U.S. Department of Housing and Urban Development
Office of Inspector General
Region IX
611 West Sixth Street, Suite 1160
Los Angeles, California 90017-3101
Voice (213) 894-8016
Fax (213) 894-8115
Issue Date
October 9, 2009
Audit Memorandum Number
2010-LA-1801
MEMORANDUM FOR: Carolyn O’Neil, Administrator, Southwest Office of Native
American Programs, 9EPI
FROM: Joan S. Hobbs
Regional Inspector General for Audit, 9DGA
SUBJECT: HUD Should Provide Additional Monitoring of the Navajo
Housing Authority’s Implementation of Recovery Act-Funded
Projects
INTRODUCTION
In accordance with our annual audit plan to review funds provided under the American Recovery
and Reinvestment Act of 2009 (Recovery Act), we conducted a capacity review of the Navajo
Housing Authority’s (Authority) operations. The objective of the review was to evaluate the
Authority’s capacity to administer its Recovery Act funds and identify related potential internal
control weaknesses that could impact its ability to properly administer the funds.
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.
SCOPE AND METHODOLOGY
Our review of the Authority was limited to gaining an understanding of its capacity to administer its
Recovery Act funds. To meet our objective, we reviewed Recovery Act documentation and
funding agreements. We interviewed Authority management and staff and reviewed Authority
documentation such as policies and procedures, organizational charts, and job descriptions. We also
interviewed management and staff from HUD’s Southwest Office of Native American Programs
and reviewed their most recent monitoring report on the Authority. In addition, we reviewed the
Authority’s recent construction contractor procurement action for its Navajo 45-unit project and
construction contractor draw requests for its Apache Trails project. Our review of this
documentation was limited to our stated objective and should not be considered a detailed analysis
of the Authority’s internal controls or operations.
We conducted our on-site review from August 4 through August 7, 2009, at the Authority’s
Construction Services Division offices in Fort Defiance, AZ.
BACKGROUND
The Recovery Act became Public Law 111-5 on February 17, 2009. The Recovery Act makes
supplemental appropriations for job preservation and creation, infrastructure investment, energy
efficiency and science, assistance to the unemployed, and State and local fiscal stabilization for
the fiscal year ending September 30, 2009, and for other purposes.
The Recovery Act institutes strict obligation and expenditure deadlines with secretarial recapture
and reallocation authority. For example, the Authority’s funds must be obligated within 1 year
(by May 18, 2010). In addition, at least 50 percent of the funds must be expended within 2 years
(by May 18, 2011), and 100 percent must be expended within 3 years (by May 18, 2012).
Division A, Title XII, of the Recovery Act provides the appropriations provisions for “Native
American Housing Block Grants,” as authorized under Title I of the Native American Housing
Assistance and Self-Determination Act of 1996 (NAHASDA). Recovery Act appropriations for
Native American programs include $255 million in funding based upon a formula allocation and
$255 million in funding based upon a competitive allocation. The Authority received $34.4
million of this funding based upon the formula allocation. This amount represents an increase of
41 percent over the Authority’s fiscal year 2009 NAHASDA grant of $84.8 million. Authority
officials stated that they submitted an application for a $5 million competitive grant; however,
they did not expect to receive this grant.
The Authority’s amended Indian housing plan specifies that its Recovery Act funds will be used
as follows:
Recovery Act
Program activity funding amount
Infrastructure and site improvements - repair
dilapidated streets in public rental subdivisions $ 11,482,620
Energy conservation/efficiency - replace furnaces in
public rental units $ 8,627,500
Modernization of 1937 Act* units - repair severely
damaged public rental units $ 3,595,500
Rehabilitation assistance to existing NAHASDA
homeowners - repair latent construction defects $ 632,654
Bathroom additions - The Authority cancelled this
project and had not yet selected a replacement project $ 2,106,024
Development - Construct 40 public rental housing units $ 7,967,828
Total $ 34,412,126
* United States Housing Act of 1937
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In an effort to address prior performance problems, including significant audit findings and low
housing production levels, the Authority recently decided to change its primary method for
construction. Instead of using its force account, the Authority decided to use construction
contractors for all construction projects.
RESULTS OF REVIEW
We did not find evidence indicating that the Authority lacked the basic capacity to administer its
Recovery Act funding. However, we did identify some concerns that could impact its ability to
meet the Recovery Act obligation and expenditure timeframes and ensure that its funds are
expended in accordance with program requirements. Additional oversight and technical assistance
will be needed to address these issues. Based on our limited review, we noted the following issues:
Policies, Procedures, and Staffing:
The Authority’s written policies and procedures were originally developed for use by its
Grants Management Division, which primarily used subrecipients for construction services.
These policies and procedures had not been adapted for use by the Authority’s Construction
Services Division, which contracts directly with construction companies. For example, the
Authority’s written policies and procedures for development and construction consistently
refer to “sub-recipient” roles and responsibilities. The Authority had not reviewed and
updated these procedures to specify how these responsibilities would be reassigned or
changed to accommodate the Authority’s use of direct contracting within its Construction
Services Division.
Authority officials acknowledged the need for a staffing reorganization within the
Authority’s Construction Services Division as they transition from a force account-based
construction process to a direct contracting-based process. However, the Authority had not
received approval from its board of commissioners to proceed with the proposed
reorganization.1 This condition could impact the Authority’s ability to administer its
Recovery Act funding efficiently and effectively because these funds will be expended
through direct contracting. For example, the Authority had one procurement specialist,
although Authority officials estimated that three would be needed to manage the additional
contracting workload under its new direct contracting process.
The Authority’s record under NAHASDA demonstrated a history of poor management
controls, but recent significant staff changes had been made. Our review of the new
staff’s qualifications and our observations under this review indicated that management
was qualified, experienced, and dedicated to the mission of the Authority.
1
The auditee’s response indicated that the reorganization was approved by the board of commissioners on
October 5, 2009 (see appendix A)
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Project Planning:
In the past, the Authority had problems expending its construction funds in a timely manner.
The Recovery Act requires that 50 percent of the funds provided be expended within 2 years
of availability and that 100 percent of the funds be expended the following year. A
financial status report provided by the Authority showed that it had $281.3 million in
NAHASDA grant funds that were not yet expended for grants from fiscal years 2000
through 2008. The Authority will need to address the expenditure of these funds in
addition to the Recovery Act funds totaling $34.4 million and its NAHASDA formula
grant funds for fiscal year 2009 totaling nearly $84.8 million.
The Authority’s past performance also indicated that it had experienced difficulty in
obligating grant funds in a timely manner. This concern was significant because the
Recovery Act requires that funds be obligated even more quickly than under existing
NAHASDA requirements. Specifically, NAHASDA requires that 90 percent of grant
funds be obligated within 2 years, while the Recovery Act requires that 100 percent of the
funds be obligated within 1 year. HUD’s most recent monitoring report, dated November
2008, noted that the Authority did not meet the NAHASDA 2-year obligation
requirement for fiscal years 2002 through 2005, and the report raised concerns regarding
whether the Authority would also fail to meet these requirements for fiscal years 2006
and 2007. A financial status report provided by the Authority showed that it had made
progress in obligating its grant funds; however, $88.9 million remained unobligated for
grant years 2002 through 2008. The Authority will need to address the obligation of
these funds in addition to the Recovery Act funds totaling $34.4 million and its
NAHASDA formula grant funds for fiscal year 2009 totaling nearly $84.8 million.
Construction project schedules provided by the Authority (updated September 4, 2009)
indicated that it would not meet the Recovery Act deadline for obligation of funds for its
40-unit construction project. However, Authority staff members stated that they would
revise the schedule for this project to comply with the deadline. Given the Authority’s
past problems in obligating and expending funds in a timely manner, additional
monitoring and technical assistance related to the Authority’s implementation of its
Recovery Act projects will be necessary to ensure that the Authority proceeds in a timely
manner.
The Authority had not selected a project for $2.1 million of its Recovery Act funding.
Authority officials initially planned to construct 161 bathroom additions for existing homes.
However, they realized that they would not be able to meet the Recovery Act funding
obligation and expenditure timeframe requirements due to complications associated with
obtaining unit eligibility and flood plain determinations. If the Authority does not proceed
in a timely manner to identify and plan for an appropriate alternate project, it could have
difficulty in meeting the obligation and expenditure deadlines for these funds.
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Procurement:
The Authority was understaffed to handle the preparation and review of bid packages for
construction contracts. As noted above, the Authority acknowledged the need to hire
additional qualified staff as part of a staffing reorganization plan. However, the
reorganization plan had not yet been approved by the Authority’s board of
commissioners. The need for additional contract specialists will be critical, given that
there was only one contract specialist responsible for completing the annual grant funding
workload, the backlog of projects from prior grant years, and the additional funding
provided by the Recovery Act. This problem could impact the Authority’s ability to
obligate and expend its Recovery Act funds in a timely manner and in accordance with
program requirements.
The Authority’s procurement policies and procedures were not clearly defined or
updated. For example,
o The process for evaluating construction contractors’ administrative and financial
capacity was not clearly defined. The Authority’s written policies and procedures
stated that before contracts were awarded, the Authority would ensure that the
bidder had the sufficient technical, administrative, and financial capability to
perform the contract work of the size and type involved and within the time
provided. However, the policies and procedures did not provide specific
procedures for how contractor capacity would be established. For example, there
were no specific procedures or criteria for verifying and documenting that the
contractor had successfully completed previous projects without significant
problems. Also there were no specific criteria for determining whether the
contractor had the appropriate financial capacity to manage the project
successfully.
o Authority staff indicated that the finance division would be responsible for
reviewing the contractors’ financial capacity. However, this policy had not been
incorporated into the Authority’s written policies and procedures.
We reviewed the Authority’s procurement files for its most recently performed
construction contractor procurement action (Navajo 45-unit). Based upon this review, we
identified the following issues:
o The procurement file contained no documentation that demonstrated appropriate
review of the contractor’s financial capacity. The contractor apparently did not
submit documentation of its financial resources such as a financial statement and
business profiles as required by the Authority’s written policies and procedures.
o The procurement file contained no documentation that demonstrated review of the
contractor’s administrative capacity and record of past performance. Authority
staff members stated that they contacted the owner of the contractor’s last project.
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However they did not retain documentation of this contact or details regarding the
information obtained.
o The procurement file contained no documentation to show that environmental
issues noted by the Authority’s environmental compliance review officer were
addressed. The environmental compliance officer noted concerns with hazardous
materials, water management, noise, and air quality and required a report
addressing these issues.
o The procurement file did not contain a certification by the contracting officer that
the proposed procurement was eligible and that the costs were allowable and
reasonable and were consistent with the approved budget as required by the
Authority’s written policies and procedures. The file also did not contain
documentation of the contracting officer’s approval of final bid documents.
o The contractor’s insurance for the project did not meet the required limits as
established by the contract between the Authority and the contractor.
Specifically, the employer’s liability and general liability insurance had limits that
were less than those required by the contract.
Contractor Monitoring and Quality Control:
Internal controls over construction contractor payment requisitions (draws) were not clearly
defined within the Authority’s written policies and procedures. These policies were written
for use with subrecipients and had not been adapted to the Authority’s process of direct
contracting. Also, the procedures did not provide specific requirements for documentation
and approvals that should be required before the finance department approved the final
payment. For example, Authority staff indicated that the inspector’s progress reports and
the contractor’s certified payroll reports would be required as part of the draw
documentation. However, the written procedures for draws did not address these items.
Also, although the standardized draw forms specified within the written procedures included
signature lines for the inspector, contractor, authorized project representative, and
contracting officer, the policy did not specifically list all signatures and documentation that
were required before final payment was approved. As noted below, the Authority did not
consistently apply signature approval requirements in the past. It should be noted that we
did not find provisions within the recently executed contract for third-party inspection
services requiring the inspector to review and approve the draws.
The Authority did not implement adequate internal controls to ensure that complete and
consistent documentation and approvals were obtained for construction draws. To evaluate
the Authority’s capacity to consistently apply appropriate documentation and approval
standards for draw requests, we reviewed a sample of 16 contractor payment requisitions for
a recently completed construction project (Apache Trails). Because Authority officials
indicated that their monthly construction meetings held with contractors were used as a
control to evaluate the information submitted as part of the draws, we also requested
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documentation supporting the performance of these meetings and the associated inspection
reports. Based upon this review, we found that
o None of the project draws contained inspection reports or contractor and
subcontractor lien waivers. Thirteen of the draws also did not have an associated
inspection report as part of the Authority’s monthly meeting documentation.
o Six of the project draws did not include the Authority’s memorandum form from the
“expediter” to the Finance and Accounting Department, which required the
Authority’s project manager, labor compliance supervisor, and Construction
Services Division director to certify to the value of work in place; that inspections
were performed; and that drawings, specifications, and other contract terms were
followed.
o Three of the project draws contained contractor certification forms that were not
signed by the Authority’s authorized project representative or contracting officer.
o Eleven of the draws contained construction progress schedules that were not signed
by the project inspector or architect. In two of these cases, there was also no
authorization signature from the Authority on the construction progress schedule. In
one of these cases, there was also no authorization signature from the Authority or
contractor on the construction progress schedule.
o For nine of the draws, the Authority did not provide documentation supporting the
associated monthly construction meeting including the sign-in sheet, agenda,
inspection report, and minutes.
o None of the draw documentation was “notary sealed” as required by the Authority’s
policy.
The Authority did not have internal controls to provide for oversight of its third-party
inspection firm to ensure that the inspections were complete, accurate, and in compliance
with the terms of the contract.
The Authority did not have procedures in place to verify and document correction of
deficiencies identified during third-party construction inspections. Further, the Authority
did not maintain documentation to support the performance of its own on-site inspections or
any associated follow-up to ensure that problems were corrected.
RECOMMENDATIONS
We recommend that the Administrator, Southwest Office of Native American Programs
1A. Provide additional monitoring and technical assistance related to the Authority’s
implementation of the Recovery Act projects, as needed, to ensure that the Authority has
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the appropriate capacity to properly administer its Recovery Act funds. This action should
include ensuring that the Authority (1) takes action to proceed with its reorganization or
otherwise provide appropriate staffing to manage its new direct contracting-based process
and (2) proceeds with its project selection and planning process in a timely manner.
1B. Require the Authority to review its written policies and procedures and adapt them to
address construction contractor procurement and monitoring. The policies and procedures
should include detailed control procedures for processing and approving contractor
payment requisitions and reviewing and documenting each contractor’s financial and
administrative capacity.
AUDITEE’S RESPONSE
We provided a discussion draft memorandum report to the auditee on September 15, 2009, and
held an exit conference with its staff on September 29, 2009. The auditee provided written
comments on October 7, 2009. It generally agreed with our results.
The complete text of the auditee’s response can be found in appendix A of this report. The
auditee’s response contained a spreadsheet attachment that is not included in Appendix A but is
available on request.
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Appendix A
AUDITEE COMMENTS
9
10
HUD Should Provide Additional Monitoring of the Navajo Housing Authority's Implementation of Recovery Act-Funded Projects
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-10-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)