oversight

Control Weaknesses at the Syracuse Housing Authority, Syracuse, New York May Affect Its Capacity to Administer American Recovery and Reinvestment Act Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-01-14.

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

                                                        U. S. Department of Housing and Urban Development
                                                                                 Office of Inspector General
                                                                                 New York/New Jersey Office
                                                                               26 Federal Plaza – Room 3430
                                                                                  New York, NY 10278-0068



                                                                 MEMORANDUM NO. 2010-NY-1802

January 14, 2010

MEMORANDUM FOR: Joan Spilman, Director, Office of Public Housing, Buffalo Field
                Office, 2CPH
                //SIGNED//
FROM:           Edgar Moore, Regional Inspector General for Audit, New York/New Jersey, 2AGA

SUBJECT:        Control Weaknesses at the Syracuse Housing Authority, Syracuse, New York May
                Affect Its Capacity to Administer American Recovery and Reinvestment Act Funds


                                            INTRODUCTION

We conducted a review of the Syracuse Housing Authority’s (Authority) administration of its
capital funding program. We selected this Authority based upon indicators identified in a risk
assessment of housing authorities that were allocated capital funds under the American Recovery
and Reinvestment Act of 2009 (Recovery Act). The primary objective of our review was to
evaluate the Authority’s capacity in the areas of internal controls, eligibility, financial controls,
procurement, and output/outcomes in administering its Recovery Act funds. This review
identified several issues of concern that we wish to bring to your attention, related to the Authority’s
capacity to fairly and reasonably administer its capital fund program in light of its receiving an
additional $4.5 million in capital funds under the Recovery Act.

In accordance with U.S. Department of Housing and Urban Development (HUD) Handbook
2000.06, REV-3, within 60 days, please provide us, for each recommendation in this
memorandum, a status report on (1) the corrective action taken, (2) the proposed corrective
action and the date to be completed, or (3) why action is considered unnecessary. Additional
status reports are required 90 days and 120 days after this memorandum is issued for any
recommendation without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of this review.

Should you or your staff have any questions, please contact Karen A. Campbell, Assistant
Regional Inspector General for Audit, at (212) 542-7977.




    Visit the Office of Inspector General on the World Wide Web at http://www.hud.gov/oig/oigindex.html
                               METHODOLOGY AND SCOPE

To gain an understanding of the Authority’s administration of the capital fund program, we
reviewed applicable laws, regulations, and HUD program requirements. In addition, we
reviewed the Authority’s procurement policy, conducted interviews with Authority personnel to
gain an understanding of the internal controls, and tested the system of controls to determine
whether the controls were functioning as intended. We also analyzed contract files and
disbursement records for the period January 2008 through May 2009.

We performed our on-site work from June through September 2009 at the Authority’s office
located in Syracuse, New York. Our work was not conducted in accordance with generally
accepted government auditing standards. Under the Recovery Act, inspectors general are
expected to be proactive and focus on prevention; thus, this report is significantly reduced in
scope.

                                        BACKGROUND

On February 17, 2009, the President signed the Recovery Act. This legislation includes 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.

The Office of Management and Budget provided guidance establishing requirements for various
aspects of Recovery Act planning and implementation. These requirements are intended to meet
crucial accountability objectives. Specifically,

       Funds are to be awarded and distributed in a prompt, fair, and reasonable manner;
       The recipients and uses of all funds are to be transparent to the public, and the public
       benefits of these funds are to be reported clearly, accurately, and in a timely manner;
       Funds shall be used for authorized purposes, and instances of fraud, waste, error, and
       abuse are to be mitigated;
       Projects funded under the Recovery Act should avoid unnecessary delays and cost
       overruns; and
       Program goals are to be achieved, including specific program outcomes and improved
       results on broader economic indicators.

In April 2009, HUD conducted a tier 1 consolidated monitoring review at the Authority. The
report identified one finding, three concerns, and 15 observations. HUD noted that the
Authority’s Capital Fund Program (CFP), Capital Fund Financing Program (CFFP), and
Recovery Act grants were not fully obligated or were nearing critical deadlines. HUD reminded
the Authority that the CFFP bond fund deadline had passed and that more than $1.3 million
remained not obligated and expended. In addition, HUD cited various procurement and financial
management concerns in the monitoring report.



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                                     RESULTS OF REVIEW

Significant control weaknesses diminished the Authority’s capacity to effectively administer its
capital fund program in the areas of internal controls, eligibility, financial controls, procurement,
and output/outcomes. Specifically, the Authority failed to (1) complete its 2002 CFFP in a
timely manner, and additional CFP grants remain open; (2) follow HUD-required contracting
and procurement regulations, thus limiting competition and potentially causing excessive and/or
ineligible costs; and (3) implement a proper control environment, which contributed to
management and financial control deficiencies.

1. The CFFP Bond Program Remained Incomplete and Additional CFP Grants Remained Open

The Authority intentionally failed to complete its 2002 CFFP in a timely manner. Specifically, it
missed the deadline for expending its 2002 CFFP bond funds, as the $6.495 million in bond
proceeds was expected to be fully expended by June 2006. Instead, as of May 31, 2009, there
was a balance of $1,390,588 in unexpended 2002 bond proceeds. Authority officials maintained
the bond fund proceeds as a contingency fund, although the proceeds were required to be used
for capital improvements needed to improve the Authority’s public housing. Therefore, we
consider the $1,390,588 as funds that can be put to better use. Many improvements remain to be
completed with the bond proceeds, including improvements to the Authority’s central office and
the demolition of a vacant structure on Burt Street that is located on hazardous substance
property. The photograph below illustrates the vacant Burt Street building.




Instead of completing work items such as those noted above, the Authority recently drew down
more than $62,000 in interest income earned on the remaining bond funds from the trustee and
then used these funds for operating costs. Hence, the continued availability of the CFFP bond
proceeds allowed the Authority to access extra operating funds. This is not the intent of the

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CFFP, as the funds are intended to complete vital and necessary improvements to benefit the
residents of public housing.

In total, the Authority had drawn down and used more than $600,000 in interest income from the
bond proceeds since 2002. At the same time, it disbursed more than $2.4 million in capital funds
to pay for interest charges on unused borrowed capital that did not fully provide the intended
benefits to the public housing developments or its residents. The Authority had no financial
incentive to complete the CFFP in a timely manner since the CFFP bond proceeds are
maintained by the trustee and HUD is unable to recapture the unexpended funds. Under the
normal CFP, HUD can deobligate or recapture funds from its Line of Credit Control System
(LOCCS) that are not obligated or expended in a timely manner.

In addition to the above, the Authority’s capacity to implement the $4.5 million in Recovery Act
funds in a timely manner, while completing its current obligations under the CFP, is a matter of
great concern. The Authority needs to obligate the following funding:


                 Source of funds      Amount unobligated     Obligation deadline
                 2008 capital fund       903,773             June 12, 2010

                 2002 bond CFFP         1,390,588             Overdue (1)

                 Recovery Act           3,518,825            Mar. 17, 2010

                 Total                $ 5,813,186


   (1) The CFFP bond funds are overdue to be obligated and expended.

As of the end of our field work (September 30, 2009), the Authority had over $5.8 million in
funds required to be obligated on or before June 12, 2010. This includes Recovery Act funds
that are required to be obligated by March 17, 2010. As of present date, the Authority has
reported in HUD’s LOCCS system that nearly $4 million has been obligated since the OIG
review began. However, the Authority needs to obligate the additional $5.8 million in less than a
year. As such, HUD will need to monitor the situation closely to ensure that the Recovery Act
funds will truly represent additional eligible expenditures as intended.

2. There Were Significant Contracting and Procurement Deficiencies

The Authority failed to follow HUD required procurement and contracting regulations, thus
limiting competition and potentially causing excessive and/or ineligible costs. Specifically, the
Authority failed to follow the contracting and procurement requirements at 24 CFR (Code of
Federal Regulations) 85.36, pertaining to procuring professional services and executing change
orders. The extent of the deficiencies demonstrates that the Authority used past capital funds
inefficiently and undermined its assurance to HUD that it had adequate capacity to administer its
Recovery Act funds in an effective manner. Contrary to 24 CFR 85.36 and its own policies, the
Authority improperly procured contracts under its capital fund program as follows:
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a. For an underground steam line replacement contract, the original bid documents did
   not contain full disclosure of the scope of services sought. Rather, the Authority
   opted to initiate a change order process within days of awarding the contract and prior
   to the contract execution date. Documentation contained in the contract files suggests
   that additional work may have been sought as early as April 26, 2007, the date that
   bids for the above contract were received. Therefore, the other three bidders for the
   contract were not allowed to provide bids based on the full scope of services to be
   provided. Consequently, there was no assurance that the contract was awarded to the
   most responsible bidder or that the requirements for full and open competition were
   fulfilled.

b. Two change orders were executed for work that was outside the original scope of an
   entry door replacement contract. Specifically, the change orders were for
   replacement doors at two additional locations not included in the original contract
   scope. Moreover, the change orders nearly doubled the amount of the costs incurred
   for the contract. Authority officials concurred that it would have been proper to
   obtain new quotes. Consequently, there was no assurance that the requirements for
   full and open competition were fulfilled pertaining to the additional work awarded
   through the change order process.

c. The Authority incurred $12,628 in architectural and engineering costs without
   following proper procurement standards and without the benefit of a binding contract.
   The services related to an exterior caulking contract, and the work was awarded
   verbally to the firm without following a formal request for proposals process,
   obtaining bids or quotes, or conducting a cost and price analysis. When the amount
   of services required in relation to a specific activity was small and limited in scope, it
   was a common practice for the Authority to solicit a firm that had not been awarded
   much work recently. Nonetheless, this practice was contrary to HUD’s procurement
   requirements. Consequently, there was no assurance that the requirements for full
   and open competition were fulfilled.

d. Without the benefit of competition, request for proposal, or cost estimate, as required
   by 24 CFR 85.36, the Authority paid an architectural firm more than $230,000 for
   services pertaining to two improvement contracts at one of its projects (Vinette
   Towers) in 2008 and 2009. There were a number of problems and concerns with the
   billing invoices, including overhead charges that appeared to be unnecessary and
   unreasonable and a lack of adequate supporting documentation. Vinette Towers is
   the project that was targeted to receive the vast majority of the Recovery Act funds.

e. On June 13, 2008, a $27,825 contract was executed for emergency repair asbestos
   abatement in the mechanical room at an Authority project (Toomey Abbot Towers).
   However, on the same date, the contractor informed the Authority that a change order
   was needed for an additional $8,475. In August 2008, the contractor submitted a
   proposal for additional asbestos abatement at the same mechanical room. This
   proposal was for $29,500, more than the original contract of $27,875. However, no

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           competing proposals were obtained, and the proposal was eventually accepted as
           another change order. Since two months had passed since the initial incident, it did
           not appear that this proposal constituted an emergency. In addition, the emergency
           work took several months to complete. Further, the Authority issued a field order to
           request a price for the additional abatement work after the contractor submitted the
           $29,500 proposal. The field order is supposed to be executed before the contractor
           submits a price quote for the additional work. The contract eventually cost a total of
           $71,075, an increase of 155 percent over the original price quote.

       f. A computer systems consulting firm was paid at least $95,463, at billing rates of up to
          $125 per hour, without the benefit of a cost estimate or request for proposals for
          competition. Moreover, there appeared to be no ceiling on the costs, and the
          Authority continued to pay for additional services from the firm without the benefit of
          price competition.

3. Control Environment Weaknesses Contributed to Management and Financial Control
  Deficiencies

Internal control is a major part of managing an organization. It serves as the first line of defense
in safeguarding assets and preventing and detecting errors and fraud. Internal control also helps
managers achieve desired results through effective stewardship of public resources. During the
review, we noted that the Authority’s control environment contributed to management and
financial control deficiencies. The deficiencies identified diminished the Authority’s capacity to
efficiently and effectively administer its public resources and included the following:

       a. The Authority’s lack of adequate segregation of duties allowed a purported employee
          embezzlement of laundry token cash receipts to go undetected for more than 10 years,
          with an estimated loss of more than $170,000. Although the Authority identified the
          purported embezzlement in October 2008, it was not reported to HUD. Moreover, the
          Authority continued to accept cash for rental payments and until recently, did not
          have adequate bonding for employees who handle cash.

       b. The Authority’s computer software system did not provide for automatic log-offs, and
          employees were not required to periodically change their passwords for system
          access. These practices could leave the system vulnerable to unauthorized access.

       c. Contrary to proper segregation of duties, the Authority’s employees responsible for
          purchasing also approved vouchers for payment.

       d. HUD’s 2009 monitoring of the Authority raised concerns over use of staff in the
          Modernization Department, suggesting a restructuring of staff duties into functional
          areas and adding an assistant to the director. The modernization coordinator
          concurred that due to staffing cuts in prior years, the department could use additional
          staff to help administer its capital funds and Recovery Act funds; however, no
          additional staff had been hired.



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       e. HUD’s 2009 monitoring also indicated that the Authority needed to strengthen its
          collection and follow-up of delinquent tenant accounts receivable, noting that over the
          past three years, the Authority had written off $532,230 in tenant accounts receivable.
          Further, HUD noted staffing problems in the Collection Department and problems
          with the interaction between the Collection and Accounting Departments.

                                         CONCLUSION

The Authority intentionally failed to complete its 2002 CFFP, and its capacity to implement the
$4.5 million in Recovery Act funds in a timely manner, while completing current obligations
under the CFP, is a matter of great concern. In addition, capital funds were expended without (1)
the benefit of full and open competition, (2) obtaining bids or quotes, (3) the completion of a cost
or price analysis, and (4) adequate supporting documentation. Consequently, the Authority did
not ensure that certain capital fund expenditures were necessary, reasonable, and eligible.
Moreover, internal control weaknesses impaired the Authority’s ability to properly safeguard
assets, ensure adequate segregation of duties, and provide security of automated systems and the
effective management of its workforce.

The Authority is required to obligate more than $5.8 million in capital funds by June 12, 2010,
including $3.5 million of recovery Act funds that are required to be obligated by March 17, 2010.
These requirements, coupled with the procurement and control deficiencies cited herein, may
negatively impact the successful administration of stimulus funding to achieve the intended
Recovery Act goals. Based on the issues presented in this report, we have major concerns
regarding whether the Authority will have the capacity to effectively and efficiently manage its
$4.5 million in Recovery Act funding to achieve the benefits intended.

                                    RECOMMENDATIONS

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

1A     Closely monitor and oversee the operations and progress of the Authority to ensure
       timely compliance with all CFFP, CFP, and Recovery Act deadlines and objectives.

1B     Certify that the Authority’s procurement practices meet the federal procurement
       requirements at 24 CFR Part 85.


We also recommend that the Director of HUD’s Buffalo Office of Public Housing instruct the
Authority to

1C.    Immediately complete its 2002 CFFP bond program activities and use the remaining
       $1,390,588 for eligible improvements as intended.

1D.    Submit a viable plan to obligate capital funds and supplemental funds provided under the
       Recovery Act, so that HUD can reassess whether the Authority is capable of meeting its
       obligation deadlines.

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1E.   Establish and implement operational procedures to ensure compliance with all applicable
      federal, state, and local procurement policies and regulations for all future procurement
      activities when obtaining goods and services. HUD should verify compliance through
      their ARRA Recovery Act monitoring strategy of remote and onsite reviews of Authority
      procurement policies.


1F.   Institute effective management and financial controls to ensure that (1) duties are
      adequately segregated, (2) assets are properly safeguarded from misappropriation and/or
      misuse, (3) automated systems have adequate controls in place to prevent unauthorized
      access, and (4) modernization staffing levels are adequate for successful administration
      and completion of the Recovery Act program and objectives.




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                                   APPENDIXES


Appendix A

             SCHEDULE OF FUNDS TO BE PUT TO BETTER USE
                       Recommendation                Funds to be put
                             number                     to better use 1/
             _________________________________________________
                                   1C                    $1,390,588

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. If the Authority implements our recommendation to use
     its remaining CFFP funds to improve its public housing and the lives of the residents, the
     above funds will be put to better use.




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Appendix B
         AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                        Auditee Comments

December 14, 2009

Edgar Moore
Regional Inspector General for Audit
Office of Inspector General
U.S. Department of Housing and Urban Development
26 Federal Plaza
Suite 3430
New York, NY 10278-0068

Dear Mr. Moore:

The Syracuse Housing Authority would like to take this opportunity to comment on the Draft
Audit Report issued by the Office of Inspector General for the Department of Housing and
Urban Development.

For two months earlier this year the Syracuse Housing Authority worked with staff from the
Office of the Inspector General in a capacity audit/risk assessment as part of a review concerning
American Recovery and Reinvestment Act of 2009 funds. Throughout the process the Syracuse
Housing Authority was appreciative of observations, insights, recommendations, and critiques by
the HUD staff. As such, the Syracuse Housing Authority began to implement many of the draft
report’s recommendations while the audit process was still underway.

Comment 1 The only critical comment concerning the content of the report has to deal with
Recommendation 1F. That recommendation uses the phrase “HUD approval for all procurement
activities.” The Syracuse Housing Authority understands that this review was focused on Capital
Funds, and specifically those dispersed through the American recovery and Reinvestment Act of
2009, and therefore believes that this recommendation should only focus on HUD approval for
those American recovery and Reinvestment Act of 2009 funds, not all procurement activities of
the Housing Authority which may include operating and other funds as well.

As to the other recommendations, the Syracuse Housing Authority has already implemented the
following:

Comment 2 Recommendation 1A – The Syracuse Housing Authority is working closely with
the Buffalo Area Field Office on the timely use of current Capital Funds.



                                               10
Appendix B
         AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                        Auditee Comments

Comment 3 Recommendation 1B – The Syracuse Housing Authority has implemented a new
board-approved Procurement Policy(November 2009).

Comment 4 Recommendation 1C – A plan for the complete obligation and expenditure of 2002
CFFP Bond funds has been developed.

Comment 5 Recommendation 1D - A plan for the complete obligation and expenditure of
American recovery and Reinvestment Act of 2009 funds has been developed.

Comment 6 Recommendation 1E – In addition to the new procurement policy, procedures and
policies regarding Section 3, purchasing authorization thresholds, small contract solicitation,
change order policy, procurement ethics, and substantial deviation definitions have all been
implemented.

Comment 7 Recommendation 1F – By implementing the new Procurement Policy, and the
various procedure and policy documents cited in 1E the Syracuse Housing Authority has
effectively tightened its control and oversight of the full procurement of goods and services
process.

Comment 8 Recommendation 1G – In addition to the procedure and policy implementation, the
Syracuse Housing Authority has also added staff to its Accounting/Finance Department, brought
in a Construction Manager for a large project, added a Clerk of the Works to its Modernization
Department, begun the conversion process to new business software (Tenmast), and added job
duties to some staff in order to provide a check and review process to the procurement of goods
and services.

Comment 9 Overall, the review process by the Office of Inspector General for the Department
of Housing and Urban Development was a smooth and positive experience for the Syracuse
Housing Authority. It has afforded the Authority an opportunity to make itself a stronger
business, a more efficient public sector model, and has furthered its ability to more strongly
fulfill its mission.

I thank you for the opportunity to submit these comments.

Sincerely,

William J. Simmons
Executive Director

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                         OIG Evaluation of Auditee Comments

Comment 1   Officials for the Authority agree with our recommendations pertaining to the
            identified procurement weaknesses. However, officials contend that the draft
            recommendation 1F should only focus on procurement activities appropriated
            from Recovery Act funds, and not all procurement activities which include
            operating and other funds. The focus of our review was the Authority’s
            administration of its capital funding program, which included funds allocated
            under the Recovery Act. However, we determined that the extent of the noted
            procurement deficiencies were systemic and need to be addressed by the
            Authority from an organizational-wide perspective. In consideration of comments
            received from both the Authority and HUD officials, we have elected to
            strengthen recommendation 1E detailed in the draft report, which covers all of the
            Authority’s procurement issues, and we have eliminated recommendation 1F as
            originally detailed in the draft report. We continue to recommend that HUD
            verify the Authority’s compliance with all pertinent procurement regulations and
            policies.

Comment 2   Officials for the Authority contend that they are working closely with HUD on the
            timely use of CFFP and CFP funds.

Comment 3   Officials for the Authority state that they have implemented a new procurement
            policy. The evidence necessary to provide closure of this recommendation would
            be a copy of the board-approved procurement policy and documentation to
            support HUD’s corresponding certification.

Comment 4   Officials for the Authority state that a plan for the complete obligation and
            expenditure of 2002 CFFP bond funds has been developed. As such, this plan
            should be submitted to HUD for review, and the provision of documentation
            supporting the completion of the 2002 CFFP activities and the use of the
            remaining funds for eligible activities would be the evidence necessary to reach a
            management decision.

Comment 5   Officials for the Authority state that a plan for the complete obligation and
            expenditure of Recovery Act funds has been developed. Nevertheless, Authority
            officials still need to ensure that all Recovery Act funds are obligated by the
            March 17, 2010 deadline.

Comment 6   Officials for the Authority state that in addition to the new procurement policy,
            they have implemented improved procurement procedures and policies.
            Nevertheless, as addressed above in comment 1, we have revised the draft
            recommendation 1E and have eliminated the draft recommendation 1F as
            originally detailed in the draft report. Thus, the Authority’s procurement policies
            and procedures should be verified for compliance through HUD’s remote and
            onsite reviews.



                                             12
Comment 7   Officials for the Authority state that they have tightened the controls and
            oversight of their procedures for the procurement of goods and services by
            implementing its new procurement policy. As noted above in comment 6, we
            have eliminated the draft recommendation 1F and incorporated its sentiment into
            our final recommendation 1E.

Comment 8   In response to recommendation 1G in the draft report, now stated as 1F, officials
            for the Authority cite the addition of staff and the conversion to new business
            software to address various internal control weaknesses. Nevertheless, the extent
            of non-compliance noted during our review requires HUD to monitor the
            Authority to also ensure that its actions have a lasting impact for improving the
            control environment.

Comment 9   Officials for the Authority have begun to implement OIG’s recommendations
            since the review was a positive opportunity for the Authority. We encourage the
            Authority to continue to work with HUD to ensure that needed improvements are
            implemented.




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