oversight

Audit of the Scranton Housing Authority

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-12-17.

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

                                                      U.S. Department of Housing and Urban Development
                                                                         Wanamaker Building, Suite 1005
                                                                                   100 Penn Square East
                                                                            Philadelphia, PA 19107-3380

                                                                      Regional Inspector General for Audit



                                                                          MEMORANDUM NO:
                                                                          2010-PH-1801

December 17, 2009

MEMORANDUM FOR:                 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:                        Audit of the Scranton Housing Authority


                                          INTRODUCTION

We audited the Scranton Housing Authority (Authority) based on a referral from our Office of
Investigation. Our audit objective was to determine whether the Authority followed applicable
procurement regulations and used U.S. Department of Housing and Urban Development (HUD)
funds properly.

                                 METHODOLOGY AND SCOPE

To accomplish our objective, we obtained and reviewed

       HUD regulations at 24 CFR [Code of Federal Regulations] Parts 85, 905, 941, and 982.

       HUD’s Public and Indian Housing Notices 96-33, 2002-13, 2003-23, 2004-7, and 2008-
       15.

       HUD Handbooks 7460.7, 7460.8, 7475.1, and 7485.3.

       Pennsylvania’s small procurements statute.

       The Authority’s procurement and investment policies and procedures.

       The Authority’s organizational chart, job descriptions, automated databases, accounting
       records, annual audited financial statements for years 2003 to 2007, resolutions brought
       before the board of commissioners for years 2003 to 2009, treasury reports presented to
       the board of commissioners for years 2003 to 2009, Section 8 program administrative


      Visit the Office of Inspector General’ s World Wide Web site at http://www.hud.gov/offices/oig/
       plan, annual and five-year plans, bank statements, invoices, cancelled checks, and
       correspondence files.
       HUD’s monitoring reports for the Authority and the Authority’s responses.

We conducted the audit from February through November 2009 at the Authority’s offices
located at 400 Adams Avenue, Scranton, Pennsylvania, and at our office located in Pittsburgh,
Pennsylvania. We interviewed the Authority’s employees and HUD staff. This was a limited
scope review. Therefore, the audit was not performed entirely in accordance with generally
accepted government auditing standards.

                                       BACKGROUND

The Authority was organized in 1940 under the laws of the Commonwealth of Pennsylvania to
provide quality housing to the low- and very low-income families in the city of Scranton. A
five-member board of commissioners, appointed by the mayor, governs the Authority. The
current executive director is Mr. Gary Pelucacci.

The Authority has 1,325 public housing units located in several developments throughout the
city. It also has a Section 8 Housing Choice Voucher program that includes about 900 vouchers.
For fiscal years 2005 to 2009, HUD provided the Authority the following financial assistance:

       $31.9 million in operating subsidies to operate and maintain its public housing
       developments.

       $20.3 million in Public Housing Capital Fund program funds to modernize its public
       housing units. In addition to those funds, HUD awarded the Authority $5.3 million in
       capital funds under the American Recovery and Reinvestment Act of 2009.

       $54.9 million to provide rental housing assistance through its Section 8 Housing Choice
       Voucher and Section 8 Single Room Occupancy programs.

The Authority developed a nonfederal housing project known as Park Gardens in the city of
Scranton, Lackawanna County, Pennsylvania, for rental to persons of low income. The project
consists of 166 dwelling units and 30 garages.

                                   RESULTS OF REVIEW

The Authority did not purchase goods, services and property in accordance with applicable HUD
requirements, the terms of its annual consolidated contributions contract, and its own
procurement policy. It awarded contracts without competition, paid for services without having
a contract, and lacked documentation to support purchases. In addition, the Authority lacked
documentation to demonstrate that HUD funds it deposited into an investment account were
returned to the appropriate program or that the funds were used for eligible program activities
and, therefore, put HUD funds at risk. The following paragraphs provide details.




                                               2
1. The Authority Did Not Comply with Procurement Requirements and Have Documentation to
   Support Purchases
Employment Arrangement for the Authority’s Head of Security

The Authority did not comply with federal procurement regulations when it paid an assistant
district attorney to be its head of security. The Authority did not have a current employment
contract, independent contract, or interagency agreement with the Lackawanna County district
attorney’s office for this individual’s services. The Authority had a January 2001 employment
contract, but it terminated on December 31, 2001. The Authority had no documentation to show
that the contract was awarded competitively or that the parties agreed to extend the contract
beyond its ending date. The contract was with the Lackawanna County district attorney’s office
and was designated as an “employment contract.” However, the individual was not an employee
of the Authority.

The Authority periodically reimbursed Lackawanna County for salary and benefit costs. HUD
Handbook 7460.8 draws a distinction between employing an individual, such as under an
employment contract, and contracting for independent services. The former is part of the
personnel process and is subject to those rules and regulations. The latter is considered to be a
procurement action, subject to the standards in 24 CFR 85.36. In an independent services
contract, there is no employer-employee relationship. Therefore, in this case, an independent
services contract existed, and it should have been awarded competitively. As a result, payments
totaling $315,000 that the Authority made during the period December 2002 to August 2007,
using operating funds ($255,000) and capital funds ($60,000), are unsupported.

Purchase and Disposal of a Vacant Building

The Authority did not notify HUD that it had acquired a vacant commercial property and obtain
HUD approval to dispose of it. In July 2006, the Authority purchased a vacant post office
building for $282,0001. The Authority certified to HUD that it used its pre-2004 Section 8
administrative fee reserves to purchase the property. In October 2007, the Authority sold the
property to the Scranton Redevelopment Authority for one dollar. The Scranton Redevelopment
Authority demolished the building and developed the land into a neighborhood park and
playground. According to the Authority’s annual consolidated contributions contract with HUD,
the Authority is required to promptly execute and deliver a declaration of trust to HUD upon the
acquisition of a property. The annual contributions contract states that the Authority will be
considered in substantial default of its contract if it disposes of property without HUD approval.
The Authority had no documentation to demonstrate that it executed a declaration of trust or
sought HUD approval before disposing of the property, although it owned the property for 14
months. Further, the Authority did not have a copy of an appraisal to support the $275,000 price
that it paid for the property. Because the Authority could not provide documentation to support
its acquisition and disposition of this property, the expenditure of $282,000 is unsupported.



1
    $282,000 includes the $275,000 sales price and other closing costs.


                                                            3
Vehicle Storage, Maintenance, Repair, Fuel, and Hauling Services

The Authority did not solicit bids for purchases of vehicle storage, maintenance, repair, fuel, and
hauling services. It paid $124,000 to a vendor to provide vehicle storage, maintenance, repair,
and fuel services during the period January 2003 to March 2008. There was no documentation in
the files to show that the Authority procured these services through full and open competition. It
also paid the vendor $8,000 in November 2004 to remove 13 truckloads of used refrigerators,
stoves, air conditioners, and other miscellaneous items from Authority property for disposal
without competition. The Authority had obtained quotes from two moving companies as
evidence that the award was competitive. There was no quote in the files from the vendor that
performed the work. The Authority’s procurement policy required it to solicit price quotes from
at least three qualified and responsible offerors, up to the limit $10,000, before requiring
advertisement and competitive bidding under Pennsylvania procurement requirements.

Further, the Authority paid the vendor using two separate vendor numbers. The Authority’s
records showed that it made 31 payments totaling $72,000 to one vendor number and 40
payments totaling $60,000 to the other vendor number. The Authority may have done this to
keep the total amount of payments to the vendor below $25,000 annually. From January 2001
until November 2008, HUD required the Authority to submit all solicitations for construction or
service contracts in excess of $25,000 for review and approval before executing or expending
any funds on those contracts. HUD placed this requirement on the Authority because a review it
conducted in August 2000 determined that the Authority failed to comply with HUD
procurement regulations. As a result, payments totaling $132,000 that the Authority made
during the period January 2003 to March 2008 for purchases of vehicle storage, maintenance,
repair, fuel, and hauling services, using operating funds, are unsupported.

Purchasing Insurance

The Authority did not purchase insurance competitively as required. Before 2003, it purchased
insurance from the Housing and Redevelopment Insurance Exchange (HARIE). HARIE is an
authority-owned not-for-profit agency. The owner of Volpe Insurance Company created HARIE
in the 1980s with a small group of housing authority executive directors. HARIE has an
exemption which allows it to provide insurance to housing authorities without having to comply
with bidding requirements. However, beginning in 2003, the Authority began purchasing its
insurance directly from Volpe Insurance Company. It did not competitively purchase this
insurance, although it was required to do so by 24 CFR 85.36.

Further, the Authority’s procurement policy required it to solicit price quotes from at least three
qualified and responsible offerors, up to the limit $10,000, before requiring advertisement and
competitive bidding under Pennsylvania procurement requirements. Generally, the Authority
had no documentation to show that it purchased the insurance competitively. However, there
were two instances in which the Authority received lower quotes, but it did not purchase the
insurance from those companies. There was no documentation in the Authority’s files to
memorialize its rationale for not purchasing the insurance from the low bidders. The Authority
could have saved 75 percent of the cost in one instance and 26 percent in the other. As a result,




                                                 4
payments totaling $180,000 that the Authority made during the period September 2003 to July
2009, using operating funds, are unsupported.

Architectural and Engineering Services

The Authority did not have documentation to demonstrate how it procured architectural and
engineering services. In 2006, it paid $14,000 to an architectural and engineering firm for
services to study the feasibility of a new 10-unit apartment building. HUD Handbook 7460.8
and the Authority’s procurement policy permit the Authority to use the qualifications-based
selection method or competitive proposals to procure these services. However, there was no
documentation in the files to show how the Authority procured these services. As a result,
payments totaling $14,000 that it made in June and July 2006, using operating funds, are
unsupported.

2. The Authority Could Not Support the Source and Use of HUD Funds and Put Funds at Risk

The Authority Did Not Document Source and Use of HUD Funds Invested with a Broker

The Authority lacked documentation to demonstrate that HUD funds it invested with a broker
were returned to the appropriate HUD program or that the funds were used for eligible program
activities. The Authority did not maintain a detailed investment ledger as required by HUD
regulations, nor did it reconcile those investments as required by Public and Indian Housing
Notice 96-33. It could not demonstrate that $480,000 in Section 8 program funds were redeemed
and returned to the program or were used for eligible program activities. As a result, $480,000 in
HUD funds, invested with the broker and later redeemed, are unsupported. The Authority’s
independent auditors had problems tracking these investments also. In its 2007 audited financial
statements, the independent auditors recorded a $200,000 prior period adjustment to investments
because of improper reconciliation to confirmed account balances during its fiscal year 2005.

The Authority’s Investments with a Broker Were Prohibited and Put HUD Funds at Risk

The Authority invested HUD funds with a broker and placed the funds at risk because it did not
execute a depository agreement. From January 2003 to November 2008, the Authority
purchased and redeemed U.S. Treasury bills through a broker. The broker was not insured by
the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration
(NCUA). The Authority’s annual contributions contracts require it to deposit and invest all
program funds under the contract in accordance with the terms of a general depository
agreement. It requires the depository institution to be insured by the FDIC or the National Credit
Union Share Insurance Fund (NCUSIF)2. HUD Handbook 7475.1, and Public and Indian
Housing Notice 96-33 reiterate this requirement. However, because the Authority invested HUD
funds with a prohibited uninsured broker and did not execute a general depository agreement as
required, it placed HUD funds at risk.



2
 The National Credit Union Administration (NCUA) administers the National Credit Union Share Insurance Fund
(NCUSIF).


                                                     5
The Authority Could Not Show the Source of Funds Withdrawn from Its Nonfederal Account

The Authority could not show the source and use of all of the funds it transferred into and out of
its nonfederal cash and investment accounts. In June 2008, the Authority certified to HUD that it
had $1.2 million in pre-2004 Section 8 administrative fee reserves. Although regulations at 24
CFR 982.155 require the Authority to use these funds to pay program administrative expenses
and allow it to use the funds for other housing purposes permitted by state and local law, HUD
and housing authorities normally refer to these funds as nonfederal funds. However, our analysis
of the general ledger transactions on the Authority’s books for its nonfederal account showed
that the amounts withdrawn from the account were significantly more than the amount of pre-
2004 Section 8 administrative fees that the Authority certified to HUD that it had. It appears that
$190,000 in post-2004 Section 8 administrative fees was deposited into the account. HUD
regulations limit the use of post-2004 administrative fees to the Section 8 program. There was
an additional deposit of $611,000 for which the Authority could not identify the source and use.
The Authority needs to show the source of the funds deposited into this account. As a result,
$801,000 in funds deposited into and withdrawn from this account are unsupported.

                                   RECOMMENDATIONS

Based on the results of our review, we recommend that the Director, Office of Public Housing,
Pennsylvania State Office, require the Authority to

       1A.     Provide documentation to support payments totaling $315,000 for security
               services or reimburse HUD or the applicable programs from nonfederal sources
               for any amounts that it cannot support.

       1B.     Provide documentation to support the $282,000 expended to acquire and dispose
               of the vacant commercial building or reimburse the applicable program from
               nonfederal sources for any amounts that it cannot support.

       1C.     Provide documentation to support payments totaling $132,000 for vehicle services
               or reimburse HUD or the applicable program from nonfederal sources for any
               amounts that it cannot support.

       1D.     Provide documentation to support payments totaling $180,000 for insurance or
               reimburse HUD or the applicable program from nonfederal sources for any
               amounts that it cannot support.

       1E.     Provide documentation to support payments totaling $14,000 for architectural and
               engineering services or reimburse HUD or the applicable program from
               nonfederal sources for any amounts that it cannot support.

       1F.     Develop and implement controls to ensure that it complies with applicable
               procurement requirements and the terms of its annual consolidated contributions
               contract.




                                                6
       2A.    Provide documentation to support that the appropriate program accounts were
              reimbursed with invested funds totaling $480,000, plus interest earned on the
              investments, or reimburse HUD or the appropriate programs from nonfederal
              sources for any amounts that it cannot support.

       2B.    Provide documentation to support the source and use of $801,000 transferred into
              and withdrawn from its nonfederal account or reimburse HUD or the appropriate
              programs from nonfederal sources for any amounts that it cannot support.

       2C.    Create and maintain a detailed investment register and periodically reconcile its
              investments to the investment register.

       2D.    Develop and implement controls to ensure that it complies with HUD cash
              management and investment regulations and trains applicable staff.

                                  AUDITEE’S RESPONSE

We provided a discussion draft audit memorandum to the Authority on November 5, 2009, and
discussed it with the Authority at an exit conference on November 17, 2009. The Authority
provided written comments to the draft audit memorandum on November 24, 2009. The
Authority generally disagreed with the content of the audit memorandum. Its written comments
included 34 pages of documentation to address issues identified by the audit. We considered this
documentation in our evaluation but did not include it in the appendix to the final audit
memorandum. The complete text of the Authority’s response, along with our evaluation of that
response, can be found in appendix B of this report.

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.




                                               7
                                   APPENDIXES

Appendix A


                 SCHEDULE OF QUESTIONED COSTS

                           Recommendation
                               number             Unsupported 1/

                                  1A                    $315,000
                                  1B                    $282,000
                                  1C                    $132,000
                                  1D                    $180,000
                                  1E                     $14,000
                                  2A                    $480,000
                                  2B                    $801,000
                                 Total                $2,204,000



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.




                                              8
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                          9
Comment 3




Comment 4




            10
Comment 5




Comment 6




            11
Comment 7




Comment 6




Comment 8




            12
Comment 9




            13
                         OIG Evaluation of Auditee Comments

Comment 1   The Authority did not have an appropriate employment contract, independent
            services contract, or an interagency agreement to support the expenditures it made
            for services of an assistant district attorney during the period December 2002 to
            August 2007. In addition, the Authority did not create a job description for the
            position and evaluate the individual’s performance.

Comment 2   We considered the documentation that the Authority provided and revised the
            audit memorandum as necessary. However, as stated in the audit memorandum,
            the Authority did not notify HUD of its acquisition of this property and it did not
            have documentation to show that it requested HUD approval to dispose of it. In
            addition, the Authority did not have an appraisal to support the price that it paid
            for the property.

Comment 3   The Authority did not provide documentation to demonstrate that these services
            were procured competitively in accordance with applicable procurement
            requirements.

Comment 4   The Authority did not maintain records to detail the significant history of the
            procurements as required. These records would include a rationale for the method
            of procurement, selection of contract type, contractor selection or rejection, and
            the basis for the contract price. For policy year 2009-2010, the Authority did not
            document its rationale for not choosing the company with the lowest quote and
            ultimately paying 35 percent more for the insurance.

Comment 5   The Authority did not maintain records to detail the significant history of the
            procurements as required. For policy year 2009-2010, the Authority relied on the
            recommendation of a broker and did not independently solicit quotes. Also see
            Comment 4.

Comment 6   The Authority’s annual contributions contracts require it to deposit and invest all
            program funds under the contract in accordance with the terms of a general
            depository agreement. The Authority purchased and redeemed U.S. Treasury
            bills through INVEST Financial Corporation. INVEST is a national financial
            services broker-dealer. According to its website, “Securities, related services and
            insurance products offered through INVEST Financial Corporation, Member
            FINRA, SIPC, a Registered Broker Dealer and Registered Investment Adviser,
            and its affiliated insurance agencies are: Not FDIC or NCUA INSURED, May
            Lose Value, No Bank or Credit Union Guarantee.” Disbursements from the
            brokerage account were made through National Financial Services LLC of New
            York, New York. HUD Notice 96-33 lists U.S. Treasury bills as an approved
            investment instrument and states that a housing authority or its agent may
            purchase these securities directly and that purchases may be made conveniently
            using the housing authority’s depository bank. The Authority did not provide a
            detailed investment ledger during the audit.



                                             14
Comment 7   The Authority has not provided adequate source documentation to demonstrate
            that the remaining amount of funds were redeemed and returned to the program or
            were used for eligible program activities.

Comment 8   As stated in the audit memorandum, we questioned a deposit into the Authority’s
            nonfederal account. The Authority has not provided source documentation to
            support its assertion that the independent auditor’s adjusting entries were
            incorrect.

Comment 9   As stated in the audit memorandum, we questioned a deposit into the Authority’s
            nonfederal account. The Authority has not provided adequate source
            documentation to demonstrate that the funds were not post-2004 Section 8
            administrative fee reserves.




                                           15