oversight

The Allegheny County Housing Authority, Pittsburgh, PA, Did Not Always Procure Goods and Services or Obligate Funds According to Recovery Act and Applicable HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-08-10.

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

                                                                                Issue Date
                                                                                      August 10, 2011
                                                                                Audit Report Number
                                                                                      2011-PH-1014




TO:              Jacqueline A. Molinaro-Thompson, Director, Office of Public Housing,
                   Pittsburgh Field Office, 3EPH
                 //signed//
FROM:            John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
                   3AGA

SUBJECT:         The Allegheny County Housing Authority, Pittsburgh, PA, Did Not Always
                 Procure Goods and Services or Obligate Funds According to Recovery Act and
                 Applicable HUD Requirements


                                             HIGHLIGHTS

    What We Audited and Why

                 We audited the Allegheny County Housing Authority’s administration of its
                 Public Housing Capital Fund grants that it received under the American Recovery
                 and Reinvestment Act of 2009. We selected the Authority for audit because it
                 received a $7.7 million formula grant and three competitive grants totaling $5.8
                 million,1 which was the third largest formula grant and the second largest amount
                 of capital fund competitive grants awarded in Pennsylvania. Our objective was to
                 determine whether the Authority properly procured goods and services and
                 obligated its Recovery Act capital funds according to Recovery Act and
                 applicable U.S. Department of Housing and Urban Development (HUD)
                 requirements.




1
 $5.8 million = a $4.4 million grant under the category of Green Communities, option 2, creation of energy-efficient
and green communities, moderate rehabilitation, and two grants totaling $1.4 million under the category of
improvements addressing the needs of the elderly or persons with disabilities.
What We Found


           The Authority did not always procure goods and services and obligate its
           Recovery Act capital funds properly according to Recovery Act and applicable
           HUD requirements. It did not have a written contract to support $1.3 million that
           it paid to a contractor. It did not always comply with the “buy American”
           requirement of the Recovery Act, improperly obligated grant funds, erroneously
           drew grant funds from HUD, did not amend its procurement policy for
           competitive grants as required, and allowed an apparent conflict of interest to
           occur.

What We Recommend


           We recommend that HUD require the Authority to provide documentation to
           support expenditures totaling $1.8 million identified in this report or reimburse
           HUD from non-Federal funds for any amount that it cannot support. We also
           recommend that HUD require the Authority to (1) reimburse $102,000 from non-
           Federal funds for ineligible expenditures, (2) develop and implement controls to
           demonstrate that funds it obligated for inspection services were related to
           Recovery Act-funded work items, (3) stop erroneously drawing grant funds, and
           (4) ensure that it complies with applicable conflict-of-interest requirements and seek
           exceptions on a case-by-case basis if applicable.

           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 June 23, 2011, and
           discussed it with the Authority at an exit conference on July 6, 2011. Following
           the exit conference, we provided an updated draft report to the Authority on
           July 15, 2011. The Authority provided written comments to the draft audit report
           on July 19, 2011. The Authority disagreed with the conclusions in the report.
           The complete text of the Authority’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                             2
                          TABLE OF CONTENTS

Background and Objective                                                         4

Results of Audit
      Finding: The Authority Did Not Always Procure Goods and Services or        5
      Obligate Funds According to Recovery Act and Applicable HUD Requirements

Scope and Methodology                                                            11

Internal Controls                                                                13

Appendixes
   A. Schedule of Questioned Costs                                               15
   B. Auditee Comments and OIG’s Evaluation                                      16




                                          3
                          BACKGROUND AND OBJECTIVE

The Allegheny County Housing Authority was established in 1938 under the laws of the
Commonwealth of Pennsylvania to effectuate State and national housing laws designed to
alleviate housing conditions in low-income groups. Its purpose is to increase the number of
decent, safe, and sanitary dwellings available to low-income families. The Authority is governed
by a five-member board of commissioners who are appointed for 5-year terms by the county
chief executive with the approval of the County Council of Allegheny County. The Authority’s
operations are subsidized primarily by the Federal Government, and it is not considered a
component unit of the County. The Authority’s executive director is Frank Aggazio. The
Authority’s offices are located at 625 Stanwix Street, Pittsburgh, PA.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
of 2009. 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 requires that $3 billion of these funds be
distributed as formula grants and the remaining $1 billion be distributed through a competitive
grant process. On March 18, 2009, the U.S. Department of Housing and Urban Development
(HUD) awarded the Authority a $7.7 million formula grant. On September 24 and
September 28, 2009, HUD awarded the Authority three competitive grants totaling $5.8 million.

The Recovery Act imposed additional reporting requirements and more stringent obligation and
expenditure requirements on the grant recipients beyond those applicable to the ongoing Public
Housing Capital Fund program grants. For example, the Authority was required to obligate 100
percent of its formula grant funds within 1 year of the effective date of the grant or by March 17,
2010, and its competitive grant funds by September 23 and 27, 2010. If the Authority failed to
comply with the obligation deadline, the Recovery Act required HUD to recapture all remaining
unobligated funds and reallocate them to agencies that complied with those requirements.2 The
Recovery Act also required public housing agencies to expend 60 percent of the grant funds
within 2 years and 100 percent within 3 years of the effective date of the grant. Transparency
and accountability were critical priorities in the funding and implementation of the Recovery
Act.

Our objective was to determine whether the Authority properly procured goods and services and
obligated its Recovery Act capital funds according to Recovery Act and applicable HUD
requirements.




2
  The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) amended the Recovery
Act, requiring recaptured funds to be returned to the U.S. Treasury and dedicated for the sole purpose of deficit
reduction.


                                                        4
                                  RESULTS OF AUDIT

Finding: The Authority Did Not Always Procure Goods and Services or
Obligate Funds According to Recovery Act and Applicable HUD
Requirements
The Authority did not always procure goods and services and obligate its Recovery Act capital
funds properly according to Recovery Act and applicable HUD requirements. It did not have a
written contract to support $1.3 million that it paid to a contractor. It did not always comply with
the “buy American” requirement of the Recovery Act, improperly obligated grant funds,
erroneously drew grant funds from HUD, did not amend its procurement policy for competitive
grants as required, and allowed an apparent conflict of interest to occur. This condition occurred
because of clerical error and a lack of controls to prevent these problems from occurring. As a
result, the Authority could not support expenditures totaling $1.8 million, made ineligible
expenditures of $102,000, and allowed an apparent conflict of interest to exist regarding its
awarding of Recovery Act contracts.



 The Authority Did Not Have a
 Written Contract To Support
 $1.3 Million in Expenditures


               The Authority paid $1.3 million for asbestos abatement and demolition services at a
               mixed-finance development with Recovery Act formula grant funds without having
               a written contract with either the entity it paid or the contractor that did the work.
               The Authority had a mixed-finance agreement from 2008, but it did not pay the
               developer for these services. Instead, the Authority paid a third party, and the third
               party contracted with a fourth party to do the work. The Authority believed its
               procurement responsibility ended when it selected the developer. The mixed-
               finance development regulations at 24 CFR (Code of Federal Regulations) 941.606
               require that proposals include an identification of the participating parties and a
               description of the activities to be undertaken by each of the participating parties and
               the public housing agency and the legal and business relationships between the
               public housing agency and each of the participating parties. The Authority could not
               demonstrate that it had a contractual relationship with the third and fourth parties.
               As a result, the expenditures totaling $1.3 million were unsupported.




                                                   5
The Authority Could Not
Demonstrate That Obligations
for Inspection Services Related
to Recovery Act Work


            The Authority did not have a sufficient process in place to demonstrate that
            $319,001, which it obligated for construction inspection services performed by its
            employees, was related to Recovery Act formula grant-funded work items. The
            Authority’s construction managers completed daily construction reports. They did
            not complete timesheets. The daily construction reports were not sufficient to
            demonstrate that the employees worked on Recovery Act-funded work items.
            Although the daily construction reports included a space for the employees to record
            the number of hours they worked on a project, the employees did not record the
            number of hours on the report. The Authority provided no other documentation to
            show how daily construction reports were related to the amounts it obligated for
            Recovery Act inspections. The Recovery Act required unprecedented levels of
            accountability and transparency in government spending. The Authority needs to
            demonstrate that the $319,001 in funds it obligated for inspection services was
            related to Recovery Act-funded work items.

The Authority Did Not Always
Obligate Funds Properly


            The Authority did not always obligate its Recovery Act formula grant funds
            properly. It reported to HUD that it had obligated all of its formula grant funds by
            the March 17, 2010, deadline; however, it did not properly obligate $295,208 of
            those funds. The following paragraphs provide details.

                   The Authority did not fully execute five purchase orders for $253,208
                   worth of energy-saving appliances before the obligation deadline. The
                   purchase orders did not constitute valid contracts because they were not
                   signed by the contractor to demonstrate acceptance. None of the
                   appliances were delivered before the obligation deadline. HUD Handbook
                   7460.8, REV-2, Procurement Handbook for Public Housing Agencies,
                   states that the issuance of a purchase order by a housing authority and its
                   acceptance by the contractor, either through performance or signature on
                   the purchase order, constitute a contract. We view this matter as a
                   technical deficiency since more than 70 percent of the appliances (based
                   on dollar value) had been delivered as of May 2011. It is clear that the
                   contractor accepted the purchase orders as contracts.

                   The Authority also amended an agreement for architectural and
                   engineering services after the obligation deadline had passed. The
                   Authority amended the agreement and increased the contractor’s fees by


                                             6
                  $42,000 on March 29, 2010. The obligation deadline for formula grant
                  funds was March 17, 2010. We view this matter as a technical deficiency
                  since the Authority provided documentation to show that the amendment
                  to the agreement was in process and approved by its board before the
                  deadline.

The Authority Did Not Always
Comply With the “Buy
American” Requirement

           As explained in the section above, the Authority ordered $253,208 worth of
           energy-saving appliances before the obligation deadline. However, it ordered the
           appliances against a basic ordering agreement that it created with a contractor in
           April 2008. Therefore, the basic ordering agreement did not address the “buy
           American” requirement of the Recovery Act. The purchase orders that the
           Authority used also did not address this requirement. The Authority created the
           five purchase orders and supporting requisitions on the same day. Thus, the five
           orders should be considered as one order because the only difference between the
           purchase orders was the “ship-to” location. We inspected the units that had been
           delivered to the Authority and found that the gas ranges were made in Mexico.
           We contacted the manufacturer and confirmed that the model numbers for the gas
           ranges the Authority received were manufactured in Mexico. The photograph
           below shows the product label on one of the gas ranges.




                                            7
           Section 1605 of the Recovery Act imposes a “buy American” requirement on
           Recovery Act funding. HUD’s Office of Public and Indian Housing (PIH) Notice
           PIH 2009-31 provides guidance for implementing this requirement. The “buy
           American” requirement states that manufactured goods must be manufactured in
           the United States. Therefore, $102,000 in purchases for gas ranges was ineligible
           because the purchases did not comply with this Recovery Act requirement.

The Authority Erroneously
Drew Down Grant Funds

           The Authority erroneously drew down $524,189 in Recovery Act funds. It
           erroneously drew $346,079 from its competitive grant and $178,110 from its
           formula grant. This error occurred because a development planner incorrectly
           coded invoices for payment. The Authority identified and corrected the error in
           the competitive grant and reduced a later draw of grant funds to compensate for
           the funds it had overdrawn. The Authority also identified and corrected the error
           in the formula grant and reduced a later draw of grant funds to compensate for the
           funds it had overdrawn earlier; however, we could not verify that the offset was
           made to legitimate formula grant expenses due to the large number of transactions
           (183), including journal entries, that the Authority processed on the draw. The
           Authority needs to show that it made the $178,110 offset to eligible formula grant


                                            8
                   expenses. The Recovery Act required unprecedented levels of accountability and
                   transparency in government spending. The Authority stated that it had changed
                   its invoice coding procedures. However, it did not provide a copy of the changed
                   procedures.

    The Authority Did Not Amend
    Its Procurement Policy as
    Required for Its Competitive
    Grants


                   Contrary to section VI.B.3.a of the notice of funding availability3 and Notice PIH
                   2010-34, the Authority did not amend its procurement policy to expedite and
                   facilitate the use of competitive grant funds. It amended its procurement policy in
                   November 2009 for its formula grant, and that amendment expired on March 31,
                   2010. The Authority created no other amendments to its procurement policy. As a
                   result, it did not have an amended procurement policy in place for its competitive
                   grants. The Authority was not aware of this problem. It needs to amend its
                   procurement policy when required.


    The Authority Allowed an
    Apparent Conflict of Interest to
    Occur


                   The Authority violated conflict-of-interest rules when it solicited contractors, to
                   which it later provided Recovery Act capital funds, to donate gifts and cosponsor
                   a golf tournament that it sponsored. It provided nearly $2 million in Recovery
                   Act funds to contractors that sponsored or cosponsored the golf tournament or
                   donated gifts and money to the event. The Authority did not believe that a
                   conflict had occurred because neither it nor its employees, officers, or agents
                   received any item of monetary value in connection with the event. The
                   regulations at 24 CFR 85.36(b) state that the grantee’s or subgrantee’s officers,
                   employees, or agents will neither solicit nor accept gratuities, favors, or anything
                   of monetary value from contractors, potential contractors, or parties to
                   subagreements. Accordingly, the Authority should not have solicited and
                   accepted donated gifts and sponsorships from these contractors. Although the
                   regulations allow HUD to make exceptions on a case-by-case basis, the Authority
                   did not seek an exception from HUD.




3
    Notice of Funding Availability, FR-5311-N-02.


                                                     9
Conclusion


             The Authority did not always procure goods and services or obligate funds
             according to Recovery Act and applicable HUD requirements. As a result, it
             could not support its use of $1.8 million in Recovery Act funds, made ineligible
             expenditures of $102,000, and allowed an apparent conflict-of-interest situation to
             exist.

Recommendations



             We recommend that the Director of HUD’s Office of Public Housing, Pittsburgh
             field office, direct the Authority to

             1A.    Provide documentation to support payments totaling $1,274,144 for
                    asbestos abatement and demolition or reimburse HUD from non-Federal
                    funds for any amount that it cannot support.

             1B.    Provide documentation to support that inspection services totaling
                    $319,001 relate to Recovery Act-funded work items or reimburse HUD
                    from non-Federal funds for any amount that it cannot support.

             1C.    Reimburse HUD $102,024 from non-Federal funds for the ineligible
                    expenditures for energy-saving appliances.

             1D.    Provide documentation to demonstrate that it offset $178,110 in funds
                    improperly drawn from its formula grant against eligible formula grant
                    expenses or reimburse HUD from non-Federal funds for any amount that
                    it cannot support.

             1E.    Develop and implement controls to demonstrate that funds it obligated for
                    inspection services were related to Recovery Act-funded work items.

             1F.    Develop and implement controls to prevent it from erroneously drawing
                    grant funds.

             1G.    Amend its procurement policy when required.

             1H.    Develop and implement controls to ensure that it complies with applicable
                    conflict-of-interest requirements and, if applicable, seek exceptions on a
                    case-by-case basis.




                                             10
                         SCOPE AND METHODOLOGY

We conducted the audit from January through May 2011 at the Authority’s office located at 625
Stanwix Street, Pittsburgh, PA, and at our office located in Pittsburgh, PA. The audit covered the
period March 2009 through December 2010 but was expanded when necessary to include other
periods. We relied in part on computer-processed data in the Authority’s computer system.
Although we did not perform a detailed assessment of the reliability of the data, we did perform
a minimal level of testing and found the data to be adequate for our purposes.

To achieve our audit objective, we

       Obtained relevant background information.

       Reviewed the Recovery Act, Office of Management and Budget implementation
       guidance, and applicable HUD regulations and guidance.

       Reviewed the Authority’s fiscal years 2008 and 2009 audited financial statements.

       Reviewed minutes from the meetings of the Authority’s board of commissioners.

       Reviewed the report from HUD’s remote monitoring of the Authority’s Recovery Act
       formula capital fund grant and the Authority’s response.

       Selected and reviewed 3 contracts valued at $1.8 million from the list of 43 contracts
       totaling $13.5 million. One of the contracts was a formula grant contract valued at $1.3
       million, and the other two contracts were competitive grant contracts with a combined
       value of $582,000.

       Reviewed the Authority’s obligations of the $13.5 million in formula and competitive
       grants it received.

       Obtained a legal opinion from the Office of Inspector General’s Office of General
       Counsel regarding an apparent conflict-of-interest situation involving contractors
       donating gifts and cosponsoring a golf tournament sponsored by the Authority and later
       receiving Recovery Act capital funds from the Authority. Counsel opined that a conflict
       of interest existed.

       Interviewed officials from HUD’s Pittsburgh Office of Public Housing and members of
       the Authority’s staff.

       Physically verified that demolition was completed at a mixed-finance location and that
       the Authority received energy-saving appliances.




                                                11
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.




                                                12
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls


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

                  Policies and procedures that management has implemented to reasonably ensure
                  that the Authority complies with obligation and procurement requirements.

                  Policies and procedures that management has implemented to reasonably ensure
                  accountability and transparency for expenditures.

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

               We assessed the relevant controls identified above.

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

 Significant Deficiency


               Based on our review, we believe that the following item is a significant deficiency:


                                                 13
The Authority did not have controls in place to ensure that it: executed all
necessary contracts; always complied with the “buy American” requirement of
the Recovery Act; properly obligated grant funds; did not draw grant funds
erroneously; amended its procurement policy for its competitive grants as
required; and prevented an apparent conflict of interest from occurring.




                            14
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                   Recommendation
                   number                  Ineligible 1/   Unsupported 2/
                   1A                                         $1,274,144
                   1B                                            319,001
                   1C                         $102,024
                   1D                                            178,110
                   Total                      $102,024        $1,771,255


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

2/   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.




                                             15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 2




                         16
Comment 3

Comment 4

Comment 5



Comment 6


Comment 6

Comment 7
Comment 8



Comment 9

Comment 10

Comment 10




             17
Comment 3

Comment 2




            18
19
Comment 11




Comment 3

Comment 12




Comment 4

Comment 13



Comment 4




             20
Comment 13




Comment 5




Comment 5




             21
Comment 6



Comment 7



Comment 6



Comment 7




            22
Comment 8




Comment 9




Comment 10




             23
Comment 10




             24
Comment 10




             25
Comment 3




            26
27
28
29
                                    OIG Evaluation of Auditee Comments

Comment 1           The general statements made by the Authority are addressed below where more
                    specific details are provided. It is important to note again however that we
                    conducted this performance 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. Our objective was to determine whether the
                    Authority properly procured goods and services and obligated its Recovery Act
                    capital funds according to Recovery Act and applicable HUD requirements.

Comment 2           We did not question the Authority’s selection of the developer.

Comment 3           The HUD legal opinion that the Authority has provided did not resolve the
                    specific issues the OIG audit identified or conclude that the Authority provided all
                    necessary contractual support to the OIG. Rather, the opinion stated, the “initial
                    review of the documents is directed towards the threshold issue of whether there
                    is a contractual relationship between the developer and Duquesne4.” The opinion
                    further states that, “neither of the previously mentioned contracts explicitly
                    connect the developer and Duquesne” and “the contracts between the Authority
                    and the developer, and separately between Duquesne Infrastructure and Mistick,
                    do not provide a direct contractual connection between the developer and
                    Duquesne Infrastructure.”

Comment 4           The regulation cited in the audit report applies because the Authority listed the
                    project as a mixed-finance development activity in its 2009 annual plan. The
                    regulations at 24 CFR 941.600 set forth the requirements that must be met by the
                    Authority and its partners before HUD can approve a mixed-finance proposal and
                    continuing requirements. Moreover, 24 CFR 941.602(b) states that in the event of
                    a conflict between the requirements for a mixed-finance project and other public
                    housing development requirements, the mixed-finance requirements shall apply,
                    unless HUD determines otherwise in writing.

Comment 5           As stated in the audit report, the Authority did not have a sufficient process in
                    place to demonstrate that construction inspection services performed by its
                    employees were related to Recovery Act formula grant-funded work items.
                    Although the daily construction reports included a space for the employees to
                    record the number of hours they worked on a project, the employees did not
                    record the number of hours on the report. The Authority provided no other
                    documentation to show how daily construction reports were related to the
                    amounts it obligated for Recovery Act inspections. Moreover, the supplement to
                    HUD Handbook 7475.1 REV., CHG-1, Financial Management Handbook,
                    provides guidance on financial management and reporting for public housing
4
    Duquesne Infrastructure, Inc.


                                                     30
               agencies. The document does not impose new requirements, but rather reflects
               statutory or regulatory requirements or common accounting industry practices.
               Section 5.3 states that construction supervisory and inspection costs incurred
               during construction are considered front-line costs of the project. These expenses
               consist of documented costs incurred during the construction phase of the project.
               For those agencies that use their own personnel to carry out this function, a time
               sheet will be required to substantiate the construction supervisor’s time. The
               Recovery Act required unprecedented levels of accountability and transparency in
               government spending.

Comment 6      As stated in the audit report, the Authority ordered appliances against a basic
               ordering agreement by executing purchase orders. The agreement did not contain
               unit quantities that the Authority was “required” to purchase or a total contract
               dollar amount, or a not-to-exceed amount. HUD Handbook 7460.8, REV-2, states
               that the issuance of a purchase order by a housing authority and its acceptance by
               the contractor constitute a contract, which is what the Authority did. Moreover,
               the Authority made the decision to expend Recovery Act funds for these
               appliances although it could have used these funds for other eligible work items.

Comment 7      As stated in the audit report, the Authority executed five purchase orders for
               appliances. The Authority created the five purchase orders and supporting
               requisitions on the same day. Thus, the five orders should be considered as one
               order because the only difference between the purchase orders was the “ship-to”
               location. These actions could be tantamount to an OIG finding of purchase
               splitting. A split purchase occurs when a purchase from a single vendor is broken
               down into two or more purchases to avoid requirements. Consequently, the
               $253,208 value of the items purchased on the five orders exceeded HUD’s
               $100,000 “buy American” national exception threshold.

Comment 8      The Authority stated in its response that it does not disagree with the finding. As
               stated in the audit report, the Authority erroneously drew down $524,189 in
               Recovery Act funds because a development planner incorrectly coded invoices for
               payment. We could not verify that a $178,110 offset was made to legitimate
               formula grant expenses due to the large number of transactions (183), including
               journal entries, that the Authority processed on the draw, thus we considered that
               amount unsupported.

Comment 9      Contrary to its assertion, the Authority was required by Notice of Funding
               Availability, FR-5311-N-02, to amend its procurement policy for its competitive
               grants as it did in November 2009 for its formula grant. The Authority’s assertion
               that it changed its procurement policy in compliance with Notice PIH 2010-34 is
               inaccurate. Notice PIH 2010-34 was issued on August 10, 2010. The Authority
               admits in its response that it failed to amend its procurement policy.

Comment 10 As stated in the audit report, despite the Authority’s belief that a conflict had not
           occurred, the regulations at 24 CFR 85.36(b) state that the grantee’s or



                                               31
              subgrantee’s officers, employees, or agents will neither solicit nor accept
              gratuities, favors, or anything of monetary value from contractors, potential
              contractors, or parties to subagreements to support even the most beneficial of
              causes (including a public housing youth program). Accordingly, the Authority
              should not have solicited and accepted donated gifts and sponsorships from these
              contractors. To do so created an appearance of impropriety. As stated in the
              report, the Authority provided nearly $2 million in Recovery Act funds to
              contractors that sponsored or cosponsored the golf tournament or donated gifts
              and money to the event. Of that, the Authority made a $1.3 million payment to an
              entity for asbestos abatement and demolition services without having a written
              contract with either the entity or the contractor that did the work. The regulations
              at 24 CFR 85.36(b) state that no employee, officer or agent of the grantee or
              subgrantee shall participate in selection, or in the award or administration of a
              contract supported by Federal funds if a conflict of interest, real or apparent,
              would be involved. The regulations allow HUD to make exceptions on a case-by-
              case basis. To comply with the regulations, the Authority should have attempted
              to obtain an exception or a waiver from HUD. Although the audit showed the
              Authority improperly solicited and accepted donated gifts and sponsorships from
              these contractors, the Authority could provide proof of its claim that its
              employees take a vacation day and pay to participate in this event. Although this
              would not change the fact that it solicited and accepted donated gifts and
              sponsorships from its contractors, it could be relevant to HUD’s decision on
              whether or not it grants a waiver.

Comment 11 The Authority did not have a contract with Duquesne Infrastructure, Inc., the
           entity to whom it paid $1.3 million in Recovery Act funds. The Authority
           provided no documentation that identified the participating parties and a
           description of the activities to be undertaken by each of the participating parties
           and the public housing agency and the legal and business relationships between
           the public housing agency and the participating parties for this project. Section
           6.01(c) of the July 2009 amended and restated development services agreement
           states that the developer shall not enter into any contract, lease, purchase order or
           other arrangement in connection with the project with any party controlling,
           controlled by or under common control with the developer unless the arrangement
           has been approved in writing by the Authority, after full disclosure in writing by
           the developer to the Authority of such affiliation or relationship and all details
           relating to the proposed arrangement. The terms of any such arrangement must
           conform to the requirements of the Authority, HUD, the annual contributions
           contract and the development services agreement. Further, Duquesne
           Infrastructure, Inc., is not an affiliate of the developer. A corporation is a legal
           entity that is created under the laws of a State designed to establish the entity as a
           separate legal entity having its own privileges and liabilities distinct from those of
           its members. An affiliated corporation is a corporation of which another company
           owns a significant percentage, but not a majority, of its shares. This gives the
           company a great deal of influence, but not outright control, of the affiliated
           corporation. In this case, the developer (Pennrose Properties, LLC and Ralph A



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              Falbo, Inc.) does not own a significant percentage of Duquesne Infrastructure,
              Inc.

Comment 12 The licensee agreement permitted the licensee, Duquesne Infrastructure, Inc.,
           access to the project site for the sole purpose of performing environmental testing
           and other pre-construction preparation services as outlined in the developer’s
           agreement. However, neither the licensee agreement nor the developer’s
           agreement included a scope of work addressing asbestos abatement and
           demolition services for an agreed upon amount. Moreover, by resolution #09-05,
           the Authority’s board of directors approved the Authority’s demolition/disposition
           application naming Duquesne Housing Initiative, LLC, as the ownership entity.
           HUD approved the Authority’s application and in its approval letter also
           identified Duquesne Housing Initiative, LLC, as the ownership entity.

Comment 13 HUD has not approved the Authority’s HOPE VI application. We did not rely on
           it in our audit work. As stated in the audit report, the Authority did not have a
           written contract to support payments totaling $1.3 million for asbestos abatement
           and demolition services.

              The July 2009 amended and restated development services agreement states that
              the developer is responsible for undertaking all necessary site preparation,
              environmental studies, and abatement of hazards on the development sites;
              clearing and otherwise preparing the development sites as necessary to perform its
              obligations; and performing all such other site preparation services which are
              necessary in connection with the project; among others. HUD’s Mixed-Finance
              Guidebook states that environmental remediation and demolition activities require
              a long lead-time. Costs for these activities and certain others can be funded prior
              to the construction closing with front-end predevelopment assistance, subject to
              HUD approval of the public housing agency’s request and budget. For mixed-
              finance developments a preliminary mixed-finance proposal must be submitted,
              and if approved, HUD and the public housing agency execute an amendment to its
              annual contributions contract for front end assistance. The guidebook also raises
              the issue of interim development agreements. An interim development agreement
              provides the developer with the confidence to proceed with pre-development
              activities knowing that there is a contractual relationship with the public housing
              agency. Otherwise, there is no legally enforceable contract and therefore no
              funding or enforcement vehicle. HUD must approve both the development
              agreement and/or the interim development agreement prior to the drawdown of
              HUD funds. The Authority provided neither an amendment to its annual
              contributions contract for front end assistance nor an interim development
              agreement.




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