oversight

The Elkton Housing Authority, Elkton, MD, Did Not Comply With HUD Regulations in Obligating and Disbursing Recovery Act Capital Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-05-03.

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

                                                               Issue Date
                                                                        May 3, 2010
                                                               Audit Report Number
                                                                        2010-PH-1007




TO:        William D. Tamburrino, Director, Baltimore Public Housing Program Hub,
              3BPH
           //signed//
FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
             3AGA

SUBJECT:   The Elkton Housing Authority, Elkton, MD, Did Not Comply With HUD
           Regulations in Obligating and Disbursing Recovery Act Capital Funds


                                 HIGHLIGHTS

 What We Audited and Why

           We audited the Elkton Housing Authority (Authority) because it received Public
           Housing Capital Fund Recovery Act grant (grant) funding as part of the American
           Recovery and Reinvestment Act of 2009 (Recovery Act). Our objective was to
           determine whether the Authority obligated and disbursed capital funds received
           under the Recovery Act according to the requirements of the act and applicable
           U.S. Department of Housing and Urban Development (HUD) rules and
           regulations.

 What We Found


           The Authority did not comply with HUD regulations in obligating and disbursing
           capital funds. Specifically, it (1) did not award a contract totaling $124,875 in
           accordance with its request for proposals, (2) did not ensure that goods used for
           its Recovery Act project complied with the “buy American” requirement, and (3)
           improperly drew down $28,695 for administrative costs before incurring
           Recovery Act expenditures. It also did not accurately report the number of jobs
           created as a result of its Recovery Act projects.
What We Recommend


           We recommend that the Director, Baltimore Office of Public Housing, require the
           Authority to provide documentation to support the evaluation of proposals and the
           selection of the contractor or reimburse HUD $124,875 from non-Federal funds.
           We further recommend that the Director require the Authority to provide
           documentation to support that goods used for its Recovery Act project were
           produced in the United States. We also recommend that the Director require the
           Authority to provide documentation to support the administrative cost requested
           and received or reimburse HUD $28,695 from non-Federal funds. Lastly, the
           Authority needs to develop and implement adequate procedures to ensure that
           Recovery Act activities meet HUD requirements. At a minimum, the procedures
           should ensure that (1) Recovery Act contracts are awarded according to the
           request for proposals, (2) goods used for Recovery Act activities meet the “buy
           American” requirement, and (3) the number of jobs created by the Recovery Act
           are accurately reported.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response

           We discussed the findings with the Authority during the audit. We provided a
           copy of the draft report to Authority officials on April 9, 2010, for their comments
           and discussed the report with the officials at the exit conference on April 22,
           2010. The Authority provided its written comments to our draft report on April
           23, 2010. In its response, the Authority agreed with the results.

           The complete text of the Authority’s response can be found in appendix B of this
           report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                     4

Results of Audit
      Finding: The Authority Did Not Comply With HUD Regulations Governing   6
      Recovery Act Expenditures

Scope and Methodology                                                        12

Internal Controls                                                            13

Appendixes
   A. Schedule of Questioned Costs                                           15
   B. Auditee Comments                                                       16




                                         3
                       BACKGROUND AND OBJECTIVE

The American Recovery and Reinvestment Act of 2009 (Recovery Act) became Public Law 111-
5 on February 17, 2009. It established supplemental appropriations for job preservation and
creation, infrastructure investment, energy efficiency and science, assistance to the unemployed,
State and local fiscal stabilization for the fiscal year ending September 30, 2009, and other
purposes.

Authorized under Title XII of the Recovery Act, the U.S. Department of Housing and Urban
Development (HUD) allocated $4 billion in Public Housing Capital Fund program funding to
carry out capital and management activities for public housing agencies. Public housing
agencies are to give priority to capital projects that can award contracts based on bids within 120
days from the date the funds are made available to the public housing authorities, rehabilitation
of vacant rental units, and capital projects that are already underway or included in the 5-year
capital fund plan.

Transparency and accountability were critical priorities in the funding and implementation of the
Recovery Act. The Recovery Act imposed additional reporting requirements beyond the
standard reporting requirements for the Authority’s capital fund grants. The Authority was
required to obligate 100 percent of its Recovery Act grant by March 17, 2010. On that date, any
unobligated funds would be recaptured by HUD. The Authority must spend all of its obligated
funds by September 30, 2011.

In 1968, the Town of Elkton established the Elkton Housing Authority (Authority) as a nonprofit
organization. The mayor of the town appoints board members to serve a 5-year term, and the
town council approves the selections. The Authority’s main office is located at 150 East Main
Street, Elkton, MD.

The Authority receives capital funds annually via a formula grant from HUD. It may use its
capital funds for development, financing, modernization, and management improvements. It
received $226,692 and $225,508 in capital fund grants in 2008 and 2009, respectively. In
addition, as part of the Recovery Act, HUD allocated $286,947 to the Authority for its capital
and management activities. An amendment to the Authority’s consolidated annual contributions
contract was executed on March 18, 2009, to cover funds received under the Recovery Act. The
Authority plans to undertake the following capital activities and also plans to allocate 10 percent
of the grant for administration and oversight of the Recovery Act capital funds.




                                                 4
  Location of Recovery Act                  Description of work                     Amount
           activity
 Windsor Village                  Water heater and furnace replacement             $124,875
 Rudy Park                        Window replacement                                 80,802
 Windsor Village/Rudy Park        Fence replacement and landscaping                  30,475
 Windsor Village/Rudy Park        Gutters and downspout replacement                  22,100
 Elkton Housing Authority         Administration and oversight of                    28,695
                                  Recovery Act grant
                                  Total                                            $286,947

As of March 2010, the Authority had obligated 100 percent of its Recovery Act funds and
expended $153,570 of the $286,947 in Recovery Act funds awarded. It plans to expend its
remaining grant balance on activities that were included in its 5-year capital fund action plan.

Our audit objective was to determine whether the Authority obligated and disbursed capital
funds provided under the Recovery Act according to the requirements of the act and applicable
HUD rules and regulations.




                                                 5
                                RESULTS OF AUDIT

Finding: The Authority Did Not Comply With HUD Regulations
Governing Recovery Act Expenditures
The Authority did not comply with HUD regulations in obligating and disbursing Recovery Act
capital funds. Specifically, it (1) did not award a $124,875 contract in accordance with its
request for proposals, (2) did not ensure that goods used for its Recovery Act project complied
with the “buy American” requirement, (3) improperly drew down $28,695 for administrative
costs before incurring Recovery Act expenditures, and (4) did not accurately report the number
of jobs created as a result of its Recovery Act activity. This condition occurred because the
Authority did not fully understand HUD regulations and did not always follow its own
procedures. Therefore, there was no assurance that the Authority obtained the best value for the
services performed by the contractor or that it met the intent of the Recovery Act.




 The Authority Did Not Award a
 Contract According to Its
 Request for Proposals


              At the time of our review, the Authority had expended $153,570 (53 percent) of
              its Recovery Act grant funds received. Specifically, it spent $124,875 for a
              project and $28,695 for administrative costs. We reviewed the expenditures to
              determine whether they met the requirements of the Recovery Act and other HUD
              regulations.

              The Authority awarded a contract totaling $124,875 for the replacement of water
              heaters and furnaces in its Windsor Village public housing development. The
              contractor was responsible for replacing both furnaces and water heaters in 50
              units. The total cost of the contract included the furnishing and installation of
              materials, supplies, equipment, and labor to complete the furnace and water heater
              replacement.

              We performed site visits to 4 of the 50 units to verify that the furnace and water
              heaters were replaced and observed that all 4 units contained a newly replaced
              furnace and water heater. Although, we did not perform site visits to the
              remaining 46 units, documentation reviewed supports that the units received new
              furnaces and water heaters. The following pictures show a newly installed
              furnace and water heater.




                                                6
New furnaces (left) and water heaters (right) were replaced in units located at the Windsor Park
public housing development.

Although we were able to verify that the furnaces and water heaters were replaced
and the expenses paid were supported with invoices, payroll records, and other
documentation, we found weaknesses with the procurement process for the
contract awarded. Specifically, the Authority did not award the contract
according to its request for proposals.

We reviewed procurement records for the contract that was awarded.
Specifically, we reviewed the request for proposals, the contractor’s response to
it, and other documentation required by 24 CFR (Code of Federal Regulations)
Part 85. The request for proposals prepared by the Authority stated that the
Authority was to award the contract based on the proposal that represented the
best overall value to the Authority, considering price and other factors, but not
solely on the lowest price. Overall, the Authority was to perform a technical
evaluation of proposals received. The request for proposals stated that the
Authority was to evaluate each proposal based on the following factors and
points: (1) the contractor’s understanding of the requirement – 20 points, (2) cost
– 20 points, (3) warranties – 15 points, (4) experience in heating, ventilating, and
air conditioning and plumbing installation – 15 points, (5) schedule of completion
– 15 points, and (6) references – 15 points.

The Authority received five proposed bids with quotes ranging from $117,500 to
$235,153. We requested that the Authority provide documentation to support the
technical evaluation of the proposals received and of the contractor selected.
However, it did not perform a technical evaluation of the proposals received and
did not have documentation to support its selection of the contractor that received
the award. The Authority explained that it awarded the contract based on the
contractor that had the lowest price and not the evaluation method documented in
its request for proposals.

The Recovery Act required public housing agencies to comply with procurement
requirements contained in 24 CFR 85.36, which state that grantees are required to
maintain records that are sufficient to detail the selection or rejection of a


                                       7
           contractor. Grantees are also required to have a method for conducting technical
           evaluations of the proposals received and for selecting awardees to ensure that
           awards are made to the responsible firm with the proposal that is most
           advantageous to the program, with price and other factors considered.

           Although the Authority established a point system to be used when conducting
           technical evaluations of the proposals received, it disregarded its own
           requirements and did not conduct the technical evaluations as required by its own
           request for proposals. Without performing technical evaluations of the proposals
           received, there was no assurance that the Authority received the best value for
           services provided.

Products May Not Have Met
the “Buy American”
Requirement

           The Recovery Act imposed a “buy American” requirement on Recovery Act
           funding. Section 1605 of the Recovery Act required the Authority to only use
           funds appropriated by the act for projects in which all of the iron, steel, and
           manufactured goods used in the project are produced in the United States (“buy
           American” requirement). Additionally, HUD’s Office of Public and Indian
           Housing (PIH) Notice PIH 2009-31(HA) provided implementation guidance and
           included the process for applying exceptions to the “buy American” requirement.

           The Authority did not ensure that the products used for the newly replaced
           furnace and water heaters met the “buy American” requirement. We reviewed the
           contractor’s file and the Authority’s procurement documentation to determine
           whether the requirement was met. Although the request for proposals for the
           $124,875 included a statement requiring the contractor to provide evidence that
           the products would meet the “buy American” requirement, the Authority failed to
           ensure that the contractor met the requirement. The Authority explained that it
           did not follow the requirement because it believed that since the contractor’s
           offices were within the United States the requirement had been met.

           Without maintaining documentation ensuring that goods used for the project
           complied with the “buy American” requirement, there was no assurance that
           Recovery Act funds were used for purposes intended.




                                           8
The Authority Improperly
Drew Down $28,695 for
Administrative Costs


           HUD regulations at PIH 2009-12 (HA) allowed the Authority to draw up to 10
           percent in expenditure reimbursements for the administration of the Recovery Act
           grant.

           We reviewed HUD’s Line of Credit Control System for the Authority’s Recovery
           Act funds to determine whether it obligated and disbursed administrative costs
           according to HUD requirements. As of July 29, 2009, the Authority had drawn
           down $28,695 (100 percent) for administrative costs related to Recovery Act
           expenditures. However, at the time of its drawdown of administrative costs, it
           had not incurred any Recovery Act expenses. The Authority did not incur
           Recovery Act expenses until August 20, 2009. We requested that the Authority
           provide additional documentation to support the $28,695 that it requested;
           however, it could not provide adequate documentation. When we asked why it
           prematurely drew down 100 percent of its administrative costs, it explained that it
           was not aware that all of the funds could not be requested at one time. The
           Authority explained that under its regular capital fund program, it had always
           collected all of its administrative costs at one time. The Authority needs to
           provide adequate documentation supporting $28,695 in administrative costs that it
           received.


The Authority Did Not Properly
Account for Jobs Created


           We reviewed the Recovery Act Web site to determine whether the Authority
           complied with the additional reporting requirements associated with the act. We
           also performed limited testing to determine whether data reported were accurate.
           Although we determined that the Authority complied with all of the reporting
           requirements by the required deadlines, the Authority did not accurately account for
           and report the number of jobs created as a result of its Recovery Act activity.

           Office of Management and Budget (OMB) Memorandum 10-08 defines a job
           created or retained as those jobs funded during the quarter by the Recovery Act.
           Recipients are required to report an estimate of jobs directly created or retained by
           project and activity or contract and enter the data into a single numeric field on the
           FederalReporting.gov Web site. The memorandum also provides guidance as to
           how to calculate full-time equivalents. Full-time equivalents were to be estimated
           by dividing the total number of hours worked and funded by the Recovery Act
           within the reporting period by the quarterly hours in a full-time schedule (520
           hours).



                                              9
             For the period October 1 through December 31, 2009, the Authority reported that its
             completed Recovery Act activities did not create any additional jobs. However, it
             did not accurately report the number of jobs created. We reviewed payroll
             timesheets for the Authority’s completed Recovery Act activity and determined that
             1,864 hours were worked and funded by the Recovery Act. Using the formula
             provided in OMB Memorandum 10-08, we calculated that the Authority’s
             completed Recovery Act activity had actually created 3.6 full-time equivalents.
             Thus, the number of jobs created that was reported to the FederalReporting.gov Web
             site was incorrect. The Authority should have reported that 3.6 jobs had been
             created.

             We asked the Authority why it had not properly calculated and reported the number
             of jobs created. It explained that it was not aware of the guidance contained in OMB
             Memorandum 10-08 pertaining to the calculation of full-time equivalents. Also, it
             explained that since the contractor selected did not hire any additional employees to
             carry out its Recovery Act activities, it reported that zero jobs had been created.


Conclusion


             The Authority did not adequately support its Recovery Act expenditures.
             Specifically, it did not award its contract according to its request for proposals,
             did not ensure that goods used met the “buy American” requirement, and
             prematurely drew down 100 percent of its administrative costs. It also did not
             properly account for jobs created due to its Recovery Act activities. This
             condition occurred because the Authority did not fully understand HUD
             regulations and did not always follow its own procedures. Without adequate
             documentation to support expenditures totaling $153,570, there was no assurance
             that Recovery Act funds were used appropriately.

             After the completion of our audit fieldwork, the Authority obligated its remaining
             Recovery Act funds of $133,377. It will need to provide adequate documentation
             to support that it obligated these funds in accordance with the applicable requests
             for proposals and that it followed “buy American” requirements.

Recommendations

             We recommend that the Director of the Baltimore Office of Public Housing require
             the Authority to

             1A.    Provide adequate documentation to support the technical evaluation of the
                    five proposals received and the selection of the contractor or reimburse
                    HUD $124,875 from non-Federal funds.



                                              10
1B.   Provide adequate documentation to support that goods used for its
      completed Recovery Act project were produced in the United States.

1C.   Provide adequate documentation to support the administrative cost
      requested and received or reimburse HUD $28,695 from non-Federal
      funds.

1D.   Provide adequate documentation to support that it obligated its remaining
      $133,377 in Recovery Act funds in accordance with its requests for
      proposals and that it followed the “buy American” requirements or
      reimburse HUD from non-Federal funds.

1E.   Develop and implement adequate procedures to ensure that future
      Recovery Act activities meet HUD requirements. At a minimum, the
      procedures should ensure that (1) adequate documentation is maintained
      for the selection of contractors performing Recovery Act activities, (2)
      goods used for Recovery Act activities meet the “buy American”
      requirement, and (3) the Authority accurately reports the number of jobs
      created according to guidance provided in OMB Memorandum 10-08.




                              11
                         SCOPE AND METHODOLOGY

We performed our audit fieldwork between November 2009 and March 2010 at the Authority’s
offices located 150 East Main Street, Elkton, MD. Our audit generally covered the period February
to October 2009. We expanded our scope as necessary.

To complete our objective, we

   •   Reviewed Recovery Act program requirements including Federal laws and regulations
       governing the Recovery Act Public Housing Capital Fund program.

   •   Reviewed HUD’s monitoring reports and funding awarded for the Authority’s Recovery Act
       Public Housing Capital Fund program.

   •   Reviewed the Authority’s policies and procedures, procurement files for Recovery Act
       activities, and audited financial statements.

   •   Conducted interviews with the Authority’s staff to gain an understanding of the internal
       controls related to the administration of its Recovery Act Public Housing Capital Fund
       program.

   •   Conducted onsite reviews of 4 of 50 units that received items purchased with Recovery
       Act funds.

To achieve our audit objective, we relied in part on computer-processed data at the Authority.
Although we did not perform a detailed assessment of the reliability of the data, we did perform
minimal level of testing and found the data to be adequate for our purposes.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                12
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls 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
              objective:

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

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

                  •   Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

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

              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.




                                               13
Significant Weakness


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

           •      The Authority did not ensure compliance with laws and regulations as it did
                  not demonstrate that activities were supported.




                                            14
                                     APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                 Recommendation         Unsupported 1/
                        number
                               1A              $124,875
                               1C                28,695
                               1D               133,377
                            Totals             $286,947


1/   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.




                                             15
Appendix B

             AUDITEE COMMENTS




                    16