic plan. The objectives of the audit were to determine (1) whether the authority’s procurement policies and procedures were in compliance with the U.S. Department of Housing and Urban Development’s (HUD) requirements, (2) whether it followed its policies and procedures and HUD procurement requirements, (3) whether it adequately supported the reasonableness of the cost of goods and services acquired, and (4) whether an electronic surveillance system installed at several of its public housing projects generated the intended benefits. What We Found Generally, the authority complied with requirements for planning, soliciting, and awarding contracts and purchase orders. However, our review identified procurement deficiencies in two contracts and three purchase orders, which resulted in monetarily significant deficiencies. The authority used an improper procurement procedure, failed to perform required cost analyses, and paid for equipment that was not used or missing. It also awarded purchase orders for other than the lowest quoted price without justification and paid more than the contract price. In addition, the electronic surveillance system installed at several of its public housing projects did not generate the intended benefits. As a result, the authority did not support the reasonableness of more than $9.7 million in contracts, paid more than $3.57 million for equipment that did not provide the intended benefits, and paid more than $28,000 for excessive expenditures. What We Recommend We recommend that the Director of the Office of Public and Indian Housing require the authority to provide support showing the eligibility and reasonableness of more than $9.7 million spent on contracts that were not awarded in accordance with HUD requirements or reimburse its programs from non-Federal funds. We also recommend that the Director require the authority to reimburse its public housing program more than $3.6 million paid for excessive costs and unused/missing equipment. In addition, we recommend that the Director evaluate the surveillance system installed throughout the authority’s public housing projects and determine whether it was implemented in an effective and efficient manner. 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 findings with HUD and the authority during the audit. We provided a copy of the draft report to the authority on June 2, 2010, for its comments and discussed the report with Department officials at the exit conference on June 18, 2010. The authority provided its written comments to our draft report on June 23, 2010. In its response, the Department generally disagreed with the findings and recommendations. The complete text of the authority’s response, along with our evaluation of that response, can be found in appendix B of this report. Attachments to the authority’s comments were not included in the report but are available for review upon request. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: The Authority’s Procurement Procedures Had Weaknesses 5 Scope and Methodology 10 Internal Controls 12 Appendixes A. Schedule of Questioned Costs 14 B. Auditee Comments and OIG’s Evaluation 15 C. Criteria 25 3 BACKGROUND AND OBJECTIVES The Puerto Rico Public Housing Administration (authority) is a governmental entity created by Commonwealth Law No. 66, dated August 17, 1989. The authority implements governmental policy for the administration of public housing projects. It is the second largest public housing agency in the Nation, administering around 55,700 units with a combined authorized budget of more than $406 million in operating funds and more than $273 million in capital funds for fiscal years 2008 and 2009. The authority’s records are maintained at 606 Barbosa Avenue, San Juan, PR. Housing agencies are required to administer procurement activities in accordance with 24 CFR (Code of Federal Regulations) 85.36 and U.S. Department of Housing and Urban Development (HUD) Handbook 7460.8. Agencies must make purchases from and award contracts to the lowest responsible bidder after properly advertising for proposals. The dollar thresholds at which agencies are required to follow procurement procedures depend on the amount of goods and services procured and Federal, State, and local laws as well as the agency’s own procurement policy. Our audit objectives were to determine whether the authority complied with HUD regulations, procedures, and instructions related to the administration of its public housing programs. Specifically, we evaluated (1) whether the authority’s procurement policies and procedures were in compliance with HUD requirements, (2) whether it followed its policies and procedures and HUD procurement requirements, (3) whether it adequately supported the reasonableness of the cost of goods and services acquired, and (4) whether an electronic surveillance system installed at several of its public housing projects generated the intended benefits. 4 RESULTS OF AUDIT Finding 1: The Authority’s Procurement Procedures Had Weaknesses Generally, the authority complied with requirements for planning, soliciting, and awarding contracts and purchase orders. However, it used an improper procedure, failed to perform required cost analyses in two contracts, and paid for equipment that was not used or missing. In addition, the authority awarded three purchase orders for other than the lowest quoted price without justification and paid more than the contract price. These conditions occurred because the authority did not develop and implement adequate internal controls and procedures to ensure compliance with HUD requirements. As a result, it did not support the reasonableness of more than $9.7 million in contracts, paid more than $3.57 million for equipment that did not provide the intended benefits, and paid more than $28,000 for excessive expenditures. We analyzed 14 contracts and 40 purchase orders awarded between May 1, 2008, and September 30, 2009, totaling more than $84.5 million. There were procurement deficiencies in two contracts and three purchase orders reviewed. Improper Procedure and Cost Analysis Not Performed The authority awarded two contracts totaling more than $20 million for the acquisition and installation of a surveillance system and multifunction printers for its public housing projects. It acquired the goods and services using contractors from the Commonwealth of Puerto Rico General Services Administration (PRGSA) schedule. HUD Handbook 7460.8, REV-2, states that a housing agency may enter into intergovernmental or interagency purchasing agreements without competitive procurement only if the agreement provides for greater economy and efficiency and results in cost savings to the housing agency and the agreement is used for common supplies and services that are of a routine nature only. Contrary to HUD Handbook 7460.8, REV 2, the authority used an improper procedure and failed to ensure that the procurement resulted in greater economy, efficiency, and cost savings. The procurements were not for common supplies and services, and the files did not contain documentation showing that proper cost analyses were performed to demonstrate that the PRGSA intergovernmental agreements resulted in cost savings to the authority. Therefore, HUD had no assurance of the reasonableness of the contracted amounts. 5 Further, the authority’s records showed that the surveillance system contract price was higher than the price of other vendors included in the PRGSA listing. For example, the contract prices of some of the surveillance system items were between $810 and $28,285 higher than the lowest price of other potential vendors. Item Lowest price Contract price Difference Room preparation $1,715 $30,000 $28,285 Video encoder $1,300 $9,116 $7,816 Managed video services software $150 $6,200 $6,050 Server rack device $3,995 $8,586 $4,591 Labor & setup cost for fixed camera installation $25 $2,600 $2,575 Labor and setup cost for pan/tilt/zoom camera installation $143 $2,600 $2,457 Pan/tilt/zoom camera $1,650 $4,059 $2,409 Work station $4,860 $7,067 $2,207 Fixed camera $440 $1,250 $810 The authority did not provide support demonstrating that the services were obtained at the most advantageous terms or their reasonableness. This noncompliance occurred because the authority’s written procurement procedures did not contain guidelines concerning the purchase of goods and services through intergovernmental agreements. Therefore, disbursements totaling more than $9.7 million for the surveillance system and printers are unsupported pending a HUD eligibility determination. Unused and Missing Equipment The surveillance system contract provided for the installation of 710 cameras at 30 public housing projects. According to the authority’s records, only 195 cameras were installed. On December 22, 2009, the authority cancelled the contract because of the unsatisfactory performance of the system and problems with vandalism.1 The surveillance system installation was completed at only 9 of the 30 proposed public housing projects. As a result, the contract did not generate the intended benefits to its public housing projects. An authority official informed us that a consultant was assessing the work performed under the surveillance system contract. Once the consultant submits the results of the assessment, the authority will decide what to do with the system. 1 According to the authority’s records, 40 (20 percent) of the 195 cameras installed were damaged due to vandalism or technical problems. 6 On March 8, 2010, we visited the contractor’s facilities and found a significant amount of unused surveillance equipment stored at its warehouse. The unused surveillance equipment stored at the contractor’s warehouse. The authority disbursed more than $3.5 million for unused equipment that was not installed at the public housing projects and stored at a warehouse for more than 12 months. Contrary to regulations at 2 CFR Part 225 (appendix C), the authority allowed the disbursement of funds for goods that did not provide the intended benefits for the administration of its public housing programs. Therefore, the more than $3.5 million in disbursements was not an allocable expense. The authority also disbursed $63,708 for 24 cameras purchased for the Jardines de Selles public housing project, but it could not locate the equipment or show where it had been installed. Consequently, $63,708 was an ineligible cost and must be reimbursed. Lowest Quote Not Selected The authority awarded three purchase orders and paid $46,608 for Internet services and kitchen appliances. Although an adequate number of price quotations were obtained, the authority did not procure goods and services at the lowest price. The files did not contain adequate support to justify the selection of 7 a higher priced purchase or its reasonableness. Therefore, the authority paid $17,810 for excessive expenditures. Purchase Purpose Amount Lowest Excessive order paid quote amount 09-108 Internet service $19,749 $7,699 $12,050 09-116 Internet service 10,749 7,699 3,050 09-086 Kitchen appliances 16,110 13,400 2,710 Total $46,608 $28,798 $17,810 Excessive Expenditures The authority paid a higher price for electronic surveillance equipment than that established by the intergovernmental agreement. Records showed that the agreement established a price of $8,167 for each server rack device. However, a review of invoices disclosed that the authority paid $8,586—$419 more than the established price. The authority purchased 26 racks and paid $10,894 in excessive expenditures. The files did not contain support explaining the increase or its reasonableness. Therefore, the $10,894 was an excessive expenditure. The authority’s internal auditor identified the same deficiency in June 1, 2009; however, no efforts were made to recover the excessive expenditures. Conclusion Generally, the authority complied with HUD procurement requirements when it awarded contracts and purchase orders. However, there were procurement deficiencies in two contracts and three purchase orders reviewed. The authority could improve its procurement process by using the correct procurement procedure, consistently performing required cost analyses, ensuring that goods and services acquired generate the intended benefits, and avoiding excessive expenditures. Recommendations We recommend that the Director of the San Juan Office of Public and Indian Housing 8 1A. Require the authority to provide support showing the eligibility and reasonableness of $9,784,1572 disbursed for the surveillance system and multifuncion printers or reimburse this amount to its operational fund account or HUD, as appropriate, from non-Federal funds. 1B. Require the authority to reimburse its operational fund account or HUD, as appropriate, from non-Federal funds $3,576,521 paid for equipment that did not provide the intended benefits and/or was unaccounted for. 1C. Require the authority to reimburse its operational fund account or HUD, as appropriate, from non-Federal funds $28,704 paid for the excessive expenditures. 1D. Require the authority to develop and implement procurement policies and procedures to comply with HUD’s intergovernmental purchasing agreement requirements, to ensure that goods and services are obtained at the most advantageous terms, and to ensure that it consistently complies with procurement requirements. 1E. Evaluate the surveillance system installed throughout the authority’s public housing projects and determine whether it was implemented in an effective and efficient manner. 2 Total disbursements of $13,371,572 were adjusted to consider $3,576,521 questioned in recommendation 1B and $10,894 questioned in recommendation 1C. 9 SCOPE AND METHODOLOGY To accomplish our audit objectives, we Reviewed applicable laws, regulations, and other HUD program requirements. Reviewed procurement policies and procedures to determine whether they were in compliance with HUD requirements. Obtained an understanding of the authority’s management controls and procedures as they related to our objectives. Analyzed the authority’s disbursement records. Interviewed HUD staff and the authority’s management and staff. Performed a site inspection of the surveillance system project contractor facilities. Reviewed the authority’s records, including contract register, purchase order register, procurement records, and purchase orders. Reviewed monitoring reports and the authority’s latest independent public accountant report. According to its records the authority awarded 111 contracts totaling more than $266 million between July 1, 2008, and September 30, 2009. We reviewed a sample of 11 contracts totaling more than $81.5 million, based on the amount of the contracts, and reviewed three additional contracts totaling more than $1.4 million, based on the type of procurement the authority used.3 We selected contracts related to the Capital Fund Program for $41.3 million, to the Public Housing Operational Fund Program for $25 million, and to the Public Housing Capital Fund Stimulus [Formula] Recovery Act for $16.5 million. We selected this approach since testing 100 percent of the population was not feasible. Therefore, the sampling results apply only to the items tested and cannot be projected to the universe or population. The authority issued 803 purchase orders totaling more than $4 million between July 1, 2008, and September 30, 2009. We reviewed 40 purchase orders totaling more than $1.6 million. We selected 22 purchase orders with amounts that were greater than $30,000. We selected eight additional purchase orders, dated between May and August 2008, based on the vendor name or type of goods and services acquired. In addition, we selected 10 purchase orders lower than $30,000 to replace purchase orders paid out of the authority’s central office service fees. We selected this approach as it allowed us to review purchase orders with higher inherent risk and 3 Contracts related to management agents and the Drug Elimination Grant program were excluded from the review. Additionally, the audit did not cover procurements made by management agents, or procurements funded with fees paid to the authority for central office services. 10 materiality. The results apply only to the items tested and cannot be projected to the universe or population. To achieve our audit objectives, we relied in part on computer-processed data contained in the authority’s database. In addition, we relied on an inventory taken by the authority of its unused surveillance equipment. Although we did not perform a detailed assessment of the reliability of the data, we performed a minimal level of testing, including testing the integrity of the data using Audit Command Language software, and found the data to be adequate for our purposes. We conducted our fieldwork from November 2009 through April 2010 at the authority’s offices in San Juan, PR. Our audit generally covered the period of July 1, 2008, through September 30, 2009, and we expanded our audit period as needed to accomplish our objectives. 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 objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 11 INTERNAL CONTROLS Internal control is a process adopted by those charged with governance and management designed to provide reasonable assurance about the achievement of the organization’s mission, goals and objectives with regard to: Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls 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: Effectiveness and efficiency of operations- Policies and procedures that the audited entity has implemented to provide reasonable assurance that a program meets its objectives, while considering cost effectiveness and efficiency. Compliance with laws and regulations - Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. We assessed the relevant controls identified above. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, the reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws and regulations on a timely basis. 12 Significant Deficiency Based on our review, we believe that the following item is a significant deficiency: The authority did not develop and implement controls and procedures to ensure that all procurement actions were conducted in accordance with HUD requirements (see finding 1). 13 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Unreasonable or number Ineligible 1/ Unsupported 2/ unnecessary 3/ 1A $9,784,157 1B $3,576,521 1C _________ _________ $28,704 Total $3,576,521 $9,784,157 $28,704 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/ 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. 14 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Auditee Comments Comment 1 15 Auditee Comments Comment 2 Comment 3 Comment 4 Comment 4 16 Auditee Comments 17 Comment 5 Comment 5 18 Auditee Comments Comment 6 Comment 6 Comment 7 Comment 8 19 Auditee Comments Comment 3 Comment 9 20 Auditee Comments Comment 10 21 OIG Evaluation of Auditee Comments Comment 1 The authority stated that it provided additional information that should put OIG in a position to remove the proposed findings. The additional information provides insight as to why management decided to acquire and install a surveillance system on several of its public housing projects. However, the authority failed to include documentation to demonstrate the reasonableness of the cost incurred in relation to the surveillance system and whether it was purchased at the most advantageous terms. In addition, the authority did not provide evidence that would justify not selecting the lowest vendors during the small purchase procurement actions in question. Finally, the authority did not provide evidence that over $3 million spent in surveillance equipment that was warehoused and idled, provided the intended benefits to its public housing residents. Accordingly, we did not remove or modify the report findings, conclusions, and recommendations. Comment 2 The authority asserted that the findings were inaccurate, unsupported, and inconsistent with OIG’s own auditing standards. It also stated that “the OIG’s conclusions are based on a fundamental misunderstanding of the (i) characteristics of the projects wherein the camera systems were installed, (ii) special circumstances surrounding the acquisition and installation of the surveillance system; and (iii) applicable rules and regulations.” Our findings are supported by source documents provided by the authority during the review. The authority did not provide documentation showing that the findings were inaccurate, unsupported, and inconsistent with the OIG’s audit standards. Circumstances surrounding the acquisition and installation of surveillance systems through several of its public housing projects were evaluated and discussed with authority officials during the audit. These circumstances did not justify the authority’s failure in ensuring that all procurement actions were made in accordance to HUD regulations. Applicable rules and regulations were also carefully analyzed and properly applied. Comment 3 The authority stated that the report does not cite any legal requirements or misapplies existing standards to support its conclusions. Our report cites applicable legal requirements that support the conclusions (see appendix C of the report). Comment 4 The authority alleged it did not receive sufficient information from the OIG to determine how we drew our conclusions. For this reason its response identifies only some of the critical areas discussed in the draft report. It also requested a meeting to obtain necessary explanations and clarifications in relation to our findings. 22 We discussed the findings with authority officials during the audit. On May 20, 2010, we met with authority officials to provide preliminary finding details. Furthermore, on June 18, 2010 we held an exit conference with authority officials in relation to the findings and recommendations included in the draft report. During the conference, we specifically asked for any concerns the authority officials may have in relation to our findings. Authority officials did not request any specific documentation or clarifications pertaining to the audit findings. Comment 5 The authority stated that it was facing a high rate of crime in several public housing projects and that several law enforcements agencies endorsed the steps taken by the authority regarding the installation of a surveillance system on the public housing projects. As a result, and based on the exemption provided by 24 CFR 85.36 (d) (4), the authority opted to cancel a request for proposal previously issued and used an alternate procedure completed by the PRGSA. The report questions the reasonableness of the cost incurred in relation to the surveillance system and whether it was purchased at the most advantageous terms. The authority failed to perform a proper cost analysis in relation to the surveillance system which resulted in a higher priced contract without proper justification. As a result, the authority did not provide the required documentation to substantiate that they followed applicable procedures when entering into the agreement. Comment 6 The authority argued that it completed a regular cost analysis in compliance with all applicable regulations and that its decision for using the PRGSA contract was permissible. They also stated that the decision was based on efficiency, cost, security, economy, need, and effectiveness. The authority did not provide documentation showing that a proper cost analysis was performed. Therefore we do not have any assurance that the procurement resulted in greater economy, efficiency, and cost savings. The intergovernmental agreement provided for the contracting of other suppliers that offered similar services more economically. The authority did not provide evidence to support that they properly evaluated the proposal from the contractor, nor that they properly evaluated the other available suppliers. Consequently, the authority could not demonstrate the reasonableness of the cost incurred in relation to the contract or show that they followed HUD’s applicable policies and procedures when entering into such agreement. Comment 7 The authority stated that stored equipment will be installed after a new Request for Proposal (RFP) for a comprehensive security surveillance system is conducted. The authority has not provided evidence that equipment missing or in storage is in operational condition or that it has provided the intended benefits for which it was acquired. Regulations at 2 CFR Part 225, Appendix A, Part C, Number 3, state that a cost is allocable when the goods or services received are assignable to a cost objective “in accordance with relative benefits received.” Because such equipment 23 has not been used for its intended purpose, the relative benefit on such unused equipment was not received. We contend that the funds paid for the unused equipment is unallowable until the authority can demonstrate that the intended benefit for the purchase of the equipment has been obtained. Comment 8 The authority stated in relation to the excessive payments for server rack devices that the additional amounts were due to the fact that the racks were modified to include additional components which were necessary to make the surveillance system more suitable for its intended use. The authority did not provide any evidence in support of the excessive payments. Comment 9 The authority asserts that OIG incorrectly applied both the facts and the law and that there is no justification for the finding. While regulations at 24 CFR 85.36(b)(5) provide for the use of intergovernmental agreements for the purchase of common goods and services, HUD guidance in Handbook 7460 requires that goods and services must be of a routine nature only and that the agreement provides for economy and cost savings to the government. The authority has failed to provide any justification for changing the finding. Comment 10 The authority alleged that it did not select the lowest quotations for the acquisition of goods and services since lower bidders were not able to provide the necessary services and equipment. The authority did not provide any evidence that the lower bidders were not able to provide the necessary services and equipment. 24 Appendix C CRITERIA 24 CFR 85.36 (b) (5) To foster greater economy and efficiency, grantees and subgrantees are encouraged to enter into State and local intergovernmental agreements for procurement or use of common goods and services. HUD Handbook 7460.8, REV 2, Paragraph 14.2A Housing agencies may enter into intergovernmental or interagency purchasing agreements without competitive procurement provided, among other things, that the following conditions are met: The agreement provides for greater economy and efficiency and results in cost savings to the housing agency. The agreement is used for common supplies and services that are of a routine nature only. Housing authorities take steps to ensure that any supplies or services obtained using another agency’s contract are purchased in compliance with 24 CFR 85.36. The procurement files contain documentation showing that cost and availability were evaluated before the agreement was executed. 2 CFR Part 225 (Appendix A) A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. 25
The Puerto Rico Public Housing Administration Needs To Improve Its Procurement Procedures
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-08-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)