oversight

The Hartford Housing Authority's Plan To Replace Boilers Did Not Meet Recovery Act and Federal Efficiency Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-21.

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

                                                                 Issue Date
                                                                      July 21, 2010
                                                                  
                                                                 Audit Report Number
                                                                      2010-BO-1005




TO:         Donna Ayala, Director, Office of Public Housing, Boston Hub, 1APH


FROM:
            John A. Dvorak, Regional Inspector General for Audit, Region 1, 1AGA

SUBJECT: The Hartford Housing Authority’s Plan To Replace Boilers Did Not Meet
           Recovery Act and Federal Efficiency Requirements


                                   HIGHLIGHTS

 What We Audited and Why


             We audited the Hartford Housing Authority (Authority) because it was awarded a
             $5 million Public Housing Capital Fund grant under the American Recovery and
             Reinvestment Act of 2009 (Recovery Act) and obligated the majority of the grant
             just before the required obligation deadline. Our objectives were to determine
             whether the Authority (1) had adequate management controls over its obligation
             process, (2) maintained support for obligations, and (3) obligated its grant funds
             for eligible projects.


 What We Found


             Overall, the Authority had adequate controls over obligating and supporting its
             Recovery Act capital grant. However, it did not always obligate funds for eligible
             activities.

             The Authority planned to use its Recovery Act funds to repair and federalize its
             State housing units. However, its plans changed when the full scope of the
           required repairs and funds needed were determined. The Authority shortened the
           normal procurement time and executed site improvement and boiler replacement
           contracts for the full amount of the grant before the statutory deadline. The audit
           showed that most of the Authority's obligations were for eligible activities,
           properly procured, and adequately supported.

           However, the Authority contracted to replace 224 boilers including 33 boilers that
           had not reached the end of their useful life with boilers that did not meet energy
           efficiency requirements. If this condition is not corrected, more than $1 million in
           Recovery Act and annual capital funds may not be used effectively and in
           accordance the Recovery Act and HUD regulations.


What We Recommend


           We recommend that the Director of HUD’s Boston Office of Public Housing
           ensure that the Authority stops its plans to replace boilers that have not reached
           the end of their economic life and reprograms $137,850 in future annual capital
           funds; and ensures that boilers scheduled for replacement in years 2015-2018 are
           replaced with energy-efficient boilers thereby putting more than $954,000 in
           Recovery Act funds to better use.

           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


           The auditee’s response, along with our evaluation of that response, can be found
           in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
      Finding 1: The Authority’s Plan To Replace Boilers Did Not Meet Recovery   5
      Act and Federal Energy Policy Act Efficiency Requirements

Scope and Methodology                                                            8

Internal Controls                                                                9

Appendixes
   A. Schedule Funds To Be Put to Better Use                                     10
   B. Auditee Comments and OIG’s Evaluation                                      11




                                           3
                      BACKGROUND AND OBJECTIVES


The Hartford Housing Authority (Authority) is incorporated under the laws of the State of
Connecticut and operates under a board of commissioners to provide safe and decent housing to
low- and moderate-income families and elderly individuals. The Authority owns and operates
more than 1,100 Federal public housing units under an annual contributions contract with the
U.S. Department of Housing and Urban Development (HUD). It also manages more than 700
State housing units.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
of 2009 (Recovery Act). This legislation included a $4 billion appropriation of capital funds to
carry out capital and management activities for public housing agencies, as authorized under
Section 9 of the United States Housing Act of 1937. The Recovery Act requires that $3 billion
of these funds be distributed as formula funds and the remaining $1 billion be distributed through
a competitive process. On March 18, 2009, HUD awarded the Authority a formula grant of more
than $5 million.

The Recovery Act imposed additional reporting requirements and more stringent obligation and
expenditure requirements on the grant recipients beyond those applicable to the ongoing Public
Housing Capital Fund program grants. Recovery Act funds can be used to address deferred
maintenance needs, including but not limited to (1) replacement of obsolete systems and
equipment with energy-efficient systems and equipment that reduce consumption, (2) work items
related to code compliance including abatement of lead-based paint, and (3) rehabilitation and
modernization activities that have been delayed or not undertaken because of insufficient funds.

The Authority allocated its Recovery Act funds to repair and replace roofs and sidewalks, make
site improvements, replace boilers, administer the grant, and prepare units for vacancy.

Our audit objectives were to determine whether the Authority (1) had adequate management
controls over its obligation process, (2) maintained support for obligations, and (3) obligated its
grant funds for eligible projects.




                                                 4
                                        RESULTS OF AUDIT

Finding 1: The Authority’s Plan To Replace Boilers Did Not Meet
Recovery Act and Federal Energy Policy Act Efficiency Requirements
The Authority contracted to replace boilers that had not reached the end of their useful life and
did not meet Federal Energy Policy Act efficiency requirements. This condition occurred
primarily because the Authority was not aware of Federal energy efficiency requirements. As a
result, it did not fully evaluate whether the existing boilers should have been replaced before the
end of their useful life or ensure that it purchased energy-efficient boilers as required. If this
condition is not corrected, more than $1 million may not be used effectively and in accordance
Federal requirements.



    The Authority Obligated Its
    Recovery Act Funds by the
    Deadline

                 The Recovery Act provided the Authority with more than $5 million for capital
                 improvements on March 18, 2009, and required that the funds be obligated within
                 1 year to stimulate the economy. The Authority planned to use the funds to repair
                 and federalize its State housing units. However, its plans changed when the full
                 scope of the required repairs was determined. To meet the March 17, 2010,
                 deadline, the Authority shortened its normal procurement time and executed
                 contracts for site improvements and boiler replacements at its Federal units.

                 The audit showed that the obligations were properly and adequately supported,
                 and most of the contracted items were eligible activities. However, two contracts
                 included replacing boilers with boilers that would not meet the Recovery Act’s
                 and HUD’s requirements for energy efficiency.


    Two Contracts Included More
    Than $1 Million To Replace
    Boilers

                 The Authority entered into two contracts that included more than $1 million to
                 replace boilers at its Federal scattered sites housing units.1 The contracts were


1
 Contract #1574-10 was executed on March 5, 2010, with total cost of site improvements and boiler replacements
not to exceed $1,025,225, of which $434,100 was for boiler replacement; and contract #1576-10 was executed on
March 10, 2010, with a total cost of site improvements and boiler replacements not to exceed $2,514,147, of which
$658,225 was for boiler replacement (a total of $1,092,325 for boiler replacement).

                                                        5
                 primarily funded with Recovery Act capital funds and some annual capital funds.2
                 We questioned replacing the boilers because the Authority’s physical needs
                 assessments showed that 190 boilers had 35 percent of their expected useful life
                 remaining and 33 boilers had 60 percent of expected useful life remaining. In
                 addition, the contracted boilers were only 82 percent efficient.3

                 Federal regulations allow for early replacement of obsolete energy systems.
                 However, when purchasing energy-consuming products, grantees must purchase
                 Energy Star products or Federal Energy Policy Act designated products, unless
                 the purchase is not cost effective.4 However, the Authority’s procurement policy
                 did not require procurement of energy-consuming products that met Federal
                 energy requirements because it was not aware of the requirements.

                 After discussions with HUD, we determined that replacing boilers with 60 percent
                 of their useful life remaining would not be a reasonable and eligible use of
                 Federal funds.5 However, we determined that replacing boilers with 35 percent of
                 expected useful life remaining may be an eligible use of Federal funds but only if
                 the boilers are replaced with energy-efficient boilers.



    The Authority Was Taking
    Steps To Procure Eligible
    Boilers

                 The Authority was proactive during our audit and agreed not to replace boilers
                 scheduled for replacement in 2023-2026. It had also met with its engineer and
                 planned to purchase and install 85-percent-efficient boilers. In addition, the two
                 contracts for site improvements and boiler replacements were structured to be
                 flexible, allowing for increasing or decreasing the scope of these activities and/or
                 the reprogramming of funds to allow changes in these activities.



    Conclusion


                 The replacement of boilers with a useful life with 35 percent of expected useful
                 life remaining may be an eligible use of Federal funds but only if the boilers are
2
  The contract included $787,093 in Recovery Act funds and $238,132 in future capital funds. The 33 boilers with
60% useful life were to be replaced using non-recovery act funds and were to be paid from the $238,132 in future
capital funds.
3
  Federal Energy Star and Energy Management Program efficiency requirements are 85 and 90 percent, respectively.
4
  The U.S. Housing Act of 1937, paragraph 9(d)(1)(c); The Energy Policy Act of 2005, Section 152; 24 CFR
905.10(k)(1)(iii); HUD Office of Public and Indian Housing (PIH) Notice PIH 2009-12; 24 CFR 965.306; and
Notice PIH 2009-25.
5
  The Authority’s physical needs assessments recommended replacing boilers with 60 percent of expected useful life
remaining in years 2023-2026.

                                                        6
                  replaced with energy-efficient boilers. The replacement of boilers with 60 percent
                  of expected useful life remaining would not be an eligible use of capital funds. In
                  addition, the Authority’s procurement policy needs to be revised to ensure that
                  procurements of energy-consuming products meet Federal energy requirements.


    Recommendations



                  We recommend that the Director of HUD’s Boston Office of Public Housing
                  ensure that the Authority

                  1A. Stops its plans to replace boilers identified for replacement in years 2023-
                      2026 and reprograms $137,850 in annual capital funds for other eligible
                      activities.6

                  1B Ensures that boilers identified for replacement in 2015-2018 are replaced with
                     boilers that meet Recovery Act requirements (i.e., are at least 85 percent
                     efficient), thereby putting $954,475 in Recovery Act funds put to better use.
                     Any funds that are not used for eligible activities must be recaptured in
                     accordance with the Recovery Act.

                  1C. Revises its procurement policy to include Federal energy requirements in
                      future procurements of energy-consuming products.




6
 These boilers were to be replaced in phase 3 of the scattered sites I contract using future non-Recovery Act Capital
funds.

                                                          7
                         SCOPE AND METHODOLOGY

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.

We conducted our audit between March and May 2010. We completed our fieldwork at the
Authority’s offices located at 180 Overlook Terrace, Hartford, CT. Our audit covered the period
March 18, 2009, through March 17, 2010, and was extended as necessary to meet our audit
objectives.

To accomplish our audit objectives, we

      Reviewed relevant laws and regulations, including

       The United States Housing Act of 1937, Section 9;
       Public Law 111-05, American Recovery and Reinvestment Act of 2009;
       24 CFR Part 905, The Public Housing Capital Fund Program;
       24 CFR Part 965, Subpart C, Energy Audits and Energy Conservation Measures;
       Notice PIH 2009-12 (HA), Information and Procedures for Processing ARRA [Recovery
       Act] Capital Fund Formula Grants;
       Notice PIH 2009-25 (HA), Energy Investment Guidance Under American Recovery and
       Reinvestment Act (Recovery Act) of 2009 (H.R. 1);
       Ensuring Responsible Spending of Recovery Act Funds, issued by the White House,
       March 20, 2009; and
       The Hartford Housing Authority ARRA Procurement Policy.

      Interviewed the Authority’s staff to determine what controls were in place to ensure
       compliance with the Recovery Act and HUD’s requirements.

      Reviewed the Authority’s files and records to verify that Recovery Act obligations
       greater than $50,000 were for eligible activities, properly procured, and adequately
       supported. We reviewed seven contracts totaling $4,308,179 and the Authority’s
       obligation of $516,097 for administrative costs.

      Reviewed two contracts that included boiler replacement activities. Contract #1574-10
       was executed on March 5, 2010, with total cost of site improvements and boiler
       replacements not to exceed $1,025,225, of which $434,100 was for boiler replacement;
       and contract #1576-10 was executed on March 10, 2010, with a total cost of site
       improvements and boiler replacements not to exceed $2,514,147, of which $658,225 was
       for boiler replacement (a total of $1,092,325 for boiler replacement).



                                                8
                                 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:

                        Controls over staff experience, training, and work load
                        Controls over selecting and approving eligible activities
                        Controls over tracking and verifying Recovery Act administrative expenses
                        Controls over maintaining accurate and timely accounting records
                        Controls over timely obligation of Recovery Act capital funds
                        Controls over contracting for activities in accordance with the Recovery Act

                  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.


 Significant Deficiencies


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

                 Controls over contracting for activities in accordance with the Recovery Act
                  (procuring energy-efficient systems - see finding 1)
                                                    9
                                    APPENDIXES

Appendix A

                         SCHEDULE OF
                 FUNDS TO BE PUT TO BETTER USE

                      Recommendation        Funds to be put
                             number          to better use 1/
                                     1A           $137,850
                                     1B            954,475


1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. For this audit, these amounts include avoiding $1,092,325
     in expenditures for potentially ineligible boiler replacements.




                                             10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 1




                               11
Ref to OIG Evaluation   Auditee Comments




Comment 2




                               12
                        OIG Evaluation of Auditee Comments

            Note on the Authority’s enclosure. The Authority’s response (enclosure)
            included an additional 165 pages of supporting documentation. We considered
            all the information in our evaluation of the auditee comments. However, the
            supporting documentation provided with the Authority’s response was not
            included as an attachment to the final report because it was too voluminous but
            is available upon request.


            The report language has been modified in the last paragraph of “What We
Comment 1   Found” to reflect that both ARRA Capital Fund and annual Capital Funds may
            not be used effectively. Since Authority’s corrective action will remove the
            boilers ineligible for replacement from the contracts and use it Capital Funds
            for eligible activities and boilers that are at least 85% energy efficient, we
            consider the proposed actions responsive to our recommendation numbers 1
            and 2. HUD will need to ensure the proposed actions are completed correctly.


            According to the bid and contract documents, the 33 boilers were to be
Comment 2   replaced in phase 3 of the contract using future annual Capital Funds (non
            Recovery Act funds). There were 30 boilers at a bid cost $126,000 and the
            three others at a bid cost $11,850 (3 X $3,950) or a total of $137,850 in future
            annual capital funds. The remaining $954,475 represents ARRA funding for
            boilers that need to be replaced with energy efficient boilers. Together, the
            future expenditures that will now be used on eligible activities (Funds Put to
            Better Use) total $1,092,325. Therefore, we consider Authority’s proposed
            actions to be responsive to our recommendation numbers 1 and 2.

            In addition, we consider Authority’s revision to its procurement policy to
            include Federal energy requirements in future procurements of energy-
            consuming products to be responsive to our recommendation number 3. HUD
            will need to ensure the proposed action is completed correctly.




                                            13