oversight

The Housing Authority of the City of Terre Haute, IN, Substantially Mismanaged Its Capital Fund Program and Lacked Capacity To Adequately Administer Its Recovery Act Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-27.

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

                                                                 Issue Date
                                                                          July 27, 2010
                                                                 
                                                                 Audit Report Number
                                                                          2010-CH-1010




TO:        Shawn Sweet, Acting Director of Public Housing Hub, 5DPH
           Dane M. Narode, Associate General Counsel for Program Enforcement, CACC
           Craig T. Clemmensen, Director of Departmental Enforcement Center, CACB


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Housing Authority of the City of Terre Haute, IN, Substantially
           Mismanaged Its Capital Fund Program and Lacked Capacity To Adequately
           Administer Its Recovery Act Funds

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Housing Authority of the City of Terre Haute, IN’s (Authority)
            Public Housing Capital Fund program (program). We selected the Authority
            based on our audits of its nonprofit development activities (see Office of Inspector
            General (OIG) audit report #2009-CH-1011, issued July 2009) and as part of
            OIG’s initiative to evaluate public housing authorities’ capacity to administer the
            capital funds provided under the American Recovery and Reinvestment Act of
            2009 (Recovery Act). Our audit objectives were to determine whether the
            Authority (1) properly administered its program and (2) had the capacity to
            administer its Recovery Act funds.

 What We Found

            Under the direction of the former executive director, the Authority violated its
            annual contributions contract (contract) with the U.S. Department of Housing and
            Urban Development (HUD) when it obtained a $2.3 million construction loan and
            a $2 million line of credit to finance capital improvements without HUD
         approval. Further, the Authority did not follow HUD’s and its own procurement
         requirements and failed to pay its maintenance staff and a contractor the
         appropriate Federal labor standard wage rates as required by the Davis-Bacon
         Act.

         The Authority obligated its Recovery Act funds in a timely manner. However, it
         lacked adequate written policies and procedures and staff knowledgeable of
         HUD’s and other Federal procurement requirements. Therefore, it lacked
         sufficient capacity to expend the funds.

         As a result, the Authority encumbered $2.3 million of its project assets, and HUD
         lacked assurance that it (1) used more than $1.4 million in program funds for their
         intended purposes, (2) operated its program in an efficient manner, and (3) had
         the capability to effectively expend its Recovery Act funding. Further, the
         Authority owed more than $49,000 in wage restitution.

What We Recommend


         We recommend that the Acting Director of HUD’s Cleveland Office of Public
         Housing require the Authority to (1) provide documentation of HUD’s approval
         of the construction loan, (2) reimburse HUD nearly $800,000 for the interest
         incurred on the loan from 2000 to 2007 and reimburse its project more than
         $70,000 for interest incurred on the loan after 2007 from non-Federal funds, (3)
         provide documentation showing that HUD approved the line of credit and the use of
         program funds for reimbursement of previously incurred expenses, (4) reimburse its
         program $129,872 from non-Federal funds for the interest paid on the line of
         credit, (5) reimburse its current and/or former maintenance employees and
         contractor $49,532 from non-Federal funds for wage restitution, and (6)
         implement adequate procedures and controls to address the findings cited in this
         audit report.

         We also recommend that HUD’s Acting Director

               Inform the Acting Deputy Assistant Secretary for Field Operations of the
                Authority’s actions, which may result in a substantial default of its
                contract.
               Consult with HUD’s Office of General Counsel to determine whether the
                construction loan encumbered and/or pledged the Authority’s project
                assets. If the loan only encumbered the assets, a determination is needed
                to conclude whether the loan can be retroactively approved. If the loan
                cannot be approved, the Authority should be required to reimburse its
                program more than $1.6 million and its project more than $800,000 from
                non-Federal funds.
               Consult with HUD’s Office of General Counsel to determine the
                appropriateness of the Authority’s using its fiscal year 2008 program funds


                                           2
                     to pay for the line of credit expenses that were previously incurred. If the
                     use of the funds was not appropriate and should not be retroactively
                     approved, the Authority should reimburse its program more than $1.4
                     million from non-Federal funds for its fiscal year 2008 program award.
                    Acquire capacity to manage its Recovery Act and other similar funding,
                     including, but not limited to, staff persons knowledgeable in Federal
                     procurement requirements or contracting for this expertise, developing
                     specific procedures for financial reporting, management controls, and
                     procurement.
                    Incorporate the applicable recommendations cited in this audit report into
                     the Authority’s memorandum of agreement with HUD.

           Further, we recommend that HUD’s Acting Director, in conjunction with the
           Director of HUD’s Departmental Enforcement Center, pursue the appropriate
           administrative sanction(s) against the Authority’s former executive director for
           failing to enforce HUD’s requirements.

           We also recommend that HUD’s Associate General Counsel for Program
           Enforcement determine legal sufficiency and if legally sufficient, pursue remedies
           under the Program Fraud and Civil Remedies Act against the Authority’s former
           board chairperson/principals for incorrectly certifying that the information
           contained in the Authority’s annual plans was true and accurate when it was not.

           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 provided our discussion draft audit report to the Authority’s executive
           director, its board president, and HUD’s staff during the audit. We held an exit
           conference with the Authority on June 1, 2010. We asked the Authority’s
           executive director to provide comments to our discussion draft report by June 18,
           2010. The executive director provided written comments, dated June 18, 2010,
           that generally disagreed with our findings and recommendations. The complete
           text of the auditee’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 Authority Obtained a $2.3 Million Construction Loan by
                 Encumbering Project Assets Contrary to Its Contract With HUD       7

      Finding 2: The Authority Encumbered Project Assets When It Obtained a Bank
                 Line of Credit To Finance Capital Improvements                    11

      Finding 3: The Authority Failed To Comply With Federal Requirements and/or
                 Its Own Procurement Policy                                        14

      Finding 4: The Authority Lacked Capacity To Adequately Expend Its Recovery
                 Act Funds                                                         18

Scope and Methodology                                                              20

Internal Controls                                                                  21

Appendixes
   A. Schedule of Questioned Costs                                                 23
   B. Auditee Comments and OIG’s Evaluation                                        24
   C. Federal Requirements                                                         36




                                            4
                      BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Terre Haute, IN, (Authority) was established on April 28,
1960, as a municipal corporation under Section 36-7-18-4 of the Indiana Code to provide decent,
safe, and sanitary housing to low-income families under the United States Housing Act of 1937.
The Authority is governed by a seven-member board of commissioners appointed by the mayor
of Terre Haute to 4-year terms. The board governs the business, policies, and transactions of the
Authority. The executive director is appointed by the board and has overall responsibility for
carrying out the board’s policies and managing the Authority’s day-to-day operations. The
Authority’s books and records are located at 2001 North 19th Street, Terre Haute, IN. The
Authority owns 868 low-rent public housing units in six projects and has the authority to
administer 917 Section 8 vouchers. As of January 31, 2010, of the 917 Section 8 vouchers, 858
were under lease. Further, the Authority manages 171 housing units for its nonprofit and for-
profit entities.

For fiscal year 2007, the Authority received an overall public housing assessment score of 63 out
of the maximum of 100. The U.S. Department of Housing and Urban Development (HUD)
designated the Authority as substandard financially. Based on the Authority’s assessment score,
HUD was drafting a memorandum of agreement (agreement) with the Authority to address its
deficiencies. As of July 19, 2010, the agreement had not been executed.

The Public Housing Capital Fund program (program) is administered by HUD’s Office of Public
and Indian Housing. Capital funds are for the development, financing, and modernization of
public housing developments and for management improvements. The Quality Housing and
Responsibility Act of 1998 converted HUD’s Comprehensive Grant and Comprehensive
Housing Assistance programs to the Public Housing Capital Fund program.

The program provides annual funding to public housing agencies for the development, financing,
and modernization of public housing developments and for management improvements. The
program must directly support public housing rental projects or their residents. Eligible activities
generally include redesign, reconstruction, and accessibility improvements for public housing
units; vacancy reduction; deferred maintenance needs; the replacement of obsolete utility
systems and dwelling equipment; planned code compliance; demolition and replacement of
units; homeownership activities; management improvements; and transfers to operations.

A public housing agency is required to obligate its program assistance within 24 months from the
date the funds are available to the agency for modernization or development activities, or the
date the agency accumulates adequate funds to undertake modernization, rehabilitation, or new
construction of units. Capital funds must be expended within 48 months from the date they are
made available. On September 17, 2009, the Authority was awarded $1,348,962 in capital
funding.

On February 17, 2009, the President signed the American Recovery and Reinvestment Act of
2009 (Recovery Act) into law. The Recovery Act provided $4 billion to public housing agencies
to carry out capital and management activities, including modernization and development of


                                                  5
public housing. Under the Recovery Act, public housing agencies are required to obligate 100
percent of the funds within 1 year of the date on which funds become available to the agency for
obligation and expense 60 percent within 2 years and 100 percent within 3 years of such date.
Public housing agencies report their obligations and expenditures using HUD’s Line of Credit
Control System (system). HUD was required to recapture remaining program funds of public
housing agencies that failed to meet the obligation deadline of March 17, 2010, and expenditure
deadlines. On March 17, 2009, the Authority was awarded $1,794,175 in Recovery Act funds

Our audit objectives were to determine whether the Authority (1) properly administered its
program and (2) had the capacity to administer its Recovery Act funds.




                                                 6
                                  RESULTS OF AUDIT

Finding 1: The Authority Obtained a $2.3 Million Construction Loan
   by Encumbering Project Assets Contrary to Its Contract With HUD
The Authority encumbered project assets when it obtained a $2.3 million construction loan to
finance electrical system upgrades to support the installation of air conditioning units at its senior
housing development, Dreiser Square. The loan agreement authorized Transamerica Public
Finance (Transamerica) to obtain a security interest in the Authority’s assets. Further, the
Authority incurred interest expenses totaling more than $800,000 on the construction loan and
did not obtain an energy audit before the upgrades. The problem occurred because the
Authority’s former board failed to provide adequate oversight of the Authority’s operations. As
a result, the Authority violated its contract with HUD and subjected itself to unnecessary risks
had it defaulted on the loan. Also, HUD and the Authority lacked assurance that the electrical
upgrades were cost effective. Further, the Authority’s failure to fully disclose its non-Federal
financing resulted in its submitting incorrect statements to HUD.


 The Authority Violated Its
 Contract

               On December 22, 1999, the Authority’s former board approved resolution number
               99-15, authorizing the bid of more than $2,284,011 from its utility provider,
               Cynergy Business Solutions, to perform electrical system upgrades and install 256
               air conditioning units at its senior housing development, Dreiser Square.
               Therefore, the Authority’s former executive director obtained a construction loan
               with Transamerica, which included a master lease purchase agreement (purchase
               agreement). The upgrades included the installation of wires in the walls of the
               housing units to allow for the installation of electrical outlets and a light in the
               attic for each air conditioning unit. Further, the purchase agreement included the
               installation of new underground transformers, individual unit utility meters,
               panels, and other electrical improvements.

               The terms and conditions of the purchase agreement included a provision that
               allowed Transamerica to have a security interest, which represented a lien on the
               equipment and all attachments such as wiring. According to the Authority’s
               contract, the Authority shall not in any way encumber any project without the
               approval of HUD. However, Transamerica filed a financing statement with the
               State of Indiana on July 14, 2004. The statement listed it as the secured party and
               the Authority as the debtor. The Authority did not disclose the loan in its annual
               plans to HUD and was unable to provide documentation indicating that HUD
               approved the loan, contrary to its contract with HUD (see appendix C).



                                                   7
The Authority Used Program
Funds To Repay the Loan

            The Authority used program funds to pay the principal and interest on the
            construction loan. According to the loan’s amortization schedule, the Authority
            agreed to semiannual payments of principal and interest over a 10-year period.
            Therefore, from July 2000 until July 2007, the Authority made 15 semiannual
            payments totaling $2,408,623. This amount included $791,650 in interest.
            According to Office of Management and Budget Circular A-87, attachment B,
            section 23(a), costs incurred for interest on borrowed capital or the use of a
            governmental unit’s own funds is unallowable.

            In October 2008, the Authority, under the direction of the new executive director,
            discontinued using program funds to repay the loan. Therefore, based on the
            advice from its fee accountant, Hawkins, Ash, Baptie & Company, Limited
            Liability Partnership, the Authority charged the remaining five payments, totaling
            $802,874, to Dreiser Square since the Authority had transitioned to asset
            management. This amount included $70,106 in interest.

The Authority Submitted
Inaccurate Certifications to
HUD

            The Authority submitted annual plans to HUD that contained inaccurate
            information. It disclosed in its 2000 annual plan that it would use capital funds to
            update the electrical system at Dreiser Square. However, it used the funds to pay
            the principal and interest on the $2.3 million construction loan, as previously
            mentioned. Further, the Authority did not disclose the loan on its statement of
            financial resources. According to HUD’s regulations at 24 CFR (Code of Federal
            Regulations) 903.7(c), the statement must address the financial resources that are
            available to the public housing agency for the support of Federal public housing
            and tenant-based assistance programs administered by the public housing agency
            during the plan year. The statement also should include the non-Federal sources
            of funds supporting each Federal program and state the planned uses for the
            resources.

            In its 2001 through 2007 annual plans, the Authority reported yearly electrical
            upgrade costs. However, it did not disclose that these costs were incurred for
            work that was performed and completed in 2000 as part of the debt service costs
            for the construction loan that was executed in 1999.

            Further, the Authority’s 2005 through 2007 annual plans required it to specifically
            indicate whether it intended to use program funds to repay debt incurred to
            finance capital improvements. The Authority was also required to disclose the


                                               8
             development(s) in which such improvements would be made, show how the
             proceeds of the financing would be used, and state the amount of the annual
             payments that would be required to service the debt. However, the Authority
             consistently indicated that it did not propose to use any portion of its program
             funds to repay debt incurred to finance capital improvements. Therefore, it did
             not provide the necessary disclosures. Additionally, since 2005 as part of its
             annual plan submission, the Authority submitted forms HUD-50076 or HUD-
             50077, certifying that all of the information contained in its annual plan was true
             and accurate. The Authority’s former board chairperson signed the forms.

             The Program Fraud Civil Remedies Act of 1986 (231 U.S.C. (United States Code)
             3801) provides Federal agencies, which are the victims of false, fictitious, and
             fraudulent claims and statements, with an administrative remedy (1) to
             recompense such agencies for losses resulting from such claims and statements;
             (2) to permit administrative proceedings to be brought against persons who make,
             present, or submit such claims and statements; and (3) to deter the making,
             presenting, and submitting of such claims and statements in the future.

The Authority Did Not Perform
an Energy Audit Before
Obtaining the Loan


             The Authority did not have an energy audit to determine the payback period for
             its energy conservation measures before obtaining the construction loan. Further,
             it did not perform a cost benefit analysis when changing to individual unit utility
             meters. According to HUD regulations at 24 CFR 965.302, all public housing
             agencies shall complete an energy audit for each public housing agency-owned
             project under management not less than once every 5 years. Energy audits shall
             analyze all of the energy conservation measures and the payback period for these
             measures. Further, HUD’s regulations at 24 CFR 965.402 states that a cost
             benefit analysis shall be made to determine whether a change to individual meters
             will be cost effective. In 2009, the Authority obtained an energy audit from
             Myszak & Palmer, Incorporated. The company was originally contracted in 2007
             to perform an energy audit.

Conclusion


             The Authority’s former board failed to provide adequate oversight of the
             Authority’s operations. According to the former board chairperson, the board was
             not aware that it could be involved in the administration of the Authority.
             Therefore, the former executive director administered the Authority’s programs
             without the board’s full involvement. As a result of the $2.3 million construction
             loan and the Authority’s noncompliance with Federal requirements regarding
             energy conservation, the Authority encumbered project assets, and HUD and the


                                                9
          Authority lacked assurance that the electrical upgrades were cost effective.
          Further, the Authority’s failure to fully disclose its non-Federal financing resulted
          in its submitting inaccurate statements to HUD.

Recommendations

          We recommend that the Acting Director of HUD’s Cleveland Office of Public
          Housing require the Authority to

          1A.     Provide documentation to support HUD’s approval of the construction
                  loan cited in this finding.

          1B.     Reimburse HUD $791,650 for the interest incurred on the loan from 2000
                  to 2007 and reimburse its project $70,106 for the interest incurred on the
                  loan after 2007 from non-Federal funds.

          We also recommend that the Acting Director of HUD’s Cleveland Office of Public
          Housing

          1C.     Inform the Acting Deputy Assistant Secretary for Field Operations of the
                  Authority’s actions that encumbered project assets without HUD approval.

          1D.     Consult with HUD’s Office of General Counsel to determine whether the
                  loan encumbered and/or pledged the Authority’s project assets. If the loan
                  only encumbered the assets, a determination is needed regarding whether
                  the loan can be retroactively approved (see recommendation 1A). If the
                  loan cannot be approved, the Authority should be required to reimburse its
                  program $1,616,973 and its project $802,874 from non-Federal funds.
                  The funds due to the project should be deposited into the project’s
                  restricted operating reserve.

          We also recommend that the Acting Director, in conjunction with the Director of
          HUD’s Departmental Enforcement Center,

          1E.     Pursue the appropriate administrative sanction(s) against the Authority’s
                  former executive director for failing to enforce HUD’s requirements.

          We also recommend that HUD’s Associate General Counsel for Progam
          Enforcement

          1F.     Determine legal sufficiency, and if legally sufficient, pursue remedies
                  under the Program Fraud and Civil Remedies Act against the Authority’s
                  former board chairperson/principals for incorrectly certifing that the
                  information contained in the Authority’s annual plans was true and
                  accurate when it was not.


                                              10
Finding 2: The Authority Encumbered Project Assets When It Obtained
        a Bank Line of Credit To Finance Capital Improvements
The Authority encumbered project assets when it obtained a promissory note for a $2 million
revolving line of credit with First Financial Bank (bank) to finance its capital improvements.
The note contained a setoff provision that allowed the bank to seize the Authority’s accounts
with the bank if it defaulted on the note. The Authority also obligated program funds before they
were available to reimburse withdrawals from its line of credit. Further, it paid more than
$129,000 in interest on the line of credit. The problems occurred because the Authority lacked
adequate procedures and controls to ensure that it complied with its contract and the former
board did not provide oversight of the former executive director. As a result, HUD lacked
assurance that the Authority used more than $1.4 million in program funds for their intended
purposes.


 The Authority Obtained a
 Promissory Note To Finance
 Capital Improvement


              On May 2, 2000, the Authority obtained a promissory note for a $2 million
              revolving line of credit with the bank. The terms and conditions of the promissory
              note contained a setoff provision that allowed the bank to collect the amounts owed
              from all of the Authority’s accounts with the bank if the Authority defaulted on the
              loan. The Authority used the bank to maintain its general fund account. According
              to the Authority’s contract, the Authority shall not encumber any project assets
              without the approval of HUD (see appendix C).

              The promissory note did not indicate a specific purpose for the line of credit;
              however, according to the bank’s loan officer, the Authority obtained the line of
              credit to finance its working capital needs. Further, in reviewing the Authority’s
              records, we determined that the Authority would reimburse withdrawals from its line
              of credit after receiving program funds. Although the Authority’s general ledger
              failed to identify the source of funds when the Authority paid for capital fund
              improvements, its former finance director maintained a separate worksheet to
              account for the line of credit withdrawals and reimbursements.

              The Authority received more than $1.4 million in program funding for fiscal year
              2008. However, it had already obligated the funds to reimburse withdrawals from
              its line of credit for capital improvement costs that were incurred in 2006 and
              2007. The Authority’s obligation of preawarded program funds to pay for costs
              that had already been incurred and paid using its line of credit was contrary to its
              program requirements and its contract with HUD. According to the Authority’s
              program amendment to its contract, the date of the amendment was the date the
              funds became available for obligation.


                                                 11
The Authority Hired a
Consulting Firm To Review Its
Program


             In 2008, after receiving a draft audit report from its prior independent public
             accountant questioning more than $1.3 million in program expenditures in its fiscal
             year 2007 financial statements, the Authority hired two certified public accountants
             as consultants to review its program. In reviewing the consultants’ report, we
             determined that the report disclosed the following information:

                   For the period 2000 to 2008, the Authority had followed the practice of
                    spending and charging expenditures to the program before the actual grant
                    award and money were received from HUD. The Authority had in
                    essence spent its program funds a full year in advance of receiving the
                    funds.

                   To help fund these expenditures, the Authority executed a bank line of
                    credit for $2 million annually. It did not receive approval from HUD for
                    the bank line of credit and/or provide justification for spending funds on
                    capital improvements in advance of annual grant awards.

                   As of September 30, 2006, the Authority had spent $1,690,071 earmarked
                    for the 2007 program. These funds were not received until September
                    2007 and amounted to only $1,303,033, or $387,038 short of the actual
                    expenditures. The $387,038 shortfall was rolled over into program year
                    2008. Additionally, as of September 30, 2007, the Authority had already
                    charged $1,324,418 to the 2008 program.

             In 2008, the Authority discontinued using the line of credit. However, it had already
             incurred and paid more than $129,000 in interest.

Conclusion

             The Authority lacked adequate procedures and controls to ensure that it complied
             with its contract, and the Authority’s board did not provide oversight of the
             former executive director. As a result, HUD lacked assurance that the Authority
             used its fiscal year 2008 program award of $1,417,421 for its intended purposes.
             Additionally, the Authority was unable to provide documentation to support that
             HUD approved its use of program funds to reimburse the line of credit.




                                                12
Recommendations

         We recommend that the Acting Director of HUD’s Cleveland Office of Public
         Housing require the Authority to

         2A.      Provide documentation to support that HUD approved the line of credit and
                  the use of program funds for reimbursement of previously incurred expenses.

         2B.      Reimburse its program $129,872 from non-Federal funds for the interest
                  paid on the line of credit.

         We recommend that the Acting Director of HUD’s Cleveland Office of Public
         Housing

         2C.      Consult with HUD’s Office of General Counsel to determine the
                  appropriateness of the Authority’s using its fiscal year 2008 program funds
                  to pay for the previously incurred expenses. If the use of the funds was not
                  appropriate and should not be retroactively approved, the Authority should
                  be required to reimburse its program $1,417,421 from non-Federal funds for
                  its fiscal year 2008 program award.




                                             13
Finding 3: The Authority Failed To Comply With Federal
           Requirements and/or Its Own Procurement Policy
The Authority failed to comply with Federal requirements and/or its own procurement policy.
Specifically, it did not (1) maintain records to support detailing significant procurement histories
and (2) ensure that its maintenance staff and/or contractors were paid the appropriate Federal
labor standards prevailing wage rates under the Davis-Bacon Act. The problems occurred
because the former executive director disregarded Federal requirements. Additionally, the
Authority’s former board did not provide adequate oversight of the executive director’s
procurement activities. As a result, HUD lacked assurance that the Authority operated its
program in an efficient manner, and the Authority owed more than $49,000 in wage restitution.



 The Authority’s Did Not
 Maintain Procurement Records

               The Authority did not maintain records to support its procurement activities.
               According to HUD’s requirements at 24 CFR 85.36(b)(9), the local public
               housing agency must maintain sufficient procurement records to detail the
               significant history of a procurement. These records will include the rationale for
               the procurement method, contract type, and contractor selection and the basis for
               the contract price as required by HUD. Therefore, we obtained and reviewed 90
               work orders that the Authority used to support charges to its 2007 and 2008
               program.

               The Authority’s work order system was designed to account for all supplies used;
               purchase orders issued for materials, services, and equipment; and maintenance
               labor charges for the work order from employee timesheets. The work orders also
               contained the names of contractors and vendors who provided goods or services.
               Therefore, in reviewing the work orders, we identified 14 contractors that were paid
               $198,000 collectively. Of the 14 contractors, 2 current maintenance employees were
               identified by the Authority’s 2007 independent auditors.

               One employee rented a large backhoe tractor to the Authority for $10,850, and the
               other employee provided kitchen cabinets for 16 of the Authority’s housing units for
               $24,897. The cabinets were made during nonwork hours. For the remaining 12
               contractors, 5 provided equipment only or were paid less than $2,000, and 7
               contractors provided services and were paid more than $2,000. The following table
               provides a listing of the 12 contractors, the services provided, the number of work
               orders involved, and the total amount paid.




                                                   14
                                                              Number of      Amount
          Contractor name          Service(s) provided        work orders     paid
       *Jack Crowley Roofing              Roofing                 11         $97,782
            *MJ Painting                  Painting                28          20,079
        *Elkins Tree Service    Tree trimming and removal          7          10,650
        *D & H Glass Service    Window repair and reglazing        1           7,229
        *Smiddy’s Carpeting              Carpeting                 5           6,477
          *Double D Fence              Install fencing             2           3,385
              HH Greg               Kitchen appliances             1           3,895
        Indiana Wholesalers          Kitchen cabinets              1           3,174
      *Chalos Carpet Cleaning            Clean unit                1           3,450
          Crossroads Door        Custom steel entry door           1           1,315
          Duncan Supply           Air conditioning unit            1           1,404
        Elite View Windows      New replacement windows            1             647
        Legend - *Davis-Bacon
             applicable


            As previously mentioned, the Authority was unable to support its procurement
            activities; therefore, we could not determine whether it complied with Federal
            requirements and its own procurement policy when procuring the goods and services
            identified above.

The Authority Did Not Comply
With the Davis-Bacon Act


            The Authority did not comply with the labor standards prevailing wage rates
            under the Davis-Bacon Act. For eight maintenance staff, three current and five
            former employees, who performed renovations to the Authority’s office and
            residential housing units, the Authority did not pay them the appropriate wage
            rates. The employees were paid their regular wage rates instead of the wage rates
            in accordance with the Davis-Bacon Act. Therefore, based on the wage rates
            applicable during the time that the work was performed, the Authority owed the
            eight employees $47,366 in wage restitution.

            Since the Authority did not maintain records of its procurements, we were unable
            to determine, for the seven contractors identified above, whether the Authority
            informed them that Federal labor standards applied. HUD Handbook 1344.1,
            paragraph 2-7, requires public housing agencies’ contract administrators and labor
            standards personnel to include the applicable wage determination in every
            construction contract and in bid documents when there is competitive bidding.

            We randomly selected three contractors (Jack Crowley Roofing, MJ Painting, and
            D & H Glass Service) from which to obtain and review payroll records to
            determine whether their employees were paid the appropriate wage rate. We were
            unable to locate the owner of Jack Crowley Roofing; therefore, we were only able to
            review the payroll documentation for MJ Painting and D & H Glass Service. We
            determined that MJ Painting employees were paid the appropriate wage rates.


                                               15
             However, for D & H Glass Service, we identified three employees that were owed
             wage restitution of $2,166.

HUD’s Monitoring Review
Identified the Authority’s Davis-
Bacon Violations

             On May 15, 2002, HUD performed a monitoring review based on a complaint and
             determined that the Authority failed to apply Federal labor standards and Davis-
             Bacon wages appropriately for the construction and rehabilitation of its
             maintenance facility. The Authority also failed to notify its contractors of the
             labor standards provision and wages; therefore, there were many wage
             underpayments to employees. The Authority was required to obtain payrolls from
             all contractors, compute all hours worked by maintenance personnel on the
             project, and calculate the restitution owed to each employee based on the
             difference between what the employee was paid and the appropriate amount based
             on the wage decision. HUD required the Authority to provide its calculations and
             proof of restitution for review. In July 2002, the Authority paid $95,516 in wage
             restitution for 43 employees, which included more than $65,000 to its own
             maintenance staff. HUD’s staff performed a follow-up monitoring visit in 2003
             and did not identify any deficiencies.

Conclusion

           The problems described above occurred because the former executive director
           disregarded Federal requirements. Further, the Authority’s former board did not
           provide adequate oversight of the executive director’s procurement activities.
           Although the Authority had a procurement policy, which stated that it would
           comply with Federal procurement requirements, it lacked procedures to aid its staff
           in implementing the policy. As a result, HUD lacked assurance that the Authority
           operated its program in an efficient manner.

Recommendations

             We recommend that the Acting Director of HUD’s Cleveland Office of Public
             Housing require the Authority to

             3A.    Reimburse its current and/or former maintenance employees and contractor
                    $49,532 ($47,366 plus $2,166) from non-Federal funds for wage
                    restitution.

             3B.    Implement procedures and controls to aid in the implementation of its
                    procurement policy.


                                               16
3C.   Maintain adequate records to support its procurement histories, such as
      bidding documentation, price analysis, etc., to ensure compliance with
      Federal requirements.

3D.   Ensure that staff conducting its procurement activities is adequately
      trained and/or knowledgeable of Federal procurement requirements.

3E.   Review the remaining five contractors identified in this finding to
      determine whether wage restitution is owed and provide the review results
      to HUD for approval. If wage restitution is required, the Authority should
      make the restitution from non-Federal funds.




                                 17
Finding 4: The Authority Lacked Capacity To Adequately Expend
                       Its Recovery Act Funds
The Authority lacked capacity to adequately expend its Recovery Act funds. It did not have (1)
written policies and procedures governing the administration of its Recovery Act funds and (2)
staff knowledgeable of HUD’s and other Federal procurement requirements. The problems
occurred because the previous board allowed the former executive director to control the
Authority’s financial and procurement activities without providing adequate oversight (see
findings 1, 2, and 3) and the Authority’s current executive director was not experienced in
administering public housing programs. As a result, HUD had no assurance that the Authority
had the necessary capabilities to manage its Recovery Act funding.


 The Authority Lacked Capacity
 To Administer Its Recovery Act
 and Capital Fund Program Funds


              The Authority obligated its Recovery Act funding in a timely manner. However,
              it lacked capacity to manage its Recovery Act funds. HUD’s regulations at 24
              CFR Part 903 require an approved annual public housing agency plan before
              program funds can be completely drawn down and expended. However, as of
              May 10, 2010, the Authority did not have an approved plan for 2009. HUD’s
              Public and Indian Housing Notice 2009-12 states that the Authority must use its
              funds on capital fund-eligible activities currently identified in either the annual
              statement (a component of the annual plan) or 5-year action plan. The
              Authority’s work items were included in its 5-year action plan. The Authority
              proposed using the funding to rehabilitate 16 vacant housing units at its Lockport
              and 40 housing units at its Market Avenue housing developments.

              The Authority had not established policies and/or procedures for financial
              reporting, management controls, and procurement and monitoring (see finding 3),
              including the administration of its Recovery Act and Capital Fund Program funds.
              In October 2009, the Authority hired a financial management consulting firm,
              Asher PHA Finance, Limited Liability Corporation, to help it get its annual public
              housing plan and its five year plan approved by HUD. In January 2010, the
              Authority also contracted with the firm to prepare a cost allocation plan, assist
              with the development of financial management and internal control procedures,
              and provide training to its staff. The firm provided the Authority a policy and
              procedures guidebook which was approved by the Authority’s board in May
              2010. However, the policies and procedures guidebook did not address specific
              procurement, administrative, and reporting procedures.

              Under the current executive director, the Authority did not have staff
              knowledgeable of HUD’s procurement requirements and contract administration
              responsibilities for Federal programs. For instance, the Authority was unaware of


                                                 18
             HUD’s annual public housing agency plan preparation and submission process
             until December 2008. The Authority hired additional staff to increase its capacity
             to oversee its program, including the Recovery Act funds. However, the newly
             hired staff had no Federal procurement experience.

Conclusion


         The problems described above occurred because the Authority’s former board
         allowed the former executive director to have complete control over the Authority’s
         operations without providing oversight (see findings 1, 2, and 3). In addition, under
         the current executive director, the Authority did not adopt policies and/or
         procedures for financial reporting, management controls, and procurement until
         May 2010. However, the policy and procedure guidebook did not address specific
         procurement, administrative, and reporting procedures. Further, the Authority’s
         staff was not knowledgeable of Federal procurement requirements. The Authority
         has until March 17, 2011 to expend 60 percent of the Recovery Act funds.

Recommendation

             We recommend that the Acting Director of HUD’s Cleveland Office of Public
             Housing require the Authority to:

             4A.    Acquire capacity to manage its Recovery Act and other similar funding,
                    including, but not limited to, staff persons knowledgeable in Federal
                    procurement requirements or contracting for this expertise, developing
                    specific procedures for financial reporting, management controls, and
                    procurement.




                                               19
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

      Applicable laws and regulations; the Authority’s contract; HUD’s program requirements
       at 24 CFR Parts 85, 903, and 965; the Authority’s financial and accounting records,
       annual audited financial statements from 2006 to 2008, general ledgers from 2007
       through 2009, bank statements, check registers, accounting spreadsheets, policies and
       procedures, by-laws, board meeting minutes, organizational charts, correspondence with
       HUD, annual plans for fiscal years 2000 through 2009, and modernization activity
       documentation (maintenance work orders, purchase orders, invoices); and other related
       documentation.

      The Authority’s construction loan documents (purchase agreement between the finance
       company and the Authority; a facility resource planning agreement between the
       contractor and the Authority; and an escrow agreement among the finance company, the
       Authority, and the escrow agent) and a cost proposal for the Dreiser Square elderly
       project.

      HUD’s files for the Authority.

      The Authority’s line of credit agreements and other related bank documents.

      The U.S. Department of Labor wage determinations in effect during our review period.

We also interviewed the Authority’s current and former employees; current and former board of
commissioners; HUD staff; the Authority’s consultants; and representatives from First Financial
Bank, Hawkins, Ashe, and Baptie & Company, MJ Painting, D & H Glass Service, and Myszak
and Palmer, Architects.

We performed our onsite audit work between June 2009 and January 2010. The audit covered
the period October 1, 2007, through May 31, 2009. The period was extended as necessary.

We reviewed the Authority’s construction loan that was obtained in 1999 because the
Authority’s new executive director expressed concerns about the loan, and the Authority was still
making payments on the loan in 2008. In reviewing the Authority’s program, we determined
that the Authority regularly obtained private financing for its capital improvements, as evidenced
by its bank line of credit.

We conducted our 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.



                                                 20
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are achieved:

      Program operations,
      Relevance and reliability of information,
      Compliance with applicable laws and regulations, and
      Safeguarding of assets and resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.


 Relevant Internal Controls

              We determined that the following internal controls were relevant to our audit
              objectives:

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

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

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

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weaknesses


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




                                                 21
   The Authority lacked adequate procedures and controls to ensure that it
    complied with its contract and Federal requirements (see findings 1, 2, and 3).

   The Authority lacked the capacity to administer its Recovery Act and Capital
    Fund Program funds (see finding 4).




                                    22
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                    Recommendation                            Unsupported
                        number              Ineligible 1/         2/
                          1B                     $861,756
                          1D                                  $2,419,847
                          2B                        129,872
                          2C                                   1,417,421
                          3A                       49,532
                         Totals                $1,041,160     $3,837,268


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.




                                               23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                           24
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




Comment 4



Comment 5




                           25
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 3
and 5




                           26
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




Comment 3
and 4




                           27
Ref to OIG Evaluation   Auditee Comments




Comment 9




                           28
Ref to OIG Evaluation   Auditee Comments




Comment 10




Comment 11




Comment 12




                           29
Ref to OIG Evaluation   Auditee Comments




Comment 10




                           30
Ref to OIG Evaluation   Auditee Comments




Comment 13




                           31
Ref to OIG Evaluation   Auditee Comments




Comment 14




Comment 15




Comment 16




                           32
                         OIG Evaluation of Auditee Comments

Comment 1   Although the issues cited in findings 1, 2, and 3 in our discussion draft audit
            report occurred under the previous administration, they should be corrected for
            the current administration to move forward in the right direction. Further, the
            current administration is responsible for ensuring that the Authority complies with
            its contract with HUD, regardless of when the issues occurred, since it is
            overseeing the operations of the same entity.

Comment 2   HUD’s regulations at 24 CFR, part 84.53, on uniform administrative requirements
            for grants applies to nonprofit organizations. HUD’s requirements at 24 CFR,
            part 85, on uniform administrative requirements for grants applies to state and
            local governments. However, both requirements on records retention state that
            the retention period for financial records, supporting documents, statistical
            records, and all other records pertinent to an award shall be kept for a period of
            three years from the date of submission of the final expenditure report or annual
            financial report. The Authority's final expenditure on the construction loan was
            December 2009 so the final expenditure report or annual financial report pertinent
            to this contract would be the annual financial report for the year ended September
            30, 2010. Therefore, the record retention period has not expired.

Comment 3   The Authority did not follow proper procedures and should have provided the
            necessary documentation to HUD to show that the electrical upgrades at Dreiser
            Square were appropriate expenditures. This would have provided HUD the
            opportunity to determine the appropriateness of the project and to ensure HUD’s
            and the Authority’s interests were safeguarded. However, since the former
            executive director obtained a project loan that placed a lien on the Authority’s
            project assets without HUD’s approval; HUD has no assurance that all of the
            upgrades were appropriate. Further, HUD specifically requires public housing
            agencies, under its contract, to request prior approval before entering into any
            loan agreements that encumbers any assets of the Authority that are covered by its
            contract with HUD. Since the Authority did not seek HUD approval, interest
            costs on the project loan are ineligible to be paid with Federal funds.

Comment 4   According to the Office of Management and Budget’s Circular A-87, attachment
            B, section 23(a), costs incurred for interest on borrowed capital or the use of a
            government unit’s own funds, however represented, are unallowable except as
            specifically provided in subsection b or authorized by Federal legislation. Since
            HUD requires an authority, under its contract, to request prior approval before
            entering any loan agreements that encumbers any assets of the Authority that are
            covered by its contract, any interest costs without HUD’s approval are considered
            unallowable.

Comment 5   The Authority already has a policy in place to prevent the encumbrance of assets
            without the appropriate HUD approval, which is its contract with HUD.
            Therefore, the recommendations proposed in this audit report are appropriate.


                                              33
Comment 6     We disagree. Recommendation 1C in our discussion draft audit report is
              appropriate considering the issues cited in this report. Although the issues
              identified for finding 1 occurred under the prior administration, it does not negate
              that these actions possibly resulted in the Authority substantially defaulting on its
              contract with HUD.

Comment 7     Violations of HUD’s requirements are subject to administrative actions, including
              referral for remedies under the Program Fraud Civil Remedies Act. Further, HUD
              form 50077 cited in our discussion draft audit report clearly warns that HUD will
              pursue false claims and statements. Therefore, our recommendation is
              appropriate. The discussion audit report addressed the actions of the Authority
              not its prior auditors. Therefore, any discussion of actions, if any, against the
              prior auditors should not be addressed in this report.

Comment 8     The Authority’s last expenditure occurred in 2009; therefore, the record retention
              period has not expired. See comment 2.

Comment 9     See comments 3 and 4. Although finding 2 in our discussion draft audit report
              does not include a recommendation for the Authority to develop policies and
              procedures to ensure that program funds are used for their intended purposes, the
              recommendation is included in finding 4. Recommendation 2C will remain due
              to the issues identified in this audit report.

Comment 10 HUD requirements established that authorities are responsible for the
           administration and enforcement of labor standards in Federally-funded or assisted
           projects. Failure by the Authority to include the wage determinations in bid
           documents and contracts does not relieve it of the responsibility for enforcement
           action. Since the Authority did not notify the bidders and contractors of Davis-
           Bacon labor standards in its bid documents and contracts, and did not monitor for
           compliance with Davis-Bacon wage rates, it is the Authority’s responsibility and
           not the contractors to make those employees whole. It should be noted that not all
           Authority business with contractors involve the payment of Davis-Bacon Act
           wage rates. Therefore, it is the responsibility of the Authority to notify potential
           bidders when Davis-Bacon Act labor standards apply.

Comment 11 As previously stated, it is the Authority’s responsibility for the administration and
           enforcement of labor standards in Federally-funded or assisted projects.
           Therefore, it should determine whether contractors are owed wage restitutions.
           The two year statute of limitation for wage claims refers to employee claims
           under the Fair Labor Standards Act. However, the Authority is responsible for
           notifying contractors of Davis-Bacon labor standards in its bid documents and
           contracts, and monitoring for compliance with the Davis-Bacon wage rates.

Comment 12 The Authority indicated a willingness to consider wage restitution provided that
           the two year statute of limitation for wage claims is not applicable. HUD requires



                                                 34
              that all maintenance and laborers employed for the operation of public housing
              must be paid no less than the prevailing wages determined or adopted by HUD.

Comment 13 We commend the Authority for the significant steps it has undertaken to improve
           its operations. Although some changes have been made, improvements are still
           needed. Nonetheless, we have revised our recommendation in consideration of
           the steps undertaken made by the Authority to improve its operations.

Comment 14 The Authority’s board is primarily responsible for the actions of the Authority. It
           is the Authority responsibility to provide information to HUD; therefore, failure to
           provide accurate and complete information obstructs HUD’s ability to properly
           monitor.

Comment 15 We disagree. The amounts cited in our discussion draft audit report do not
           constitute payments for the same work. The report clearly identifies the costs
           charged and the sources of funding, when appropriate, that comprised the figures
           contained in the report. Based on the issues identified in our audit report, we
           made the appropriate recommendations to HUD.

Comment 16 Although the issues cited in findings 1, 2, and 3 in our discussion draft audit
           report occurred under the previous administration, they should be corrected for
           the current administration to move forward in the right direction. Therefore based
           on the issued identified in the report, we made the appropriate recommendations
           to HUD. The Authority has opportunity to work with HUD to resolve the
           recommendations.




                                                35
Appendix C

                           FEDERAL REQUIREMENTS

Section 7 of the Authority’s contract with HUD states that the Authority shall not pledge as
collateral for a loan assets of any project covered under this contract.

Section 17 of the contract states that events of substantial default shall include but shall not be
limited to any of the following occurrences: (1) failure to maintain and operate the project(s)
under this contract in decent, safe, and sanitary manner and (2) the disposition or encumbrance
of any project or portion thereof without HUD approval.

HUD’s regulations at Title 24, Code of Federal Regulations, Part 85.22 (24CFRPart 85.22)
requires the Housing Authority to comply with the cost principles in Office of Management and
Budget Circular, A-87. Attachment B, Section 23(a) of this circular on “interest” states: “Costs
incurred for interest on borrowed capital or the use of a governmental unit’s own funds, however
represented, are unallowable except as specifically provided in subsection b or authorized by
federal legislation. Subsection b applies to financing costs (including interest) paid or incurred
which are otherwise associated with allowable costs of building acquisition, construction,
rehabilitation or remodeling. HUD requires public housing agencies under its contract to request
prior approval before entering any loan agreements that encumbers any assets of the public
housing agency that are covered by its contract.

HUD’s regulations at 24 CFR Part 903.7(c) require that annual plans include a statement of
financial resources. This statement must address the financial resources that are available to the
public housing agency for the support of Federal public housing and tenant-based assistance
programs administered by the authority during the plan year. The statement must include a
listing, by general categories, of the authority’s anticipated resources, such as its operating,
capital and other anticipated Federal resources available to the authority, as well as tenant rents
and other income available to support public housing or tenant based assistance. The statement
also should include the non-Federal sources of funds supporting each Federal program, and state
the planned uses for the resources.

HUD’s regulations at 24 CFR Part 965.302 requires all public housing agencies to complete an
energy audit for each housing project it owns under management at least once every five years.
Further, 24 CFR Part 965.402 states that a cost benefit analysis shall be made to determine
whether a change to individual metering will be cost effective.

The Contract Amendments for the Capital Fund Program (CFP) (Form HUD-53012) between
HUD and the Authority (herein called the PHA), paragraph 3 states in part:

“…the 24 month time period in which the PHA must obligate this CFP assistance pursuant to
Section 9(j) (1) of the United States Housing Act of 1937, as amended, and the 48 month time
period in which the PHA must expend its CFP assistance pursuant to Section 9(j) (5) of the Act



                                                   36
starts with the effective date of this CFP assistance (the date on which CFP assistance becomes
available to the PHA for obligation.)”

HUD’s regulations at 2 CFR 2424.10 state that HUD adopted, as HUD’s policies, procedures,
and requirements for nonprocurement debarment and suspension, the Federal regulations at 2
CFR Part 180.

HUD’s regulations at 24 CFR 24.1 state that the policies, procedures, and requirements at 2 CFR
Part 2424 permit HUD to take administrative sanctions against employees of recipients under
HUD assistance agreements that violate HUD’s requirements. The sanctions include debarment,
suspension, or limited denial of participation and are authorized by 2 CFR 180.800, 2 CFR
180.700, or 2 CFR 2424.1110, respectively. HUD may impose administrative sanctions based
upon the following conditions:

      Failure to honor contractual obligations or to proceed in accordance with contract
       specifications or HUD regulations (limited denial of participation);

      Violation of any law, regulation, or procedure relating to the application for financial
       assistance, insurance, or guarantee or to the performance of obligations incurred pursuant
       to a grant of financial assistance or pursuant to a conditional or final commitment to
       insure or guarantee (limited denial of participation);

      Violation of the terms of a public agreement or transaction so serious as to affect the
       integrity of an agency program, such as a history of failure to perform or unsatisfactory
       performance of one or more public agreements or transactions (debarment); or

      Any other cause so serious or compelling in nature that it affects the present
       responsibility of a person (debarment).




                                                  37