oversight

The City of Memphis, TN, Did Not Ensure Compliance With All Requirements for Its Homelessness Prevention and Rapid Re-Housing and Community Development Block Grant-Recovery Programs

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-08-26.

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

                                                                Issue Date
                                                                     August 26, 2011
                                                                Audit Report Number
                                                                     2011-AT-1015




TO:        Mary Wilson, Director, Office of Community Planning and Development,
             Knoxville, TN, 4JD


           //signed//
FROM:      James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA


SUBJECT: The City of Memphis, TN, Did Not Ensure Compliance With All Requirements for
           Its Homelessness Prevention and Rapid Re-Housing and Community
           Development Block Grant-Recovery Programs

                                   HIGHLIGHTS

 What We Audited and Why


             We audited the City of Memphis’ administration of its Homelessness Prevention
             and Rapid Re-Housing Program (HPRP) and Community Development Block
             Grant-Recovery (CDBG-R) funds received under the American Recovery and
             Reinvestment Act. We selected the City for audit because it received more than
             $3.3 million in HPRP funds and more than $2.1 million in CDBG-R funds, the
             most for any Tennessee city. The City had expended more than $1.5 million, or
             about 47 percent, of its HPRP funds, and $846,713, or about 39 percent, of its
             CDBG-R funds by March 14, 2011.

             Our objective was to determine whether the City’s Division of Housing and
             Community Development administered its HPRP and CDBG-R funds in
             compliance with the Recovery Act and other applicable requirements.
             Specifically, our objective was to determine whether the City ensured that (1)
             program participants were eligible, (2) program expenditures were supported with
             adequate documentation, (3) program reporting requirements were met, and (4)
             subgrantees were monitored and trained.
What We Found

           Although the City complied with most Recovery Act requirements, its program
           administration was deficient in some areas. The City (1) procured an architectural
           and engineering contract using the incorrect procurement methodology and
           without an adequate cost analysis, (2) paid a contractor for work performed
           without an executed contract, (3) delayed the execution of a greening and
           demolition contract to such an extent that the lowest bidder dropped out, (4) did
           not always comply with U.S. Department of Housing and Urban Development
           (HUD) guidance for implementing the “Buy American” provision of the
           Recovery Act, and (5) could not support the job figures reported in its most recent
           quarterly report for either the HPRP or CDBG-R grants. These conditions
           occurred because the City did not follow all of the requirements of the Recovery
           Act or its own policies and procedures. As a result, it incurred $619,114 in
           questioned costs related to its procurements and could not ensure compliance with
           all Recovery Act requirements.

What We Recommend


           We recommend that the Director of the Knoxville Office of Community Planning
           and Development require the City to (1) provide adequate support and
           justification for the procurement deficiencies and repay its program any portion of
           the $619,114 in questioned costs that it cannot support, (2) provide staff training
           on procurement requirements, and (3) provide HUD assurance that it has
           sufficient controls in place to ensure compliance with applicable procurement and
           Recovery Act 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 findings with City officials during the audit. We provided the
           draft report to the City on July, 26, 2011, and discussed the findings with City
           officials at an exit conference on August 4, 2011. The City provided its written
           comments on August 8, 2011. City officials expressed general disagreement with
           the findings and recommendations.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report. Attachments to the auditee’s
           response were not included in the report, but are available for review upon
           request.

                                            2
                            TABLE OF CONTENTS

Background and Objective                                                       4

Results of Audit
      Finding: The City Did Not Fully Comply With Recovery Act Requirements    5

Scope and Methodology                                                         10

Internal Controls                                                             11

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use          13
   B. Auditee Comments and OIG’s Evaluation                                   14




                                            3
                       BACKGROUND AND OBJECTIVE

On February 17, 2009, the President signed the American Recovery and Reinvestment Act of
2009. The purpose of the Recovery Act was to jumpstart the Nation’s ailing economy, with a
primary focus on creating and saving jobs in the near term and investing in infrastructure that
will provide long-term economic benefits. This legislation included $1.5 billion in
Homelessness Prevention and Rapid Re-housing Program (HPRP) funds for communities to
provide financial assistance and services to either prevent individuals and families from
becoming homeless or help those who are experiencing homelessness to be quickly re-housed
and stabilized. The Recovery Act also included a $1 billion appropriation of Community
Development Block Grant-Recovery (CDBG-R) funds to carry out activities authorized under
Title 1 of the Housing and Community Development Act of 1974.

The City of Memphis, TN, is an entitlement grantee. The U.S. Department of Housing and
Urban Development (HUD) annually awards grants, including Community Development Block
Grants (CDBG), to entitlement grantees to carry out a wide range of community development
activities directed toward revitalizing neighborhoods, economic development, and providing
improved community facilities and services. The City manages its community development
programs, including HPRP and CDBG-R, through its Housing and Community Development
Division.

The City received $3.33 million in HPRP funds and $2.17 million in CDBG-R grant funds under
the Recovery Act on June 10 and July 27, 2009, respectively. The City’s HPRP activities
focused on homelessness prevention services, financial assistance for rent and utilities, operation
of a homeless hotline, and administering a Homeless Management Information System database.
The City planned to use its CDBG-R funds for three activities, the greening and demolition of
the fairgrounds site, the demolition of Manassas High School, and the rehabilitation of a
commercial laundromat.

Our objective was to determine whether the City administered its HPRP and CDBG-R programs
according to the requirements of the Recovery Act and applicable HUD requirements.
Specifically, our objective was to determine whether the City ensured that (1) program
participants were eligible, (2) program expenditures were supported with adequate
documentation, (3) program reporting requirements were met, and (4) subgrantees were
monitored and trained.




                                                 4
                                RESULTS OF AUDIT

The City Did Not Fully Comply With Recovery Act Requirements
Although the City administered its HPRP and CDBG-R funds in accordance with most major
Recovery Act requirements, its program administration was deficient in some areas. The City
did not (1) always use the proper procurement methodology for procuring goods and services,
(2) execute a contract before making payments for completed work, (3) always execute contracts
in a timely manner, (4) always comply with HUD guidance for implementing the “Buy
American” provision of the Recovery Act, (5) always perform an adequate cost analysis before
executing contracts, and (6) adequately support the reported figures for jobs created with
Recovery Act funding. These conditions occurred because City staff failed to follow all
applicable requirements in the Recovery Act or its own policies and procedures. As a result, the
City incurred $619,114 in questioned costs related to its procurements and could not ensure
compliance with all Recovery Act requirements.




 The City Complied With Most
 Recovery Act Requirements

              The City complied with most major Recovery Act requirements for both its HPRP
              and CDBG-R funding. It

                     Expended program funds for only eligible activities,
                     Maintained adequate documentation to support expenditures (with the
                     exception of the expenditures detailed below),
                     Ensured the eligibility of HPRP participants,
                     Ensured that its HPRP subgrantees were monitored and trained as required,
                     and
                     Ensured that CDBG-R contractors complied with Davis-Bacon Act
                     requirements when applicable.


 The City Made Procurement
 Errors


              The Architectural and Engineering Contract Was Not Properly Procured
              The City planned to demolish buildings on the site of the fairgrounds and replace
              them with green areas, parking areas, etc. As part of that development, the City
              procured the services of an architectural and engineering (A&E) firm for a wide


                                               5
range of services. However, the City failed to adequately justify the procurement
method or perform the required cost analysis.

City staff misunderstood Federal procurement requirements and used the sole
source procurement method when procuring the A&E firm’s services.
Regulations at 24 CFR (Code of Federal Regulations) 85.36(d)(4) allow sole
source procurement only when certain circumstances are met. The regulations
read in part, “(i) Procurement by noncompetitive proposals may be used only
when the award of a contract is infeasible under small purchase procedures,
sealed bids or competitive proposals and one of the following circumstances
applies: (A) The item is available only from a single source; (B) The public
exigency or emergency for the requirement will not permit a delay resulting from
competitive solicitation; (C) The awarding agency authorizes noncompetitive
proposals; or (D) After solicitation of a number of sources, competition is
determined inadequate.”

The City justified the sole source method of procurement by stating that the
procurement was an “urgent and time-sensitive engagement.” The City then cited
the factors for which it deemed the engagement to be urgent and time sensitive.
However, the factors it cited consisted only of a list of the firm’s supposed unique
qualifications related to its knowledge of the fairgrounds, thus failing to explain
how the procurement was an urgent and time-sensitive engagement.

The City also failed to perform the cost analysis required by the regulations and
its own procurement policy. Federal procurement procedures at 24 CFR 85.36
read in part, “Grantees and subgrantees must perform a cost or price analysis in
connection with every procurement action including contract modifications.” The
regulations also required that the cost analysis include verifying the proposed cost
data, the projections of the data, and the evaluation of the specific elements of
costs and profits.

The City supplied an e-mail document as evidence of a cost analysis for the A&E
services. The e-mail stated that the City would use 6 or 7 percent of the total
project cost as the fee rate. There was no explanation of the methodology used
for determining these percentages or how the City determined them to be
reasonable. As a result, the City could not assure HUD that the A&E services
were procured at a fair and reasonable cost.

The City awarded the original A&E contract using a portion of its annual CDBG
grant. Later contract extensions and contract amendments included both annual
CDBG and CDBG-R funds. Since the original contract was improperly procured,
we considered all CDBG and CDBG-R funds expended on the contract to be
unsupported. The City expended a total of $310,000 in CDBG and CDBG-R
funds on the contract (including extensions and amendments), and the contractor
had earned an additional $25,000 for which the City was planning to use CDBG-
R funds.

                                 6
           The City Expended CDBG-R Funds for Work Completed Without an
           Executed Contract
           The City properly obtained sealed bids for the greening and demolition of the
           fairgrounds. The greening and demolition work was performed under two
           separate contracts known as “package 2” and “package 3.” Soon after beginning
           the work on package 2, the City discovered that additional work was needed to
           complete the project. The additional work added $648,718 (of which $235,978
           was CDBG-R funds) to the original $564,475, increasing the contract to more
           than $1.2 million. An amendment covering the additional work was drawn up but
           was not executed. The City paid the contractor for the completed work.

           The City’s contracting procedures, which it failed to follow, required a contract to
           be executed before payments could be made for completed work. Therefore, the
           expenditure of $235,978 in CDBG-R funds for the additional fairgrounds work
           was unsupported.

           The City Lost the Services of the Low Bidder Due to Its Long Delay in
           Executing a Contract
           The City properly obtained sealed bids for package 3 for the greening and
           demolition of the fairgrounds and properly selected the lowest bidder to perform
           the work. The City’s bid documents required that the submitted bids remain
           viable for 120 days. This timeframe appears to have been a reasonable amount of
           time to write, review, and execute the contract with the lowest bidder. However,
           the City failed to enter into a contract within the 120 days, and the low bidder
           rescinded its bid at the 120-day mark. The City later executed a contract for the
           work related to package 3 with the next lowest bidder. The City incurred an
           additional $48,136 in CDBG-R costs due to failing to execute a timely contract
           with the lowest bidder. We considered the additional costs to be unreasonable.

The City Did Not Always
Comply With the Recovery
Act’s “Buy American”
Provision
           The City did not always follow HUD guidance for implementing the “Buy
           American” provision of the Recovery Act. Section 1605 of the Act reads in part,
           “BUY AMERICAN SEC. 1605. USE OF AMERICAN IRON, STEEL, AND
           MANUFACTURED GOODS. (a) None of the funds appropriated or otherwise
           made available by this Act may be used for a project for the construction,
           alteration, maintenance, or repair of a public building or public work unless all of
           the iron, steel, and manufactured goods used in the project are produced in the
           United States.” The City did not include the “Buy American” provision in the
           contract amendment for additional work related to the greening and demolition of
           the fairgrounds (which included some construction work). As a result, there was
           no assurance that the company receiving Recovery Act funds complied with the
           requirement.

                                             7
The City Did Not Adequately
Document the Number of Jobs
Created

             Section 1512(c) of the Recovery Act required recipients of funds to report
             quarterly on the Internet at FederalReporting.gov. The recipients were to report
             on the nature and status of their projects and the number of jobs created or
             retained. We reviewed the City’s latest HPRP and CDBG-R reports for the
             quarter ending March 31, 2011, for timeliness, completeness, and accuracy.

             The City’s quarterly reports were generally timely, complete, and accurate, but
             the information related to the creation and retention of jobs was not always
             sufficiently supported. The City was unable to support the reported jobs created
             for either the HPRP or the CDBG-R grant. OMB (Office of Management and
             Budget) Memorandum M-10-08 outlined how “jobs created or retained” should
             be calculated. The City reported on March 31, 2011, that it had created a total of
             9.92 jobs via HPRP and an additional 27 jobs using CDBG-R grant funds. The
             City had no written internal control procedures related to the required reporting,
             and staff members stated that they used the instructions found at the
             FederalReporting.gov Web site for guidance. When asked to support the job
             figures, the City could not. As a result, it could not assure HUD or the public that
             its reported job figures were accurate.

Conclusion


             Although the City administered its HPRP and CDBG-R funds in accordance with
             most major Recovery Act requirements, its program administration was deficient
             in some areas. This condition occurred because City staff failed to follow all
             applicable requirements of the Recovery Act and the City’s own policies and
             procedures. As a result, the City incurred $619,114 in questioned costs related to
             its procurements and could not ensure compliance with all Recovery Act
             requirements.

Recommendations

             We recommend that the HUD Tennessee Community Planning and Development
             Director require the City to

             1A. Provide adequate support for the procurement method and cost of the
                 fairground’s A&E contract or repay its program (CDBG or CDBG-R as
                 appropriate) $310,000 using non-Federal funds. In addition, the City should
                 not use Federal funds to pay the contractor an additional $25,000 (earned but
                 not paid) until it provides the needed support.

                                              8
1B. Provide assurance that controls are in place to ensure that the required cost
    analysis will be performed for all future contracts or amendments.

1C. Provide adequate support for the $235,978 it paid for greening and demolition
    work without an executed contract or repay its CDBG-R program using non-
    Federal funds.

1D. Provide adequate justification for the loss of the lowest bidder for package 3 of
    the fairgrounds project or repay $48,136 in unreasonable costs to its CDBG-R
    program using non-Federal funds.

1E. Train the appropriate City staff on Federal and City procurement policies
    and procedures to ensure that they are understood and followed as required.

1F. Include the “Buy American” provision in all future applicable contracts.

1G. Provide assurance that appropriate controls are in place to ensure that accurate
    and supported job numbers are included on the quarterly reports required by
    the Recovery Act.




                                  9
                         SCOPE AND METHODOLOGY

Our objective was to determine whether the City administered its HPRP and CDBG-R programs
according to the requirements of the Recovery Act and applicable HUD requirements.
Specifically, our objective was to determine whether the City ensured that (1) program
participants were eligible, (2) program expenditures were supported with adequate
documentation, (3) program reporting requirements were met, and (4) subgrantees were
monitored and trained.

To accomplish our objectives, we reviewed

       The Recovery Act, HPRP and CDBG-R program regulations at 24 CFR Part 570 and 24
       CFR 85.36; and HUD’s Knoxville Office of Community Planning and Development’s
       correspondence and files pertaining to the City’s HPRP and CDBG-R grant.

       The City’s policies and procurement and contracting manuals, list of HPRP-assisted families
       and units, HPRP participant files, City program draw requests, the two latest City audits, and
       the City’s organizational charts.

We also interviewed City employees and HUD’s Knoxville staff involved with oversight of the
City’s community planning and development programs.

We tested the computer-processed data supplied by the City for reliability while performing our
audit steps, and no problems were noted.

We selected a nonstatistical random sample of 20 participants (from a universe of 785 adult
participants) receiving HPRP assistance on which to perform participant file reviews. We also
selected a nonstatistical random sample of 10 HPRP draws (from a universe of 47 draws) and
reviewed the expenditures for eligibility and accuracy. Our sample covered $475,500, or
approximately 27 percent, of the total HPRP expenditures as of April 28, 2011. The results from
these samples pertain only to the units sampled and were not projected to the universe as a whole.

We reviewed 100 percent of the City’s CDBG-R expenditures as of May1, 2011, and all CDBG-R
procurements.

We performed our onsite work from April 25 through June 10, 2011, at the Memphis Housing
Community Development Division’s offices located at 701 North Main Street, Memphis, TN. The
review generally covered the period May 2009 through April 2011 and was expanded as necessary.

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.


                                                10
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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:

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

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.




                                                 11
Significant Deficiency


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

                   The City failed to follow all applicable Recovery Act or procurement
                   requirements (finding).




                                             12
                                    APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

     Recommendation          Unsupported          Unreasonable or      Funds to be put to
             number                    1/          Unnecessary 2/           better use 3/
           1A                   $310,000                                         $25,000
           1C                     235,978
           1D                    _______                 $48,136                _______
          Total                 $545,978                 $48,136                 $25,000


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.

2/   Unreasonable or unnecessary costs are those costs not generally recognized as ordinary,
     prudent, relevant, or necessary within established practices. Unreasonable costs exceed
     the costs that would be incurred by a prudent person in conducting a competitive
     business.

3/   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. In this instance, if the City implements recommendation
     1A, the amount payable to the contractor will be properly supported for eligible activities
     consistent with CDBG-R program requirements.




                                             13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                                  Auditee Comments

             August 8, 2011

             Mr. James D. McKay
             Regional Inspector General for Audit
             U. S. Department of Housing and Community Development
             Region 4 Office of Inspector General
             Office of Audit, Box 42
             Richard B. Russell Federal Building
             75 Spring Street, SW, Room 330
             Atlanta, GA 30303-3388

             SUBJECT: The City of Memphis, TN - Draft Audit Report: Homeless Prevention and Rapid
             Re-Housing Program (HPRP) and Community Development Block Grant - Recovery
             (CDBG-R) funds. April 25-June 10, 2011.

             Dear Mr. McKay,

             As per your request of July 26, 2011, please accept this as the City of Memphis, Division of
             Housing and Community Development (HCD) comments to the draft audit report prepared as a
             result of the site survey work performed by Charles Pagano and Shane Weaver, HUD/OIG Senior
             Auditors, from April 25-June 10, 2011 relative to activities funded by the Homeless Prevention
             and Rapid Re- Housing Program (HPRP) and Community Development Block Grant - Recovery
             (CDBG-R).

             An exit conference was held here in Memphis on August 4th with David Butcher, Assistant
             Regional Inspector General for Audit, Charles Pagano, HUD/OIG Senior Auditor and pertinent
             HCD staff copied here. During the conference we discussed the format and timing for HCD's
             response to the draft audit report, as well as the next steps in the process which will include
             working with Mary Wilson, Director of Region IV Community Planning and Development, on
             any recommendations or management decisions made relative to the report.

             I appreciated the positive comments from Mr. Butcher and Mr. Pagano concerning HCD's
             program administration of these funds. I expressed, however, that the City's high level of
             commitment to regulatory compliance motivates these comments and documentation in support of
             our activities which we believe will address any concerns which may be raised by the final report.




                   Suite 100 • 701 North Main Street· Memphis, Tennessee Suite 100 • 701 North Main Street· Memphis, Tennessee 38107-
                                         2311 • (901) 576-7300 • (901) 576-7444-2311 • (901) 576-7300 • (901) 576-7444

                                                           14
Letter to James D. McKay
August 8, 2011
Page 2


If you have any questions or need additional information relative to HCD's response, please
do not hesitate to contact me at (901) 576-7308 or Debbie Singleton at (901) 576-7304.
Thank you.




cc:
         A C Wharton, Jr., Mayor, City of Memphis
         Mary Wilson, Director, HUD Community Planning and Development
         John Baldwin, Senior Community Planning Development Representative
         Debbie Singleton, Administrator, Compliance, City of Memphis HCD
         Kimberly Mitchell, Administrator, Homeless and Special Needs,
         City of Memphis HCD
         Harry Green, Manager, Accounting, City of Memphis HCD
         Patrick Smith, Internal Auditor, City of Memphis HCD




                                     15
City of Memphis, HCD
HPRP and CDBG-R
Audit Response
                                    RESULTS OF AUDIT

Finding 1: The City Did Not Fully Comply With Recovery Act
Requirements
Although the City administered its HPRP and CDBG-R funds in accordance with most major
Recovery Act requirements, its program administration was deficient in some areas. The
City did not (l) always use the proper procurement methodology for procuring goods and
services, (2) execute a contract before making payments for completed work, (3) always
execute contracts in a timely manner, (4) comply with HUD guidance for implementing the
"buy American" provision of the Recovery Act, (5) always perform an adequate cost analysis
before executing contracts, and (6) adequately support the reported figures for jobs created
with Recovery Act funding. These conditions occurred because City staff failed to follow all
applicable requirements in the Recovery Act or its own policies and procedures. As a result,
the City incurred $619,114 in questioned costs related to its procurements and could not
ensure compliance with all Recovery Act requirements.

The City Complied With Most
Recovery Act Requirements

         The City complied with most major Recovery Act requirements for both its
         HPRP and CDBG-R funding. It
             Expended program funds for only eligible activities,
             Maintained adequate documentation to support expenditures (with the exception
             of the expenditures detailed below),
             Ensured the eligibility of HPRP participants,
             Ensured that its HPRP subgrantees were monitored and trained as required, and
             Ensured that CDBG-R contractors complied with Davis-Bacon Act
             requirements
             when applicable.


The City Made Procurement
Errors

The Architectural and Engineering Contract Was Not Properly Procured
The City planned to demolish buildings on the site of the fairgrounds and replace
them with green areas, parking areas, etc. As part of that development, the City
procured the services of an architectural and engineering (A&E) firm for a wide




                                     16
range of services. However, the city failed to adequately justify the procurement
method or perform the required cost analysis.

City staff misunderstood Federal procurement requirements and used the sole source
procurement method when procuring the A&E firm's services. Regulations at
24CFR (Code of Federal Regulations) 85.36(d)(4) allow sole source procurement
only when certain circumstances are met. The regulations read in part, "(i)
Procurement by noncompetitive proposals may be used only when the award of a
contract is infeasible under small purchase procedures, sealed bids or competitive
proposals and one of the following circumstances applies: (A) The item is available
only from a single source; (B) The public exigency or emergency for the requirement
will not permit a delay resulting from competitive solicitation; (C) The awarding
agency authorizes noncompetitive proposals; or (D) After solicitation of a number of
sources, competition is determined inadequate."

The City justified the sole source method of procurement by stating that the
procurement was an "urgent and time-sensitive engagement." The City then cited the
facts for which it deemed the engagement to be urgent and time sensitive. However,
the factors it cited consisted only of a list of the firm's supposed unique qualifications
related to its knowledge of the fairgrounds, thus failing to explain how the
procurement was an urgent and time-sensitive engagement.

The City also failed to perform the cost analysis required by the regulations and its
own procurement policy. Federal procurement procedures at 24 CFR 85.36 read in
part, "Grantees and subgrantees must perform a cost or price analysis in connection
with every procurement action including contract modifications." The regulations
also required that the cost analysis include verifying the proposed cost data, the
projections of the data, and the evaluation of the specific elements of costs and
profits.

The city supplied an e-mail document as evidence of a cost analysis for the A&E
services. The e-mail stated that the City would use 6 or 7 percent of the total
Project cost as the fee rate. There was no explanation of the methodology used for
determining these percentages or how the City determined them to be reasonable. As
a result, the City could not assure HUD that the A&E services were procured at a fair
and reasonable cost.

The City awarded the original A&E contract using a potion of its annual CDBG
grant. Later contract extensions and contract amendments included both annual
CDBG and CDBG-R funds. Since the original contract was improperly procured, we
considered all CDBG and CDBG-R funds expended on the contract to be
unsupported. The City expended a total of $310,000 in CDBG and CDBG-R funds
on the contract (including extensions and amendments), and the contractor had earned
an additional $25,000 for which the City was planning to use CDBG-R funds.




                                       17
            CITY RESPONSE:

            1.       Regulations at 24CFR (Code of Federal Regulations) 85.36 (d) (4) (i) allow
Comment 1   procurement by non-competitive proposals only when award of a contract is
            infeasible under the other forms of procurement and one of the following
            circumstances applies: (A) The item is available only from a single source; (B) The
            public exigency or emergency for the requirement will not permit a delay resulting
            from competitive solicitation; (C) The awarding agency authorizes noncompetitive
            proposals; or (D) After solicitation of a number of sources, competition is determined
            inadequate.

            In initially procuring the A & E services, the City immediately needed a firm with the
            most intrinsic and historic knowledge available relative to the 175+ acre Memphis
            Fairgrounds in order to review a proposal from a potential developer and assist the
            City with its due diligence process in order to move forward on making a decision
            relative to the development proposal. As the City believed its need made it urgently
            necessary to obtain this review and assistance from a firm that was most familiar with
            the site, its design and history, the A & E firm was engaged as provided by 24 CFR
            85.36(d) (4) (i) (A) and (B) due to the public exigency created by the development
            decision which could not be delayed and as such, the firm that was chosen provided
            both historic and intrinsic knowledge of the site due to the following factors:

                     The firm participated in the design of the Pipkin Building, the Youth Center
                     Building, The Revolution and various other buildings and structures on the
                     site.
                     The firm was the original designer of the 1977 Site Master Plan for the
                     Memphis Fairgrounds.

            As the City's immediate need for a decision could be expedited with the assistance of
            a firm with a specific familiarity with the site, the firm was selected. A copy of the
            Justification Memo is attached as Exhibit A. The Memo provides the qualifications
            of the firm as the sole source provider in order to meet this time-sensitive need to
            reach a decision as to the viability of the redevelopment of the Memphis Fairgrounds.

            2.       24 CFR 85.36 (d) (4) (ii) provides: Cost analysis, i.e. verifying the
Comment 2   proposed cost data, the projections of the data, and the evaluation of the specific
            elements of costs and profits is required. As a professional services contract does not
            usually contain cost or profit quotes but rather hourly rates or percentage rates based
            on the total project costs, the City believes the reviewed by the City Engineer, as
            evidenced by the attached email as Exhibit B, as to cost reasonableness was based on
            industry standards as experienced and funded by the City for other City projects.

            Therefore, the City believes adequate determination and documentation has been
            provided to justify that the original Architectural and Engineering contract was
            properly procured, cost were determined to be reasonable and the $335,000 in CDBG
            and CDBG-R funds contract funds (including extensions and amendments) are
            eligible disbursements for which adequate support has been submitted.




                                                  18
            The City Expended CDBG-R Funds for Work Completed Without an
            Executed Contract

            The City properly obtained sealed bids for the greening and demolition of the
            fairgrounds. The greening and demolition work was performed under two separate
            contracts known as "package 2" and "package 3." Soon after beginning the work on
            package 3, the City discovered that additional work was needed to complete the project.
            The additional work added $648,718 (of which $235,978 was CDBG-R funds) to the
            original $564,475, increasing the contract to more than $1.2 million. An amendment
            covering the additional work was drawn up but was not executed. The City paid the
            contractor for the completed work.

            The City's contracting procedures, which it failed to follow, required a contract to be
            executed before payments could be made for completed work. Therefore, the
            expenditure of $235,978 in CDBG-R funds for the additional fairgrounds work was
            unsupported.

            CITY RESPONSE:

            With the award of CDBG-R funding from HUD came the opportunity to fund the
Comment 3   hard development costs associated with the construction of the publicly owned Grand
            Promenade Park, as a public facilities and improvements project, eligible under 24
            CFR §570.201 (c). The project provided for the clearance of obsolete structures on
            the site.

            As submitted to and approved by HUD, the Grand Promenade Park (now known as
            Tiger Lane) was proposed as the focal point of a 175-acre public/private project that
            reflects our city's values related to strong neighborhoods, strong families, and new
            economic anchors; provide public space for community and family events; restore
            primary access to the area and provide connectivity to the Cooper Young
            neighborhood and surrounding areas through vehicular, bicycle and pedestrian
            access.

            The CDBG-R demolition project, procured and contracted as Packages 2 & 3
            referenced above, was placed on hold subject to resolution of the concerns and needs
            of the major tenants of the Liberty Bowl Memorial Stadium (the Southern Heritage
            Classic, the University of Memphis and the Liberty Bowl Classic). Final council
            approval was obtained on March 23, 2010. In addition to final approval for the
            demolition, the Memphis City Council approved, allocated and appropriated
            $15,260,000 in local funds (11 to 1 leverage of federal funding) for the construction.
            of "Tiger Lane" with the understanding that the project would be completed for use
            by the Southern Heritage Classic on September 6, 2010. The Tiger Lane included the
            construction and installation of sewers, gutters, streets, sidewalks, landscaping,
            parking, walking spaces, lighting flagpoles, restrooms and a water feature.

            In order to meet the public's urgent need to complete the Tiger Lane project within
            the extremely compressed time frame (90+ days), it was determined the Package 2




                                                 19
contractor, who had control of the site, must provide simultaneous demolition
services and construction related services in order to coordinate the placement of
utility services, cooperate with the accelerated phasing of the project, permit site
access, prepare a radial cast wall (earth retaining structure) as site preparation for the
subsequent accelerated construction of the Tiger Lane project. The details of the
additional work were included in the Construction Change Directives (CCD) #1 and
#2, attached as Exhibits C and D. The Tiger Lane project commenced on June 7,
2010 and was completed on time and on budget. It also resulted in a 54% minority
participation, the largest participation rate for a City project to-date.

After further review of the City Attorney's Office, the City's Purchasing Agent and
the Director of Finance, it was decided that in lieu of the requested contract
modification, the CCDs would serve as individual invoices for payments. The
payments for the CCDs were submitted under two separate payment requests and
approved by the Director of Finance for payment. Copies of the payment requests and
authorizing e-mails are attached as Exhibit E.

Therefore, the City believes adequate determination and documentation has been
provided to justify that the City reviewed, approved and expended all CDBG-R
Funds for Work Completed under Package 2 subject to the City's contracting policies
and that adequate support for the $235,978 has been submitted.

The City Lost the Services of the Low Bidder Due to Its Long Delay in Executing
a Contract

The City properly obtained sealed bids for package 3 for the greening and demolition
of the fairgrounds and properly selected the lowest bidder to perform the work. The
City's bid documents required that the submitted bids remain viable for 120 days.
This timeframe appears to have been a reasonable amount of time to write, review,
and execute the contract with the lowest bidder. However, the City failed to enter
into a contract within the 120 days, and the low bidder rescinded its bid at the 120-
day mark. The City later executed a contract for the work related to package 3 with
the next lowest bidder. The City incurred an additional $48,136 in CDBG-R costs
due to failing to execute a timely contract with the lowest bidder. We considered the
additional costs to be unreasonable.

CITY RESPONSE:

Although the review provides above that a 120 day timeframe appears to have been a
reasonable amount of time to write, review, and execute the contract with the lowest
bidder, the following circumstances prevented the City from executing a contract
within 120 days from bid opening:

        The "bid viability period" expired on January 25, 2010.
        The Authority to Use Grant Funds, see Exhibit F, was approved on January
        29, 2010 and received by HCD on February 5, 2010.
        The lowest bidder formally withdrew his bid on February 1, 2010,
        see Exhibit G.




                                        20
                   • Final City Council approval received on March 23, 2010.
Comment 4
               Therefore, the City does not believe there was a failure to execute a contract in a
               timely manner, as the next lowest bidder became the lowest bidder at the time of the
               expiration of the "bid viability period" and prior to the final approval given by City
               Council. As the lowest bid at the time of the approval from City Council was
               selected, there was not a $48,136 unreasonable or unnecessary expenditure. The City also
               believes adequate determination and documentation has been provided to justify that the
               City awarded its CDBG-R funds to the lowest bidder for Package #2, subject to the City's
               contracting policies.

            The City Did Not Comply With
            the Recovery Act's "Buy
            American" Provision

                   The City failed to follow HUD guidance for implementing the "buy American"
                   provision of the Recovery Act. Section 1605 of the Act reads in part, "BUY
                   AMERICAN SEC. 1605. USE OF AMERICAN IRON, STEEL, AND
                   MANUFACTURED GOODS. (a) None of the funds appropriated or otherwise
                   made available by this Act may be used for a project for the construction,
                   alteration, maintenance, or repair of a public building or public work unless all of
                   the iron, steel, and manufactured goods used in the project are produced in the
                   United States." The City did not include the "buy American" provision in the
                   contract for the rehabilitation of the commercial laundromat and the contract
                   amendment for additional work related to the greening and demolition of the
                   fairgrounds (which included some construction work). As a result, there was no
                   assurance that the companies receiving Recovery Act funds complied with the
                   requirement.

                   CITY RESPONSE:
                   In reference to the comments above relative to compliance with the "Buy
                   America Provision":

                           SMA (Commercial Laundromat): Since this project is not a public building or
                   public work project, the Buy America provisions may not apply. However, no
                   contract funds have been expended on the project, and if required, the contract may
                   be amended to include the "Buy America Provisions". In the interim, the contractor
                   has provided an executed "P.L.-5 -ARRA 2009 - Buy America Provisions
                   Contractor Certification" (see Exhibit H) which contains all provisions and
                   certifications of the Buy America cited above.

                          Greening and Demolition Project: As previously provided in the City
                   Response relative to the additional work performed, approved and funded for the
                   additional CCD work association with the Tiger Lane, the CCDs served as invoices
                   for payments in lieu of executing a contract amendment. In the absence of a contract




                                                21
                   amendment and in order to acknowledge and assure compliance with the provisions
                   of the "Buy America" provisions the contractor has executed "P.L.-5 -ARRA 2009-
Comment 5          Buy America Provisions Contractor Certification" (see Exhibit I).

                   Therefore, the City believes adequate determination and documentation has been
                   provided to justify that the City has complied with the Recovery Act's “Buy
                   American" Provision.

            The City Did Not Adequately
            Document the Number of Jobs
            Created

                   Section 1512( c) of the Recovery Act required recipients of funds to report
                   quarterly on the Internet at Federalkeporting.gov. The recipients were to report
                   on the nature and status of their projects and the number of jobs created or
                   retained. We reviewed the City's latest HPRP and CDBG-R reports for the
                   quarter ending March 31, 2011, for timeliness, completeness, and accuracy.

                   The City's quarterly reports were generally timely, complete, and accurate, but
                   the information related to the creation and retention of jobs was not always
                   sufficiently supported. The City was unable to support the reported jobs created
                   for either the HPRP or the CDBG-R grant. OMB (Office of Management and
                   Budget) Memorandum M-l 0-08 outlined how "jobs created or retained" should
                   be calculated. The City reported on March 31, 2011, that it had created a total of
                   9.92 jobs via HPRP and an additional 27 jobs using CDBG-R grant funds. The
                   City had no written internal control procedures related to the required reporting,
                   and staff members stated that they used the instructions found at the
                   FederalReporting.gov Web site for guidance. When asked to support the job
                   figures, the City could not. As a result, it could not assure HUD or the public that
                   its reported job figures were accurate.

                   CITY RESPONSE:

                   Pursuant to the OMB Memorandum M-I0-08, section 5.3, the City used the
                   guidance provided in calculating the number of FTE jobs for both the HPRP and
                   CDBG-R projects. In addition, section 5.2 of the OMB Memorandum M-I0-08,
                   number 10. states that the guidance does not establish specific requirements for
Comment 6          documentation or other written proof to support reported estimates on jobs created
                   or retained; however, recipients should be prepared to justify their estimates. To
                   that extent, the jobs relative to the CDBG-R project were based on the
                   documented time sheets submitted during the project phase.

                   Subsequent to the review, staff has reviewed it supporting documentation and
                   assured that its quarterly report for the quarter ending June 30, 2011 reflects its
                   reviews and accurately reports CDBG-R job figure estimates. As follows:




                                                22
"The CDBG-R project was actually completed in the 3rd quarter of 2010 for The
Fairground/Grand Promenade Park. In that quarter, there were only 17 FTE jobs created.
This is a correction from the previous two quarters. Upon bid review, the City opted to
utilize the Division of Public works for site demolition on New Chicago/Manassas project.
Additional delays in the bidding process has resulted in the slower than expected
progress of this project. The SMA Alliance/ Laudromat project contract was executed and
an amendment was required due to changes in the over all project. The project has been
redesigned and re-engineered to increase the scale of the project. The environmental
assessment has been completed for the expanded site. There are currently no jobs to
report this quarter."

Therefore, the City believes it has adequately reviewed its documentation and
accurately reported job figure estimates.




                                      23
                         OIG Evaluation of Auditee Comments

Comment 1   In order to justify its selection of the A&E contractor, the City supplied the same
            information in its response that it supplied during the audit. The documentation
            outlines the A&E firm’s supposed unique qualifications but contains no
            explanation as to why the contract was of an urgent and time-sensitive nature.
            The procurement regulations do not allow selection of an A&E firm as a sole
            source provider based only on qualifications.

Comment 2   The City supplied the same information in its response that it supplied during the
            audit to document its cost analysis for the A&E contract. The copy of an email
            that it provided simply assigns a percentage of the project cost to the amount of
            the A&E contract without an explanation as to how the percentage was
            determined. The regulations at 24 CFR 85.36(f)(1) require a much more detailed
            cost analysis than the City performed in order to ensure that the cost of the A&E
            contract was reasonable.

Comment 3   The City supplied the same information in its response that it supplied during the
            audit (contract change directives, check request documentation, etc.) to support its
            payment for the greening and demolition work. The City’s comments do not
            change the fact that the additional construction work was performed and paid for
            without an executed contract. The City’s procurement procedures required
            contracts to be obtained for all purchases of goods or services over $50,000. In
            this case, the additional work performed by the contractor totaled $648,718. As
            such, the City was required to obtain a contract for the additional work. In
            addition, the method of payment used by the City in this case, check requests, is
            limited by the City’s contracting procedures to payments of no more than $2,500
            in the aggregate. The City paid the contractor an additional $235,978 in CDBG-R
            funds.

Comment 4   The City advertised for sealed bids for the demolition and greening work at the
            fairgrounds work on September 11 and 14, 2009, and the bids were opened and
            tabulated on September 25, 2009. As such, on September 25, 2009, the City had
            an approved activity in place and had a contractor to perform the work. However,
            the City delayed over 3 months, until January 11, 2010, to request authority to use
            grant funds. There is nothing in the City’s response that explains the long delay
            or indicates that it attempted to expedite the approval process as the 120 day
            expiration date approached (e.g., faxing the form and alerting HUD of the
            upcoming deadline). As a result, the authority to use grant funds form was not
            approved by HUD until January 29, 2010, and the City did not receive the
            approved form until February 5, 2010, or two weeks after the bid expiration date
            was reached. In the absence of an acceptable explanation for the delays from the
            City, we believe that the extra $48,136 in costs resulting from the withdrawal of
            the low bidder was unreasonable.

Comment 5   The City commented that the “Buy American” provision may not apply because
            the laundromat is not a public works project. Based on some additional research

                                             24
            including information supplied by the Director of the Knoxville office of
            Community Planning and Development, we agree that the “Buy American”
            provision does not apply in this case because the laundromat is privately owned.
            The exemption for privately owned projects is detailed in CPD Notice 09-05. We
            amended the report accordingly.

            The certification provided by the City to show compliance with the “Buy
            American” provision of the Recovery Act for the additional work related to the
            greening and demolition of the fairgrounds was required to accompany the
            contractor’s partial payment estimates. The fact remains that the contract change
            directives under which the additional work performed as part of package 2 of the
            project did not include the “Buy American” provision as required by the Recovery
            Act.

Comment 6   The OMB guidance states that recipients should be prepared to justify their
            reported jobs figures. During the review, OIG made several requests for the
            City’s documentation to support how the jobs figures were calculated. No
            support was supplied during the review, and none was supplied in the City’s
            response.




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