oversight

The Housing Authority of the City of Port Arthur, TX, Mismanaged Its Recovery Act Funding

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-01-25.

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

                                                                 Issue Date
                                                                          January 25, 2011
                                                                 Audit Report Number
                                                                              2011-FW-1005




TO:         Dan Rodriguez, Director, Office of Public Housing, 6EPH

            //signed//
FROM:       Gerald R. Kirkland
            Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: The Housing Authority of the City of Port Arthur, TX, Mismanaged Its
           Recovery Act Funding


                                    HIGHLIGHTS

 What We Audited and Why

             In accordance with our goal to review funds provided under the American
             Recovery and Reinvestment Act of 2009 (Recovery Act), we audited the Housing
             Authority of the City of Port Arthur’s (Authority) Public Housing Capital Fund
             Stimulus (formula) Recovery Act Funded activities. We wanted to determine
             whether (1) Public Housing Capital Fund formula grant obligations made between
             January 30 and March 17, 2010, were appropriate, prudent, eligible, and
             supported and (2) related procurements were made in accordance with 24 CFR
             (Code of Federal Regulations) Part 85 and Recovery Act requirements.
             Additionally, we assessed the Authority’s compliance with Recovery Act
             reporting and environmental review requirements.


 What We Found

             The Authority’s Recovery Act obligation was not appropriate, prudent, eligible,
             and supported because its related procurement was not made in accordance with
             24 CFR Part 85 and Recovery Act requirements. The Authority violated
             procurement requirements designed to ensure full and open competition and
             reasonable cost and did not practice sound financial controls over the grant. As a
           result, the Authority’s obligation of its $725,546 Recovery Act grant and its
           resulting expenditures were ineligible. In addition, the Authority did not comply
           with Recovery Act environmental review reporting requirements and it
           commenced site work for its project before receiving environmental clearance to
           proceed.

What We Recommend


           We recommend that the U. S. Department of Housing and Urban Development
           (HUD) rescind the Authority’s Recovery Act grant, including the $67,640
           expended, and return the entire $725,546 allocation to the U. S. Treasury. HUD
           should also ensure that the Authority complies with procurement requirements,
           adopts adequate financial controls, and complies with environmental review
           requirements. We further recommend that HUD prohibit the Authority from
           conducting further site work until it receives environmental clearance to do so,
           regardless of the funding source.

           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 issued a draft report to the Authority and HUD on December 21, 2010, and
           requested written comments by January 12, 2011. We conducted an exit
           conference on January 6, 2011. The Authority requested an extension of time to
           provide written comments and provided them on January 19, 2011. The
           Authority generally disagreed with the report. We made some revisions to the
           report language based on the Authority’s comments but did not revise the overall
           conclusions 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.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                            4

Results of Audit
        Finding: The Authority Mismanaged Its Recovery Act Funding   5

Scope and Methodology                                                16

Internal Controls                                                    17

Appendixes
   A.   Schedule of Questioned Costs                                 19
   B.   Auditee Comments and OIG’s Evaluation                        20
   C.   Gulfbreeze – As Built Survey                                 30
   D.   Learning Center Original Survey                              31
   E.   Property Descriptions                                        32




                                            3
                         BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Port Arthur (Authority) is a public body, both corporate
and politic, that was established pursuant to the laws of the State of Texas for the purpose of
engaging in the development, acquisition, and administration of a low-income housing program.
The governing body of the Authority is its board of commissioners. The Authority is fiscally
independent of the City of Port Arthur (City) and is not considered a component unit of the City.

The Authority receives capital funds annually via a formula from the U. S. Department of
Housing and Urban Development (HUD). The Authority may use its capital funds for
development, financing, modernization, and management improvements for its public housing
developments. It received $573,191 and $582,663 in formula capital funds in 2008 and 2009,
respectively.

On February 17, 2009, the President signed the American Recovery and Reinvestment Act of
2009 (Recovery Act) into law. 1 The Recovery Act provided $4 billion for public housing
agencies to carry out capital and management activities, including modernization and
development of public housing. It allocated $3 billion for formula grants and $1 billion for
competitive grants. The Recovery Act required public housing agencies to obligate 100 percent
of the funds within 1 year of the date on which funds became available to the agency for
obligation and expend 60 percent within 2 years and 100 percent within 3 years of such date.

HUD allocated $725,546 to the Authority for its Recovery Act Public Housing Capital Fund
formula grant (formula grant). HUD made the formula grant available to the Authority on
March 18, 2009, resulting in a statutory obligation deadline of March 17, 2010. If the Authority
failed to comply with the obligation deadline, the Recovery Act required HUD to recapture all
remaining unobligated funds and reallocate them to agencies that complied with those
requirements. 2

HUD required the Authority to use its Recovery Act grant on eligible activities already identified
in either its annual statement or Five-Year Action Plan (action plan). 3 The HUD-approved
comprehensive plan sets forth all of the Authority’s physical and management improvement
needs for its public housing developments and must demonstrate long-term physical and social
viability of proposed projects, including cost reasonableness. If the Authority decided to
undertake work items not in its approved plans, HUD required it to amend its approved plans.

Our audit objectives were to determine whether obligations the Authority made between
January 30 and March 17, 2010, were appropriate, prudent, eligible, and supported and
procurements were made in accordance with requirements and to assess the Authority’s
compliance with Recovery Act reporting and environmental review requirements.


1
    Public Law 111-5
2
    The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) amended the
    Recovery Act, requiring recaptured funds to be returned to the U. S. Treasury and dedicated for the sole purpose
    of deficit reduction.
3
    The annual statement, annual plan, and action plan were all components of the Authority’s comprehensive plan.

                                                         4
                                     RESULTS OF AUDIT

Finding: The Authority Mismanaged Its Recovery Act Funding
The Authority poorly planned its Recovery Act activities, violated procurement regulations and
Recovery Act requirements, did not practice sound financial controls, failed to meet reporting
requirements, and commenced site work for its project before receiving environmental clearance
to proceed. In its haste to meet strict Recovery Act obligation and expenditure deadlines, the
Authority disregarded these requirements. As a result, it committed its $725,546 Recovery Act
grant without ensuring it obtained goods and services at a reasonable cost for a prudently
planned project.



    The Authority Poorly Planned
    Its Recovery Act Activities

                 The Recovery Act required the Authority to give priority consideration to the
                 rehabilitation of vacant rental units, prioritize capital projects that were already
                 underway or included in its action plan, and give priority to capital projects that
                 could award contracts based on bids within 120 days from the date the funds were
                 made available. 4

                 For the first 8½ months of the grant, the Authority considered using its Recovery
                 Act grant as part of a complex mixed-finance redevelopment project for its Carver
                 Terrace public housing development, with the hope of leveraging funds that were
                 not available at the time. It anticipated receiving disaster recovery funds from the
                 State of Texas that it could use in conjunction with the Recovery Act grant for this
                 purpose, including acquiring land to use for replacement housing for Carver Terrace,
                 which was damaged by Hurricane Rita in 2005. The Authority’s original grant
                 budget allocated the funds mainly for site acquisition, as shown in table 1.

                 Table 1: Initial Recovery Act grant budget, dated April 7, 2009

                  Budget line item                 Description                                  Amount
                  1430/Fees and costs              Architects, engineering, and environmental    $50,000
                  1440/Site acquisition            Site acquisition                              600,546
                  1470/Non-dwelling structures     Educational computer & activity building       75,000
                                                      Total                                     $725,546

                 When it became clear to the Authority that the disaster recovery funds would not be
                 available in time to obligate its Recovery Act grant before the deadline, it decided to
                 change its plans. With about 3½ months remaining before the obligation deadline,
                 the Authority amended its action plan on December 3, 2009, to add a learning center

4
     HUD made funds available on March 18, 2009. The 120-day award period would have been through July 16,
     2009. The Authority did not enter into an agreement until December 2009.

                                                       5
                at its Gulfbreeze Place public housing development. 5 The Authority stated it had
                wanted to construct a learning center at Gulfbreeze Place for some time, but it had
                not previously included this item in its action plan. As shown in table 1, the
                Authority included the learning center in its initial grant budget even though it was
                not part of its approved action plan at the time. However, the Authority did amend
                its action plan before entering into a contract to obligate the funds and complied with
                the related public notice requirements.

                The Authority revised its grant budget in its amended action plan to allocate the
                grant funds as shown in table 2. At that time, it was still not clear how much it
                planned to spend on the learning center project, as it included three distinctly
                different projects in the same category in its budget (non-dwelling structures).

                Table 2: Recovery Act grant budget in revised action plan, dated December 3, 2009

                  Budget line item                   Description                                    Amount
                  1410/Administration                Administration                                  $72,000
                  1430/Fees and costs                Architects, engineering, and environmental      100,000
                  1440/Site acquisition              Site acquisition                                100,000
                  1470/Non-dwelling structures       Educational computer and activity               453,546
                                                     building/administration office/ replacement
                                                     housing
                                                        Total                                       $725,546

                The Authority’s action plan did not include an estimate of what it would cost to
                operate the facility but did include a list of potential sources of funds to operate this
                and another newly proposed initiative as follows:

                         Funding for these initiatives may come from a variety of sources: the Port
                         Arthur Housing Authority, the City, the City’s Economic Development
                         Commission, Regional Planning Commission, the State, Federal and private
                         resources.

                This statement further demonstrated the Authority’s failure to adequately plan how it
                would undertake and fund the projects it proposed for its community.

                The Authority believed it had limited options to spend its grant funds. It had
                demolished and rebuilt Gulfbreeze Place in 2008-2009, with occupancy beginning in
                March 2010. Therefore, that development did not require rehabilitation. Because
                the Authority planned to seek approval from HUD to demolish the units at Carver
                Terrace and redevelop replacement units elsewhere, the executive director believed
                it would be imprudent to use Recovery Act funds to rehabilitate that property.
                However, the Authority should have had viable options in its existing action plan for
                spending the funds, as it was required to plan in advance how it would spend its
                annual capital fund allotment of more than $500,000 over a 5-year period. Further,


5
    The development has been called Gulf Breeze Plaza, Gulfbreeze Place, Gulfbreeze I, and Lakeview Palms on
    various documents.

                                                          6
                 by amending its plan to add a new project, the Authority did not prioritize capital
                 projects that were already planned or underway as directed by the Recovery Act.


         The Project Already Had Some
         of the Amenities Planned for
         the Learning Center

                 The new development at Gulfbreeze Place had 86 units of public housing and a
                 leasing center, which included a kitchen, computer room, lounge area, and fitness
                 center. The preliminary specifications for the Authority’s proposed learning center 6
                 on a parcel of land adjacent to Gulfbreeze Place called for a two-story building
                 comprised predominantly of a 40-by-60-foot indoor basketball court. The design
                 also included offices, a conference room, and a media room with computers on the
                 first floor and a craft room and recreational area on the second floor (refer to figure
                 1). While the learning center may have been considered an eligible use of capital
                 funds, some of the proposed amenities were similar to amenities in the newly
                 constructed leasing center.

                 Figure 1: Preliminary diagram of learning center as of January 2010




6
    The Authority has also referred to the project as a tenant services building. In its reports on Recovery.gov, the
    Authority published that it was building an “Educational Computer Activity Building at our Public Housing
    Apartments.”

                                                          7
    The Authority Violated
    Procurement Regulations

                 HUD specifically instructed grantees to comply with Federal procurement
                 requirements in 24 CFR (Code of Federal Regulations) Part 85 and allowed them to
                 follow the guidance in its Procurement Handbook for Public Housing Agencies. 7
                 However, the Authority disregarded these requirements when it entered into a
                 noncompetitive agreement to obligate its grant funds, neglected to perform the
                 required independent cost estimate, and failed to maintain records sufficient to detail
                 the significant history of the procurement. The Authority also had a history of
                 procurement-related noncompliance issues but had not corrected them.

                 The Authority Awarded the Contract without Competition or Justification

                 The Authority entered into a development agreement effective June 2008 for the
                 demolition and reconstruction of Gulfbreeze Place. Rather than follow competitive
                 bidding requirements, the Authority executed an addendum to the development
                 agreement, effective December 15, 2009, to add a learning center/tenant services
                 building on a parcel of land adjacent to Gulfbreeze Place. It rationalized that the
                 addendum was part of the original development agreement the board had approved.
                 However, the fact that the Authority recognized the need to execute an addendum to
                 add the learning center to the development agreement indicated it was not part of the
                 existing agreement. The Authority believed it was appropriate to award the work
                 directly to the same developer because the development was new and it knew the
                 developer and was pleased with the developer’s work.

                 The Authority provided no evidence the learning center was intended as part of the
                 original development agreement. A learning center was not marked on the list of
                 amenities to be provided when it planned the redevelopment project in 2007, even
                 though the Amenities form included options for “Furnished and staffed Children’s
                 Activity Center” and “Sport Court (Tennis, Basketball or Volleyball).” 8 As shown
                 in appendixes C and D, the land on which the Authority planned to build the
                 learning center was not included in the original redevelopment project. Site plans
                 for Gulfbreeze Place did not include the learning center or the land until 2010, when
                 the architect prepared plans showing how it would incorporate the learning center
                 into the existing development.

                 Because the new building was beyond the scope of the original development
                 contract, HUD’s policy considered this a major change and required a new




7
     Office of Public and Indian Housing (PIH) Notice PIH 2009-12 (HA), issued March 18, 2009
8
     Source: The Authority’s Texas Department of Housing and Community Affairs 2007 Multifamily Uniform
     Application for Community Development Block Grant (CDBG) Disaster Recovery funds for Gulfbreeze Plaza I
     & II

                                                     8
                  procurement. 9 The Authority violated this requirement when it awarded the work
                  without competition to its existing developer.

                  Federal procurement regulations allowed the Authority to award contracts by
                  soliciting noncompetitive proposals from only one source in certain situations,
                  including a public exigency or emergency. 10 HUD’s Recovery Act procurement
                  guidance 11 gave grantees the latitude to use the public exigency exception to justify
                  noncompetitive awards based on the Recovery Act requirement to commence
                  expenditures and activities as quickly as possible. HUD cautioned grantees that they
                  must comply with all procurement requirements, including the requirement for a
                  cost analysis, the conflict-of-interest requirement, and the requirement to maintain
                  records sufficient to detail the significant history of each contract’s procurement.
                  The Authority failed to document its justification for the noncompetitive award. In
                  fact, there was no evidence the Authority solicited or evaluated a proposal from the
                  developer; it merely added the learning center to the existing development
                  agreement.

                  The Authority Neglected to Perform an Independent Cost Estimate for the
                  Project

                  The Authority did not perform an independent cost estimate before entering into the
                  agreement, as required by Federal regulations. The executive director and a
                  consultant stated they discussed whether they could construct the desired building
                  with the available Recovery Act funds, and the consultant stated the Authority could
                  not perform a cost estimate without preliminary drawings, which it did not have at
                  the time it entered into the agreement with the developer. As a result, the Authority
                  haphazardly assigned costs to the project at various points in time. As shown in
                  table 3, it assigned costs to the project ranging from $75,000 to more than $1.3
                  million. Further, the Authority accepted an arbitrary budget of $750,000 proposed
                  by the developer when it had allocated only $453,546 12 of its Recovery Act grant for
                  this and two other projects.

                  In October 2010, the Authority used the developer’s engineering diagrams and
                  design specifications to obtain a cost analysis for the project from a consultant,
                  which estimated a reasonable budget for the project would be more than $1.3
                  million. Clearly, the Authority failed to adequately budget for the project and
                  allowed its developer to steer cost via its design specifications. It is unclear whether
                  or how the Authority planned to fund any budget shortfall. Further, the Authority
                  had not identified a source of funds to cover the facility’s operating costs.



9
     HUD Handbook 7460.8, REV-2, Procurement Handbook for Public Housing Agencies, dated February 2007,
     section 11.4.C
10
     24 CFR 85.36(d)(4)
11
     Notice PIH 2009-12 (HA), issued March 18, 2009
12
     The Authority allocated another $100,000 of its Recovery Act grant for unspecified fees and costs, some of
     which presumably related to the learning center project.

                                                        9
                           Table 3: Changes in project budget over time

                           Date           Budget/cost document                 Project
                                                                               budget
                           4/7/2009       Initial grant budget                      $75,000
                           12/3/2009      Revised grant budget                      453,546
                           12/15/2009     Development agreement addendum            750,000
                           10/21/2010     Consultant’s cost analysis              1,314,848
                                            Variance (highest vs. lowest)        $1,239,848

                  The Authority Kept Inadequate Procurement Records

                  The Authority did not have a system of records that allowed it to demonstrate the
                  significant history of the procurement. It did not maintain consolidated procurement
                  records for its contracts, including the rationale for the method of procurement,
                  selection of contract type, contractor selection or rejection, and the basis for the
                  contract price.

                  Since the agreement for the Recovery Act work was an addendum to an existing
                  contract, it was necessary to review the original procurement records. 13 After
                  searching the Authority’s administrative offices and an offsite storage warehouse,
                  the Authority was unable to produce the bids it received in response to its original
                  request for proposals and qualifications. The Authority later provided copies of its
                  bid evaluation and scoring forms, but not the bids themselves.

                  The Authority Had a History of Procurement Issues

                  The Authority had written procurement policies that it obtained from a consultant
                  and were consistent with Federal procurement requirements. However, as described
                  above, there was no evidence the Authority followed its policy or valued the
                  underlying concepts of full and open competition or cost reasonableness. The
                  Authority’s fiscal year 2008 financial statement audit report included two
                  procurement-related findings. The Authority

                  •   Did not maintain documentation for procurement transactions in accordance
                      with requirements, including incomplete bid tabulations, lack of support for
                      quotes obtained, and its rationale for the method of procurement.

                  •   Did not include required prevailing wage rate clauses in construction contracts,
                      and there was no evidence of required contractor-submitted weekly certified
                      payrolls in the Authority’s records.

13
     The original solicitation was for qualifications and proposals to redevelop Gulfbreeze Place and other public
     housing using the Texas Department of Housing Community Affairs Community Development Block Grant
     Disaster Recovery program and at the sole option of the Authority to develop possible additional affordable
     housing developments using this program, low-income housing tax credits, and/or other financing. Proposals
     were due June 25, 2007. This solicitation suggested the Authority had preselected awardees, as evidenced by
     language in the solicitation: “All properties had hurricane damages and insurance claims were filed. Copies of
     the insurance claims were faxed to you.”

                                                        10
            In its corrective action plan included in its 2008 audit report, the Authority asserted
            it had implemented procedures to correct the deficiencies. Contrary to this assertion,
            it had not, as evidenced by its mismanagement of its Recovery Act grant. Further,
            the Authority’s fiscal year 2009 audit report repeated the finding related to
            prevailing wage rates. Again, the Authority promised to implement procedures to
            ensure it complied with the requirement. HUD staff also commented that
            procurement continued to be an issue at the Authority. The executive director
            acknowledged the previous audit findings and the need to maintain adequate
            documentation. He recognized the Authority’s vulnerability in this area but had not
            taken definitive steps to improve its procurement function.

            Because the Authority did not follow procurement requirements, it committed its
            $725,546 Recovery Act grant without ensuring it obtained goods and services at a
            reasonable cost for a prudent project. Further, the $67,640 the Authority expended
            on fees and costs (see below) was ineligible. HUD should rescind the Authority’s
            Recovery Act formula grant, require it to repay the $67,640 already expended, and
            return the entire $725,546 to the U.S. Treasury for the sole purpose of deficit
            reduction.

The Authority Did Not Practice
Sound Financial Controls

            For its Recovery Act expenditures, the Authority did not exhibit basic financial
            controls, such as separation of duties between those authorizing payments and
            those requesting the goods or services or ensuring it paid expenses in a timely
            manner. It had no formal procedures for invoice review and approval or for
            ensuring it charged expenses to the correct source. The executive director was
            heavily involved in procurement, the receipt and approval of invoices, and cost
            allocation. He also signed the checks, as did a board member.

            As of October 31, 2010, the Authority had drawn down $67,640 (9 percent) of its
            Recovery Act grant for fees and costs, supported by four invoices. Examination
            of the underlying invoices showed the Authority did not pay two of four invoices
            on time (refer to table 4) and did not properly authorize three of four payments. It
            paid one invoice more than 90 days after the invoice date, and documentation
            attached to a second invoice showed the vendor requested payment four times
            before the Authority paid it.




                                              11
                  Table 4: Schedule of invoice payments

                     Invoice         Invoice        Invoice      Date                Authorization/
                     number          amount           date       paid            evidence of approval
                       4000-01          $10,000    3/31/2010   5/18/2010   E-mail from executive director
                    AES095912              2,640    4/1/2010    7/2/2010   None
                       4000-02           30,000     7/1/2010   7/22/2010   Executive director’s initials and
                                                                           “ARRA” 14 on invoice
                       4000-03            25,000   7/19/2010   7/22/2010   Executive director’s initials and
                                                                           “ARRA” on invoice

                  While there was evidence the executive director directed the staff to pay three of
                  the four invoices, they were not properly authorized. Specifically, the invoices
                  contained no evidence or certification that the Authority received the goods and
                  services billed. However, auditors were able to trace the expenses to the specific
                  deliverables, which included an environmental site assessment, an architectural
                  agreement, and architectural plans. Further, there was a lack of separation of
                  duties between the authorization of payments and the requesting of goods and
                  services, as the executive director both procured all the invoiced services and
                  approved the payments.

                  The Authority’s fiscal year 2009 audit included two findings that the Authority
                  did not have supporting documentation for vendor payments, including the lack of
                  supervisor approval and discrepancies between the invoice amount and the
                  amount paid. According to finance staff, the Authority did not follow formal
                  policies and procedures for incoming invoices, including routing and approval.
                  Staff explained that the executive director or the director of property services
                  would hand an invoice for payment to the payables clerk and tell her what grant to
                  charge for the expense. The executive director acknowledged the need to use
                  purchase orders and ensure controls were in place but had not taken corrective
                  action. The Authority should establish and implement procedures to ensure the
                  proper routing and approval of invoices and adequate separation of duties
                  between those requesting goods and services and those approving payments. This
                  measure will help to ensure the Authority allocates costs to the appropriate source
                  and that it receives the goods and services for which it pays.

     The Authority Failed To Meet
     Reporting Requirements

                  One of the central tenets of the Recovery Act was the concept of accountability
                  and transparency. To this end, it required recipients to report funds received,
                  expended, or obligated to projects or activities, 15 which would be reviewed by the
                  awarding agency and then posted to the Web site Recovery.gov. The Authority
                  was required to submit the reports within 10 days after the end of each calendar

14
      “ARRA” is a widely used acronym for the Recovery Act.
15
      Section 1512

                                                      12
                  quarter, beginning the third quarter of 2009. The Authority submitted the
                  quarterly reports; however, it filed its first three reports late. In addition, the
                  Authority used the incorrect grant number on its first report. It submitted its
                  fourth quarterly report on time (refer to table 5).

                  The Recovery Act 16 also required that applicable environmental reviews under the
                  National Environmental Policy Act (NEPA) be completed on an expeditious
                  basis. HUD developed the Recovery Act Management Performance System
                  (RAMPS) for Recovery Act grantees to use for reporting on environmental
                  compliance and required the Authority to report NEPA compliance in RAMPS by
                  October 10, 2009. It required quarterly reporting thereafter until the
                  environmental reviews were completed for each activity funded with Recovery
                  Act funds. HUD performed a monitoring review in November 2009 and gave the
                  Authority an extension until January 15, 2010, to complete this process.
                  However, as of August 2010, the Authority had not fulfilled its environmental
                  reporting responsibility. On October 22, 2010, the Authority entered information
                  into RAMPS stating that the environmental review was pending and it expected to
                  complete the review on November 1, 2010.

                          Table 5: Recovery Act reporting submissions

                                                           Date         Days
                              Report       Due date     submitted        late
                               Q3 2009    10/10/2009    10/20/2009           10
                               Q4 2009     1/10/2010     1/14/2010            4
                               Q1 2010     4/10/2010     4/13/2010            3
                               Q2 2010     7/10/2010      7/9/2010            -
                                 NEPA      1/15/2010          none      300+ 17


     The Authority Commenced Site
     Work without Environmental
     Clearance

                  By signing the grant agreement, the Authority agreed to carry out its capital
                  activities in accordance with all HUD regulations, including the environmental
                  review requirements under 24 CFR Parts 50 and 58. Those regulations required
                  the Authority to provide the City, as the responsible entity conducting the
                  environmental review, with all available project and environmental information.
                  The City was required to complete an environmental certification, which the
                  Authority was required to submit to HUD with a request for release of funds. The
                  Authority was required to refrain from undertaking any physical activities until
                  HUD approved its request for release of funds.

                  The environmental review process should begin as soon as a recipient determines
                  the projected use of HUD assistance. The Authority initiated this process in

16
      Section 1609
17
      As of December 3, 2010, the report was 322 days overdue.

                                                        13
                   November 2009 when it engaged a consultant to perform an environmental site
                   assessment. The assessment revealed no onsite recognized environmental
                   conditions in connection with the property but noted the property had previously
                   been used as a gas station. The Authority later determined there were
                   underground gas tanks on the property and in September 2010 had them removed,
                   although the City had not completed the environmental certification and the
                   Authority had not submitted the information to HUD.

                   It appeared the Authority was so determined to complete the project before the
                   grant expenditure deadline 18 that it chose not to comply with rules designed to
                   protect people and the environment. By disturbing the potentially contaminated
                   site before receiving clearance to do so, the Authority exposed itself, the City, and
                   HUD to potential liability.


     Conclusion

                   The Authority mismanaged its Recovery Act formula grant. It failed to
                   adequately plan its use of the grant and disregarded fundamental requirements for
                   procurement, finance, and environmental review that were designed to ensure full
                   and open competition, reasonable cost, receipt of goods and services, and the
                   protection of people and the environment. As these requirements are the
                   overarching principles of Federal grant administration, we question the
                   Authority’s capacity to adequately operate its public housing programs.

     Recommendations

                   We recommend that the Director, Office of Public and Indian Housing,

                   1A. Rescind the Authority’s $725,546 Recovery Act grant and return the funds to
                       the U. S. Treasury in accordance with the Recovery Act, as amended, for the
                       sole purpose of deficit reduction. This amount includes the $67,640 already
                       expended and the balance of $657,906.

                   1B. Require the Authority to implement procedures to ensure it complies with all
                       relevant procurement requirements. This process may include the provision of
                       technical assistance on HUD’s part.

                   1C. Require the Authority to adopt and implement financial controls to ensure the
                       proper routing and approval of invoices and adequate separation of duties
                       between those requesting goods and services and those approving payments.




18
      The Authority was required to expend 60 percent of the grant before March 17, 2011.

                                                        14
1D. Provide the Authority with or require it to obtain training on environmental
    review requirements.

1E. Prohibit the Authority from conducting further activity on the site of the
    proposed learning center until it receives environmental clearance to do so,
    regardless of the funding source.




                                 15
                         SCOPE AND METHODOLOGY

The scope of the review was the Authority’s Recovery Act Public Housing Capital Fund formula
grant obligations made between January 30 and March 17, 2010. The Authority obligated its
entire grant during this period, so we reviewed activities related to the obligation and expenditure
of the grant funds, which generally took place between March 2009 and November 2010. We
performed the work at the Authority’s administrative offices in Port Arthur, TX, and our offices
in Fort Worth, TX, from August 4 through December 3, 2010.

To accomplish our objectives, we performed the following steps as they related to the
Authority’s Recovery Act Public Housing Capital Fund formula grant:

   •   Reviewed relevant laws, regulations, and HUD guidance.
   •   Reviewed meeting minutes of the Authority’s board of commissioners.
   •   Reviewed the Authority’s audited financial statements for fiscal years 2008 and 2009.
   •   Reviewed the Authority’s Recovery Act Public Housing Capital Fund formula grant
       agreement, procurement policies, revised action plan, procurement records, invoice
       payments and related deliverables, status reports, and environmental review reporting.
   •   Assisted the Authority in searching for procurement records at an offsite storage facility.
   •   Conducted site visits of and photographed the Authority’s Gulfbreeze Place public
       housing development and the adjacent site of the proposed learning center.
   •   Obtained a legal opinion concerning whether the learning center was an eligible use of
       Recovery Act capital funds.
   •   Interviewed the Authority’s staff, its consultant, and HUD staff in Houston and Fort
       Worth, TX, and Washington, DC.

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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                16
                              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:

               •   Controls to ensure the Authority followed procurement requirements.
               •   Controls to ensure payments were properly authorized and allocated to the
                   appropriate source and that the Authority received the goods and services for
                   which it paid.
               •   Controls to ensure the Authority met mandated environmental review
                   requirements.

               We assessed the relevant controls identified above.

               A deficiency in internal controls 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.

 Significant Deficiencies


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

               •   The Authority did not have a system in place to ensure it followed its
                   procurement policies or documented its procurement activities (finding).


                                                17
•   The Authority did not have procedures in place to ensure invoice payments were
    properly authorized and allocated and that the Authority received the goods or
    services for which it paid (finding).
•   The Authority lacked controls to ensure it received environmental clearance
    before commencing construction activities (finding).




                                18
                                       APPENDIXES
Appendix A

                    SCHEDULE OF QUESTIONED COSTS


                          Recommendation              Ineligible 1/
                                 number
                                         1A              $725,546




1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
   that the auditor believes are not allowable by law; contract; or Federal, State, or local policies
   or regulations.



                                                 19
Appendix B
        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                              Auditee Comments


                                                                    COMMISSIONERS
                                                                    REV. RONNIE LINDEN, CHAIRMAN
                                                                    DESIREE EDWARDS, VICE-CHAIRMAN
                                                                    CLONIE AMBROISE
                                                                    BART BRAGG
                                                                    FARHANA SWATI




                 EXECUTIVE DIRECTOR
                   CELE QUESADA

             January 19, 2011

             VIA FEDERAL EXPRESS AND E-MAIL

             Mr. Gerald R. Kirkland, Regional Inspector General for Audit
             U.S. Department of Housing and Urban Development
             Office of Inspector General, Region VI
             819 Taylor Street, Suite 13A09
             Fort Worth, TX 76102

                       RE:         Management Comments to Discussion Draft Audit Report 2010-__-____
                                   (Recovery Act Funding)

             Dear Mr. Kirkland:

                       On behalf of the Housing Authority of the City of Port Arthur, Texas (the "Authority"), I am
             writing to provide the Authority's comments to the discussion draft audit report ("Report") from the
             Office of Inspector General (the "OIG") relating to the Authority's management of funds (the "ARRA
             funds") provided under the American Recovery and Reinvestment Act of 2009 (the "Recovery Act").
             The ostensible objective of the audit was to determine whether the Authority managed its ARRA funds in
             accordance with both the U.S. Department of Housing and Urban Development's ("HUD") requirements
             and the Recovery Act. In spite of this stated objective, substantial portions of the Report – particularly
Comment 1    the sections addressing the Authority's "history of procurement issues" - focus on issues unrelated to the
             Authority's management of ARRA funds.

                      With the foregoing rationale in mind, the following are our comments on each of the findings
             and recommendations:




                                     HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                                   920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                                Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                       20
            Finding 1: The Authority Mismanaged Its Recovery Act Funding

            The Authority Poorly Planned Its Recovery Act Activities

Comment 2   Authority's Response: Disagree. The Authority utilized a rational, businesslike approach in
            planning its use of the ARRA funds. Initially, the Authority determined that the best use of
            the ARRA funds, in conjunction with disaster assistance funds from the State of Texas and
            other monies, was to rehabilitate or replace the units at Carver Terrace. The State of Texas
            for disaster recovery fund deadlines and the Recovery Act expenditure deadlines made
            proceeding with Carver Terrace infeasible. Thus, the Authority acted prudently and
            responsibly to plan to use the ARRA funds for a different project. As the Report notes, the
            Authority properly amended its action plan and then executed an addendum to the
            Development Agreement in order to use the ARRA funds to develop a learning center at the
            Gulfbreeze Place housing development which was, at that time, under construction. Use of
            the funds at Gulfbreeze is certainly a "viable option" for the expenditure of the funds. In
Comment 3   fact, the learning center had been on the agenda by the Authority's Board of Commissioners
            ("Board") for years prior to the ARRA funds becoming available.

            The Report incorrectly portrays the Authority as failing to plan how it would financially
Comment 4   undertake the operation of the learning center. The Report then sets forth the list of
            possible funding sources the Authority included in its plan to fund ongoing operational
            costs. In other words, the Report both criticizes the failure to plan and highlights the
            planning itself. In fact, it is premature to find fault with the Authority for not lining up
            funding which is not yet needed (while acknowledging that sources exist). The Authority
            will certainly pursue all available funding that may be available to provide services to its
            residents. Moreover, the Authority intends to operate the learning center as part of the
            overall Gulf Breeze development. As such, the costs and the reserves will be set forth in
            the annual operating budget as a whole rather than in a piece-meal fashion covering only a
            part of the overall development.

            The Proposed Learning Center Duplicated Some Existing Amenities at Gulfbreeze
            Place

Comment 5   Authority's Response: Disagree. Fundamentally, the learning center amenities are intended
            to supplement, not duplicate the amenities in the leasing center. For example, while there is
            a fitness center in the leasing center, it does not include a full basketball court such as the
            one proposed in the learning center. The media room is intended to be used for different
            purposes, and will include different equipment than the computer room in the leasing
            center.




                              HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                            920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                         Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                 21
            Moreover, the Authority and its Board determined that the learning center was needed for
            the community. It was approved by HUD. It is not for the OIG to substitute its judgment as
            to what is needed in Port Arthur for that of the Board residing in Port Arthur.

            As the Report accurately states, the learning center is an eligible use of capital funds.

            The Authority Violated Procurement Regulations In That It:

                1.   Awarded the contract without competition or justification; and

                2.   Neglected to perform an independent cost estimate for the project; and

                3.   Kept inadequate procurement records.

            Authority's Response: Disagree. The Authority maintains that the new building was not
Comment 6   beyond the scope of the original contract. The original scope of work contemplated the
            redevelopment of the Gulfbreeze site "in as entrepreneurial a manner as possible," and
            included, but was by no means limited to, the construction of public housing units. In fact,
            the Request for Qualifications ("RFQ") stated that offices and community space were to be
            developed. Accordingly, the addition of the learning center to the project necessitated only
            an amendment to the Development Agreement, not an entirely new procurement. Further,
            the learning center is not on "adjacent property" consisting of an otherwise separate site. The
            land for the learning center is part of the public housing development and has been since it
            was acquired in 1993.

            As the Authority noted in the exit conference, the Authority has an independent cost
Comment 7
            estimate (which the Authority has referred to as a "cost analysis"), which was obtained as
            soon as the plans and specifications were completed. As the OIG is aware, the $750,000
            price on the Addendum to the Development Agreement was not intended as a not-to-exceed
            amount, but rather represented only the amount of ARRA funds that would be involved in
            the project.

            With respect to procurement records, the Authority acknowledges that it can improve its
Comment 8   record retention practices and procedures; however, the quote attributed to the Executive
            Director regarding the possibility that the bids were thrown away is taken grossly out of
            context. It was an off the cuff attempt at humor, and was not intended to be taken seriously.
            The RFQ, the response and the scoring have all been provided to the OIG.

            The section of the Report addressing the Authority's "history of procurement issues" is
Comment 1   inappropriate in the context of this audit, particularly when the OIG has not identified any
            material procurement problems, aside from document retention issues. Significantly, the




                               HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                             920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                          Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                  22
             Authority has engaged the services of Mike Gifford, a consultant specializing in procurement
             matters, to assist it in ensuring that all procurement requirements are fully met.

             The Authority Did Not Practice Sound Financial Controls

             Authority's Response: Disagree. This section raises issues regarding the payment of four
Comment 9    particular invoices. Following the exit conference we believe that the OIG now concedes that
             three of the invoices at issue were paid properly. In particular, much of the delay in payment
             attributed to the Authority is actually due to the contractors' failure to submit appropriate
             invoices containing the requisite information to enable the Authority to process the payments.
             Had the Authority paid those invoices absent such documentation, that in and of itself would
             have appeared in the audit as a deficiency. With respect to the fourth invoice number
             AES095912 in the amount of $2,640, the Authority acknowledges that it was paid both late
             and without sufficient evidence of approval. Consultant Mike Gifford is currently working
             with the Authority to develop a better system of procedures for invoice processing which will
             include checks and balances relating to purchasing and approval of invoices.

             The Authority Failed to Meet Reporting Requirements

             Authority's Response: Disagree. The Recovery Act report for the second quarter of 2010 was
Comment 10   submitted on time. The first and fourth quarter Recovery Act reports were submitted three (3)
             and four (4) days late respectively. Only the third quarter Recovery Act report was submitted
             more than a week late, and the Authority notes that the Columbus Day holiday fell during that
             time. While the Authority acknowledges the importance of reporting deadlines, the
             deficiencies described in the Report are de minimus.

             With respect to the NEPA reporting, the reporting could not be done until the site was cleared
             and the appropriate environmental approvals were received. Once the final environmental
             clearances were received, the NEPA reporting was entered on the Recovery Act Management
             and Performance System. Please also note that, as described in the following section, this was
             a second, unrequired, environmental clearance.

             The Authority Commenced Site Work Without Environmental Clearance

             Authority's Response: Disagree. The Report incorrectly stated the facts and then derived
             from them, improper conclusions. In fact, the Authority performed an environmental
             assessment on the entire site and obtained clearance from the Texas Department of Housing
Comment 11   and Community Affairs ("TDHC") well before any work took place on the site. The work on
Comment 6    the Gulf Breeze development began in 2007. At that time, the Authority resolved to revitalize
             an existing 152-unit complex comprised of 21 buildings into a new 86-unit multi-family
             residential community to be known as Gulf Breeze Plaza.




                                HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                              920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                           Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                  23
             The original Gulf Breeze Plaza apartments were constructed in 1955. Two adjacent lots were
             acquired in 1993 utilizing non-federal funds. The entire parcel was to be utilized for the
Comment 6    revitalized Gulf Breeze development to include both residential units and related amenities.
             The Authority engaged Astex Environmental Services, Inc. to perform an environmental
             assessment pursuant to the requirements of 24 C.F.R. part 58.36. This environmental
             assessment was completed and delivered on December 21, 2007. The environmental
Comment 11
             assessment clearly set forth that capital funds, of which the ARRA funds are a part, would be
             utilized. Notice was properly posted and the clean environmental assessment was then
             submitted to the TDHC.
             On March 21, 2008, the TDHC authorized the use of funds provided in granting the required
             compliance and approvals under 24 C.F.R. 58.36. TDHC further noted:
                     At combined a notice of a "finding of no significant impact" and of the intent/request
                     for release of funds, affidavit of publishing and a request for release of funds
                     certification (RROF) was submitted to HUD. After reviewing for accuracy and the
                     conclusion of the 15-day federal comment period, HUD issued an authorization to use
                     grant funds on 3-18-08.
Comment 11   Accordingly, on March 21, 2008, the Authority had completed an environmental assessment of
             the entire property and received all necessary compliance certificates from the local agency, as
Comment 6    well as from HUD. This environmental review encompassed the entire Gulf Breeze property
             including the property now designated for the learning center.
             Unfortunately, the Authority did not have sufficient funds to build out the total Gulf Breeze
             development. The learning center was thus postponed. Subsequently, the ARRA funds became
             available to the Authority and the Authority determined that the best use of funds was to
             proceed with a mixture of capital funds and ARRA funds to develop the learning center. While
             the Authority already had all of the necessary environmental clearances, it nonetheless did an
             additional review of the property. That review determined, for the first time, that underground
Comment 12   storage tanks existed on the property. Based on this fact, the Authority acted in a prompt and
             responsible fashion and had the tanks removed. Once the tanks were removed, the Authority
             moved forward to obtain new clearance certificates from the City of Port Arthur. These were
             obtained on November 3, 2010.
             As the foregoing clearly demonstrates, the Authority had all necessary environmental
             approvals. The environmental assessment of the entire site was completed on December 21,
             2007 and the clearance certificates were issued by the Texas Department of Housing and
             Community Affairs on March 21, 2008. When underground storage tanks were subsequently
             discovered, the Authority acted in a responsible fashion in removing those tanks and only then
             sought additional clearance certificates for the property. Any other action would have been
             irresponsible. The fact remains that all proper documents were obtained and the Authority
             ensured a clean site.




                                HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                              920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                           Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                 24
             The following are the Authority's comments with respect to the individual recommendations set
             forth in the Report:

             Recommendations

             That the Director, Office of Public and Indian Housing:

                     1A. Rescind the Authority's $725,546 Recovery Act grant and return the funds
                     to the U.S. Treasury in accordance with the Recovery Act, as amended, for the
                     sole purpose of deficit reduction. This amount includes the $67,640 already
                     expended and the balance of $657,906.

                     Authority's Response: Disagree. As clearly set forth in the foregoing response,
                     the Authority planned the use of the ARRA funds and procured a developer to
                     develop the learning center on property which already had environmental
                     clearance. Thus, no funds have been improperly committed or spent. Even if
                     the Report's version of the facts were correct, the recommendation is
                     premature, and belies both the fact that only $67,640 has been expended thus
Comment 13           far and that the Authority has until March 17, 2011 of this year to expend 60%
                     of its ARRA funds. Working collaboratively with the HUD Field Office, the
                     Authority would still have an opportunity to commit and to expend the
                     remainder of its funds appropriately. Rescinding the Authority's entire grant
                     would constitute an unjustified denial of the Authority's due process rights and
                     ultimately simply serve to deprive the low income residents of Gulfbreeze
                     Place of a learning center intended to benefit their entire community.

                     Rescinding the ARRA funds is not an appropriate remedy, especially where, as
                     here, the Authority has properly proceeded with HUD's approval.

                     1B. Require the Authority to implement procedures to ensure that it complies
                     with all relevant procurement requirements. This process may include the
                     provision of technical assistance on HUD's part.

                     Authority's Response: Agree. The Authority is fully willing to comply with
Comment 14           such requirements and has retained the services of Mike Gifford, a consultant
                     specializing in procurement, to enable the agency to develop and to implement
                     procedures that will help to bring the agency into full compliance with all
                     procurement requirements.

                     1C. Require the Authority to adopt and implement financial controls to ensure
                     the proper routing and approval of invoices and adequate separation of duties
                     between those requesting goods and services and those approving payments.




                                 HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                               920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                            Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                 25
                     Authority's Response: Agree. The Authority is fully willing to adopt and to
Comment 14           implement such controls and is willing to accept any training or technical
                     assistance that HUD has to offer.

                     1D. Provide the Authority with or require it to obtain training on
                     environmental review requirements.

                     Authority's Response: Although the Authority strenuously disagrees that it
                     handled the environmental clearance incorrectly in this case, as outlined
Comment 14           herein, the Authority is open to accepting any training that HUD wishes to
                     provide.

                     1E. Prohibit the Authority from conducting further activity on the site of
                     the proposed learning center until it receives environmental clearance to
                     do so, regardless of funding source.

                     Authority's Response: Disagree. The Authority has the appropriate
                     environmental clearance and there is no legitimate environmental
                     impediment from continuing site work.

                     While the Authority agrees with certain findings in this discussion Report, we do not
             agree with all of them. Our hope is that you will reconsider both the finding and the
             numerous recommendations in light of these comments.


                                                                  Very truly yours,

                                                                    //signed//
                                                                  Seledonio Quesada
                                                                  Executive Director



             cc:     Michael H. Syme, Esq.




                               HOUSING AUTHORITY OF THE CITY OF PORT ARTHUR
                             920 DeQueen Blvd. ● P. O. Box 2295 ● Port Arthur, TX 77643
                          Phone: (409) 982-6442 ● 1(800) 590-6442 ● FAX: (409) 983-7803




                                                 26
                         OIG Evaluation of Auditee Comments

Comment 1   The Authority took exception to our reporting its history of procurement issues as
            it was unrelated to its management of its Recovery Act funds. However, the
            Authority's history of procurement issues was relevant because it showed the
            Authority's continuing pattern of not complying with procurement requirements.
            We found procurement issues with the Recovery Act grant even after the
            Authority agreed to correct its prior deficiencies and asserted it had done so.

Comment 2   The Authority believed it appropriately planned its use of the Recovery Act
            grant. We disagree. The Recovery Act's priorities for capital funds were
            rehabilitation of vacant rental units, capital projects already underway or included
            in the action plan, and projects that could award contracts within 120 days of the
            grant. None of the projects the Authority contemplated met these priorities. If the
            Authority had properly planned and procured the learning center, it would have
            been allowable.

Comment 3   The Authority stated the learning center had been on the board agenda for years.
            However, the Authority provided no documentation supporting its claim. We
            reviewed the Authority's board meeting minutes from February 2009 through
            June 2010. Aside from approving the revised action plan, which included the
            learning center, during its December 3, 2009 meeting, there was no mention of the
            learning center in any of the board minutes we reviewed.

Comment 4   The Authority argued it had adequately planned how it would operate the learning
            center, as it had listed possible funding sources in its action plan. Further, it
            stated it will set forth funds in its overall operating budget for the development.
            We disagree that listing entities from which it may receive funds was sufficient
            planning. Additionally, the Authority did not provide an operating budget that
            included the learning center and its comments indicated it had not developed one.

Comment 5   The Authority disagreed that the amenities at the learning center duplicated
            amenities in the leasing center and stated we had substituted its judgment for that
            of the board. We agreed at the exit conference to revise the report language and
            have done so.

Comment 6   The Authority maintained that the learning center was not beyond the scope of the
            original contract because its request for qualifications and proposals contemplated
            offices and community space. It also stated that the land for the learning center
            was part of the public housing development. However, the original
            redevelopment documents did not make reference to a learning center or similar
            project and both the legal description of the land and the land survey for the
            Gulfbreeze Place development excluded the adjacent lots in question (refer to
            appendixes C through E). For these reasons, we disagree that the learning center
            was part of the original development agreement and have revised the report
            language accordingly.



                                             27
              Regardless of the Authority's original plans, HUD's guidance specifically stated
              that adding the construction of a new building to a modernization contract would
              not be considered within the scope of the contract but should be considered a new
              contract and subject to competition. Since the learning center was not specifically
              in the development agreement, it required a new contract and cost estimate.

Comment 7     The Authority was required to comply with federal procurement regulations,
              which clearly stated it must perform a cost or price analysis before receiving bids
              or proposals. None of the circumstances the Authority cited excused it from this
              requirement. The audit report accurately reflected that the Authority did not
              perform a cost estimate until 10 months after the effective date of the addendum
              to the development agreement.

Comment 8     The Authority stated it had provided the request for qualifications and proposals
              (request), the response, and the scoring. It further stated OIG took the executive
              director's comment regarding record retention out of context. The Authority did
              provide the request and scoring sheets but did not provide the bids it received in
              response to the request. We removed the sentence regarding the executive
              director possibly throwing away the bids.

Comment 9     The Authority stated we had agreed that three of four payments were paid
              properly. We agreed at the exit conference that it was difficult to determine from
              the documents when the contractor submitted an appropriate invoice for payment
              and agreed to revise the report language. However, after review of the related
              documents, we disagree that the payment was made in a timely manner in light of
              the contractor's repeated requests for payment. The documents provided did not
              show that the Authority told the contractor it had not received an appropriate
              invoice and would not pay until it received one.

Comment 10 The Authority acknowledged the information in the report was correct but argued
           it was de minimus. The information was included in the report because it was
           indicative of the Authority's mismanagement and non-compliance with federal
           requirements. Regarding NEPA reporting, the Authority was prohibited from
           clearing the site until the environmental review was complete.

Comment 11 The Authority asserted the parcel of land on which it planned to build the learning
           center was part of the 2007 environmental assessment for the overall Gulfbreeze
           development and that it received environmental clearance certificates for the
           "entire property." However, the Authority's documents contradicted its
           argument. The November 2009 environmental assessment of the land for the
           learning center was conducted by the same consultant as the 2007 assessment.
           The consultant's 2009 report stated that it was important to note that in December
           2007, it conducted environmental assessments of the Gulfbreeze Place
           Apartments, but at that time the 0.468 acre of undeveloped land tract for the
           learning center was omitted; therefore, the current assessment was ordered as a
           supplement to the 2007 report. In addition, the original redevelopment



                                               28
              documents, including legal descriptions and land surveys, did not include this
              parcel of land in the project description (refer to appendixes C through E).

Comment 12 The Authority stated the November 2009 environmental assessment identified the
           underground storage tanks on the property. This was incorrect; the assessment
           report stated the consultant found there was no visual evidence of any past
           underground tanks, fill ports, stained soils or other indications of past petroleum
           product use. The Authority later learned of the tanks when it began clearing the
           site in 2010, which was before it received environmental clearance from the City
           or HUD approval of its Request for Release of Funds. The Authority should not
           have cleared the site before receiving the requisite clearance. If it later found
           environmental problems (such as underground storage tanks), it would have been
           responsible for remedying them.

Comment 13 The Authority argued the recommendation to rescind the grant was premature.
           However, because the Authority violated procurement requirements, its obligation
           of the Recovery Act grant was ineligible. The Recovery Act required HUD to
           recapture all funds not obligated by the 1-year deadline. Since the obligation was
           improper, HUD's only available remedy is to recapture the funds.

Comment 14 The Authority agreed with recommendations 1B, 1C, and 1D. We acknowledge
           this agreement.




                                              29
Appendix C
                    GULFBREEZE – AS BUILT SURVEY




The Gulfbreeze As Built Survey included in the Authority's records concerning the
redevelopment of Gulfbreeze Place. Note that the original legal description and drawing did not
include the lots to be used for the learning center, outlined by us in red above. The original
development is outlined by us in green, using the metes and bounds in the property description.



                                              30
Appendix D
               LEARNING CENTER ORIGINAL SURVEY




The learning center survey provided with the development agreement and building plan to
HUD’s Office of Public Housing in January 2010. Note that the survey only covered the
learning center and did not include the adjacent Gulfbreeze apartments.




                                             31
Appendix E
                          PROPERTY DESCRIPTIONS


Gulfbreeze 1 development, from the Authority’s application for disaster recovery funds:

       Being a tract or parcel containing 8.980 acres of land out of Lot 7, Block 3, Range F, Port
       Arthur Land Company Subdivision as recorded in Volume 1, page 22 of the Map of
       Records of Jefferson County, Texas and also containing 0.099 acre of land being the
       Southerly 33 feet of Lot 18, Block 40 in Lakeview Third Addition, as recorded in
       Volume 7, page 92 of the Map of Records of Jefferson County, Texas. It describes the
       specific metes and bounds of the property.

Vacant tract on which the Authority planned to build the learning center:

       A 0.468 acre undeveloped land tract consisting of all of lots 1 and 2 and north 10” of lot
       3, block 2, Jones Addition, Jefferson County, Texas.




                                               32