oversight

The Housing Authority of the County of Monterey, Salinas, CA, Did Not Administer the Procurement and Contracting of Its Capital Fund Recovery Grant Funds in Accordance With HUD Laws and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-07-21.

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

                                                               Issue Date
                                                                        July 21, 2011
                                                               Audit Report Number
                                                                            2011-LA-1014




TO:         Melina Whitehead, Acting Director, San Francisco Office of Public Housing,
            9APH



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

SUBJECT: The Housing Authority of the County of Monterey, Salinas, CA, Did Not
         Administer the Procurement and Contracting of Its Capital Fund Recovery Grant
         Funds in Accordance With HUD Laws and Regulations


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the County of Monterey’s (Authority)
             administration of more than $2.9 million in Capital Fund Recovery Grant funding
             as part of the American Recovery and Reinvestment Act of 2009. We conducted
             the audit because the Authority had received more than $2.9 million in Recovery
             Act grants. In addition, the San Francisco U.S. Department of Housing and
             Urban Development (HUD) Office of Public Housing had expressed concerns
             regarding the use of the funds.

             Our objective was to determine whether the Authority administered the
             procurement and contracting of its grant funds in accordance with HUD laws and
             regulations.
What We Found


         The Authority did not administer the procurement and contracting of $99,900 in
         grant funds in accordance with HUD laws and regulations. It did not follow
         HUD’s or its own procurement policies and procedures when it procured grant-
         funded construction contracts.

         The Authority also included required geographic preference clauses in its grant-
         funded construction contracts. These clauses restricted the procurement process
         in a manner that was not fair and open to competition.


What We Recommend


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

            •   Provide to HUD documentation of at least three written price quotations
                showing justification for the $99,900 in unsupported costs incurred for
                electrical wiring upgrades at 15 housing units. This documentation should
                include a tabulation of quotations received, certified, and retained by the
                Authority. Otherwise, the Authority should repay HUD $99,900 from
                non-Federal funds for the unsupported payments incurred.
            •   Conduct all future procurements in compliance with HUD laws and
                regulations to ensure fair and open competition. If the Authority does so,
                it will avoid instances such as the roofing and solar panel installation
                contracts identified in this report that were conducted with limited
                competition.
            •   Establish a record-keeping system that ensures complete, consistent, and
                accurate documentation of all future procurements to ensure compliance
                with HUD laws and regulations.
            •   Provide appropriate training to responsible personnel to ensure better
                understanding of HUD procurement laws and regulations.

         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.




                                          2
Auditee’s Response


           We provided the Authority a discussion draft report on July 7, 2011, and held an
           exit conference with Authority and HUD officials on July 14, 2011. The
           Authority provided a written response to the report on July 15, 2011, and
           generally agreed with our finding.

           The complete text of the Authority’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            3
                             TABLE OF CONTENTS

Background and Objective                                                           5

Results of Audit
Finding: The Authority Did Not Administer the Procurement and Contracting of Its   6
         Grant Funds in Accordance With HUD Laws and Regulations

Scope and Methodology                                                              9

Internal Controls                                                                  10

Appendixes

       A. Schedule of Questioned Costs                                             12
       B. Auditee Comments and OIG’s Evaluation                                    13
       C. Criteria                                                                 19




                                             4
                      BACKGROUND AND OBJECTIVE

The purpose of the American Recovery and Reinvestment Act of 2009 Capital Fund Recovery
Grant program was to provide an additional $995 million to public housing authorities for capital
and management activities as authorized under Section 9 of the United States Housing Act of
1937 in accordance with four funding categories:

   •   Improvements addressing the needs of the elderly and/or persons with disabilities;
   •   Public housing transformation;
   •   Gap financing for projects that are stalled due to financing issues; and
   •   Creation of energy-efficient, green communities.

The Housing Authority of the County of Monterey administered its allocated amount of more
than $2.9 million toward capital improvement projects such as roofing, electrical wiring
upgrades, and solar panel installation at select housing developments and units.

The Authority was created under the authority of the Health and Safety Code by Resolution,
which identified a need for safe and sanitary low-income housing, by the Monterey County
Board of Supervisors on March 21, 1941. The Authority provides a variety of housing and
services to low- and moderate-income residents of Monterey County. The Authority is
supported by grants and special allocations from the U.S. Department of Housing and Urban
Development (HUD) and State of California housing programs. In addition, the Monterey
County Inclusionary Housing Fund often provides seed money for housing development
projects. The agency receives no general fund allocation, tax increment revenue, or special
funding from the State of California, the County of Monterey, or any city government.

Our objective was to determine whether the Authority administered the procurement and
contracting of its grant funds in accordance with HUD laws and regulations.




                                                5
                                 RESULTS OF AUDIT

Finding: The Authority Did Not Administer the Procurement and
         Contracting of Its Grant Funds in Accordance With HUD
         Laws and Regulations
The Authority did not administer the procurement and contracting of its grant funds in
accordance with HUD laws and regulations. We attributed this problem to the Authority’s not
having a clear understanding of which procurement method to use. As a result, the Authority did
not ensure that the procurement of a construction contract totaling $99,900 was supported and
justified. It also did not ensure two other grant-funded construction contracts were procured in a
manner that allowed for fair and open competition.



 Fifteen Unit Electrical Wiring
 Upgrade Contract Was Not
 Properly Procured

               According to the Authority, the electrical wiring upgrade work for 17 housing
               units was needed due to potential fire hazards involving the use of aluminum
               wiring. Due to uncertainties involving the wiring configurations behind the
               housing unit walls, the Authority started this upgrade project by soliciting price
               quotes for work on two housing units. It solicited three contractors but received
               only two bids. From the two price bids, the Authority selected a contractor with
               the lower price quote to perform the upgrade work for $20,788, or $10,394 per
               unit. This contract did not include options or contingency clauses to retain the
               contractor for additional work.

               Before completing the contracted work, the Authority asked the same contractor
               to provide a price quote for similar work on the remaining 15 housing units. The
               Authority and contractor were able to negotiate a lower per unit price of $6,660
               for a total of $99,900. The Authority did not solicit the required minimum three
               price quotes because it believed its solicitation from the prior procurement was
               sufficient. According to Authority officials, there was a meeting that included the
               former executive director to discuss the execution of the $99,900 contract and
               how to proceed with the work. The Authority was unable to provide
               documentation showing that the former executive director agreed to the price
               quote for work to begin.

               These contracts were separate procurements that fell within the small purchase
               threshold. For the $99,900 contract, the Authority did not solicit price quotes
               from an adequate number of contractors as required by HUD for small purchases
               under $100,000. The Authority’s own procurement policies and procedures for

                                                6
           small purchases, specifically section (II)(A)(3)(c)(i), require it to solicit three
           written price quotes for procured work. In this case, the Authority did not provide
           documentation to show that it had solicited written price quotes from the
           minimum number of contractors as required. In addition, it lacked procurement
           history documentation and, therefore, violated the regulation at 24 CFR
           85.36(b)(9) that the Authority maintain records sufficient to detail the
           procurement. Without the required documentation of the procurement history, the
           Authority was unable to demonstrate that its procurement was conducted with fair
           and open competition. Also, it could not support or justify the expenditure of
           $99,900 in grant funds used towards the electrical upgrade work at 15 housing
           units.


The Authority’s Use of
Geographic Preference Clauses
Prohibited Fair and Open
Competition

           The Authority awarded two contracts totaling more than $1.9 million using
           geographic preference clauses as a requirement for obtaining the contracts. The
           Authority’s inclusion of geographic preference clauses violated HUD
           procurement laws and regulations, as well as restricting the procurement process
           in a manner that was not fair and open to competition. Regulations at 24 CFR
           (Code of Federal Regulations) 85.36(d)(1) require the Authority to conduct
           procurements in a manner that prohibits the use of statutorily or administratively
           imposed in-State or local geographic preferences in the evaluation of bids or
           proposals, except in those cases in which applicable Federal statutes expressly
           mandate or encourage geographic preference. HUD’s Office of General Counsel
           (OGC) provided a legal opinion addressing whether the Authority’s use of
           geographic preference clauses as conditions to obtaining the contract violated
           HUD laws and regulations. According to OGC’s legal opinion, the Authority’s
           use of such geographic preference clauses violated HUD laws and requirements.
           For future procurements involving HUD funds, it should award contracts without
           the use of geographic preference clauses to ensure fair and open competition.

                                   Solar Panels Installation Contract

           In October 2009, the Authority awarded more than $1.2 million in grant-funded
           contracts for the installation of solar panels at its housing developments with the
           requirement that the contractor hire local area youth. Also, at least 50 percent of
           the workforce on the project had to be from the local area. The Authority’s
           requirements prevented conducting the procurement in a manner that was fair and
           open to competition.




                                            7
                                      Roofing Construction Contract

             In May 2009, the Authority awarded a $753,077 grant-funded roofing contract
             with the requirement that the contractor hire local area youth as part of its
             workforce. Such a requirement used by the Authority prevented the procurement
             from being conducted in a manner that was fair and open to competition.

Conclusion



             We attributed the problems described above to the Authority’s not having a clear
             understanding of which procurement method to use in ensuring that its
             procurements complied with HUD laws and regulations. As a result, the
             Authority did not provide assurance that a $99,900 grant-funded construction
             contract was supported and justified. It also did not provide assurance that the
             procurement of two other grant-funded construction contracts were conducted in a
             manner that promoted fair and open competition.

Recommendations



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

             1A.    Provide to HUD documentation of at least three written price quotations
                    showing justification for the $99,900 in unsupported costs incurred for
                    electrical wiring upgrades at 15 housing units. This documentation should
                    include a tabulation of quotations received, certified, and retained by the
                    Authority that supports its justification for incurring $99,900 in expenses.
                    Otherwise, the Authority should repay HUD $99,900 from non-Federal
                    funds for the unsupported payments.

             1B.    Conduct all future procurements in full compliance with HUD laws and
                    regulations to ensure fair and open competition. If the Authority does so,
                    it will avoid instances such as the roofing and solar panel installation
                    contracts identified in this report that were conducted with limited
                    competition.

             1C.    Establish a record-keeping system that ensures complete, consistent, and
                    accurate documentation of all future procurements to ensure compliance
                    with HUD laws and regulations.

             1D.    Provide appropriate training to responsible personnel to ensure better
                    understanding of HUD procurement laws and regulations.

                                              8
                        SCOPE AND METHODOLOGY

We performed our onsite audit work at the Authority, located in Salinas, CA, from February to
March 2011. Our audit generally covered the period October 1, 2008, through January 31, 2011.

To complete our objective, we

   •   Reviewed applicable HUD laws, regulations, and guidance;

   •   Obtained relevant background information pertaining to the Authority;

   •   Reviewed Authority policies and procedures related to procurement, monitoring, and
       reporting of Recovery Act funds, expenditures, and disbursements;

   •   Interviewed relevant Authority personnel, HUD personnel, and vendors;

   •   Reviewed relevant Authority monitoring and reporting records, financial records, and
       procurement records;

   •   Selected three contractors awarded five grant-funded contracts that exceeded $100,000.
       This amounted to more than $2 million of the more than $2.9 million in grant funds
       awarded to the Authority; and

   •   Conducted onsite reviews of housing developments and units where procured
       construction work was provided to the Authority.

We conducted the audit in accordance with the 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 finding and conclusion based on our
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusion based on our audit objective.




                                               9
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls


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

                  •   Effectiveness and efficiency of operations - Policies and procedures that
                      were implemented to reasonably ensure that procurement activities were
                      conducted in accordance with applicable laws and regulations.

                  •   Reliability of financial reporting - Policies and procedures that were
                      implemented to reasonably ensure that program funds were monitored and
                      reported in accordance with applicable laws and regulations.

                  •   Compliance with applicable laws and regulations - Policies and
                      procedures that were implemented to reasonably ensure that payments
                      made to vendors and procurement activities complied with applicable laws
                      and regulations.

               We assessed the relevant controls identified above.

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


                                                10
Significant Deficiencies


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

                •   The Authority did not ensure compliance with applicable laws and
                    regulations concerning the record keeping of procurements and
                    documentation to support payments for electrical wiring upgrades at 15
                    housing units using grant funds (finding 1).

                •   The Authority did not ensure compliance with applicable laws and
                    regulations when it included geographic preference clauses that did not
                    ensure fair and open competition for procurements of its grant-funded
                    roofing construction and solar panels installation contracts (finding 1).




                                             11
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                           Recommendation         Unsupported 1/
                                  number
                                          1A              $99,900


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
14
15
16
17
                        OIG Evaluation of Auditee Comments

Comment 1   We acknowledge the Authority’s agreement with the finding and efforts to
            implement corrective action. We appreciate the time and resources devoted to
            addressing the deficiencies noted in our report.




                                           18
Appendix C

                                         CRITERIA
The following sections of HUD laws and regulations and Authority procurement policies and
procedures were relevant to our audit of the Authority’s administration of grant funds.

24 CFR 85.36(b)(9) states that the Authority “will maintain records sufficient to detail the
significant history of a procurement. These records will include, but are not necessarily limited
to the following: rationale for the method of procurement, selection of contract type, contractor
selection or rejection, and the basis for the contract price.”

24 CFR 85.36(c)(2) states that the Authority “will conduct procurements in a manner that
prohibits the use of statutorily or administratively imposed in-State or local geographical
preferences in the evaluation of bids or proposals, except in those cases where applicable Federal
statutes expressly mandate or encourage geographic preference.”

24 CFR 85.36(d)(1) states that “small purchase procedures are those relatively simple and
informal procurement methods for securing services, supplies, or other property that do not cost
more than the simplified acquisition threshold fixed at 41 U.S.C. [United States Code] 403(11)
(currently set at $100,000). If small purchase procedures are used, price or rate quotations shall
be obtained from an adequate number of qualified sources.”

Authority Procurement Policies and Procedures, effective January 25, 2010, (II)(A)(3)(c)(i),
states that for small purchases and contracts between $10,000 and $100,000, “the Executive
Director or a representative, delegated by the Executive Director in writing, shall solicit written
price quotations from at least three suppliers. A tabulation of quotations received and certified
by the responsible party shall be retained in the purchasing files.”




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