oversight

Naomi Gardens, Arcadia, CA, Did Not Comply With HUD Procurement and Waiting List Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-11-24.

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

                                                                  Issue Date
                                                                        November 24, 2010
                                                                  Audit Report Number
                                                                           2011-LA-1003




TO:         Kelly S. Boyer, Director, Los Angeles Office of Multifamily Housing, 9DHML


            Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA
FROM:

SUBJECT: Naomi Gardens, Arcadia, CA, Did Not Comply With HUD Procurement and
         Waiting List Requirements

                                    HIGHLIGHTS

 What We Audited and Why

      We audited the Naomi Gardens housing project (project) in response to a congressional
      request from Representative David Dreier of the 26th District of California. The request
      to review the project was based on a constituent’s complaint that alleged the possible
      misuse of U.S. Department of Housing and Urban Development (HUD) funds, including
      the award of work to the family members of project employees without seeking proposals
      from other companies. The constituent later added concerns over waiting list violations
      and families occupying multiple units. Our objective was to determine whether the
      project was operated in accordance with HUD rules and regulations; specifically, whether
      HUD funds were misused as alleged.


 What We Found


      The project’s expenses were properly authorized and necessary for its operation;
      however, the project did not adequately support that it conducted procurement activities
      in accordance with HUD requirements. As a result, it did not ensure that it paid at least
     $170,916 to contractors and suppliers at a reasonable cost and in accordance with HUD
     rules and regulations.

     The project also did not properly maintain and administer its waiting list. It skipped over
     eligible applicants on its waiting list to accommodate other applicants without proper
     justification, allowed applicants to remain on the waiting list longer than HUD rules and
     regulations allowed, and improperly allowed household member to transfer to additional
     units. Therefore, the project provided no assurance that tenants were properly admitted
     to the project in a fair and equitable manner.


What We Recommend

     We recommend that the Director of HUD’s Los Angeles Office of Multifamily Housing,
     require the project to (1) implement additional procurement procedures and controls to
     ensure compliance with HUD handbook requirements, (2) follow and enforce its tenant
     selection plan and submit documentation to HUD showing that future waiting list pulls
     have been conducted according to its tenant selection plan, (3) maintain a transfer waiting
     list for current tenants, and (4) amend the tenant selection plan to clarify and address the
     transfer of household members into additional units.

     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 the project a discussion draft report on November 3, 2010, and held an exit
     conference with project officials on November 10, 2010. The project provided written
     comments on November 17, 2010, and generally agreed with our findings.

     The complete text of the auditee’s response can be found in appendix A of this report.




                                              2
                             TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
   Finding 1: The Project Did Not Adequately Support Its Procurement Activities   5
   Finding 2: The Project Did Not Maintain and Administer Its Waiting List in
                                                                                  8
              Accordance With HUD Rules and Regulations


Scope and Methodology                                                             10

Internal Controls                                                                 12

Appendixes

   A. Auditee Comments                                                            14
   B. Criteria                                                                    16
   C. Schedule of Procurement Review Results                                      18




                                              3
                       BACKGROUND AND OBJECTIVE

The Naomi Gardens housing project (project) is located in Arcadia, CA. The project is owned
by California Trinity Housing, Inc., located in Atlanta, GA, and operated by an independent
management agent, ManSerMar, Inc. (agent), located in Duluth, GA. The project is designated
as a Section 202 senior project that was granted occupancy after 1981. It is designed to serve
persons 62 years of age or older, with 10 percent of its units set aside for persons 18 years of age
and older who are physically disabled and require units that have accessible design features. The
project has 100 1-bedroom units under a Section 8 housing assistance payments contract with the
U.S. Department of Housing and Urban Development (HUD).

The Section 202 program provides direct Federal loans for a maximum term of 40 years under
Section 202 of the Housing Act of 1959, as amended, to assist private, nonprofit corporations
and consumer cooperatives in the development of new or substantially rehabilitated housing and
related facilities to serve the elderly, physically handicapped, developmentally disabled or
chronically mentally ill adults. The Section 8 program provides federally funded housing
assistance payments to very low-income families and elderly and disabled households.

Representative David Dreier of the 26th District of California submitted a constituent’s complaint
that alleged the possible misuse of U.S. Department of Housing and Urban Development (HUD)
funds, including the award of work to the family members of project employees without seeking
proposals from other companies. The constituent later added concerns over waiting list
violations and families occupying multiple units.

Our objective was to determine whether the project was operated in accordance with HUD rules
and regulations; specifically, whether HUD funds were misused as alleged.




                                                 4
                                RESULTS OF AUDIT

Finding 1: The Project Did Not Adequately Support Its Procurement
           Activities
The project procured professional services and awarded contracts without properly soliciting
bids or obtaining oral or written cost estimates and did not maintain procurement records as
required by HUD regulations. This condition occurred due to the project’s lack of written
policies and procedures before March 2010. Further, current policies and procedures lacked
sufficient details to ensure compliance with HUD rules and regulations. As a result, the project
paid at least $170,916 to contractors and suppliers without adequate support to show whether the
services were performed at a reasonable cost.



 Prudent Procurement Practices
 Were Not Followed

       The project did not obtain the required number of bids before awarding contracts. HUD
       Handbook 4381.5, paragraph 6.50(a), requires the solicitation of written cost estimates
       from at least three contractors or suppliers for any contract, ongoing supplies, and
       services expected to exceed $10,000 per year. However, the project only obtained two
       bids before awarding two contracts in 2009 for painting and awning services. Further, it
       was unable to provide documentation showing that bids were obtained from three other
       contractors that performed air conditioning, landscaping, and floor installation services
       (see appendix C for details). In each case, the amount paid exceeded $10,000 for
       calendar year 2009 and/or 2010 (or was on track to exceed this amount for 2010 as of
       May 2010).

       Further, the project did not document that it obtained cost estimates for the two vendors
       used for ongoing supplies that exceeded $5,000 per year (see appendix C). HUD
       Handbook 4381.5, paragraph 6.50(b), requires that for any contract, ongoing supplies, or
       services estimated to cost less than $5,000 per year, the agent should solicit verbal or
       written cost estimates to ensure that the project obtains services, supplies, and purchases
       at the lowest possible cost. Although the handbook is silent concerning expenditures
       between $5,000 and $10,000, in the absence of more stringent project policies, this
       criteria remains applicable as the minimum procurement requirement.


  Procurement Documents Were
  Not Retained

       The project was unable to provide documentation showing that bidding was performed
       for the continuing air conditioning and landscaping services contracts. Specifically, the



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     project’s compliance officer stated that HUD rules and regulations only required the
     project to keep records for 3 years; and since the vendors had been in use for over 3
     years, the project did not have to maintain documentation showing the bidding that was
     performed. However, HUD Handbook 4381.5, paragraph 6.50(c), states that
     documentation of all bids should be retained as part of the project’s records for 3 years
     following the completion of the work. Consequently, since the project continued to
     extend its contracts with the two vendors in question, and the work was never completed
     within the context of the handbook requirements, all records of bids should have been
     retained.

     In addition, the onsite staff claimed to have called for estimates on the supply services
     vendors that were paid more than $5,000 but did not document the price quotes to justify
     the use of those vendors.


The Project Did Not Have
Adequate Written Policies and
Procedures

     We attribute the above deficiencies to the project’s lack of written policies and
     procedures before March 2010. Although policies and procedures have since been
     established, the project’s updated procurement policy did not provide details related to
     the bidding threshold. The agent’s procurement procedure also did not provide details
     related to the bidding threshold. Instead, it merely stated that a major report or
     improvement that was not routine in nature in excess of $5,000 required owner approval.

Conclusion

     The project violated HUD procurement requirements. This condition occurred because
     the project did not have written procurement procedures in place before March 2010.
     Further, although written procurement policies have since been established, they did not
     provide details related to the bidding threshold. Additionally, there were no controls in
     place to ensure the implementation of the new procurement policies. As a result, the
     project paid at least $170,916 to contractors and suppliers without adequate support to
     show whether the services were performed at a reasonable cost and in accordance with
     HUD rules and regulations. Although the project did not support its procurement
     activities, since the payments were made to unrelated third-party vendors and it did not
     appear that the potential overpayments on amounts expended would be material, we do
     not believe it is necessary for the project to demonstrate their reasonableness to HUD.
     However, we recommend that the project implement and follow procurement procedures
     to ensure that all expenditures are performed at a reasonable cost and HUD funds are
     spent accordingly.




                                             6
Recommendations

    We recommend that the Director of HUD’s Los Angeles Office of Multifamily Housing
    require the project to

    1A.   Implement additional procurement procedures and controls to ensure compliance
          with HUD Handbook 4381.5, paragraphs 6.50(a), (b), and (c), regarding soliciting
          cost estimates, soliciting bids, obtaining and retaining written cost estimates, and
          documenting the reasons for the selection of other than the lowest bidder.




                                           7
Finding 2: The Project Did Not Maintain and Administer Its Waiting
           List in Accordance With HUD Rules and Regulations
The project did not follow the waiting list policies and procedures required in the tenant selection
plan. The waiting list was not maintained in accordance with the tenant selection plan, and
tenants were selected out of order. Additionally, the project improperly transferred household
members to additional units. The waiting list violations were a result of the project’s lack of
internal controls. As a result, the project selected applicants out of order, applicants remained on
the waiting list longer than rules and regulations allowed, and there was no assurance that tenants
were properly admitted to the project in a fair and equitable manner.



 The Waiting List Was
 Improperly Administered

       The project skipped over eligible applicants on its waiting list to accommodate other
       applicants without proper justification. One to four people were skipped each time. The
       actions of the project denied the applicants who had been on the list the longest
       immediate Section 202/8 housing and inappropriately allowed other families to receive
       housing ahead of these applicants.

       In addition, this practice of skipping applicants allowed applicants to remain on the
       waiting list longer than HUD rules and regulations allowed under waiting list removal
       requirements. HUD Handbook 4350.3 and the project’s tenant selection plan state that
       once an applicant is offered and rejects two units in the property, the applicant must be
       removed from the waiting list. Three applicants were allowed to remain on the waiting
       list and remained next on the list to be offered a unit, although they had already rejected a
       unit twice. Further, one of these applicants was essentially allowed to remain on hold
       while residing out of the area, as multiple units were offered to other applicants while this
       applicant was bypassed and remained on the waiting list. The onsite project manager
       conducted all selections from the waiting list without supervision from the agent. As a
       result, we attribute these deficiencies to the lack of internal control over the waiting list.


  Household Members
  Improperly Transferred to
  Additional Units

       The project improperly allowed the spouses of two tenants to transfer into additional
       units. In one case, the applicant was the mother-in-law of the onsite manager. In the
       other instance, the separation documents were not current or official. According to the
       tenant selection plan, transfers may be granted for medical reasons certified by a medical
       doctor, to gain access to a needed handicap accessible unit or to resolve tenant disputes.



                                                 8
    These transfers have priority over the waiting list. However, the project failed to
    maintain a transfer waiting list as required by HUD rules and regulations and the
    project’s tenant selection plan. In addition, by transferring these tenants instead of
    requiring them to apply for another unit, eligible applicants on the waiting list had to wait
    longer than they should have. If the project intends to allow these types of requested
    transfers, they should amend the tenant selection plan to address this issue to prevent the
    appearance of favoritism.

Conclusion

    The project did not provide equitable consideration and provided no assurance that
    tenants were properly admitted to the project in a fair and equitable manner. A lack of
    internal controls allowed the project to select applicants out of order on the waiting list.
    The project could maintain fairness and equality in the waiting list selection process by
    ensuring that policies and procedures are followed and reflect the most current housing
    needs.

Recommendations

    We recommend that the Director of HUD’s Los Angeles Office of Multifamily Housing
    require the project to

    2A.      Implement additional procedures and controls to ensure that future waiting list
             pulls are conducted in accordance with its tenant selection plan.

    2B.      Implement and maintain a waiting list for all current tenants that request to
             transfer to other units to ensure compliance with the tenant selection plan.

    2C.      Amend the tenant selection plan to clarify whether the transfer of individual
             household members into new units is considered a transfer or whether the
             individual is required to apply for a unit and go through the waiting list process.




                                               9
                        SCOPE AND METHODOLOGY

We performed our onsite audit work at the project, located in Arcadia, CA, between June and
September 2010. Our audit generally covered the period January 1, 2009, through May 31,
2010.

To accomplish our audit objectives, we

   •   Reviewed applicable HUD regulations, including the Occupancy Requirements of
       Subsidized Multifamily Housing Programs, HUD Handbook 4350.3, and the
       Management Agent Handbook 4381.5.
   •   Reviewed the project’s tenant selection plan and internal policies and procedures.
   •   Interviewed personnel from the HUD Los Angeles Office of Multifamily Housing.
   •   Interviewed the project’s management and staff to determine their job responsibilities and
       understanding of waiting list administration and procurement practices.
   •   Reviewed the project’s general ledger and expenses reports.

          o The total amount of expenditures between January 1, 2009, and May 31, 2010,
            was just under $2 million. We selected the top 15 expense accounts for
            disbursements between January 1, 2009, and May 31, 2010. We removed the
            following expenditures that were considered low risk:

                     Interest on mortgage payment
                     Current depreciation
                     Property and liability insurance
                     Electricity
                     Employee medical insurance
                     Payroll taxes

          o From the nine remaining expense accounts (totaling $44,004), we selected
            invoices with the highest disbursement amounts.
                We also reviewed disbursements for indications that relatives of
                   employees were paid for working at the facility and interviewed project
                   staff on the matter, but found no evidence any such material amounts were
                   paid by the project.

   •   Reviewed tenant files to determine whether the project followed HUD rules and
       regulations in determining tenant eligibility and rent calculations, including household
       members that transferred to additional units.

          o For our review, we looked at the universe of all units and tenants that received
            housing assistance payments from January 1, 2009, to May 31, 2010. There was a
            total of 112 tenants during this period.




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           o We nonstatistically selected three tenants as follows: a tenant who moved out
             during our audit period, a tenant who moved in during our audit period, and one
             existing tenant who did not move in or out during our audit period.

   •   Reviewed the project’s waiting list and applicant files.

           o For our review of the waiting list, we looked at the current active waiting list from
             May 9, 2006, to February 22, 2010. There was a total of 70 applicants on the
             waiting list, including inactive applicants.
           o For our review of applicant files, we nonstatistically selected our sample from the
             waiting list to include at least one active applicant and one applicant that had been
             removed. We ultimately reviewed three applicants.

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 audit 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.




                                                11
                              INTERNAL CONTROLS

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

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

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


       We determined that the following internal controls were relevant to our audit objective:

       •   Policies and procedures that management has implemented to ensure that HUD funds
           are expended in accordance with HUD rules and regulations.

       •   Policies and procedures for the waiting list that management has implemented to
           reasonably ensure compliance with HUD rules 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.

  Significant Deficiencies



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




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•   The project’s procurement policies and procedures were inadequate to ensure that
    HUD funds were expended in compliance with HUD rules and regulations (finding
    1).

•   The project lacked controls to ensure that the waiting list was administered in
    accordance with HUD rules and regulations (finding 2).




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                   APPENDIXES

Appendix A

             AUDITEE COMMENTS


                Auditee Comments




                       14
15
Appendix B

                                          CRITERIA
HUD Handbook 4350.3, Occupancy Requirements of Subsidized Multifamily Housing
Programs; Chapter 4, Waiting List and Tenant Selection; Section 3, Waiting List
Management; paragraph 4-20, Removing Names from the Waiting List, states that the
owner must document removal of any names from the waiting list with the time and date of the
removal.

       A. The tenant selection plan must include a written policy that describes when applicant
       names will be removed from the waiting list. Examples of applicant removal policies an
       owner may adopt are:
              1. The applicant no longer meets the eligibility requirements for the property or
              program;
              2. The applicant fails to respond to a written notice for an eligibility interview;
              3. The applicant is offered and rejects two units in the property (or any number of
              unit offers as specified in the owner’s written policies);
              4. Mail sent to the applicant’s address is returned as undeliverable; or
              5. The unit that is needed – using family size as the basis – changes, and no
              appropriate size unit exists in the property.

HUD Handbook 4350.3, Occupancy Requirements of Subsidized Multifamily Housing
Programs; Chapter 4, Waiting List and Tenant Selection; Section 4, Selecting Tenants
from the Waiting List; paragraph 4-23, General

A. Once an owner has solicited applications and developed a waiting list for applicants for whom
no unit is immediately available, the owner must select applicants from the waiting list and offer
units in the order required by HUD rules and owner policies. This section describes options for
the owner and provides guidance on how to carry out these activities.

B. When a unit becomes vacant, the owner must select the next applicant from the waiting list
based on the unit size available, preferences established for the property, income-targeting
policies and requirements, and screening policies applied by the owner. The owner will select
the first name on the waiting list for the appropriate unit size (or list of names for units reserved
for disabled applicants) and make a final determination of eligibility and suitability for tenancy,
using the criteria described in Chapter 3, Sections 1 and 2, and the procedures in this section.

HUD Handbook 4381.5, The Management Agent Handbook, paragraph 6.50(a), provides
that a management agent should solicit written cost estimates from at least three contractors or
suppliers for any contract, ongoing supplies, and services expected to exceed $10,000 per year.
Paragraph 6.50(b) provides that for any contract, ongoing supplies, or services estimated to cost
less than $5,000 per year, the agent should solicit verbal or written cost estimates to ensure that
the project is obtaining services, supplies, and purchases at the lowest possible cost.
Paragraph 6.50(c) states that documentation of all bids should be retained as a part of the
project’s records for three years following the completion of the work.


                                                  16
Tenant Selection Plan, Waiting List: Accessible units will first be offered to current tenants
requiring the accessibility features of the unit. Then, management must offer the unit to a
qualified applicant on the waiting list who has a physical impairment requiring the accessibility
features of the unit. When neither a current tenant nor qualified applicant with disabilities in
need of a unit with accessibility features is available, management may offer the unit to a non-
disabled applicant. The non-disabled applicant must sign an agreement to move to a typical unit
when one becomes available, or when the accessible unit is needed to house a physically
impaired applicant.

If there are no transfer requests, the unit will be offered to the household at the top of the waiting
list for that unit type. If the household cannot be contacted within four working days, the offer
will be canceled and the unit will be offered to the next applicant on the waiting list.

In that event, the first applicant will be sent a letter requesting confirmation of its interest in
remaining on the waiting list. If no reply is received within 14 days, the application will be
withdrawn from the list. If applicant cannot move into unit at the time of offer but wishes to
remain on the waiting list, they will retain their position on list. After two offers of housing and
refusal, for any reason, the applicant will be removed from the waiting list and the application
will be cancelled. A letter will be sent confirming their cancellation of application.

Tenant Selection Plan, Transfers: A waiting list of residents that request to transfer into
another unit must be maintained by management. In house transfers are given priority before
applicants on the waiting list. Tenants will be placed on transfer waiting list according to date
and time of the request. Factors concerning transfers include a transfer for a medical reason
certified by a medical doctor, based on the need for an accessible unit/features, and to resolve
resident disputes. Residents will be responsible for personal moving costs associated with the
transfer.

Tenant Selection Plan, Removal of Applicants from the Waiting List: Applicants may be
removed if: they request to be removed; they were clearly advised of the requirement to tell
management of his/her continued interest in housing by a particular time and failed to do so; they
fail to respond to a written notice of eligibility; they are offered and reject two units in the
property; mail sent is returned undeliverable; the unit size that is needed does not exist in the
property; they fail to move in on agreed upon date; or they fail to contact management, in
writing, every six months of intent to stay on waiting list. If this occurs the application will be
cancelled and removed from the list and unit will be offered to next applicant.




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Appendix C

       SCHEDULE OF PROCUREMENT REVIEW RESULTS
          Vendor          Compliance with HUD              Expenses not properly
                            Handbook 4381.5                     procured
                        Section   Section    Section     2009        2010      Totals
                        6.50(a)   6.50(b)    6.50(c)
       Pacific            No        N/A        Yes      $49,964       $-      $49,964
       Painting
       Superior           No        N/A        Yes         -        10,226    $ 10,226
       Awning
       California Air     No        N/A        No       18,004      6,497     $ 24,501
       Conditioning
       Services
       Stonetree          No        N/A        No       27,316      7,458     $ 34,774
       Landscape
       HD Facilities    N/A**       No        N/A       17,887      6,976     $ 24,863
       Supplies
       Perfect Floors     No        N/A        No       11,142      5,067     $ 16,209

       Orchard          N/A**       No        N/A       10,379         -      $10,379
       Supply
       Total expenses not properly procured                                   $170,916

** Although amounts paid to these vendors exceeded $10,000 in 2009, since the supply items
purchased were dissimilar and generally purchased as needed, we only held the project to the
section 6.50(b) requirements.




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