oversight

Polk County, FL, Did Not Comply With Procurement and Contract Requirements in Its NSP and HOME Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-28.

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

                                                              Issue Date
                                                                   September 28, 2010
                                                              Audit Report Number
                                                                    2010-AT-1014




TO:        Gary A. Causey, Director, HUD Jacksonville Office of Community Planning
             and Development, 4HD


           //signed//
FROM:      James D. McKay, Regional Inspector General for Audit, Atlanta Region,
              4AGA

SUBJECT:   Polk County, FL, Did Not Comply With Procurement and Contract
             Requirements in Its NSP and HOME Program


                                  HIGHLIGHTS

 What We Audited and Why


           We conducted an audit of Polk County, FL’s (County) Neighborhood
           Stabilization Program (NSP) and its HOME Investment Partnerships Program
           (HOME) based on a confidential complaint submitted through the U.S.
           Department of Housing and Urban Development (HUD) Office of Inspector
           General (OIG) hotline. The complaint alleged several improprieties involving the
           County’s NSP and HOME programs. Our objectives were to determine whether
           the County (1) complied with requirements in the procurement, award, and
           execution of its NSP administrative contract and (2) incurred reasonable and
           eligible NSP and HOME expenditures for administrative and construction
           contract services.
What We Found


         The County did not comply with requirements for competition and conflict of
         interest in the procurement of administrative and implementation services for its
         $14.5 million NSP. The violations occurred because County officials did not
         adequately plan for the procurement of NSP services and did not implement
         controls to ensure that procurements complied with requirements. The number
         and significance of the procurement violations brings into question the County’s
         capacity to implement future NSP activities in accordance with competitive
         contracting requirements. The violations warrant termination of the
         administrative contract and the services provided by the nonprofit to implement
         the NSP. These actions may prevent the County from obligating more than $4
         million in NSP funds by the program’s statutory 18-month deadline.

         The County did not take proper actions to protect the ownership of abandoned and
         foreclosed-upon properties acquired with NSP funds or the revenues expected
         from their disposition from loss and misuse between the time of their acquisition
         and their sale. The funds were put at risk because the County allowed a nonprofit
         entity, with whom it had no contract, to acquire abandoned and foreclosed-upon
         properties in its name without title restrictions and sell the properties. The County
         also paid the nonprofit for NSP services based on a questionable fee schedule. As
         a result, more than $6.1 million of the County’s NSP funds and projected revenue
         were at risk.

         Also, the County did not accurately report NSP acquisition obligations in HUD’s
         Disaster Recovery Grants Reporting (DRGR) system and did not post NSP
         performance reports to its Web page in a timely manner. It consistently
         understated NSP acquisition obligations in DRGR. The inaccurate reports
         deprived HUD of information it needed to monitor NSP operations and the
         untimely reports hindered residents from timely access to information concerning
         the status of the NSP. We attribute these conditions to error and lack of adequate
         planning and oversight of the County’s NSP by County officials.

         Lastly, the County did not require its community housing development
         organization (CHDO) to comply with its contract that required it to obtain
         competitive bids for procurements. As a result, the CHDO did not have
         documentation to support the reasonableness of more than $1.2 million in
         construction contract costs examined during the review. We used an OIG staff
         appraiser to review a sample of the construction costs, and we determined that the
         costs were reasonable. However, the violations reflected a lack of attention by
         County and CHDO officials to their obligation to enforce contract procurement
         requirements that should have been followed and documented to support the
         reasonableness of construction costs paid with HOME funds.




                                           2
What We Recommend


           We recommend that HUD require the County to

              Promptly terminate its NSP administrative contract and arrange for the
              continued administration and implementation of its NSP by County staff or a
              properly procured contractor to ensure the proper obligation of more than $4.4
              million in NSP funds that was not obligated at the time of our review;

              Reimburse the NSP more than $4.4 million from non-Federal funds if the
              nonprofit entity does not transfer title to NSP properties purchased in its name
              to the County or an entity with the legal authority to hold title and establish
              proper safeguards to ensure that more than $1.7 million in revenue expected
              from property sales is adequately protected from losses due to lawsuits, liens,
              and judgments;

              Reimburse its NSP from non-Federal funds more than $98,000 for fees paid
              based on a questionable fee schedule and ensure that future services are billed
              at contract rates or based on properly executed contract change orders;

              Review and determine whether NSP funds the County obligated after the
              completion of our on-site review met the requirements for obligations by its
              obligation deadline date.

              Post its quarterly NSP performance reports to the County’s Web page; and

              Ensure that all future CHDO construction contracts comply with procurement
              requirements and that the County monitors the costs to ensure that they are
              reasonable and that the procurement practices do not restrict or eliminate
              competition.

           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 County and HUD officials during the audit. On
           September 1, 2010, we provided a copy of the draft report to County officials for
           their comment and discussed the report with them at the exit conference on
           September 8, 2010. The County provided its written comments to the draft report
           on September 14, 2010. Generally, the County did not agree with the findings
           and recommendations. The complete text of the County’s response, along with
           our evaluation of that response, can be found in appendix B of this report.


                                            3
                            TABLE OF CONTENTS

Background and Objectives                                                              5

Results of Audit
      Finding 1: The County Did Not Properly Procure Its NSP Administrative            7
                 Contract and NSP Implementation Services
      Finding 2: The County Did Not Have Adequate Safeguards Over the Ownership        15
                 of Abandoned and/or Foreclosed-Upon Properties Acquired With
                 NSP Funds and Revenues Expected From Their Disposition
      Finding 3: The County Understated NSP Acquisition Obligations and Did Not        21
                 Post Its NSP Quarterly Progress Reports to Its Web Page in a Timely
                 Manner
      Finding 4: The County Did Not Require Its CHDO To Obtain Competitive Bids        23



Scope and Methodology                                                                  26

Internal Controls                                                                      28

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                   30
   B. Auditee Comments and OIG’s Evaluation                                            31




                                             4
                     BACKGROUND AND OBJECTIVES

We conducted an audit of Polk County, FL’s (County) Neighborhood Stabilization Program
(NSP) and its HOME Investment Partnerships Program (HOME) based on a confidential
complaint. Congress established NSP (also referred to as NSP-1) to stabilize communities that
have suffered from foreclosures and abandonment through the purchase and redevelopment of
foreclosed-upon and abandoned homes and residential properties. NSP, authorized under
Division B, Title III, of the Housing and Economic Recovery Act of 2008 (HERA), provides
grants to all States and selected local governments on a formula basis. During 2008, The U.S.
Department of Housing and Urban Development (HUD) awarded the County more than $14.5
million in NSP funds. HUD allocates HOME funding to eligible local and State governments to
strengthen public-private partnerships and to supply decent, safe, and sanitary affordable housing
to very low-income families. Participating jurisdictions may use HOME funds to carry out
multiyear housing strategies through acquisition, rehabilitation, new construction, and tenant-
based rental assistance. For the period 2006 through 2009, HUD awarded the County more than
$4.3 million in HOME program funds.

The County is governed by a five-member board of county commissioners (board). The board
appoints the county manager who is responsible for carrying out the decisions, policies, and
ordinances made by the board. The county manager oversees all of the departments under the
board including the Human Services Department, which encompasses the Housing and
Neighborhood Development Division (Division) that administers the NSP and HOME program.

HUD’s Office of Community Planning and Development in Jacksonville, FL, is responsible for
overseeing the County’s NSP and HOME program. HUD’s most recent monitoring report on the
County’s HOME program, dated October 20, 2008, included a finding that the agreement
between the County and its sole community housing development organization (CHDO) did not
meet certain Federal requirements. The monitoring report also included a concern that the
CHDO did not obtain the required competitive bids for construction contracts.

Our objectives were to determine whether the County (1) complied with requirements in the
procurement, award, and execution of its NSP administrative contract and (2) incurred
reasonable and eligible NSP and HOME expenditures for administrative and construction
contract services.




                                                5
                                       RESULTS OF AUDIT

Finding 1: The County Did Not Properly Procure Its NSP
Administrative Contract and NSP Implementation Services
The County did not comply with requirements for competition and conflict of interest in the
procurement of administrative and implementation services for its $14.5 million NSP.
Specifically, it

         Awarded an unsupported contract to administer its NSP;

         Allowed a nonprofit to implement NSP activities, although the services were not
         competitively procured and the nonprofit did not have a contract with the County; and

         Allowed actual or perceived conflicts of interest in the procurement of NSP services.

The violations occurred because County officials did not adequately plan for the procurement of
NSP services and did not implement controls to ensure that procurements complied with
requirements. The number and significance of the procurement violations noted in this finding
and in findings 2 and 4 bring into question the County’s capacity to implement future NSP
activities in accordance with competitive contracting requirements. The violations warrant
termination of the administrative contract and the services provided by the nonprofit to
implement the NSP. Unless the County can correct the violations in a timely manner, the
terminations may prevent it from obligating more than $4 million in NSP funds by the program’s
statutory 18-month deadline.



    The County Violated HUD
    Procurement Requirements in the
    Award of the NSP Administrative
    Contract

                  The County awarded a contract to administer its $14.5 million NSP that was not
                  supported because it involved a prohibited arbitrary process in the scoring of
                  ranking factors used to make the award. The regulations at 24 CFR (Code of
                  Federal Regulations) 85.36(c)(1) provide that all procurement transactions will be
                  conducted in a manner providing full and open competition consistent with the
                  standards of section 85.36. Some of the situations considered to be restrictive of
                  competition include but are not limited to noncompetitive pricing practices
                  between firms or between affiliated companies and any arbitrary1 action in the

1
 Webster’s dictionary defines “arbitrary” as actions based on or subject to individual discretion or preference or
sometimes impulse.



                                                          6
procurement process. In addition, the County did not prepare an independent cost
estimate for the work. The regulations at 24 CFR 85.36(f) state that grantees must
make independent estimates before receiving bids or proposals. A cost analysis
must be performed when the offeror is required to submit the elements of his
estimated cost.

The County assembled a nine-member selection committee to review and score
proposals submitted in response to its request for proposal (request) for an
administrative contractor. The County received seven proposals for the
administrative contract in response to the request. The selection committee
determined that five proposals were responsive to the request and were worthy of
further consideration in the award process. We limited our review to the five
responsive proposals. The request stated that the County would assess the
proposals and award the contract based on the following five ranking factors:

 Ranking factor                                                     Points
 Experience and expertise (organizational capability)                 35
 Technical & personnel resources (organizational profile)             20
 Proficiency in similar projects (project description, time line)     10
 References                                                            5
 Proposed cost                                                        30
 Total                                                               100

The County did not provide the selection committee with instructions on how to
implement a County requirement for scoring the price ranking factor, and it did
not establish procedures nor did it instruct the selection committee on how to
award points up to the maximum for the remaining four ranking factors. These
conditions indicate a failure by County officials to adequately plan for the
procurement. Specifically, the review revealed the following conditions
concerning the price ranking factor and the remaining four ranking factors:

        Price ranking factor - The selection committee did not score price based on
        the County’s procedure because County officials did not provide the
        committee with instructions on how to implement the requirements. The
        County’s request evaluation procedures provided that if price is one of the
        evaluation criteria and a point system is used for evaluating the proposals,
        the lowest priced proposal, as determined by the committee, shall receive the
        maximum score for the price criteria. The procedures provided that the other
        proposals shall receive a percentage of the score for price based on the
        number of proposals received. The procedures also provided that the
        selection committee shall review the proposals received and independently
        evaluate each criterion except price and that when the committee first meets,
        a determination will be made on how to evaluate price. We reviewed the
        minutes of the selection committee meetings and determined that there were
        records for only two meetings and at neither meeting did the committee
        discuss how price should be scored.




                                         7
We interviewed two selection committee members who were County
employees, and they stated that they were not aware of the cited requirement
for evaluating price. The score variations discussed below indicate that the
selection committee members scored price based on their individual
discretion or preference. We could not determine the exact impact of the
County’s failure to follow its procedures for scoring the price factor because
of other scoring problems discussed below for the remaining four ranking
factors.

We requested that County purchasing officials recalculate the score for price
based on their criteria to determine what the score should have been, but they
declined to make the calculation. Therefore, we recalculated the scores for
the price factor based on methodology cited in the County’s procedures. We
then applied the points to the five proposals in place of the scores provided
by the nine selection committee members. We discussed the basis for our
calculation with the County’s purchasing director, who agreed with the basis
we used to make the calculation. Based on our assessment, the selected
contractor would not have scored high enough to have been included in the
top three firms from which the County selected the contractor.

                     Total score for the       Total score for all five
 Proposal           price ranking factor          ranking factors           Final ranking by
                    County         OIG         County          OIG**       County       OIG
  Proposal 5          148          270          618              740          4          1
  Proposal 1          182          216          665              699          3          2
  Proposal 3          168          162          697              691          2          3
  Proposal 2 *        176          108          756              688          1          4
  Proposal 4          152           54          594              496          5          5
* Proposal 2 was the contractor selected by the County.
** Adjusted only for the Office of Inspector General’s (OIG) reassessment of the price
factor.

A County representative stated, “ Because the Committee did not discuss
and determine the lowest priced proposal as a group the price component
of scoring should/must be omitted from the totals.” The regulations at 24
CFR 85.36(d)(3) provide that the method in which price is not used as a
selection factor can only be used in the procurement of architectural and
engineering professional services and that it cannot be used to purchase
other types of services. The comment by the County’s representative
reflects a continued effort to justify the procurement, although it did not
comply with the selection method cited in the request or with Federal and
County procurement requirements.

The remaining four ranking factors - The County’s failure to establish
and/or implement objective criteria for evaluating the remaining four
ranking factors resulted in significant unexplained score variations. The
score variations were not logical because the selection committee


                               8
members all reviewed and scored the same information, which should
have resulted in scores with less variance. The following table provides
examples of some of the score variations using four of the nine selection
committee members for two of the five ranking factors. However, we
observed similar score variations by selection committee members for
some of the other ranking factors.

                     Committee          Committee       Committee   Committee
    Proposal
                     member A           member B        member C    member D
  Ranking factor: experience/expertise (35 maximum points)
  Proposal 1              15                 20            29          30
  Proposal 2*             30                 30            35          35
  Proposal 3              15                 25            30          35
  Proposal 4              15                 30            25          25
  Proposal 5              20                 15            20          35
  Ranking factor: proposed cost (30 maximum points)
  Proposal 1              10                 20            28           0
  Proposal 2*             20                 20            30           0
  Proposal 3              10                 20            28           0
  Proposal 4              15                 20            20           0
  Proposal 5              15                 20            26           0
* Proposal 2 was the contractor selected by the County.

For instance, when evaluating experience/expertise for proposal 1,
committee member A and committee member D reviewed the same
information, but committee member D awarded the factor 30 of a possible
35 points, while committee member A only awarded 15 points. The table
reflects similar discrepancies in the scoring of experience/expertise by
committee members for proposals 3, 4, and 5 and proposed cost for
proposals 1, 3, and 5. Committee member D did not score proposed cost.
We interviewed committee member D, who had participated in other
County procurement evaluations. He stated that he did not recall, but may
not have scored proposed cost because he was instructed not to do so or
did not know how he was supposed to score this factor.

We interviewed two members of the selection committee, who were also
County employees. They stated that the County did not provide
instructions concerning the rationale committee members should use to
help them decide how many points to assign within the point range to any
of the five ranking factors. This condition indicated a failure by County
officials to adequately plan for the procurement. As a result, the
committee members were left to use their individual discretion or
preference rather than objective criteria to score the ranking factors. The
subjective assessments in essence represented an arbitrary process that
was prohibited by Federal procurement requirements. The arbitrary
process caused or contributed to the scoring variances.




                              9
                 The County’s legal representative stated that in his legal opinion, the
                 selection committee awarded the administrative contract in full
                 compliance with procurement procedures. We assessed the opinion and
                 determined that it was not factually supported. The County’s position
                 with regard to the procurement reflected a continued lack of understanding
                 of Federal procurement requirements and an unwillingness or lack of
                 ability to comply with the requirements, which County officials either
                 knew or should have known.

The County Violated HUD
Procurement Requirements in
the NSP Implementation
Contract

          The County did not have a contract with the nonprofit selected to implement its
          NSP, and the nonprofit was not selected on a competitive basis. The regulations
          at 24 CFR 85.36(c)(1) provide that all procurement transactions will be conducted
          in a manner providing full and open competition consistent with the standards of
          section 85.36. Our assessment showed that

                 NSP implementation services performed by a nonprofit were not
                 competitively procured - The County’s NSP contract administrator
                 awarded a noncompetitive contract to a nonprofit to implement the
                 County’s NSP. Despite the lack of competition, the County allowed the
                 contract administrator to use the nonprofit to implement practically all
                 phases of its NSP. We interviewed the contract administrator, who stated
                 that it did not select the nonprofit through a competitive process because
                 the selection was made before it submitted the administrative proposal to
                 the County. The contract administrator stated that the nonprofit was the
                 best fit to do the work and there was no other nonprofit in the area that had
                 its credibility and experience. As a result, the County allowed the
                 noncompetitive selection of the nonprofit without the control needed to
                 ensure that the fees for the implementation services were properly set and
                 reasonable.

                 We observed that the initial June 2009 agreement between the contract
                 administrator and the nonprofit did not include specific compensation
                 rates and/or amounts. The regulations at 24 CFR 85.36(d)(3) provide that
                 the method in which price is not used as a selection factor can only be
                 used in the procurement of architectural and engineering professional
                 services and that it cannot be used to purchase other types of services.
                 The administrative contractor amended the contract with the nonprofit in
                 March 2010 after we raised questions about the agreement. The revised
                 agreement included a fee schedule. However, some of the fees were
                 higher than the fee examples cited in the administrative contractor’s
                 proposal.


                                          10
For example, finding 2 discusses payments made to the nonprofit based on
a fee structure that was different from the fee example shown in the
contract administrator’s NSP proposal. County officials commented that
the fee examples were nonbinding and that it was up to the contract
administrator to establish the fee amounts because the contract was
between the administrator and the nonprofit. The County’s comments
were not reasonable because the fee structure was not set by a competitive
award, the open-ended fee arrangement lacked the safeguards needed to
prevent unreasonable costs and abuse, and the County paid the fees instead
of the contract administrator.

The County and not its NSP contract administrator should have contracted
with the nonprofit to implement its NSP - The agreement with the
nonprofit to implement the County’s NSP should have been between the
County and the nonprofit rather than the NSP contract administrator and
the nonprofit because the County paid the nonprofit for its services. The
County’s agreement with the contract administrator did not provide funds
to pay the nonprofit to implement the NSP. The County paid the nonprofit
through a reimbursement arrangement that was separate and apart from the
payments the County made to the contract administrator. The payment
arrangement indicated that the nonprofit worked for the County despite its
separate contract with the County’s contract administrator. In essence, the
County paid the nonprofit without a contract and at prices negotiated by
the contract administrator and not the County. Since the County was
responsible for the payments to the nonprofit, the contract for the
implementation services should have been between the County and the
nonprofit based on a competitive award.

The County commented that it did not understand our logic in criticizing it
for failing to have a contract with the nonprofit, which had a contract with
the County’s NSP administrator. This condition may have been avoided if
the County had required the nonprofit to sign as a party to the
administrative contract. The proposal submitted by the County’s
administrative contractor stated that the program described in the proposal
was designed by the selected administrative contractor and its nonprofit
partner that would implement the program. However, the County did not
require the nonprofit to sign as a party to the NSP administrative contract.
We discussed this situation with HUD’s legal counsel, who stated that the
County could not enforce the implementation components of the
administrative contract relative to the nonprofit.

The County did not have adequate contractual safeguards to protect its
interest in properties purchased with NSP funds that were titled in the
name of the nonprofit. This condition created the problem discussed in
finding 2.




                         11
The County Improperly Allowed
an Apparent Conflict of Interest in
the Procurement Process

          The review identified two apparent conflicts of interest which the County allowed or
          took no action to prevent during the procurement of its NSP administrative contract.
          The regulations at 24 CFR 85.36(b)(3) prohibit an employee, officer, or agent of the
          grantee or subgrantee from participating in the selection or award or administration
          of a contract supported by Federal funds if a conflict of interest, real or apparent,
          would be involved. The regulations at 24 CFR 85.36(c)(1) provide that an
          organizational conflict of interest is considered to be a prohibited restriction to
          competition. The County’s purchasing procedures manual required employees to
          follow its code of ethics, which required staff to identify and eliminate participation
          of any individual in operational situations in which a conflict of interest may be
          involved. We identified two apparent conflict-of-interest situations:

                 One apparent conflict of interest involved a member of the selection
                 committee and the nonprofit partner of the County’s NSP administrative
                 contractor. The selection committee member was the executive director of
                 an association in which the contractor’s nonprofit partner was a member at
                 the time of the selection process. We reviewed this issue with
                 representatives of HUD’s Office of General Counsel, and they concluded
                 that the situation constituted an apparent conflict of interest in violation of
                 Federal regulations.

                 We noted that the committee member in question was the only one of the
                 nine-member selection committee to award a perfect score to any of the
                 submitted proposals. The proposal that included the perfect score was for
                 the administrative contractor selected by the County.

                 The County disagreed that there was an apparent or otherwise conflict of
                 interest in the above situation. The County maintained that neither the
                 selection committee member nor the association directly or indirectly
                 benefited from whichever contractor was selected.

                 The other apparent conflict of interest involved the prior director of the
                 County’s Division and a prior County commissioner, who were affiliated
                 with a firm that submitted a proposal to administer the County’s NSP.
                 Although County officials were aware of the affiliations, they considered the
                 firm’s proposal to be responsive to the request, and the selection committee
                 included it as one of the five proposals that it evaluated for contract award.

                 The County acknowledged the apparent conflict of interest in this situation
                 but stated that the issue became moot after the company was not selected to
                 be among the firms included in the short list used to make the final selection.


                                            12
                    The County should have disqualified the firm from consideration during the
                    competition instead of allowing it to compete up to the point at which the
                    County selected the short list.

  HUD Initiated Preliminary
  Actions

             We briefed HUD’s Jacksonville Office of Community Planning and Development,
             Office of General Counsel, and County officials concerning the above issues during
             our audit. Although our conclusions were not final at the time, the violations were
             significant enough to warrant immediate action to address and attempt to resolve
             them before the County’s September 2010 obligation deadline. In response, HUD
             required the County to

                    Rebid the NSP administrative contract and discontinue payment to the
                    contractor until supported by a properly awarded contract.

                    Ensure that titles to NSP-acquired properties are in the name of the County
                    or an authorized entity instead of the nonprofit subcontractor of the contract
                    administrator with whom the County had no contract for NSP services.

                    Obtain HUD review and approval for all NSP draws that exceed $25,000.

             The County informed HUD that it believed that it selected the NSP administrative
             contractor in accordance with the County’s purchasing procedures. Despite its
             disagreement with the tentative audit results, the County requested that HUD allow
             it to forego rebidding its NSP administrative contract and to allow its in-house staff
             to assume temporary responsibility for the administration and implementation of its
             NSP with the assistance of the selected contractor and its nonprofit partner.

             HUD agreed to allow the County to continue carrying out its NSP with its in-house
             staff and to allow the completion of activities that were already underway.
             However, HUD would not allow the County to start new NSP activities using the
             administrative contractor and its nonprofit partner.


Conclusion


             The above violations occurred because County officials did not adequately plan
             for the procurement of NSP services and did not implement controls that they
             either knew or should have known to ensure that procurements complied with
             requirements. The number and significance of the procurement violations bring
             into question the County’s capacity to implement its NSP in accordance with
             competitive contracting requirements. The violations warrant termination of the


                                               13
          administrative contract and the services provided by the nonprofit to implement
          the NSP. Unless the County can correct the violations in a timely manner, the
          terminations may prevent it from obligating more than $4.4 million in NSP funds
          by the program’s statutory 18-month deadline in September 2010.


Recommendations


          We recommend that the Director of the Jacksonville Office of Community Planning
          and Development determine whether the County

          1A. Has the capacity to administer its NSP in accordance with HUD’s procurement
              requirements and if not, terminate the County’s NSP and recapture all funds
              that are not obligated to complete ongoing activities at the time this
              determination is made. This action should be coordinated with
              recommendation 1D.

          We further recommend that the Director require the County to

          1B. Promptly terminate its NSP administrative contract due to its failure to comply
              with procurement requirements and deobligate $745,000 in fees contracted for
              but not yet paid to the contractor.

          1C. Promptly terminate the services of the nonprofit currently implementing its
              NSP.

          1D. Arrange for the continued administration and implementation of its NSP
              through the use of County staff or the proper procurement of contractors to
              administer and/or implement its NSP and ensure the proper obligation of
              $4,494,941 that had not been obligated to NSP activities at the time of our
              review.

          1E. Ensure that actions are taken to prevent real or apparent conflicts of interest in
              future NSP procurements.




                                            14
Finding 2: The County Did Not Have Adequate Safeguards Over the
Ownership of Abandoned and/or Foreclosed-Upon Properties Acquired
with NSP Funds and Revenues Expected From Their Disposition
The County did not take proper actions to protect the ownership of abandoned and foreclosed-
upon properties acquired with NSP funds or the revenues expected from their disposition from
loss and misuse between the time of their acquisition and their disposition. The funds were put
at risk because the County allowed a nonprofit entity, with whom it had no contract, to acquire
abandoned and foreclosed-upon properties in its name without title restrictions and sell the
properties. Specifically, the County

       Closed on the purchase for more than $4.4 million for NSP properties in which the
       nonprofit held unrestricted title without adequate safeguards. The nonprofit expected to
       sell the properties to generate more than $1.7 million in projected revenues also without
       adequate safeguards to protect the funds from loss or misuse.

       Paid the nonprofit more than $98,000 for NSP services based on a questionable fee
       schedule.

As a result, more than $6.1 million of the County’s NSP funds and projected revenue are at risk
because the County did not execute an agreement with the nonprofit entity to secure and
safeguard the funds from potential loss or attachments and paid the nonprofit more than $98,000
in questionable fees for NSP services.



The County Did Not Have a Contract With
the Nonprofit Entity It Used To Acquire
and Sell Properties Acquired With NSP
Funds

              The County allowed the nonprofit entity to hold title to properties purchased with
              NSP funds and sell them without a contract with the entity to govern the terms of
              its holding the titles and subsequent disposition of the properties. As a result, it
              did not have the safeguards needed to protect the properties from the time of their
              acquisition to the point of sale and the revenues expected from their disposition
              from losses or restriction that could result from lawsuits, liens, and judgments
              against the nonprofit. Also, because the nonprofit held unrestricted title to the
              properties, there was nothing to prevent it from using the properties as security to
              obtain loans or secure other financial arrangements.

              Office of Management and Budget (OMB) Circular A-133 requires reasonable
              assurance that funds, property, and other assets are safeguarded against loss from
              unauthorized use or disposition. The Federal Register, dated October 6, 2008,
              Vol.73, No. 194, page 58340, provides that units of general local government and


                                               15
subrecipients must incorporate in agreements with private individuals and other
entities that are not subrecipients such provisions as are necessary to ensure
compliance with the requirements governing disposition of revenue generated by
activities carried out pursuant to section 2301(c). The regulations at 24 CFR
570.501(b) state that the recipients are responsible for ensuring that Community
Development Block Grant funds (which included NSP funds) are used in
accordance with all program requirements. The use of designated public
agencies, subrecipients, or contractors does not relieve the recipient of this
responsibility.

The nonprofit was a subcontractor to the County’s NSP contract administrator
(discussed in finding 1), but it had no contract with the County to implement the
NSP. The administrative contract, executed on June 3, 2009, limited the
administrator’s role to the provision of administrative oversight of the NSP, but it
stipulated that the nonprofit would purchase, hold title to, and sell NSP properties.
The administrative contract also required the administrator to return program
income from property sales to the County. We reviewed this matter with HUD’s
legal counsel, who determined that the administrative contract provisions related
to the nonprofit, including its holding title to and selling NSP-acquired properties,
were legally enforceable against the contract administrator but not against the
nonprofit because the nonprofit was not a party to the administrative contract.

Specifically, the County designed the implementation of its NSP in such a way
that it allowed the nonprofit, with whom it did not have a contract, to

       Hold unrestricted title to all NSP properties planned for acquisition under the
       program. At the time of our review, the County had closed on the purchase
       of more than $4.4 million of the more than $7.8 million budgeted for NSP
       property acquisitions in which the nonprofit held unrestricted ownership.
       We selected and reviewed the recorded deeds for eight NSP properties
       purchased and titled in the name of the nonprofit. The deeds did not contain
       restrictions that would limit the nonprofit’s use of the properties or protect
       them from attachment to settle lawsuits, liens, or judgments against the
       nonprofit or prevent the nonprofit from using the properties to secure loans
       or other financial obligations.

       In response to preliminary actions initiated by HUD, discussed in finding 1,
       the County executed an indemnification agreement with the nonprofit and
       said that it would obtain a note and mortgage from the nonprofit in favor of
       the County for any property it acquired with NSP funds. We examined the
       indemnification agreement and determined that it did not provide the proper
       safeguards. During a meeting with County officials on June 22, 2010, the
       County’s legal representative stated that mortgages were recorded between
       the nonprofit and the County at the time each property was acquired by the
       nonprofit that provided the type of safeguards we were concerned about.
       The official later retracted his comment when it was determined that there



                                 16
      were no mortgages recorded between the County and the nonprofit when
      NSP properties were acquired. About a month later, on July 21, 2010, the
      County provided copies of recorded mortgages for the NSP properties with
      the nonprofit as borrower and the County as lender. A representative from
      HUD’s Office of General Counsel reviewed the mortgages and concluded
      that they did not provide adequate safeguards to protect the County’s interest
      in the properties from the time of their acquisition to the time of their sale.

      Hold title without safeguards to protect the properties from lawsuits,
      judgments, and other attachments that could arise against the nonprofit
      and which could jeopardize the more than $1.7 million in revenues
      projected to be generated from sale of the properties. We obtained the
      expected revenue percentage from the proposal submitted by the
      administrative contractor and projected the revenue amount based on the
      total acquisition amount titled to the nonprofit multiplied by 40 percent.

      We also noted that without a proper contract, the regulations would allow
      the nonprofit to keep program income despite the County’s intentions and
      expectation that the nonprofit would return the funds to the County. The
      Federal Register, dated June 19, 2009, Vol. 74, No. 117, page 29224,
      states that revenue generated from the use of NSP funds and received by a
      private individual or other entity that is not a subrecipient is not required
      to be returned to the grantee as was required by section 2301(d)(4). It
      further states that grantees are strongly encouraged to avoid the undue
      enrichment of entities that are not subrecipients.

      We reviewed records related to the nonprofit’s sale of nine NSP-acquired
      properties and determined that the nonprofit returned to the County more
      than $555,000 in revenues generated from the sales. The nonprofit’s
      voluntary compliance with the County’s administrative contract to return
      income to the County was no substitute for the missing agreement and
      safeguards that should be in place to protect NSP program income. The
      controls were needed in case the nonprofit was sued and to protect the
      funds from loss for reasons including but not limited to liens, suits,
      judgments, fraud, or abuse between the time of the acquisition and the
      point of sale.

As a result of the above conditions, the County did not have adequate safeguards
to protect more than $6.1 million in NSP acquisition funds ($4.4 million) and
projected revenues from property sales ($1.7 million) from losses or restriction
that could result from the nonprofit’s operations.




                                17
The County Lacked Adequate
Support for NSP Service Fees


           The County paid the nonprofit more than $98,000 in NSP funds for acquisition
           and inspection services that exceeded the fee amounts contained in the proposal
           submitted by the administrative contractor. The fees paid in excess of the
           proposed rates were for all 67 NSP properties acquired from the program’s
           inception through April 30, 2010. The payment occurred because County staff
           approved fee increases although it did not have the authority to do so. The
           proposal submitted by the contract administrator contained a schedule that listed
           examples of service fees, including the acquisition and inspection fees that would
           be charged for services rendered by the nonprofit. The contract the County
           awarded to the administrator incorporated the proposal by reference, including the
           example fee schedule. The fees charged exceeded the amounts cited in the
           proposal by $1,550 per property and amounted to more than $98,000 for the 67
           properties.

           The regulations at 24 CFR 85.36(b)(2) provide that grantees and subgrantees will
           maintain a contract administration system which will ensure that contractors
           perform in accordance with the terms, conditions, and specifications of their
           contracts or purchase orders. The County’s purchasing procedures manual
           provided that any amendment, modification, or change order must be approved by
           the board to be effective, except when a change order decreases the final amount
           of the contract. Section 16.1 of the NSP administrative contract also required
           modifications, amendments, or alterations in the terms or conditions to be
           approved by the board.

           After the contract was awarded, the NSP administrator submitted a revised fee
           schedule to the County’s Division. The revision represented a change order that
           required review by the board to determine whether to approve the request.
           However, Division staff did not submit the change order to the board but, instead,
           approved the change order and allowed the increased fee amounts, although the
           Division did not have the authority to approve change orders. We reviewed the
           change order and found no justification for the fee increase, which allowed the
           nonprofit to receive more funds up front during the early phase of the NSP
           contract. We also noted that Division staff increased the inspection fee by $50
           per property, although the change order did not request the increase.

           A representative for the administrative contractor stated that the fees cited in the
           proposals were examples and that the contractor had requested the County to
           adjust them based on actual experience after the work started. The representative
           stated that the request increased the fees for the cited services but decreased fees
           cited for certain other contract services. A County representative stated that the
           Division did not seek board approval of the change order because there was no
           overall increase or decrease in the scope of services. We recognize that in the



                                            18
                  proposal, the fee schedules were cited as examples. However, we maintain that
                  the administrator and the nonprofit were bound by the fee schedule and had an
                  obligation to ensure that they could do the work for the proposed amounts. The
                  contract required amendments and modifications to be approved by the board.

    Conclusion


                  The above conditions occurred because County officials did not adequately
                  perform their responsibility to manage and safeguard NSP funds specifically in
                  relation to titles/ownership of acquired properties that were abandoned or
                  foreclosed upon, revenues expected from the sale of NSP-acquired properties, and
                  payments to the nonprofit for NSP services. As a result, more than $6.1 million
                  of the County’s NSP funds and projected revenue are or were at risk because the
                  County did not execute an agreement with the nonprofit entity to secure and
                  safeguard the funds from potential loss or attachments and paid the nonprofit
                  more than $98,000 based on a questionable fee schedule.

Recommendations

                  We recommend that the Director of the Jacksonville Office of Community Planning
                  and Development require the County to

                  2A. Reimburse the NSP $ 4,426,071 2 from non-Federal funds if it does not require
                      and ensure that the nonprofit entity transfers title to all NSP properties
                      purchased in its name to the County or an entity with the legal authority to
                      hold title to properties.

                  2B. Develop and submit for HUD’s review and approval a template for a mortgage
                      that includes safeguards needed for past and future NSP property acquisitions
                      to protect them from losses due to lawsuits, liens, and judgments against the
                      nonprofit or other entities used in the future to hold title to NSP properties for
                      the period between their acquisition date and their disposition.

                  2C. Record a mortgage prepared using the HUD-approved template in favor of the
                      County for each past and future NSP acquisition that has not been sold for the
                      full acquisition price to ensure that $1,770,428 3 in revenue expected from the
                      sale of the properties is adequately safeguarded and protected.




2
  This amount ($4,426,071) is the difference between the contract sales prices for 82 properties titled to the nonprofit
entity ($5,055,021) and the contract sales price ($628,950) for nine properties that had been sold.
3
  This amount was based on the 40 percent rate for projected revenues that was included in the administrative
contractor’s proposal applied to the $4,426,071 in NSP funds used for acquisitions.


                                                          19
2D. Reimburse the program $98,550 from non-Federal funds for the fees paid
    based on a questionable fee schedule if the Director determines that they
    were excessive and ensure that future services are billed at the contract rate
    or based on a properly executed contract change order.




                                20
Finding 3: The County Understated NSP Acquisition Obligations and
Did Not Post Its NSP Quarterly Progress Reports to Its Web Page in a
Timely Manner
The County did not accurately report NSP acquisition obligations in HUD’s Disaster Recovery
Grants Reporting (DRGR) system and did not post NSP performance reports to its Web page in a
timely manner. We attribute these conditions to error and a lack of adequate planning and
oversight by the County of their NSP. It consistently understated NSP acquisition obligations in
DRGR because it reported the net proceeds due from the buyer as the obligation amount rather
than the larger gross amount due from the buyer. The inaccurate reports deprived HUD of
information it needed to monitor NSP operations and the untimely reports hindered citizens from
timely access to information concerning the status of the NSP.



 Reporting of NSP Acquisition
 Obligations Was Inaccurate

              We examined all 34 acquisition obligations that the County had posted to DRGR
              as of December 31, 2009, and determined that it understated the obligations by
              more than $54,000 for 31 acquisitions. The Regulations at 24 CFR 85.20 provide
              that the grantee’s financial management system must meet the standard for
              financial reporting. That standard requires accurate, current, and complete
              disclosure of the financial results of financially assisted activities in accordance
              with the financial reporting requirements of the grant.

              The understated acquisition obligations occurred because the County
              systematically and erroneously reported the obligations based on the net cash
              amounts that were due from the buyer (the County through its nonprofit agent) as
              shown on HUD-1 settlement statements. The County should have used the
              settlement statement line for the gross amount due from the buyer as the
              obligation amount because that amount represented the total acquisition cost. The
              net amount due from buyer understated the obligations because that amount was
              reduced for items such as the earnest money deposit and credit for taxes attributed
              to the seller. As a result, similar understatements occurred for acquisition
              obligations the County posted to DRGR after December 31, 2009. We informed
              County officials about the underreported acquisition obligations, and they stated
              that they would correct the understatements.

              We observed that County staff members experienced difficulties when providing
              responses to our requests for documents to support and reconcile to the entries
              they posted to DRGR. The delays indicated that the County needed to improve
              the organization and accuracy of records maintained to support the entries it
              makes to the system.




                                               21
Performance Reports Were Not
Posted on the County’s Web
Site in a Timely Manner


             At the time of our review, the County had not posted its NSP quarterly performance
             reports for March 31, 2010, and June 30, 2010, to its Web site. The Federal
             Register, Vol.73, No. 194, page 58341, dated October 6, 2008, requires that
             quarterly reports be posted prominently on the grantee’s official Web site. This
             situation occurred because the County did not have adequate controls to ensure that
             the reports were posted to the Web site in a timely manner. As a result, County
             residents were not kept informed in a timely manner concerning the progress of the
             NSP.


Conclusion


             We attribute the above conditions to error and the lack of adequate planning and
             oversight by County officials to ensure the accuracy of NSP acquisition
             obligations and the posting of the County’s NSP quarterly reports to its Web site
             in a timely manner. The inaccurate reports deprived HUD of information needed
             to monitor the County’s NSP and the untimely reports hindered County residents
             from gaining timely access to information about the status of the NSP.

Recommendations



             We recommend that the Director of the Jacksonville Office of Community
             Planning and Development require the County to

             3A. Review and determine whether NSP funds the County obligated after the
                 completion of our on-site review met the requirements for obligations by its
                 obligation deadline date.

             3B. Complete and post its March 31, 2010, and June 30, 2010, NSP quarterly
                 reports to its Web page and ensure that future quarterly reports are
                 completed and posted in a timely manner.




                                              22
Finding 4: The County Did Not Require Its CHDO To Obtain
Competitive Bids
The County did not require its CHDO to comply with its contract that required it to obtain
competitive bids in the purchase of construction services. As a result, the County and the CHDO
did not have documentation to support the reasonableness of more than $1.2 million in
construction contract costs examined during the review. We used our staff appraiser to review
the sampled construction costs and determined that the costs were reasonable. However, the
violations reflected a lack of attention by County and CHDO officials to their responsibility to
enforce procurement requirements that were designed to ensure and support the reasonableness
of construction costs for HOME-funded projects.




 The CHDO Did Not Follow a
 Competitive Bid Process


              The County did not require its CHDO to obtain competitive bids for construction
              contracts as required by its agreement with the CHDO. The regulations at 24
              CFR 92.504 provide that recipients are responsible for managing the day-to-day
              operations of their HOME program, ensuring that HOME funds are used in
              accordance with all program requirements and written agreements. The County
              had not monitored the CHDO in the last 5 years, and there was no evidence that it
              enforced its contract provision that required the CHDO to comply with Federal
              procurement requirements.

              Article VI of the agreement between the County and its CHDO required the
              CHDO to comply with the regulations at 24 CFR Part 84. The regulations at 24
              CFR 84.43 provide that all procurement transactions shall be conducted in a
              manner to provide, to the maximum extent practical, open and free competition.
              The recipient shall be alert to organizational conflicts of interest as well as
              noncompetitive practices among contractors that may restrict or eliminate
              competition or otherwise restrain trade. Awards shall be made to the bidder or
              offeror that is responsive to the solicitation and is most advantageous to the
              recipient, considering price, quality, and other factors.

              We interviewed CHDO officials, who stated that they did not solicit competitive
              bids from construction contractors but selected the contractors from an established
              contractor list and requested that firms provide proposals for the construction
              projects. This statement was significant considering that for 2005 through 2008,
              the CHDO’s general ledger showed that it spent more than $4.2 million for new
              construction projects that were completed by five contractors. The payments
              included work on 28 separate homes. Three of the contractors worked on 25 of
              the 28 homes and were paid more than $3.9 million. The award of such a large


                                              23
           portion of the funds to so few contractors in the absence of competition gave the
           appearance that the CHDO provided preferential treatment to the three
           contractors.

           We examined procurements for 9 of the 28 construction contracts that totaled
           more than $1.2 million and determined that in neither instance did the CHDO
           obtain competitive bids for the work. Instead, it accepted the proposed costs
           submitted by the firms without competition. In addition, we found no evidence of
           cost estimates independent of those provided by the contractors. Thus, the files
           contained no evidence of competition needed to determine and support that the
           costs were reasonable and that preferential treatment was not given to the three
           most frequently used contractors. We used our staff appraiser to inspect the nine
           properties and to determine whether the construction costs were reasonable. The
           appraiser determined that the construction costs were reasonable.

           The above conditions occurred because County and CHDO officials did not fulfill
           their obligation to enforce procurement requirements that were designed to ensure
           and support the reasonableness of construction cost paid with HOME funds. The
           fact that the cost we examined turned out to be reasonable does not justify not
           enforcing the requirements.


The County Did Not Resolve Prior
HUD Recommendations Concerning
CHDO Procurement on a Timely
Basis


           The County did not require the CHDO to correct procurement violations on a
           timely basis, despite a prior HUD review that identified this problem and
           recommended corrective action. Specifically, HUD’s October 2008 monitoring
           report expressed a concern that contrary to its contract with the County, the
           CHDO did not obtain bids for construction contract work. The County
           responded that it was developing a new agreement with the CHDO. As of the
           date of our review, 11 months had passed since the County’s scheduled
           completion date, but the County still had not completed the actions recommended
           by HUD. For instance, as of July 26, 2010, the County had just completed the
           draft CHDO agreement, which County staff members said they planned to submit
           to the board for approval on August 4, 2010. The draft agreement contained
           language that would require the CHDO to obtain competitive bids for
           construction contracts. County staff stated that it would monitor the CHDO on an
           annual basis to ensure compliance with the contract.




                                           24
Conclusion



             The County had not required its CHDO to obtain competitive bids for contracts
             awarded for HOME-funded construction despite the fact that HUD had previously
             brought this matter to its attention. This condition reflected a lack of attention by
             County and CHDO officials to their obligations to ensure the reasonableness of
             construction cost paid with HOME funds and prohibit noncompetitive practices
             that may restrict or eliminate competition.


Recommendations


             We recommend that the Director of the Jacksonville Office of Community
             Planning and Development require the County to

             4A. Ensure that all future CHDO construction contracts comply with
                 procurement requirements in compliance with its CHDO agreement.

             4B. Ensure that its staff monitors the CHDO’s compliance with requirements
                 designed to ensure that HOME funds used for contract work are reasonable
                 and that the practices do not restrict or eliminate competition.




                                              25
                         SCOPE AND METHODOLOGY

We performed the audit from February to July 2010 at the County’s Division office located in
Bartow, FL, and the HUD Office of Community Planning and Development in Jacksonville, FL.

We did not review and assess general and application controls for computer-processed data that
the County entered into HUD’s DRGR system for NSP obligations and its general ledger for
NSP and HOME revenues and/or expenditures. We conducted other tests and procedures to
ensure the integrity of obligations that were relevant to the audit objectives and for expenditures
and revenues. Specifically, we examined HUD-1 settlement statements, checks, payment
vouchers, and other supporting documentation to determine the accuracy of obligations that the
County entered into the DRGR system and for expenditures and revenues that the County
entered into its general ledger. The review disclosed that the County entered inaccurate or
inadequately supported information into the systems.

The review generally covered the period October 1, 2005, through June 21, 2010. We adjusted
the review period when necessary. To accomplish our objectives, we

       Researched HUD handbooks, the Code of Federal Regulations, Federal Registers, OMB
       circulars, and other requirements and directives that govern the NSP and HOME
       program.

       Interviewed officials and staff of the County and the HUD Office of Community
       Planning and Development to obtain a general understanding of the County’s NSP and
       HOME program.

       Obtained legal opinions from HUD’s chief counsel in the Office of General Counsel in
       Jacksonville, FL, on various matters related to procurement and conflicts of interest.

       Assessed the contract the County awarded to administer its $14.5 million NSP and the
       services it obtained from a nonprofit to implement the NSP for compliance with
       procurement requirements.

       Obtained and reviewed DRGR system reports from the County and HUD Office of
       Community Planning and Development in Jacksonville, FL. We examined all 34
       acquisition obligations that the County had posted to DRGR as of December 31, 2009, to
       determine whether the postings were for legitimate obligations.

       Researched the Lexis-Nexis database and Guide Star nonprofit Web site for possible
       affiliations and conflicts of interest and public records for recorded deeds and mortgages
       on NSP-acquired properties.

       Conducted site visits to NSP properties to confirm the existence and location of the
       properties.



                                                26
       Assessed a sample of payments that the County made to its administrative contractor to
       determine whether the fee charged to the County was consistent with the fee schedule
       provided in the proposal and the executed contract. We examined payment vouchers for
       $200,000 of the $480,000 that the County paid the contractor during the period June 3,
       2009, through June 21, 2010. The results apply only to the items selected and cannot be
       projected to the universe or population.

       Assessed payment invoices submitted by the nonprofit that implemented the County’s
       NSP through a contract with the County’s contract administrator. We examined all of the
       payment invoices, totaling $219,915 that was billed for the period October 23, 2009,
       through May 5, 2010.

       Assessed a sample of payments made for new construction in the County’s HOME
       program by the nonprofit that also implemented its NSP. We examined $1,218,645 of
       the $4,214,957 paid by the nonprofit for the period October 6, 2005, through December
       31, 2009, for 9 of 28 properties. The review included site inspections with an Office of
       Inspector General (OIG) appraiser of the nine sample properties for the appraiser to
       assess whether the construction costs were reasonable. The results apply only to the
       items selected and cannot be projected to the universe or population.

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.




                                               27
                              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 program operations - Policies and procedures
                  that management has implemented to reasonably ensure that a program meets
                  its objectives.

                  Compliance with applicable laws and regulations - Policies and procedures
                  that management has implemented to provide reasonable assurance that
                  program implementation is in accordance with laws, regulations, and
                  provisions of contracts or grant agreements.

               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.




                                                 28
Significant Deficiencies


             Based on our review, we believe that the following items are significant deficiencies:

                The County violated procurement requirements for the administration and
                implementation of its NSP (see finding 1).

                The County did not have adequate safeguards over the ownership of
                abandoned and/or foreclosed-upon properties acquired with NSP funds and
                revenues expected from their disposition (see finding 2).

                The County did not comply with Program requirements for accurate reporting
                of obligations in HUD’s system (see finding 3).

                The County did not require its CHDO to obtain competitive bids (see finding
                4).




                                              29
                                    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/

              1B                                                             $745,000
              1D                                                           $4,494,941
              2A                                      $4,426,071
              2C                                                          $1,770,428
              2D                     $98,550                             __________
             Total                   $98,550          $4,426,071          $7,010,369

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 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. In this
     instance, if our recommendations are implemented, HUD will require the County to (1)
     deobligate $745,000 for the improper administrative contract, (2) ensure the proper
     obligation of or return to HUD $4,494,941in NSP funds not yet obligated, and (3)
     provide proper safeguards to protect $1,770,428 in projected revenues from loss while the
     properties are held for sale.




                                             30
Appendix B
        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         31
Comment 1




Comment 2



Comment 3




Comment 4




            32
Comment 5




Comment 6




Comment 7



Comment 8




            33
Comment 9




Comment 10




Comment 11




Comment 11




             34
Comment 12




Comment 13




Comment 5



Comment 7



Comment 8


Comment 8


Comment 9




             35
Comment 10




Comment 14




Comment 14




Comment 14




Comment 15




             36
Comment 15




Comment 16




Comment 16




Comment 17




             37
Comment 18




             38
                         OIG Evaluation of Auditee Comments

Comment 1   The County disagreed with finding 1 and the recommendations. The County’s
            response focused on NSP accomplishment without acknowledging the validity
            and the seriousness of the procurement violations discussed in the finding.

            The County was required to comply with federal procurement standards that
            required it and its subcontractors to conduct all procurement transactions in a
            manner that provide full and open competition and without arbitrary actions that
            are considered to be restrictive of completion. The County’s procurement
            violations underscore the need for the corrective actions included in
            recommendations 1A, 1B, 1C and 1D.

Comment 2   The County commented that in its opinion it followed purchasing procedures that
            resulted in a fair, transparent and competitive procurement process.

            The County’s procurement violations involve requirements which it either knew
            or should have known. The procurement violations presented in the finding
            rendered the procurement of the NSP administrative contract to be invalid along
            with a failure by the County and its NSP contract administrator to competitively
            purchase the services performed by the nonprofit hired to implement the NSP.

Comment 3   The County commented that its request for proposal for NSP administration
            clearly set forth its requirements and criteria for evaluating proposals. It further
            commented that the selection committee recognized that there was a problem in
            comparing pricing, so in response to the dilemma and in compliance with the
            County’s procedures, the committee agreed to short list the top three firms and
            conduct interviews.

            We were aware that the request for proposal listed five ranking factors and
            explained that a selection committee would evaluate proposals against the five
            ranking factors. We did not question those components of the request. The
            finding questioned the County’s failure to follow federal procurement
            requirements and its own requirement for evaluating the price ranking factor and
            to plan and implement procedures the selection committee should use to evaluate
            and assign points within the point range for the other four ranking factors. We
            reviewed the County’s purchasing procedures and the request for proposal and
            found no provision that provided the County with the option to replace the
            selection method cited in the request (which included the consideration of price)
            with an interview process. Even if the County’s purchasing procedures and the
            request had contained such a provision it would not have mattered because the
            provision would have been in violation of federal procurement standards for the
            type of procurements questioned by the audit. Regulations at 24 CFR 85.36(d)(3)
            provide that the method in which price is not used as a selection factor can only
            be used in the procurement of architectural and engineering professional services
            and that it cannot be used to purchase other types of services.



                                              39
Comment 4   The County commented that the OIG suggests that the services provided by a
            subcontractor required an additional competitive procurement and a separate
            contract. The County commented that its goal from the beginning was to contract
            for the NSP administration and implementation with one vendor. It also
            commented that the firm selected through the competitive process included in its
            proposal that it would contract with the subcontractor for certain services.

            When the County planned the NSP it was required to ensure that the plans for
            administering and implementing the NSP complied with federal procurement
            standards. Regulations at 24 CFR 85.36c provide that all procurement
            transactions will be conducted in a manner providing full and open competition
            consistent with the standards of 85.36. The County did not comply with federal
            procurement standards when it awarded the NSP administrative contract and the
            County and its NSP administrator did not comply with federal procurement
            standards when the administrator awarded a contract to the nonprofit to
            implement the NSP.

            As stated in the finding, the County should have awarded the implementation
            contract instead of its NSP administrator because the County paid for the
            implementation services. In effect, the County allowed the NSP administrator to
            award a noncompetitive contract to the nonprofit and then set the fees to be paid
            for the services although the nonprofit worked for and was paid by the County
            and not the NSP administrator.

Comment 5   The County commented that the selected firm had always been contractually
            liable for its subcontractors with protection supported by a Commercial General
            Liability insurance policy and a Professional Liability insurance policy. It also
            commented that in response to OIG’s concerns, the County requested and the
            selected firm and the nonprofit willingly agreed to execute an indemnification
            agreement for the benefit of the County. It commented that the agreement was
            backed by insurance coverage and that it executed an amendment to the
            agreement between them expressly requiring them to comply with all applicable
            HUD requirements and to include the County as a third party beneficiary. The
            County further commented that the nonprofit was contractually obligated to take
            all appropriate measures to adequately secure all properties purchased through the
            NSP Program and guidelines for the benefit of Polk County.

            During the audit, we discussed concerns that we had about the safeguards the
            County claimed to have over NSP implementation by the nonprofit through its
            NSP administrative contractor with a representative of HUD’s Office of General
            Counsel. HUD’s attorney advised that provisions in the administrative contract
            for NSP implementation work performed by the nonprofit is not enforceable by
            the County because the nonprofit was not a party to the administrative contract.
            We reviewed the indemnification agreement and the amended agreement between
            the selected firm and the nonprofit referenced in the County’s response. We



                                            40
            concluded that the indemnification agreement did not adequately safeguard the
            County’s interest in the NSP-acquired properties.

Comment 6   The County’s response recited the nonprofit’s responsibilities for implementing
            the NSP.

            The finding did not question the need for or the eligibility of the services
            performed by the nonprofit. The finding questioned the failure by the County and
            its administrator to purchase the nonprofit implementation services in compliance
            with federal procurement requirements.

Comment 7   The County commented that the properties acquired by the nonprofit under the
            County’s NSP program were secured by recorded mortgages in favor of the
            County. It also commented that the mortgages were in part purchase money
            mortgages, which have a super priority over any potentially supervening lienors
            resulting in the highest collateral security protection possible.

            The County’s comment is misleading in that it gives the impression that the
            mortgages were already recorded at the time of our review. As discussed in the
            finding, the mortgages mentioned in the County’s response were not recorded
            when we initiated the review. The County recorded the mortgages only after we
            brought this matter of safeguards to its attention. Furthermore, during the audit a
            representative from HUD’s Office of General Counsel reviewed the mortgages
            and concluded that they did not provide adequate safeguards to protect the
            County’s interest in the NSP properties from the time of their acquisition to the
            time of their sale. We addressed this matter in recommendations 2B and 2C of
            the report.

Comment 8   The County commented that counties in the State of Florida may only convey by
            a county deed (which is statutory and carries no warranty of title), not a warranty
            deed. It added, therefore, that it is in the best legal interest of the buyers of the
            NSP properties that they receive title from a non-sovereign in order to receive the
            greatest protections afforded by law. The County also commented that it believed
            the contractual protections and the nonprofit’s qualifications and experience
            justify the trust placed in the nonprofit to hold title to the NSP properties until
            they are ultimately sold to qualifying borrowers/owners.

            We did not question the validity of the County concern about titling the NSP
            acquired properties in its name. We questioned the fact that the titles to NSP
            acquired properties were held by a nonprofit that did not have the contract
            authority to hold the titles and the County’s failure to established adequate
            safeguards to protect the NSP funds used to acquire them. It was up to the
            County to determine how it would comply with requirements to properly
            safeguard the NSP funds. Recommendation 2A recommends that HUD ensure
            that the County corrects the concerns raised by the audit.




                                             41
              We did not question the credentials and reputation of the nonprofit the County
              used to implement the NSP. We questioned the failure by the County and its NSP
              administrator to purchase the nonprofit services based on federal procurement
              requirements and to properly safeguard NSP funds used to purchase foreclosed
              and abandoned properties.

Comment 9     The County’s response referenced sections of its administrative contract that
              stipulated requirements that governed the allocation and use of NSP property
              revenues.

              The finding questioned the fact that the contract did not provide adequate
              procedures to safeguard the NSP funds used to acquire properties from the date of
              the acquisitions until the properties were sold.

Comment 10 The County’s response explained a process it followed to keep up with and to
           control its NSP.

              We did not question the process referenced in the County’s response. We
              questioned the County’s failure to follow procurement requirements and to ensure
              that NSP funds ware adequately safeguarded from loss and abuse.

Comment 11 The County commented that in its opinion no impermissible conflict of interest
           existed, apparent or otherwise based upon the executive director's participation on
           the selection committee.

              The County provided no information that we had not considered during the audit.
              As discussed in the finding, we disagree with the County’s assessment that there
              was not an apparent conflict-of-interest in this case. We addressed this condition
              in recommendation 1E of the report.

Comment 12 The County acknowledged that it had a conflict-of-interest concern involving the
           proposal submitted by a group that included a former County Commissioner and
           the former head of the Housing Division. The County said that it contacted HUD
           for guidance. However, it stated that while working through the conflict issue
           with HUD, the selection committee prepared a shortlist of proposers. The group
           in question was not included on the shortlist thus making the issue moot.

              As discussed in the finding, the County should have disqualified the group’s
              proposal from the competition. The corrective action for this condition is
              addressed by recommendation 1E.

Comment 13 The County disagreed with OIG’s finding 2 and the recommendations. The
           County commented that it had reviewed the various contractual agreements
           related to its use of the selected firm and the nonprofit in connection with the NSP
           scope of services and believed that the County had maintained adequate
           contractual safeguards over the properties, funds, and revenues. The County



                                              42
              provided no information in its response which we had not considered during the
              audit.

              We disagreed with the County’s response based on the reasons cited in the
              finding. Specifically, the County allowed the nonprofit to hold title to properties
              purchased with NSP funds and sell them without a contract to govern the terms of
              the nonprofit holding the titles and subsequent disposition of the properties. As
              discussed in the finding, the County did not have adequate safeguards needed to
              protect the NSP funds from lawsuits, liens, and judgments against the nonprofit
              between the dates that the properties were acquired and the dates the properties
              were sold. The corrective action included in recommendations 2A, 2B, and 2C
              are needed to ensure that NSP funds used to acquire properties are adequately
              safeguarded.

Comment 14 The County’s response failed to recognize federal procurement standards and the
           cost controls the standards were designed to achieve. The County’s comments to
           justify the questionable fee schedule are not consistent with federal procurement
           standards and support the basis for recommendation 1A which recommends that
           HUD determine if the County has the capacity to administer the NSP in
           accordance with federal procurement standards. Specifically, the County’s
           response stated

                     The fee schedule of August 27, 2009, was developed as a policy tool that
                     applied not only to the nonprofit implementing the NSP, but also to any
                     other nonprofit developer that may participate in the County’s NSP. The
                     County should have established all NSP services fees in compliance with
                     24 CFR 85.36. The County was not authorized to develop and to
                     implement a fee schedule based on a noncompetitive method.

                     The example fees provided in the selected firm’s proposal were for
                     illustrative purposes only, were not binding, and were not a substitute for
                     formal fee schedules for the selected firm’s contractors. The County’s
                     comment reflects a failure to recognize and to follow federal procurement
                     standards designed to ensure the reasonableness of contract costs. It made
                     no sense for the County to go through a competitive process to only obtain
                     fee examples and to later set the fees based on a noncompetitive method.
                     Regulations at 24 CFR 85.36c provide that all procurement transactions
                     will be conducted in a manner providing full and open competition
                     consistent with the standards of 85.36. Regulations at 24 CFR 85.36f
                     provide that costs or prices based on estimated costs for contracts under
                     grants will be allowable only to the extent that costs incurred or cost
                     estimates included in negotiated prices are consistent with federal cost
                     principles.

                     The board approved the single-family and multi-family fee schedules and
                     ratified all previous fees paid although the County does not agree with the


                                              43
                      OIG’s interpretation. The board’s approval of the questionable fee
                      schedule did not resolve our concern about whether the increased fees
                      were reasonable.

                      The County provided OIG with fees of seven other NSP programs in and
                      out of Florida where developer fees were significantly higher. The fee
                      amounts provided by the County were not a substitute for its responsibility
                      to independently develop the fee schedule based on competition for the
                      specific scope of work called for by its NSP.

              Recommendation 2D appropriately recommends that HUD require the County to
              reimburse the questionable fee amount if it determines the amount was excessive.

Comment 15 The County commented that the performance of construction work write-ups by
           the nonprofit was never a component of the developer fee. The County claimed
           that the fee was a distinct billable service that was provided by the nonprofit as a
           program vendor. It also commented that the selected firm’s proposal estimated
           this work to cost $500 but the actual program cost differed by $50.

              The County’s comments reflect a failure to recognize and to follow federal
              procurement standards which, as mentioned in comment 14, require all
              procurement transactions to be conducted in a manner to provide full and open
              competition. We also noted that Division staff increased the fee by $50 per
              property, although the change order did not request the increase.

Comment 16 The County commented that its NSP was designed to reduce concerns by
           providing the selected firm broad authority to implement the “administration and
           implementation” of the program within HUD and Federal rules and regulations,
           and with close oversight by County staff, but without the need for ongoing review
           and approval by the board for every project detail of every property transaction.
           It also commented that many of these processes and procedures have been
           reviewed by HUD.

              As presented in findings 1 and 2, the County did not adequately plan for the NSP
              procurements, did not execute NSP contracts in accordance with federal
              procurement requirements, and it did not ensure adequate safeguards for NSP
              funds used to acquire foreclosed and abandoned properties. The fact that HUD
              had not previously identified the issues discussed in the report did not relieve the
              County of its primary responsibility to ensure that its program complied with
              federal requirements for procurement and the safeguarding of program assets.

Comment 17 The County disagreed with OIG’s finding 3 and the recommendations. The
           County commented that the current report from the DRGR system showed that
           Polk County had obligated funds correctly concerning the NSP1 requirements. It
           also commented that the July 1, 2010 through September 30, 2010 performance




                                               44
             report located on the DRGR database showed that Polk County had met all
             requirements of the project with $14,586,258 funds obligated.

             The finding was accurate in stating that the County understated amounts reported
             in DRGR for acquisition obligations and that it did not post its DRGR report to its
             web-page in a timely manner. We did not audit obligations the County made after
             the time of our on-site review, June 21, 2010, which the County claimed to have
             put them at the level needed to fully meet the NSP obligation requirement.
             However, the County is incorrect in its claim that the current DRGR report
             showed that it had obligated funds correctly concerning the NSP requirements.
             The accuracy of the reported obligation can only be determined from the source
             obligation documents and not from the DRGR report. We revised the
             recommendations because the County claimed that it obligated enough funds after
             the date of our audit to fully meet the NSP obligation requirement. We deleted
             recommendations 3A and 3B and replaced them with recommendation 3A which
             recommended that HUD review and determine the accuracy of the County’s NSP
             obligations made after the completion of our on-site review. We renumbered
             recommendation 3C to recommendation 3B.

Comment 18 The County agreed with finding 4 and the OIG recommendations.




                                             45