oversight

The Rockford Housing Authority, Rockford, IL, Needs to Improve Its American Recovery and Reinvestment Act Contract Administration Procedures

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-07-25.

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

                                                                Issue Date
                                                                         July 25, 2011
                                                                 
                                                                Audit Report Number
                                                                         2011-CH-1010




TO:         Steven Meiss, Director of Public Housing Hub, 5APH

            //signed//
FROM:       Kelly Anderson, Regional Inspector General for Audit, (Region V), 5AGA

SUBJECT: The Rockford Housing Authority, Rockford, IL, Needs to Improve Its American
           Recovery and Reinvestment Act Contract Administration Procedures


                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Rockford Housing Authority’s (Authority) American Recovery and
            Reinvestment Act of 2009 (Recovery Act) Public Housing Capital Fund Stimulus
            Formula and Competitive grants. The audit was part of the activities in our fiscal
            year 2011 annual audit plan. We selected the Authority based on a citizen
            complaint. Our objective was to determine whether the Authority administered its
            grants in accordance with Recovery Act and U.S. Department of Housing and
            Urban Development (HUD) requirements and its administrative plan.

 What We Found

             The Authority did not administer its Capital Fund grants in accordance with
             Recovery Act and HUD’s requirements and its administrative plan. Specifically,
             it did not ensure that (1) its contractors complied with “buy American” and
             Section 3 requirements (see Appendix C) and (2) construction work was complete
             before payments were issued. This condition occurred because the Authority
             lacked adequate procedures and controls to ensure compliance with Federal
             requirements and its administrative plan. As a result, it was unaware that one of
             its contractors purchased nearly $18,000 in materials manufactured outside the
           United States, and HUD and the Authority lacked assurance that the contractors
           followed HUD’s Section 3 requirements and work was complete before payments
           were issued. However, based on our review, the Authority correctly reported its
           Recovery Act progress and disbursed its grant funds in a timely manner in
           accordance with HUD’s requirements.

           The complainant’s allegations regarding fraud, waste, abuse, and serious
           mismanagement regarding Recovery Act funds were not substantiated by the
           results of this audit.

           We informed the Authority’s executive director and the Director of HUD’s
           Chicago Office of Public Housing of minor deficiencies through a memorandum,
           dated July 20, 2011.

What We Recommend

           We recommend that the Director of HUD’s Chicago Office of Public Housing
           require the Authority to (1) provide documentation to ensure that Capital Fund
           grants were not used to reimburse the nearly $18,000 in materials purchased
           contrary to the Buy American Act, (2) review the products purchased by its
           remaining contractors to ensure that they were manufactured in the United States,
           and (3) implement adequate procedures and controls to ensure that Recovery Act
           activities meet “buy American” and Section 3 requirements and that construction
           work is complete before payments are made.

           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 provided our review results and supporting schedules to the Director of
           HUD’s Chicago Office of Public Housing and the Authority’s executive director
           during the audit. We also provided our discussion draft audit report to the
           Authority’s executive director, its board chairman, and HUD’s staff during the
           audit. We held an exit conference with the Authority’s executive director on July
           18, 2011.

           We asked the Authority’s executive director to provide comments on our
           discussion draft audit report by July 18, 2011. The Authority’s executive director
           provided written comments, dated July 18, 2011. The executive director agreed
           with the report findings. The complete text of the auditee’s response, along with
           our evaluation of that response, can be found in appendix B of this report except



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for six pages of documentation that were not necessary for understanding the
Authority’s comments. A complete copy of the Authority’s comments was
provided to the Director of HUD’s Chicago Office of Public Housing.




                                3
                            TABLE OF CONTENTS

Background and Objectives                                                          5

Results of Audit
      Finding: The Authority’s Contract Administrative Procedures Had Weaknesses   6

Scope and Methodology                                                              9

Internal Controls                                                                  10

Appendixes
   A. Schedule of Questioned Costs                                                 12
   B. Auditee Comments and OIG’s Evaluation                                        13
   C. Federal Requirements and the Authority’s Program Administrative Plan         16




                                            4
                      BACKGROUND AND OBJECTIVES

The Rockford Housing Authority was established by the State Housing Board of Illinois in July
1951 under the laws of the State of Illinois to provide decent, safe, and sanitary housing. The
Authority is governed by a five-member board of commissioners appointed by Rockford’s mayor to
5-year staggered terms. As of March 30, 2011, the Authority had four commissioners on its board.
The board’s responsibilities include overseeing the operations of the Authority and reviewing and
approving its policies. The board appoints the executive director. The executive director is
responsible for general supervision over the administration of the Authority’s business and is
charged with the management of its housing projects.

The Public Housing Capital Fund grant is administered by the U.S. Department of Housing and
Urban Development’s (HUD) Office of Public Housing. The grant funds are available for capital
and management activities, including development, financing, and modernization of public housing
projects. For fiscal year 2010, the Authority was authorized to receive nearly $3.6 million in funds.

On February 17, 2009, the President signed the American Recovery and Reinvestment Act. The
Recovery Act provided an additional $4 billion to public housing agencies to carry out capital and
management activities, including modernization and development of public housing. The Recovery
Act required that $3 billion of these funds be distributed as formula grants and the remaining $1
billion be distributed through a competitive process. In March 2009, the Authority received a
formula grant for nearly $4.2 million. In addition, it was awarded two competitive grants totaling
$3.8 million in September 2010. According to HUD requirements, the Authority was required to
obligate 100 percent of its grant funds within one year, expend 60 percent of the funds within two
years, and fully expend the funds within three years. As of December 2010, the Authority had
expended all of its formula grant funds. In addition, as of March 2011, the Authority had obligated
nearly 11 percent and expended nearly 3 percent of its competitive grant funds.

Our objective was to determine whether the Authority effectively administered its grants in
accordance with Recovery Act and HUD requirements. Specifically, we wanted to determine
whether the Authority (1) appropriately used Federal funds for program expenditures, (2) ensured
that contractors followed Section 3 requirements, and (3) performed construction inspections to
ensure that work was complete before issuing payments.




                                                  5
                                 RESULTS OF AUDIT

Finding: The Authority’s Contract Administration Procedures Had
                            Weaknesses
The Authority’s contract administration procedures had weaknesses. Specifically, the Authority
did not ensure that its contractors complied with “buy American” and Section 3 requirements. It
also did not ensure that construction work was complete before payments were issued. This
condition occurred because the Authority lacked adequate procedures and controls to ensure
compliance with Federal requirements and its own policies. As a result, it was unaware that one
of its competitive grant contractors purchased $17,806 in materials manufactured outside the
United States. In addition, HUD and the Authority lacked assurance that the contractors
followed Section 3 requirements and that construction work was complete before payments were
issued.



 The Buy American Act Was
 Not Followed

              We judgmentally selected a sample of three of the Authority’s 17 Recovery Act
              contracts for review to determine compliance with Federal requirements. The three
              contracts selected included one architectural and engineering contract and two
              construction contracts. The two construction contracts included a contract to install
              siding at 46 of the Authority’s scattered site properties as part of its formula grant
              activities, and a contract to install furnaces at its Orton Keyes property as part of its
              competitive grant activities.

              Based on our review, we determined that the Authority required its contractors to
              sign a Buy American Act compliance certification. However, it did not obtain
              supporting documentation in accordance with the certification to ensure that the
              contractors followed the requirement. We reviewed the materials purchased by two
              contractors to determine whether the materials were manufactured within the United
              States in accordance with the Buy American Act.

              The Authority’s siding contractor purchased 19 products as part of its contract.
              Of the 19 products, 5 were produced by manufacturers that had international
              production facilities in addition to those located in the United States. The five
              products included insulation, tape, and lumber.

              The Authority’s furnace contractor purchased furnaces and thermostats to fulfill
              its contract. The thermostats were purchased from Honeywell. According to a
              customer service representative from Honeywell, the thermostats purchased were
              manufactured in China. As of April 29, 2011, the contractor had purchased



                                                  6
            $17,806 in Honeywell thermostats under its contract. However, there was no
            support that the Authority reimbursed the contractor for the inappropriate
            purchase.

            According to the Authority’s modernization coordinator, the Authority did not
            require its contractors to submit supporting documentation to ensure compliance
            with the Buy American Act. However, he inspected shipping boxes while
            performing construction inspections.


The Authority Did Not Have
Sufficient Quality Control
Procedures for Its Section 3
Program

            According to the Authority’s Section 3 policy, if a contractor did not need to hire
            staff to fulfill its contract, it could contribute 5 percent of its total labor costs towards
            the Authority’s education fund to satisfy the Section 3 requirements. However, the
            Authority did not perform quality control reviews to determine whether the
            contractor, after certifying that it did not need to hire staff, hired non-Section 3
            eligible staff to complete its contract. During our review, we did not note any
            contractors that hired staff after the contract was executed.


The Authority’s Inspection
Reports Did Not Show
Completion Dates

            We reviewed two of the Authority’s Recovery Act-funded construction contracts.
            For the two contracts, the Authority could not provide inspection reports showing
            that construction work was completed before payments were issued.

            For the siding contract, the Authority provided copies of the inspection reports for
            8 of the 46 sites included in the contract. The Authority stated that the inspections
            were performed but could not provide copies of the reports. Of the eight
            inspection reports provided, only one indicated the completion date of the
            construction. We compared the construction dates listed on the eight inspection
            reports with the contractor’s invoice dates and the Authority’s payment dates.
            Based on the comparison, the contractor submitted invoices for three of the eight
            sites before construction began. Because the Authority was unable to provide
            inspection reports, it could not support that work was completed before the
            contractor was paid. We inspected 10 of the 46 sites to determine whether new
            siding was installed and determined that the work had been completed.

            For the furnaces contract at the Orton Keyes property, the Authority provided a
            contract progress tracker. The progress tracker included the dates on which

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             inspections were performed and a description of activities, such as workers in unit.
             However, it did not include the date on which the work at each unit was completed.
             According to the Authority, the date on the progress tracker was the date the work at
             the unit was completed. However, some of the units appeared under multiple dates.
             Therefore, the progress tracker did not provide the information necessary to
             determine the number of units at which work had been completed for comparison
             with the contractor invoices.

Conclusion


             The Authority’s contract administration procedures had weaknesses. Specifically,
             the Authority did not ensure that its contractors complied with the Buy American
             Act, Section 3 requirements were met, and construction work was complete
             before payments were issued. This condition occurred because the Authority
             lacked adequate procedures and controls to ensure compliance with Federal
             requirements and its own polices. As a result, HUD and the Authority lacked
             assurance that the requirements of the Recovery Act were followed and was
             unaware that one of its contractors purchased $17,806 in materials manufactured
             outside the United States contrary to the Buy American Act.


Recommendations


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

             1A. Provide documentation to ensure that Capital Fund competitive grant funds
                 were not used to reimburse the $17,806 for the materials purchased contrary to
                 the Buy American Act.

             1B. Conduct reviews of the products purchased by its remaining contractors to
                 ensure that they were manufactured in the United States.

             1C.   Implement adequate procedures and controls to ensure that Recovery Act
                   activities meet “buy American” and Section 3 requirements, and that
                   construction work is complete before payments are made.




                                               8
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

      Applicable laws and regulations; HUD’s program requirements at 24 CFR (Code of Federal
       Regulations) Parts 5, 85, 135, 905, and 982; HUD Office of Public and Indian Housing
       notices; and HUD’s Handbook 7460.8 Rev-2.

      The Authority’s accounting records, bank statements, contract files, policies and procedures,
       board meeting minutes for February 2009 through March 2011, organization chart, program
       annual contributions contract with HUD, and 5-year and annual plans.

      Contractors’ accounting records, bank statements, invoices, and payroll calculations.

      HUD’s files for the Authority.

We also interviewed the Authority’s employees, contractors, and HUD staff.

We reviewed three of the Authority’s Recovery Act program contract files. The three contracts
reviewed included one architectural and engineering contract and two construction contracts.
We also reviewed the materials invoices and payroll reports for the two construction contracts
reviewed. We relied in part on data maintained by the Authority in its systems. Although we did
not perform a detailed assessment of the reliability of the data, we performed a minimal level of
testing and found the data to be adequately reliable for our purposes.

We performed onsite audit work between March and May 2011 at the Authority’s office located
at 223 South Winnebago Street, Rockford, IL. The audit covered the period March 18, 2009,
through February 28, 2011, but was expanded as determined 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. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                 9
                              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
               objectives:

                     Effectiveness and efficiency of operations – Policies and procedures that the
                      audited entity has implemented to provide reasonable assurance that a
                      program meets its objectives, while considering cost effectiveness and
                      efficiency.

                     Reliability of financial reporting – Policies and procedures that management
                      has implemented to provide reasonable assurance regarding the reliability of
                      financial reporting and the preparation of financial statements in accordance
                      with generally accepted accounting principles.

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

               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.



                                                 10
Significant Deficiencies

             Based on our review, we believe that the following items are significant deficiencies:

                   The Authority lacked procedures and controls to ensure that Recovery Act
                    program contractors followed the Buy American Act and Section 3
                    requirements (see finding).

                   The Authority lacked inspection procedures that provided assurance that
                    construction work was complete before payments were issued (see finding).


Separate Communication of
Minor Deficiencies


             We informed the Authority’s executive director and the Director of HUD’s Chicago
             Office of Public Housing of minor deficiencies through a memorandum, dated July
             20, 2011.




                                              11
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                            Recommendation        Unsupported 1/
                                number
                                   1A                $17,806
                                  Total              $17,806


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.




                                             12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         13
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         14
                         OIG Evaluation of Auditee Comments

Comment 1   The Authority provided a report showing funds were transferred from its central
            office cost center account to its capital fund stimulus account. However, the
            documentation was not sufficient to show that non-Federal funds were used to
            purchase the materials. In addition, no documentation was provided to ensure that
            the Authority reviewed the materials purchased by its remaining contractors to
            ensure they complied with the "buy American' requirements, or that quality
            control procedures were implemented to ensure future materials purchases
            comply with the "buy American" requirements.

Comment 2   The proposed procedure would ensure that contractors are following the
            Authority’s Section 3 requirements in regards to hiring. No policy documentation
            was provided to support the implementation of the procedure.

Comment 3   The proposed procedure would ensure that the Authority is verifying that
            construction work is complete before payments are issued to the contractors. The
            job description for the Physical Asset and Quality Assurance Manager was
            provided. However, no policy documentation was provided to support the
            implementation of the procedure.




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Appendix C

      FEDERAL REQUIREMENTS AND THE AUTHORITY’S
            PROGRAM ADMINISTRATIVE PLAN

The American Recovery and Reinvestment Act of 2009, Section 1605, states that 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.

HUD Public and Indian Housing Notice 2009-12, section VII, states that the public housing
agency shall requisition funds only when payment is due and after inspection and acceptance of
the work.

The Authority’s Section 3 policy, Resident Hiring Requirements, states that the prime contractor
may satisfy the Authority’s resident hiring requirements by making a contribution to the
Authority’s education fund to provide assistance to the Authority’s public housing or low- and
very low-income neighborhood residents in obtaining training. The level of contribution would
be commensurate with 5 percent of the total contract amount.

The Authority’s Buy American Act certification states that the bidder verifies that it will submit
to the Authority documentation that will verify compliance with the requirements of Section
1605 of the American Recovery and Reinvestment Act.




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