oversight

The Harrisburg, PA, Housing Authority Did Not Procure Goods and Services in Accordance With HUD Regulations and Its Procurement Policy

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-PH-1012




TO:        Dennis G. Bellingtier, Director, Office of Public Housing, Pennsylvania State
             Office, 3APH
           //signed//
FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
             3AGA

SUBJECT:   The Harrisburg, PA, Housing Authority Did Not Procure Goods and Services
           in Accordance With HUD Regulations and Its Procurement Policy

                                 HIGHLIGHTS

 What We Audited and Why

           We audited the Harrisburg Housing Authority’s (Authority) procurement
           function. We audited the Authority because a previous audit conducted in 2007
           indicated that there was weakness in its purchasing process. Our objective was to
           determine whether the Authority procured goods and services in accordance with
           U.S. Department of Housing and Urban Development (HUD) regulations and
           other applicable requirements.

 What We Found


           The Authority did not purchase goods and services in accordance with HUD
           regulations and its procurement policy. We identified deficiencies with the
           Authority’s purchases of goods and services from 17 of 20 vendors reviewed.
           The Authority acquired goods and services without having contracts in place and
           after contracts had expired. Also, the Authority improperly awarded
           noncompetitive contracts and did not maintain records to document the significant
           history of procurements.
What We Recommend


           We recommend that the Director, Pennsylvania State Office of Public Housing,
           require the Authority to (1) provide documentation to support that payments for
           goods and services totaling $1.7 million were fair and reasonable or reimburse the
           applicable programs from non-Federal funds for any amounts that it cannot
           support, (2) develop and implement controls to ensure that it complies with all
           applicable procurement requirements, (3) provide procurement training to all
           employees involved in the procurement process, and (4) develop and implement a
           contract administration system.

           We also recommend that the Pennsylvania State Office of Public Housing expand
           its monitoring of the Authority’s procurement function to ensure that it operates in
           compliance with applicable requirements.

           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 report with the Authority during the audit and at an exit
           conference on July 7, 2010. The Authority provided written comments to our
           draft report on July 9, 2010. It agreed with the conclusions and recommendations
           in the report. The complete text of the Authority’s response can be found in
           appendix C of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                         4

Results of Audit
      Finding: The Authority Did Not Purchase Goods and Services in Accordance   6
      With HUD Regulations and Its Procurement Policy

Scope and Methodology                                                            12

Internal Controls                                                                13

Appendixes
   A. Schedule of Questioned Costs                                               15
   B. Schedule of Deficiencies and Unsupported Costs                             16
   C. Auditee Comments                                                           17




                                           3
                         BACKGROUND AND OBJECTIVE

The Harrisburg Housing Authority (Authority) was established in 1938 under the Housing
Authority Laws of the Commonwealth of Pennsylvania to serve the needs of low-income, very
low-income, and extremely low-income families in Harrisburg, PA, and to (1) increase the
availability of decent, safe, and affordable housing in its communities; (2) ensure equal
opportunity in housing; (3) promote self-sufficiency and asset development of families and
individuals; and (4) improve community quality of life and economic viability. A five-member
board of commissioners governs the Authority. The commissioners serve 5-year terms on the
board. From June 2007 through October 2009, the Authority operated under the direction of an
acting executive director. The Authority’s former executive director formally resigned as part of
a plea agreement with Federal prosecutors in November 2007. In October 2009, the Authority
hired Mr. Senghor Manns to be its executive director. The Authority’s main administrative
office is located at 351 Chestnut Street, Harrisburg, PA.

The Authority owns and manages 1,728 low-rent public housing units under its consolidated
annual contributions contract with the U.S. Department of Housing and Urban Development
(HUD). The consolidated annual contributions contract defines the terms and conditions under
which the Authority agrees to develop and operate all projects under the contract. HUD
authorized the Authority the following operating subsidies and capital funds for its public
housing units for fiscal years 2007 to 2009.

                                          Public housing               Public housing
                                          operating funds               capital funds
                    Fiscal year
                                             authorized                  authorized
                        2007                 $8,574,106                   $3,566,938
                        2008                  8,338,990                    3,492,176
                        2009                  9,676,638                   3,493,9401
                        Total               $26,589,734                 $10,553,054

In October 2006, the Authority converted its method of financial management for its public
housing developments to asset management. Asset management is a management model that
emphasizes project-based management, as well as long-term and strategic planning. Under asset
management, the Authority established a central office cost center. The central office cost center
is used to account for non-project-specific costs. The Authority covers the cost of operating its
central office cost center by charging asset management, bookkeeping, and management fees to
its various developments and programs. Earned fees are treated as local revenue subject only to
the controls and limitations imposed by the public housing agency’s management, board, or
other authorized governing body. As of April 30, 2010, the Authority had approximately $2
million in unrestricted cash in its central office cost center account.



1
 Does not include $7.8 million of capital funds provided under the American Recovery and Reinvestment Act of
2009.

                                                       4
Our audit objective was to determine whether the Authority procured goods and services in
accordance with HUD regulations and other applicable requirements.




                                              5
                                         RESULTS OF AUDIT

Finding: The Authority Did Not Purchase Goods and Services in
Accordance With HUD Regulations and Its Procurement Policy
Contrary to HUD regulations and its procurement policy, the Authority improperly procured
goods and services from 17 of 20 vendors that we reviewed. It acquired goods and services
without having contracts in place and after contracts expired. In addition, it improperly awarded
noncompetitive contracts and did not maintain records to document the significant history of
procurements. This noncompliance occurred because (1) the Authority did not conduct annual
procurement planning, (2) the Authority did not implement a contract administration system to
monitor contracts, (3) management did not demonstrate a positive and supportive attitude toward
procurement requirements, and (4) employees with no procurement training were tasked to put
together contracts. Since the Authority did not purchase goods and services in accordance with
HUD regulations and its procurement policy and it could not demonstrate that the prices it paid
for these services were fair and reasonable, payments totaling more than $1.7 million2 are
unsupported.



    The Authority Acquired
    Services Without Having
    Competitive Contracts in Place


                    The Authority did not have contracts in place for legal services totaling $116,866
                    that it acquired from three vendors, and its files contained no evidence to
                    demonstrate that it selected the vendors competitively. The Authority used
                    $111,723 in central office cost center funds and $5,143 in public housing
                    operating funds to pay for these services. The Authority’s procurement policy
                    states that if the amount of a purchase exceeds $10,000, the Authority will award
                    a contract using sealed bids or competitive proposals. Although fees earned by
                    the central office cost center are considered non-Federal funds, the Authority is
                    required to follow State and local laws, as well as controls and limitations
                    imposed by its management when making purchases from the central office cost
                    center. The Authority’s procurement policy states that for any purchases over
                    $10,000, it will award a contract using sealed bids or competitive proposals.
                    There was no evidence in the Authority’s files that it complied with these
                    requirements. This noncompliance occurred because the Authority’s management
                    disregarded its procurement policy and had a “buy now and worry about it later”
                    attitude toward contracting. Since the Authority did not have contracts in place
                    for these services as required and it could not demonstrate that the prices it paid


2
    Appendix B of this report summarizes the results of our review.

                                                           6
           for these services were fair and reasonable, the payments totaling $116,866 are
           unsupported.

The Authority Continued To
Acquire Services After
Contracts Expired


           Although the Authority had contracts in place for legal, information management,
           financial consulting, and resident services that it acquired from five vendors, it
           made payments to the vendors totaling $583,545 after the contracts had expired.
           The Authority acquired these services noncompetitively and it did not perform an
           analysis to determine whether the prices were fair and reasonable. The Authority
           used $355,381 in public housing operating funds, $168,378 in central office cost
           center funds, and $59,786 in public housing capital funds to pay for these
           services. The following table shows the dates on which the contracts expired and
           the amounts the Authority paid after they expired.

                                            Date contract       Amount paid after
                  Service acquired            expired            contract expired
               Legal services (general
               counsel)                         7/31/2003             $370,855
               Information
               management services              10/21/2008             119,571
               Financial consulting
               services                         3/26/2009               42,253
               Resident services
               (convenience store
               manager)                         10/16/2006              36,531
               Resident council
               advisory services                3/31/2009               14,335
                         Total                                        $583,545

           The Authority paid for these services on expired contracts because it did not
           perform procurement planning as required by its procurement policy and had not
           implemented a contract administration system to monitor contracts. The
           Authority’s procurement policy states that procurement requirements are subject
           to an annual planning process to ensure efficient and economical purchasing. It
           also requires the Authority to maintain a contract administration system to
           monitor its contracts. HUD Handbook 7460.8 requires HUD approval on all
           contracts that exceed 5 years, including options, which the Authority did not
           obtain for the legal services. Since the Authority made payments for these
           services after the contracts had expired and it could not demonstrate that the
           prices it paid for these services were fair and reasonable, the payments totaling
           $583,545 are unsupported.


                                            7
    The Authority Did Not Properly
    Award Four Noncompetitive
    Contracts


                 The Authority improperly awarded noncompetitive contracts for elevator
                 maintenance, nursing, and resident services totaling $211,714. The Authority
                 used public housing operating funds to pay for these services. Regulations at 24
                 CFR (Code of Federal Regulations) 85.36 require procurements by
                 noncompetitive proposals to be conducted only if a written justification is made as
                 to the necessity of using this acquisition method. Because there is no price
                 competition, a cost analysis is required, and the costs or price must be determined
                 to be reasonable. The Authority’s files contained neither a written justification
                 nor a cost analysis as required. HUD Handbook 7460.8 requires HUD approval
                 on all contracts that exceed 5 years, including options, which the Authority did
                 not obtain for the elevator maintenance services. This noncompliance occurred
                 because the Authority tasked its tenant relations specialist, an employee with no
                 procurement training, to put the contracts together. Since the Authority
                 improperly awarded noncompetitive contracts for these services and it could not
                 demonstrate that the prices paid for these services were fair and reasonable, the
                 payments totaling $160,8483 are unsupported.

    The Authority Issued Purchase
    Orders Rather Than
    Competitive Contracts


                 The Authority improperly issued purchase orders rather than competitive
                 contracts for painting, plumbing, and cleaning services and supplies totaling
                 $875,703. It used public housing operating funds to pay for these expenses.
                 Although HUD Handbook 7460.8 recognizes a purchase order issued by the
                 Authority and accepted by the vendor, either through performance or signature on
                 the purchase order, to constitute a contract, the Authority routinely issued the
                 purchase orders after it received the goods and services. Thus, goods and services
                 were provided without having a contract in place first. Also, because the
                 Authority used purchase orders, it did not comply with HUD Handbook 7460.8,
                 which requires contracts to include certain clauses such as examination and
                 retention of contractor’s records and termination for cause and for convenience.
                 However, the Authority did not include any of the mandatory clauses in its
                 purchase orders for these items from these four vendors.

                 The Authority also could not demonstrate that the prices it paid for painting and
                 cleaning services and supplies were fair and reasonable. It had no documentation
                 to demonstrate that there was competition and that the prices were fair and

3
  $160,848 does not include $50,866 in payments ($36,531 + $14,335) addressed in the preceding section of the
finding.

                                                        8
           reasonable for these three vendors. The Authority’s procurement policy states
           that the competitive proposal method of procurement shall be used for purchases
           of more than $10,000. However, the Authority did not comply with this
           requirement, although it consistently paid these vendors more than $10,000 per
           year. For the plumbing services, the Authority obtained price quotes from three
           vendors, and it selected the vendor who submitted the lowest price to do the work.
           This noncompliance occurred because the Authority’s management disregarded
           its procurement policy and had a “buy now and worry about it later” attitude
           toward procurement. Since the Authority improperly acquired these goods and
           services and could not demonstrate that prices it paid for these services were fair
           and reasonable, payments totaling $875,703 are unsupported.

The Authority Did Not
Maintain Required Contract
Documentation

           The Authority did not maintain documentation to support its purchases of health
           care and life insurance and disability benefits for its employees. Regulations at 24
           CFR 85.36 require the Authority to maintain records sufficient to detail the
           significant history of each procurement. The Authority provided contracts and
           supporting documentation during the audit, but it had to obtain these documents
           from its broker. The documentation included contracts, bid information, and a
           cost analysis demonstrating that there was competition and that the prices were
           fair and reasonable. However, the packages of documentation were incomplete
           because they did not include copies of the solicitations. This condition occurred
           because the Authority tasked its personnel officer, an employee with no
           procurement training, to put the contracts together and was unaware of the
           requirement to maintain the documentation.


The Authority Did Not Always
Issue Complete Contracts

           The Authority competitively awarded a contract for legal services; however, the
           contract did not include any of the required clauses, an expiration date, and a total
           contract dollar amount or a not-to-exceed amount. Also, the contract file lacked
           support for the independent cost estimate. The Authority’s procurement policy
           requires all contracts to include any clauses required by Federal statutes,
           executive orders, and regulations at 24 CFR 85.36. Expiration dates and contract
           ceiling amounts are standard contract elements. This condition occurred because
           the interim executive director tasked the Authority’s modernization director to put
           the contract together. The modernization director stated that he had no experience
           in putting together contracts for legal services and carried out to the best of his
           ability the task that he was assigned.



                                             9
The Authority Was Taking
Action


             We discussed these issues with the Authority’s executive director during the
             audit. He was receptive to our findings and initiated corrective action. The
             executive director agreed that the Authority needed to do a better job of
             documenting its procurements. He terminated the Authority’s acquisition of
             resident council advisory services and informed the resident council that it would
             have to procure and pay for this service. In addition, the executive director stated
             that he planned to improve controls over the process by hiring a chief
             procurement and compliance officer.


Conclusion


             The Authority did not procure goods and services in accordance with HUD
             regulations and its procurement policy. Since the Authority did not comply with
             established requirements and could not demonstrate that the prices it paid for goods
             and services were fair and reasonable, more than $1.7 million in related payments
             are unsupported. The Authority needs to develop and implement controls to ensure
             that it complies with HUD procurement regulations and its procurement policy.

Recommendations



             We recommend that the Director of HUD’s Pennsylvania State Office of Public
             Housing require the Authority to

             1A.    Provide documentation to support that payments for goods and services
                    totaling $1,736,962 were fair and reasonable or reimburse the applicable
                    programs from non-Federal funds for any amounts that it cannot support.

             1B.    Develop and implement controls to ensure that it complies with all
                    applicable procurement requirements including those to conduct annual
                    procurement planning meetings, execute contracts before services are
                    rendered and goods are procured, and maintain documentation to detail the
                    significant history of each procurement action.

             1C.    Provide procurement training to all employees involved in the
                    procurement process.

             1D.    Develop and implement a contract administration system.

             We also recommend that HUD’s Pennsylvania State Office of Public Housing
                                              10
1E.   Expand its monitoring of the Authority’s procurement function to ensure
      that it operates in compliance with applicable requirements.




                              11
                         SCOPE AND METHODOLOGY

We conducted the audit from October 2009 through June 2010 at the Authority’s offices located at
351 Chestnut Street, Harrisburg, PA, and our offices located in Baltimore, MD, and Pittsburgh, PA.
The audit covered the period January 1, 2007, through December 31, 2009, but was expanded when
necessary to include other periods.

To accomplish our audit, we

       Reviewed HUD regulations at 24 CFR Part 85; HUD Handbook 7460.8, REV-2; the
       Commonwealth of Pennsylvania’s Field Procurement Handbook; and the Authority’s
       procurement policy.

       Reviewed the Authority’s accounting records, annual audited financial statements for 2007
       and 2008, contract files, board meeting minutes, organizational chart, and relevant
       background information.

       Interviewed the Authority’s staff and financial consultant.

       Discussed our audit results with officials from HUD’s Pennsylvania State Office of Public
       Housing.

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

We reviewed purchases that the Authority made with 20 vendors. We statistically selected 31 of the
Authority’s vendors to review from a universe of 57 vendors to whom the Authority paid at least
$10,000 per year between January 2007 and December 2009 to determine whether the Authority
procured goods and services in accordance with HUD regulations and other applicable
requirements. However, we reviewed only 11 of the 31 vendors from the sample because the
results from our review of the 11 vendors, combined with the results from our review of 9 vendors
that we selected for review nonstatistically, based on problem indicators disclosed during interviews
with Authority staff, provided adequate evidence to support our conclusions.

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 were implemented to
                      reasonably ensure that procurement activities were conducted in accordance
                      with applicable requirements.

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

                      Validity and reliability of data – Policies and procedures that were
                      implemented to reasonably ensure that payments to contractors/vendors were
                      made in accordance with applicable requirements.

              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:

                                               13
The Authority did not

       Conduct annual procurement planning.

       Demonstrate a positive and supportive attitude toward procurement
       requirements.

       Develop and implement an effective contract administration system.




                               14
                                   APPENDIXES


Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                             Recommendation
                                 number           Unsupported 1/
                                    1A             $ 1,736,962




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

                             SCHEDULE OF DEFICIENCIES
                              AND UNSUPPORTED COSTS

                                                                     Source:  Source: Source:
                                                                      public  central     public
                                                                     housing office cost housing
                                                        Unsupported operating center     capital
 Vendor       Item purchased          Violations noted*    costs      funds    funds      funds
                                     1 2 3 4 5 6 7 8
            Contracts
Vendor 1 Legal services                  x         x   x             $370,855     $284,188   $86,667
Vendor 2 Legal services              x             x   x               37,499                 37,499
Vendor 3 Legal services              x             x   x               13,263                 13,263
Vendor 4 Legal services              x             x   x               66,104        5,143    60,961
Vendor 8 Resident council                x       x x   x               59,567       59,567
          advisory
Vendor 9 Nursing                                 x x x                 45,441       45,441
Vendor 10 Convenience store              x       x x x                 36,531       36,531
          manager
Vendor 11 Elevator maintenance                   x x x                 70,175       70,175
Vendor 12 Information management         x         x x                119,571       20,327    39,458 $59,786
Vendor 13 Financial management           x         x x                 42,253                 42,253
Vendor 14 Health care                        x                              0
Vendor 15 Life insurance and                 x                              0
          disability benefits
Vendor 17 Legal services                                        x           0
        Purchase orders
Vendor 5 Painting services                 x       x x x               393,270     393,270
Vendor 6 Cleaning services                 x       x x x               289,142     289,142
Vendor 7 Cleaning supplies                 x       x x x               193,291     193,291
Vendor 16 Plumbing                         x            x                    0
          Totals                     3 5 2 8      13 13 4 1         $1,736,962   $1,397,075 $280,101 $59,786

     * Violations noted during review
         1. No contract
         2. Contract expired
         3. Files missing documentation to detail the significant history of the procurement
         4. Contract missing mandatory clauses
         5. No evidence of competition
         6. No cost analysis conducted
         7. Purchase order issued after goods and services were received
         8. Contract missing terms and conditions

                                                           16
Appendix C

             AUDITEE COMMENTS




                    17