Issue Date
May 17, 2011
Audit Report Number
2011-PH-1010
TO: Donald J. Lavoy, Acting Deputy Assistant Secretary, Public and Indian
Housing, Office of Field Operations, PQ
//signed//
FROM: John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
3AGA
SUBJECT: The Philadelphia Housing Authority, Philadelphia, PA, Failed To Support
Payments and Improperly Used Funds From the American Recovery and
Reinvestment Act of 2009
HIGHLIGHTS
What We Audited and Why
We audited the Philadelphia Housing Authority’s (Authority) use of its Public
Housing Capital Fund formula grant that it received under the American
Recovery and Reinvestment Act of 2009 (Recovery Act). We selected the
Authority for audit based on a citizen’s complaint alleging misuse of these funds
and because it received $126.5 million1 in Recovery Act capital funds, which was
the largest amount of this type of funding awarded in the U.S. Department of
Housing and Urban Development’s (HUD) Region III.2 We focused strictly on
$31.5 million in Recovery Act formula grant funds designated for the
rehabilitation of 340 of the Authority’s portfolio of approximately 7,300
scattered-site units. The audit objective was to determine whether the Authority’s
payments to rehabilitate its scattered-site housing under the Recovery Act were
supported and complied with HUD regulations and other applicable requirements.
1
$126.5 million = $90.5 million in formula grant capital funds awarded in March 2009 and $36 million in
competitive capital fund grants awarded in September 2009.
2
Region III encompasses Pennsylvania, Virginia, Maryland, West Virginia, Delaware, and the District of
Columbia.
What We Found
The Authority’s payments to rehabilitate its scattered-site housing under the
Recovery Act were not supported and did not comply with other applicable
requirements. Specifically, the Authority could not support payments of almost
$1 million in Recovery Act funds to rehabilitate 10 scattered-site units, virtually
the entire amount we reviewed, raising questions about the propriety of the
remaining $26.4 million3 it spent during our audit period to rehabilitate the units
we did not review. Additionally, the Authority’s tenants were subjected to health-
and safety-related hazards, and the Authority failed to use its Recovery Act funds
properly when it failed to ensure that the units it rehabilitated complied with local
codes and other contract requirements. The Authority also made unsupported,
unreasonable, and unnecessary payments to outside attorneys in an effort to
obstruct the progress of this audit.4
What We Recommend
We recommend that HUD require the Authority to provide adequate
documentation to support almost $1 million in unsupported costs identified by the
audit or reimburse the applicable programs from non-Federal funds for any costs
that it cannot support. We also recommend that HUD require the Authority to
provide documentation to support the remaining $26.4 million in payments to
rehabilitate its scattered sites using Recovery Act funds, if the Authority cannot
support the $1 million. Alternatively, it should reimburse the applicable programs
from non-Federal funds for any costs that it cannot support.
We also recommend that HUD require the Authority to implement adequate
procedures and controls to ensure that its payments for scattered-site rehabilitation
comply with relevant laws and regulations and develop and implement controls to
ensure that invoices for scattered-site rehabilitation are adequately verified and
payments are made in accordance with the terms of the related contracts. We
further recommend that HUD direct the Authority to implement appropriate
measures to ensure compliance with applicable laws, ordinances, codes, rules, and
regulations. Lastly, we recommend that HUD require the Authority to task its
Office of Inspector General (OIG) to periodically audit a sample of current and
future payments for scattered-site rehabilitation to ensure that responsible
personnel enforce contract requirements and payments are adequately supported,
necessary, and reasonable.
3
The Authority expended a total of $27.4 million of the $31.5 million in Recovery Act funding planned for
scattered-site rehabilitation during our audit period of March 18, 2009, through June 30, 2010.
4
HUD OIG audit report #2011-PH-1007, dated March 10, 2011, “The Philadelphia, PA, Housing Authority Did Not
Comply with Several Significant HUD Requirements and Failed To Support Payments for Outside Legal Services,”
covered this and related problems and provided recommendations for corrective action.
2
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 a discussion draft audit report to the Authority on March 18, 2011.
The Authority’s outside attorney from Ballard Spahr Andrews & Ingersoll, LLP
hired a consultant on March 22, 2011, and the Authority included the consultant’s
report in its original response to the audit. We discussed the draft audit report
with the Authority at an exit conference on April 1, 2011. The Authority
provided its original written comments to the draft audit report on April 7, 2011.
On May 12, 2011, the Authority retracted its original written comments and the
Ballard Spahr Andrews & Ingersoll, LLP consultant’s report and submitted a
revised response. In its revised response the Authority stated it disagreed with
many of the findings in the report but that it would use the information contained
within the report to assist it in the close-out of its Recovery Act funded scattered-
site rehabilitation project. The complete text of the Authority’s official 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 Support Recovery Act Payments Used To 8
Rehabilitate Scattered-Site Housing
Scope and Methodology 21
Internal Controls 23
Appendixes
A. Schedule of Questioned Costs 25
B. Auditee Comments and OIG’s Evaluation 26
C. Example of Purchase Order and Related Invoice 29
D. Chart of Code and Contractual Violations 32
4
BACKGROUND AND OBJECTIVE
The U.S. Housing Act of 1937 initiated the Nation’s public housing program. That same year,
the City of Philadelphia established the Philadelphia Housing Authority (Authority) under the
laws of the Commonwealth of Pennsylvania to address housing issues affecting low-income
persons. Normally, a five-member board of commissioners governs the Authority. However, on
March 4, 2011, the Authority’s board of commissioners, including its chairman, announced their
resignations and the U.S. Department of Housing and Urban Development (HUD) took control of
the Authority. HUD Secretary Shaun Donovan appointed HUD’s Chief Operating Officer, Estelle
Richman, to serve as the sole member of the Authority’s board. Interim executive director Michael
P. Kelly, who was appointed administrative receiver, continues to manage the day-to-day operations
of the Authority. The cooperative endeavor agreement formalizing HUD’s takeover of the
Authority expires on March 4, 2012, and is renewable in 1-year increments thereafter, or until such
time as mutually determined by the Deputy Secretary and the mayor of Philadelphia that the
Authority has built sufficient capacity to be self supportive.
John F. Street served as the mayor of Philadelphia from January 3, 2000, to January 7, 2008. He
was first appointed to the Authority’s board on September 1, 1993, and he resigned March 18,
1999. He became board chairman on April 22, 2004. He reappointed himself to the board late
into his second term as mayor and remained board chairman until his resignation. The
Authority’s executive director at the beginning of our audit was Carl R. Greene. The Authority
terminated his employment, effective September 23, 2010. It hired Mr. Kelly to serve as interim
executive director, effective December 6, 2010. Between the termination of Mr. Greene and the
hiring of Mr. Kelly, three assistant executive directors managed the day-to-day operations of the
Authority. The Authority’s main administrative office is located at 12 South 23rd Street,
Philadelphia, PA.
The Authority is the Nation’s fourth largest public housing authority and owns and operates
more than 14,000 affordable housing units, serving about 81,000 people in Philadelphia. The
Authority employs 1,200 people and has an annual budget of approximately $345 million. It
receives most of its funding from HUD. Public housing was established to provide decent and
safe rental housing for eligible low-income families, the elderly, and persons with disabilities.
Public housing comes in all sizes and types, from scattered single-family houses to high-rise
apartments for elderly families.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
(Recovery Act). This legislation included a $4 billion appropriation of capital funds to carry out
capital and management activities for public housing agencies as authorized under Section 9 of
the United States Housing Act of 1937. The Recovery Act required that $3 billion of these funds
be distributed as formula grants and the remaining $1 billion be distributed through a competitive
process. Transparency and accountability were critical priorities in the funding and
implementation of the Recovery Act. The Recovery Act imposed additional reporting
requirements and more stringent obligation and expenditure requirements on the grant recipients
beyond those applicable to the ongoing capital fund program grants. Overall, the Authority
received $126.5 million in Recovery Act capital funds, which was the largest amount of this
5
funding awarded in HUD’s Region III.2 Of this $126.5 million, it was awarded $90.5 million in
formula grant capital funds in March 2009 and $36 million in competitive capital fund grants in
September 2009. The Authority designated $31.5 million of the formula grant capital funds for
the rehabilitation of 340 of its portfolio of approximately 7,300 scattered-site units. The
rehabilitation of the scattered-site units was ongoing during our audit. The audit focused strictly
on the Recovery Act formula grant funds designated for the rehabilitation of the Authority’s
scattered-site units. The chart below shows how the Authority planned to use or was in the
process of using its $90.5 million Recovery Act capital fund formula grant.
Project Units Funds
Scattered-site rehabilitation 340 $31,450,000
800 block of Markoe Street 23 6,718,893
Plymouth Hall rehabilitation 53 13,763,000
Scattered-site replacement units 100 12,746,023
Mechanical/heating system upgrades 19,759,898
Fire suppression standpipe upgrades 6,123,845
Formula-funded total 516 $90,561,659
In 1996, Congress authorized the Moving to Work Demonstration program (Moving to Work) as
a HUD demonstration program. This program allowed certain housing authorities to design and
test ways to promote self-sufficiency among assisted households, achieve programmatic
efficiency, reduce costs, and increase housing choice for low-income households. Congress
exempted participating housing authorities from much of the Housing Act of 1937 and
associated regulations as outlined in the Moving to Work agreements. Participating housing
authorities have considerable flexibility in determining how to use Federal funds. In December
2000, the Authority submitted an application to HUD to enter the program, and in February
2002, HUD signed a 7-year agreement with the Authority that was retroactive to April 2001.
From April to October 2008, the Authority continued to operate under a HUD-developed plan to
transition back to traditional HUD program regulations because the term of its Moving to Work
agreement had expired. In October 2008, HUD entered into a new 10-year Moving to Work
agreement with the Authority. The expiration date of the Authority’s new agreement is March
2018.
The Authority’s stewardship of HUD funds has recently garnered the attention of Congress as
well as the local and national media. On January 11, 2011, Senator Charles E. Grassley sent a
letter to 20 law firms in Philadelphia asking for information about their billing of the Authority
as part of a larger review to determine whether the Authority had potentially misused Federal tax
dollars. The Senator commented in his related press release that the Authority “reportedly has a
record of trying to cover its tracks where it’s spent tax dollars either inappropriately or in a way
that would embarrass its leadership.” The Senator further commented that the Authority’s
behavior was “an affront to taxpayers, and taxpayers deserve an accounting of what’s gone on so
that it can be stopped.” We issued an audit report addressing our concerns regarding the
Authority’s use of outside attorneys on March 10, 2011 (Audit Report 2011-PH-1007).
6
The audit objective addressed in this audit report was to determine whether the Authority’s
payments to rehabilitate its scattered-site housing under the Recovery Act could be supported
and complied with HUD regulations and other applicable requirements.
7
RESULTS OF AUDIT
Finding: The Authority Did Not Support Recovery Act Payments Used
To Rehabilitate Scattered-Site Housing
The Authority did not maintain or provide adequate support for Recovery Act capital funds it
used to pay a contractor to rehabilitate its scattered-site housing. The Authority also failed to
ensure that the contractor’s work complied with local code and other contractual requirements.
Specifically, it failed to provide adequate documentation supporting the validity, accuracy,
necessity, and reasonableness of almost $1 million in Recovery Act funding that we audited.
Because none of the payments we reviewed was adequately supported, we question the propriety
of the remaining $26.4 million in Recovery Act funding that the Authority used during the audit
period to rehabilitate its scattered-site housing. Through its outside attorneys, the Authority
informed us that it would provide electrical, plumbing, and mechanical permits but did not do so.
Also, through its outside attorneys, the Authority informed us that it did not see a need to
maintain documentation detailing the rehabilitation work performed on its scattered-site
properties. This problem occurred because the Authority’s leadership and executive
management chose to oversee its capital fund Recovery Act expenditures in this manner. The
Authority needs to implement adequate procedures and controls to ensure that its payments to
rehabilitate its scattered-site housing using Recovery Act funds meet HUD regulations and that it
complies with other applicable laws and regulations. Otherwise it will continue to pay for
scattered-site rehabilitation work that is unsupported, unnecessary, and unreasonable and that
may subject tenants to health- and safety-related hazards.
The Authority Could Not
Support the Eligibility of Its
Recovery Act Payments
Transparency and accountability were critical priorities in the funding and
implementation of the Recovery Act. The Authority spent $27.4 million in
Recovery Act funds to rehabilitate 244 of its scattered-site units. The
rehabilitation work was managed by one general contractor. To determine
whether the Authority met the priorities of the Recovery Act and spent the funds
on eligible activities, we statistically selected and inspected a sample of 10
rehabilitated units to determine or verify what repair/rehabilitation work had been
completed. During the inspections, our HUD appraiser/inspector was unable to
determine specifically what repair/rehabilitation had been completed on each unit,
and the Authority was unable to tell us specifically what was done. The Authority
spent almost $958,000 in Recovery Act funds on these units. However, it did not
maintain or provide adequate documentation to support the expenditures contrary
8
to stipulations in the services contract it executed with its contractor. The contract
stated the following:
Before the first progress payment under this contract, the Contractor shall
furnish, in such detail as requested by the Contracting Officer, a breakdown of
the total contract price showing the amount included therein for each principal
category of the work, which shall substantiate the payment amount requested
in order to provide a basis for determining progress payments.
The breakdown shall be approved by the Contracting Officer and must be
acceptable to HUD. If the contract covers more than one project, the
Contractor shall furnish a separate breakdown for each. The values and
quantities employed in making up this breakdown are for determining the
amount of progress payments and shall not be construed as a basis for
additions to or deductions from the contract price. The Contractor shall
prorate its overhead and profit over the construction period of the contract.
The Contractor shall submit, on forms provided by the PHA (public housing
agency), periodic estimates showing the value of the work performed during
each period based upon the approved breakdown of the contract price.
In addition, the Authority’s contracting officer’s letter to its contractor stated that
payments would be made monthly upon receipt of an itemized invoice. The
Authority did not comply with the provisions above. It did not provide any
documentation reflecting a breakdown of costs for the principal categories of
work its contractor performed on the scattered-site units. We reviewed billing
invoices and related documents for each of the 10 sample units and found that the
invoices did not itemize the costs of the work completed or show a breakdown of
costs by the principal categories of work performed. Documentation included
with the invoices generally showed three broad categories of charges including
the following: Unit Rehab Cost, Construction Management (CM) Contingency,
and Allowance. See appendix C for an example of a typical purchase order and
related invoice.
The bulk of the charges billed were allocated to the Unit Rehab Cost category;
however, no additional detail was provided to show or explain the composition of
the amount charged or the principal categories of work involved. Also, contrary
to the contract provisions, the Authority’s method of cost accounting was not
acceptable to HUD. Recent HUD monitoring reviews of the Authority’s
Recovery Act expenditures identified similar problems. In a September 2010
review of the Authority’s expenditures, HUD’s Office of Public Housing,
Pennsylvania State Office, noted that several purchase orders did not include
itemized costs associated with the work performed for each unit and
recommended that detailed invoices for each unit be provided by subcontractors
to the Authority’s general contractor. HUD added that the detailed invoices
should list the type of work that was performed with the itemized costs associated
with the work activities. In a more recent report dated February 25, 2011, HUD
9
found that the Authority’s contractor’s progress reports which were used as a
basis for payment lacked detail on the work that was accomplished to justify the
payments. HUD noted that it believed systematic issues may exist related to the
Authority’s oversight and monitoring of its contractor’s work, as well as the
Authority’s basis for payment to the contractor. Since the Authority did not have
adequate information on the specific repairs completed and the associated
itemized expenses, approximately $958,000 that it spent to rehabilitate the 10
units reviewed in detail could not be verified.
The Authority’s outside attorney from the law firm of Ballard Spahr Andrews &
Ingersoll, LLP stated that the Authority was not required to provide detailed
information on the specific repairs that it completed because this information was
not required by the contract or HUD regulations. In a separate meeting, the
Authority’s outside attorney from the law firm of Schnader Harrison Segal &
Lewis, LLP stated that the Authority had been featured on national television for
its exceptional work rehabilitating its scattered sites with Recovery Act funds and
demanded to know why we were conducting an audit. He also stated that he
believed our audit was initiated based solely on complaints initiated by
disgruntled neighbors of those living in the Authority’s scattered-site housing and
demanded that we respond to this charge. In response, we explained to the
Authority’s outside attorney that we selected the Authority for audit not only
based on a citizen’s complaint alleging misuse of these funds, but more
importantly because of our statutory responsibility to review the significant
amount of capital funds that HUD had given to the Authority under the Recovery
Act.
The outside counsel was incorrect in asserting that detailed supporting
documentation was not required by the contract or HUD regulations. As stated
above, the Authority failed to follow contract provisions pertaining to the
accounting for the cost of rehabilitating its scattered-site units. Additionally,
regulations at 2 CFR (Code of Federal Regulations) Part 225, appendix
A(C)(1)(j), provide that to be allowable under Federal awards, costs must be
adequately documented. The Authority failed to provide adequate support for its
expenditures for the rehabilitation of its scattered sites with accounting records
detailing the expenditures and supporting documents such as detailed invoices,
receipts, canceled checks, or electronic transfers.
The Authority spent $27.4 million in Recovery Act funding during our audit
period for the rehabilitation of 244 scattered-site properties and did not comply
with this important contract provision. Due to the lack of supporting
documentation for the 10 units reviewed, the fact that HUD identified similar
issues, and the assertion by the Authority’s outside counsel that detailed
supporting documentation was not needed and that it was not available, we
question the propriety of the entire $27.4 million in Recovery Act funding
expended by the Authority during the audit period for scattered-site rehabilitation.
10
The Authority Failed To Ensure
Compliance With Applicable
Laws, Ordinances, Codes,
Rules, and Regulations
The Authority failed to ensure that its contractor complied with HUD’s general
condition in section 12(a) and (b) of the construction management contract, which
required it to give all notices and comply with all applicable laws, ordinances,
codes, rules, and regulations and to secure and pay for all permits, fees, and
licenses for the proper execution and completion of the work as required. During
the audit, we asked the Authority to provide the required permits for the
properties we inspected; however the permits were not provided. Therefore, at
our request, responsible officials from the City of Philadelphia’s Department of
Licenses and Inspections searched their records and found only a single electrical
permit for one of the properties inspected. Based on the inspections of our HUD
appraiser/inspector, our review of the City of Philadelphia codes and ordinances,
and guidance provided by responsible officials from the City of Philadelphia’s
Department of Licenses and Inspections, we determined that the Authority failed
to obtain
Electrical permits required in 9 of 10 units inspected. For example, it
failed to obtain required electrical permits to ensure the proper installation
of hard-wired smoke detectors.
Plumbing permits required in all 10 units inspected. For example, it failed
to obtain required plumbing permits to ensure the safe and proper
installation and replacement of water heaters.
Mechanical permits required in 9 of 10 units inspected. For example, it
failed to obtain required mechanical permits to ensure the safe and proper
installation and replacement of heating, ventilation, and air conditioning
systems.
Since all 10 units statistically selected for review were missing required plumbing
permits and 9 of 10 statistically selected units were missing required electrical and
mechanical permits, we question whether the Authority obtained required permits
on the remaining units. If the required permits had been obtained, the properties
would have been inspected by the City of Philadelphia’s Department of Licenses
and Inspections, and many of the problems discussed below could have been
prevented or corrected.
11
The Authority Failed To Ensure
That Units Were Properly
Rehabilitated
The Authority’s tenants were subjected to health- and safety-related hazards, and
the Authority failed to use its Recovery Act funds properly when it did not ensure
that the units it rehabilitated complied with local codes and other contractual
requirements. We notified HUD officials of two violations that were considered
24-hour exigent health and safety violations since a family was living in the unit.
HUD officials informed us that the Authority had corrected the violations.
During the inspections, our HUD appraiser/inspector noted 44 violations of local
code and other contractual requirements in 9 of the 10 units inspected. Of these
44 violations, 15 violations at 6 of the units were health- and safety-related
violations (see appendix D).
We performed inspections of the scattered-site properties on August 5 and 6,
2010. During the inspection process, the Authority had two outside attorneys and
one Authority official present at each inspection. They informed us that the units
were vacant units that were completely rehabilitated, down to the stud walls.
However, our inspections revealed that the units did not appear to have been
rehabilitated down to the stud walls. Due to the lack of required documentation
showing repairs accomplished in each unit, it was difficult to determine with any
certainty what the Authority paid to have done in each unit. However, based on
the general scope of work that was available, we noted the following deficiencies:
5 of 10 units had entrance and front access doors which were not properly
fire safety rated. The contract required 90-minute fire rated doors, and
doors in 5 units were only rated for 20 minutes.
6 of 10 units had electrical hazards such as nongrounded outlets, open
circuits, open slots on breaker panel, smoke detector not wired properly,
and electrical hot/neutral reverse.
1 unit was missing a carbon monoxide detector.
2 of 10 units had flues on hot water heaters that were not properly sloped
to allow fumes to escape.
4 of 10 units were missing a total of 17 interior closet doors. Another unit
had closets less than 2 feet deep that did not allow for the hanging of
clothes.
The photographs below illustrate some of the problems identified at the 10 units.
12
The closet is wrapped with sheetrock and has no doors.
The water heater flue pipe level needs to have a positive slope for fumes to escape.
13
The closets in bedrooms 2 and 3 are only 14.5 inches deep.
The meter base is not secured for the first floor. The tenant has access to the
basement. Exposed terminals are a 24-hour exigent health and safety violation.
HUD informed us that the Authority corrected the issue after the inspection.
14
There are open slots in the breaker panel in the basement. This hazard is
a 24-hour exigent health and safety violation. HUD informed us that the
Authority corrected the violation after the inspection.
The contract required 90-minute fire rated doors. Doors in 5 of 10 units inspected
were only fire rated for 20 minutes. Note: We shielded the identity of the inspector.
15
There are open slots on the breaker panel in the basement. This hazard is
a 24-hour exigent health and safety violation. HUD informed us that the
Authority corrected the violation after the inspection.
The water heater flue should have a positive slope from the heater to the wall
connection to allow fumes to escape properly. Note: We shielded the identity of
the inspector.
The Authority’s Payments Did
Not Appear Reasonable
The Authority originally planned to rehabilitate 340 units using $31.5 million in
Recovery Act funds, for an estimated average cost of $92,500 to rehabilitate each
16
unit. In response to our requests, the Authority provided information showing
that it had completely rehabilitated 244 units at a cost of $27.4 million, or an
average cost of about $112,000 for each unit. The Authority could not explain
why it spent on average about $20,000 more per unit, or about 20 percent, than it
had originally estimated.
For comparative purposes, we reinspected 5 of the 10 units previously inspected
to estimate the maximum amount that should have been paid to completely
rehabilitate each unit. Due to the lack of required documentation showing repairs
made on each unit, our appraiser/inspector relied solely on his professional
expertise and detailed inspections and observations to determine what the
Authority could have potentially repaired or renovated in each unit. Since the
Authority claimed that each unit was essentially gutted to the stud walls and
ceiling joists and completely rehabilitated to relatively good condition, our HUD
appraiser/inspector prepared a generous estimate for each unit as if this level of
renovation had occurred. Our estimates were based on an assumption that the
following had occurred: demolition and installation of drywall; priming/painting
of all new drywall/woodwork; installation of underlayment over existing flooring
and new vinyl flooring; replacement of kitchen cabinets, countertops,
backsplashes, stainless steel sinks and accessories, appliances, vanities, lavatories,
fiberglass shower surround in baths; reglazing of bathtubs; and installation of gas
furnace HVAC systems, hot water heaters, hardwired smoke detectors, windows,
and fire rated front and rear doors. We also included other items including but not
limited to ceiling lights, vent fans (kitchen and bath), and window blinds. Our
estimate of the Authority’s actual costs versus the estimated maximum possible
costs to rehabilitate each property showed that for three of five units, the
Authority paid significantly more to rehabilitate the units than our maximum, as
shown below.
Authority’s OIG estimated
Unit rehabilitation cost maximum cost Difference
A $104,521 $85,500 $19,021
B $101,900 $82,000 $19,900
C $105,484 $95,200 $10,284
As stated above, we sought to compare the absolute maximum estimated costs
with the Authority’s reported rehabilitation costs. For three of the five properties,
our appraiser estimated that even if the properties had been gutted and completely
rehabilitated, which he opined did not occur, the Authority spent up to $20,000
more than it should have needed for each property. Regulations at 2 CFR Part
225, appendix A(C)(1), state that to be allowable under Federal awards, a cost
must be necessary and reasonable for proper and efficient performance and
administration of Federal awards. While we do not question whether the
Authority performed rehabilitation work, we do question whether the payments
17
were supported, necessary, and reasonable for these properties as well as the units
we did not inspect.
The Authority Obstructed the
Audit Process
In another recent audit,4 we determined that the Authority paid two law firms5
$1.1 million from December 2008 to August 2010, which was unreasonable and
unnecessary because it obstructed the progress of three audits (this audit and two
other recent OIG Section 8 audits6). Since most of the invoices provided by the
Authority’s outside attorneys to justify their fees did not show to which audit the
fees were attributable, we could not determine the exact amount of the $1.1
million that was attributable to this Recovery Act audit. However, based on the
number of attorneys we observed during the audit and the time we observed the
attorneys in audit meetings and accompanying us on housing inspections, we
believe that amount would be significant. These fees were generally for routine
matters dealing with the audit that are typically performed by lower level non-
attorney staff at other housing authorities that we have audited. Further,
documents that were routinely provided on audits at other housing authorities
often were requested by the auditors but not provided by the attorneys. During
the audit when documents were provided, it often took an inordinate amount of
time to coordinate the delivery and acceptance of the documents from the outside
attorneys. Such interference obstructed the efficient conduct of this audit without
benefiting the Authority’s program or its effective use of Recovery Act funding.
As a result of the efforts of the Authority to withhold information needed to
conduct this audit in accordance with generally accepted government auditing
standards, we served the former executive director with three subpoenas on
July 14, 2010, in an attempt to obtain information which is routinely provided
without objection during other housing authority audits. A brief description and
the status of the three subpoenas are described below.
An outside attorney refused to provide tenant files for 18 tenants living in
the Authority’s scattered-site housing, claiming in a letter, dated June 9,
5
Schnader Harrison Segal & Lewis, LLP’s invoices showed that it was paid $672,040 for work it performed on two
Section 8 audits and $91,260 for work on this Recovery Act audit; Ballard Spahr Andrews & Ingersoll, LLP’s
invoices showed that it was paid $325,570 for work on OIG audits, but the invoices did not did not identify the
audits. We reviewed invoices only for outside legal work from September 2008 until August 2010; therefore,
payments for outside legal work for audits outside that period (including work on HUD OIG audit report #2011-PH-
1007) was not accounted for in the $1.1 million figure, which would be significant.
6
The two audits referred to here are HUD OIG audit report #2010-PH-1011, “The Philadelphia Housing Authority,
Philadelphia, PA, Did Not Ensure That Its Section 8 Housing Choice Voucher Program Units Met Housing Quality
Standards,” dated July 8, 2010, and HUD OIG audit report #2010-PH-1002, “The Philadelphia Housing Authority,
Philadelphia, Pennsylvania, Needs to Improve Its Controls over Housing Assistance Payments,” dated October 6,
2009.
18
2010, that he objected to how HUD OIG selected its audit sample. After
we served the former executive director with this subpoena, the outside
attorney provided the requested files.
An outside attorney refused to provide a list of contractors and
subcontractors that performed work and/or provided services in relation to
the Authority’s scattered-site units, as well as information on the Recovery
Act funds spent on the contracts/units. We requested the information in
our audit notification letter, dated April 9, 2010, and reiterated the need
for the information during a May 19, 2010, audit status meeting. After we
served the former executive director with this subpoena, the outside
attorney provided us with the tenant files and records showing the amount
of funds spent on the units. The attorney provided us with the
procurement files but did not provide what he called the attorney review
portion of the procurement file, citing attorney-client privilege.
An outside attorney refused to provide 28 partial Social Security numbers
requested by the auditors to perform public record searches to evaluate
whether apparent conflicts of interest existed with responsible Authority
officials and contractors doing business with the Authority. We requested
the information in our audit notification letter, dated April 9, 2010, and
reiterated the need for the information during a May 19, 2010, audit status
meeting and several additional communications with the outside attorney
throughout the audit. Since the Authority’s outside attorney continued to
refuse to provide the information, on November 9, 2010, the United States
Attorney’s Office petitioned for summary enforcement of the subpoena on
behalf of HUD OIG. After a court hearing in the United States District
Court for the Eastern District of Pennsylvania, the court ordered on
February 4, 2011, that the petition for summary enforcement of the
subpoena be granted. The Authority complied with the subpoena on
February 14, 2011. We will perform an audit test using this information
and will report audit results and conclusions and/or other action as
appropriate.
Since this overall problem was addressed in a recent audit report,7 including
detailed recommendations for corrective action, no recommendations are made in
this audit report on this matter.
Conclusion
The Authority failed to provide adequate documentation supporting the validity,
accuracy, necessity, and reasonableness of $957,742 in payments that it made for
scattered-site rehabilitation using Recovery Act funding during the audit period.
It also failed to ensure that its rehabilitation work complied with local code and
7
See footnote 4.
19
other contractual requirements. These conditions occurred because the
Authority’s leadership, board of commissioners, and executive management chose
to operate the Authority in this manner. In particular, the Authority’s board of
commissioners failed to meet its fiduciary responsibility to ensure that the
Authority complied with all Federal laws and regulations as well as fully
cooperating with HUD OIG. The Authority needs to implement adequate
procedures and controls to ensure that its payments for scattered-site rehabilitation
using Recovery Act funds comply with applicable laws and regulations. It also
needs to implement appropriate measures to ensure that the contract requirements
are enforced, including a quality control function. Without these improvements, it
will continue to pay for rehabilitation work that is unsupported and may be
unreasonable and unnecessary.
Recommendations
We recommend that the Acting Deputy Assistant Secretary, Public and Indian
Housing, Office of Field Operations direct the Authority to
1A. Implement adequate procedures and controls to ensure that its payments for
scattered-site rehabilitation comply with applicable laws and regulations.
1B. Immediately provide documentation to HUD to support the $957,742 in
unsupported costs identified by the audit or reimburse the applicable
programs from non-Federal funds for any costs that it cannot support.
1C. Immediately provide documentation to HUD to support the remaining
$26,433,077 in payments for scattered-site rehabilitation using Recovery Act
funds, if the Authority cannot support the costs referenced in
recommendation 1B, or reimburse the applicable programs from non-Federal
funds for any costs that it cannot support.
1D. Develop and implement controls to ensure that invoices for scattered-site
rehabilitation are adequately verified and payments are made in accordance
with the terms of the related contracts.
1E. Require its board of commissioners to implement appropriate measures to
ensure compliance with applicable laws, ordinances, codes, rules, and
regulations.
1F. Task its OIG to periodically audit a sample of current and future payments
for scattered-site rehabilitation to ensure that responsible personnel enforce
contract requirements and payments are adequately supported, necessary,
and reasonable.
20
SCOPE AND METHODOLOGY
To accomplish our objective, we reviewed
Applicable laws; regulations; the Authority’s administrative plan; HUD’s program
requirements at 2 CFR Part 225 and 24 CFR Parts 85 and 135; HUD Handbook 7460.8,
REV-2; HUD Handbook 2210.18; HUD Litigation Handbook 1530.01, REV-5; and 24
CFR Parts 5, 941, and 982 and sections 85.36 and 905.10.
The Authority’s accounting records; annual audited financial statements for its fiscal
years ending March 31, 2008, and March 31, 2009; tenant files; computerized databases
including housing assistance payment and family data; board meeting minutes;
organizational chart; and Moving to Work documents including the agreement, plans, and
reports.
HUD’s Office of Public Housing, Pennsylvania State Office, Recovery Act monitoring
reports for the Authority.
We also interviewed the Authority’s employees and HUD staff.
To achieve our audit objective, we relied in part on computer-processed data in the Authority’s
databases. The Authority, however, denied our requests for read-only access to its computerized
data and contract and invoice files. Because of these limitations imposed by the Authority, we
were prevented from assessing the reliability and completeness of the data to which the
Authority allowed us access. Consequently, for our purposes, we used the data and files that the
Authority provided without a complete data reliability assessment.
With the assistance of HUD OIG’s statistician, we selected a sample of 13 units using a random
number generator in RAT-STATS 2007, a common statistical program used for selecting audit
samples. Our sample universe was 244 scattered-site units on which rehabilitation work had
been completed using Recovery Act funds. Due to difficulties obtaining information from the
Authority, we only reviewed 10 of the 13 sample units. We identified deficiencies in all 10 units
reviewed. The deficiencies included insufficient documentation of costs, lack of required
plumbing, electrical and mechanical permits required by the City of Philadelphia’s Department
of Licenses and Inspections, and defects in the rehabilitated units. While the sample size was
limited, 10 out 10 randomly selected units found to be problematic are compelling enough to
indicate a general pervasive problem. Based on the laws of probability, we can be 95 percent
confident that at least 183 of the universe of 244 projects (75 percent) are likely to have similar
problems.
Our appraiser developed the rehabilitation estimates presented in the report using construction
cost information provided by RSMeans, a nationally recognized cost estimating service. The
estimates were based on data from RSMeans’ Facilities Construction Cost Data (2010 Edition)
and Residential Repair and Remodeling Costs (2009 Edition), and cost information obtained
from local suppliers. The cost data was used in calculating demolition cost and repair cost for
21
each repair item required by the Authority’s Statement of Work, along with information obtained
from the Authority and observation during inspections of the units. It should be noted that the
Authority and its representatives stated that the units were gutted to the stud walls and
completely rehabbed. Therefore, the cost estimates were developed taking into consideration the
cost of gutting a unit to the stud walls and ceiling joist, hauling debris and installing new
sheetrock, taping, floating and priming.
During our review we served three subpoenas on the Authority’s former executive director for
information commonly provided on similar audits, which the Authority’s outside attorneys
refused to provide. The subpoenas covered the Authority’s tenant files, procurement files, and
the first 5 digits of the Social Security numbers for 28 of the Authority’s employees. The
Authority ultimately complied with the subpoena for the tenant files. However, the remaining
subpoenas served during the audit related to the procurement file and the first five digits of the
employees’ Social Security numbers were not fully complied with. Accordingly, our review was
limited due to the Authority’s noncompliance with two of the three subpoenas served during our
review. A more detailed description of the status of each subpoena is presented on pages 18 and
19 of this report.
We performed our onsite audit work from April through November 2010 at the Authority’s
office located at 712 North 16th Street, Philadelphia, PA. The audit covered the period March
2009 to June 2010 but was expanded when necessary to include other periods.
Except for those instances in which the Authority imposed limitations, we conducted the audit in
accordance with generally accepted government auditing standards. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objective. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objective. The audit included tests of internal controls that we considered necessary under
the circumstances.
22
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:
Program operations – Policies and procedures that management has
implemented to reasonably ensure that a program meets its objectives.
Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
Safeguarding resources – Policies and procedures that management has
implemented to reasonably ensure that resources are safeguarded against
waste, loss, and misuse.
Validity and reliability of data – Policies and procedures that management has
implemented to reasonably ensure that valid and reliable data are obtained,
maintained, and fairly disclosed in reports.
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
23
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 ensure compliance with applicable laws and regulations
concerning record-keeping requirements and documentation to support
payments for scattered-site rehabilitation using Recovery Act funds.
The Authority violated its Moving to Work agreement, its consolidated annual
contributions contracts, and HUD regulations when it denied and obstructed the
HUD OIG auditors’ access to its records and documentation.
The Authority lacked sufficient procedures and controls to ensure that scattered-
site rehabilitation using Recovery Act funds was adequately verified before
payment.
The Authority failed to ensure that its rehabilitation work complied with local
code and other contractual requirements.
24
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation Unsupported 1/
number
1B $957,742
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.
25
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
26
Comment 1
Comment 2
27
OIG Evaluation of Auditee Comments
Comment 1 The Authority does not state what findings it disagrees with here or why it
disagrees, so we cannot address its disagreement here. It should be noted again
however, that the OIG conducted the audit in accordance with generally accepted
government auditing standards, conducted interviews and requested relevant
information and documentation throughout the audit. All analysis supporting the
conclusions in the audit report and all statements in the report attributed to
Authority officials and its outside counsels are properly documented in the audit
work papers.
Comment 2 We disagree with the Authority’s assertion that all Federal dollars have been
accounted for and that it received appropriate value for the rehabilitation work
completed by its contractor. As explained in the audit report and discussed at the
exit conference, the audit evidence showed that the Authority did not provide
required documentation reflecting a breakdown of costs for the principal
categories of work its contractor performed on the scattered-site units. We
thoroughly inspected the audit sample of 10 units, supporting invoices and other
documentation the Authority provided during the audit, and although we have
concerns about the entire $27.4 million the Authority expended we were very
conservative in our estimate and only categorized the $958,000 related to the
sample units we reviewed in detail as unsupported costs in appendix A to this
audit report. Also, our analysis of the Authority’s actual costs versus the
estimated maximum possible costs to rehabilitate 5 of the 10 units showed that the
Authority paid significantly more than the absolute maximum to rehabilitate 3 of
the units. For those 3 units, we estimated that even if the properties had been
gutted and completely rehabilitated, which our appraiser opined did not occur, the
Authority spent up to $20,000 more than it should have needed for each property.
While we do not question whether rehabilitation work was performed, we do
question whether the payments were supported, necessary, and reasonable for
these properties as well as the units we did not inspect. At the audit exit
conference conducted on April 1, 2011, the Authority acknowledged it did not
provide the appropriate documentation required to support the payments for the
scattered-site units to the OIG. Authority officials further stated they would
provide the needed support but as of the date of this audit report they have not
done so.
28
Appendix C
EXAMPLE OF PURCHASE ORDER AND
RELATED INVOICE
29
30
31
9
8
7
6
5
4
3
2
1
10
Audit sample unit #
Class B steel fire door
5
1
1
1
1
1
not installed
Appendix D
Closet doors not
3
6
4
4
17
installed
“no equipment ground.”
Closets not cased out to
2
2
24 inches in depth
24-hour exigent health
2
2
and safety electrical
hazard * (1)
(1) Health- and safety-related violations
Hot water flue not
2
1
1
properly sloped (1)
Separate circuits and
32
5
1
1
1
1
1
breakers GFCI
Open grounds outlets
** Open grounds and hot/neutral reverse are not to code.
4
2
2 ** (1)
Open grounds GFCI
3
1
1
1
*** (1)
Electrical hot/neutral
2
1
1
reverse ** (1)
Smoke detector not
* Meter base cover is missing, permitting exposed contacts in breaker panel box.
1
1
wired properly (1)
Missing carbon
1
1
monoxide detector (1)
CHART OF CODE AND CONTRACTUAL VIOLATIONS
*** Code requires that open grounded ground fault circuit interrupters (GFCI) be labeled as
6
1
3
9
7
3
2
7
6
44
Total
The Philadelphia Housing Authority, Philadelphia, PA, Failed To Support Payments and Improperly Used Funds From the American Recovery and Reinvestment Act of 2009
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-05-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)