Issue Date
September 28, 2011
Audit Report Number
2011-PH-1016
TO: Donald J. Lavoy, Acting Deputy Assistant Secretary for 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, Did Not Have Conflicts
of Interest Related to Recovery Act Rehabilitation but Failed To Comply With
Financial Disclosure Requirements
HIGHLIGHTS
What We Audited and Why
We audited the Philadelphia Housing Authority’s compliance with the U.S.
Department of Housing and Urban Development’s (HUD) conflict-of-interest and
financial disclosure requirements as a result of the Authority’s initial failure to
comply with an Office of Inspector General (OIG) subpoena during a previous
American Recovery and Reinvestment Act of 2009 audit.1 This audit was needed
to evaluate information we later obtained from the Authority as a result of the
United States District Court’s summary enforcement of the subpoena. The audit
objective addressed in this report was to determine whether there were any
apparent conflicts of interest involving responsible Authority employees and
contractors that performed Recovery Act-funded rehabilitation of the Authority’s
scattered site housing units and whether the Authority complied with mandatory
financial disclosure reporting requirements.
1
HUD OIG audit report number 2011-PH-1010, “The Philadelphia Housing Authority, Philadelphia, PA, Failed To
Support Payments and Improperly Used Funds From the American Recovery and Reinvestment Act of 2009,” dated
May 17, 2011
What We Found
The information we obtained from enforcement of the OIG subpoena did not
indicate the existence of any apparent conflicts of interest involving Authority
employees and the contractor or subcontractors that completed Recovery Act-
funded rehabilitation of the Authority’s scattered site housing units. The audit did
show, however, that the Authority did not comply with provisions in its Moving
to Work Demonstration program agreement with HUD that required it to comply
with State and local laws because it failed to comply with financial disclosure
provisions in the Pennsylvania Public Official and Employee Ethics Act.
The Authority’s new leadership took immediate corrective action during the audit
to develop policies and procedures to address the problems noted. The Authority
provided a copy of its proposed financial disclosure statement policies and
procedures, which its board approved on July 22, 2011.2 The policies and
procedures were comprehensive and if implemented and enforced, should correct
the problem.
What We Recommend
We recommend that HUD require the Authority (1) take immediate action to
ensure that appropriate employees and board members file the required financial
disclosures for calendar year 2010 and for the year following their termination of
service and (2) fully implement and enforce the financial disclosure statement
policies and procedures approved by its board on July 22, 2011.
For each recommendation in the body of the report 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 discussed the audit results with the Authority during the audit. We provided
our draft audit report to the Authority on September 7, 2011, and requested its
response by September 21, 2011. The Authority waived an exit conference and
provided written comments to our draft report on September 21, 2011. It agreed
with the finding in the report and stated that it would implement and enforce
policies and procedures that it developed to address the finding and ensure its
ongoing compliance. The complete text of the Authority’s response can be found
in appendix A of this report.
2
Estelle Richman served as the sole member of the Authority’s board of commissioners.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding: The Authority Did Not Have Conflicts of Interest Related to Recovery 6
Act Rehabilitation but Failed To Comply With Financial Disclosure
Requirements
Scope and Methodology 10
Internal Controls 12
Appendix
A. Auditee Comments 14
3
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 under Pennsylvania laws
to address housing issues affecting low-income persons. The Authority’s executive director at
the beginning of the audit period was Carl R. Greene. The board of commissioners terminated
Mr. Greene’s employment, effective September 23, 2010, and hired Mr. Michael P. Kelly to
serve as interim executive director, effective December 6, 2010. On August 8, 2011, Mr. Kelly
began serving as the Authority’s permanent executive director. Between the termination of Mr.
Greene’s employment 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.
Before March 4, 2011, a five-member board of commissioners governed the Authority. On
March 4, 2011, the Authority’s commissioners 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 and Michael P. Kelly as HUD’s administrative
receiver. 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 the Deputy
Secretary and the mayor of Philadelphia mutually determine that the Authority has built
sufficient capacity to be self-supporting.
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. A small part of the budget ($20 million) is received in
the form of grants, notably the HOPE VI program to replace old developments. The Authority
reports that another $2 million is from interest and other forms of income and that it collects
approximately $13 million in rents.
In 1996, Congress authorized the Moving to Work Demonstration program 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 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.
4
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 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. Overall, the Authority received $126.5 million in
Recovery Act capital funds, which was the largest amount of this funding awarded in HUD’s
Region III.3
HUD’s Office of Public and Indian Housing Notice PIH 2010-34 provided public housing
agencies and HUD field offices with information and procedures for the implementation of
Public Housing Capital Fund Recovery competition grants as authorized by the Recovery Act.
Section VI regarding procurement states that housing authorities shall continue to follow all 24
CFR (Code of Federal Regulations) Part 85 requirements regarding conflicts of interest, contract
cost, and price. The Authority’s Moving to Work agreement also required it to follow 24 CFR
Part 85, which prohibits conflicts of interest. Additionally, the Authority’s consolidated annual
contributions contract with HUD prohibited it from entering into any contract or arrangement in
connection with any project under the contract in which several classes of people had an interest,
direct and indirect, during their tenure or for 1 year thereafter. These classes included any
present or former member or officer of the governing body of the Authority, any Authority
employee who formulated policy or influenced decisions with respect to the project(s), and any
public official who exercised functions or responsibilities with respect to the project(s) or the
Authority.
The audit objective addressed in this report was to determine whether there were any apparent
conflicts of interest involving responsible Authority employees and contractors that performed
Recovery Act-funded rehabilitation of the Authority’s scattered site housing units and whether
the Authority complied with mandatory financial disclosure reporting requirements.
3
Region 3 encompasses Pennsylvania, Virginia, Maryland, West Virginia, Delaware, and the District of Columbia.
5
RESULTS OF AUDIT
Finding: The Authority Did Not Have Conflicts of Interest Related to
Recovery Act Rehabilitation but Failed To Comply With Financial
Disclosure Requirements
We did not identify any evidence of apparent conflicts of interest with 28 Authority employees4
who we determined could influence the awarding and management oversight of the Authority’s
contract and subcontracts for rehabilitation of its scattered site units. The Authority did not
comply, however, with provisions in its Moving to Work agreement with HUD that required it to
comply with State and local laws because it failed to comply with financial disclosure provisions
in the Pennsylvania Public Official and Employee Ethics Act. The Authority’s new leadership
took immediate corrective action during the audit to develop policies and procedures and began
to address the problems noted. The Authority provided us a copy of its proposed financial
disclosure statement policies and procedures, which were approved by its board2 on July 22,
2011. The procedures were comprehensive and if implemented and enforced, should correct the
problem.
Conflicts of Interest Related to
Recovery Act Rehabilitation
Were Not Evident
Transparency and accountability were critical priorities in the funding and
implementation of the Recovery Act. In keeping with these priorities, we asked
the Authority to provide partial Social Security numbers for 28 of its employees
to perform routine audit tests to review for the existence of apparent conflicts of
interest during our recent Recovery Act Capital Fund audit.1 The Authority,
through its outside law firms of Schnader, Harrison, Segal & Lewis, LLP, and
Ballard Spahr Andrews & Ingersoll, LLP, refused to provide the requested partial
Social Security numbers. Therefore, the Office of Inspector General (OIG)
served the former executive director with a subpoena on July 14, 2010, to obtain
the information. The Authority, through its outside counsel, contested the OIG
subpoena in United States District Court. On February 4, 2011, the United States
District Court for the Eastern District of Pennsylvania ordered summary
enforcement of the subpoena on behalf of OIG. The Authority complied with the
court order and provided the requested partial Social Security numbers on
February 14, 2011.
4
This review did not include the Authority’s former board of commissioners.
6
We reviewed information pertaining to the 28 Authority employees4 who we
determined could influence the awarding and management oversight of the
Authority’s contract and subcontracts for rehabilitation of its scattered site units
and found no evidence of apparent conflicts of interest with those employees.
The Authority Did Not Comply
With State Financial Disclosure
Requirements
Section 1.C. of the Authority’s Moving to Work agreement with HUD, as
amended, required the Authority to comply with State and local laws. The
Authority’s employees and its board of commissioners were subject to conflict-of-
interest provisions and financial disclosure reporting under the Ethics Act. The
Act required them to complete and file a statement of financial interests for each
year in which they held the position and for the year following their termination
of that service. The Authority’s records showed that 45 of its employees and 3
members of its board of commissioners filed 109 annual financial disclosures
between 2007 and 2010. However, we identified 27 additional employees, who
were required under the Ethics Act to file disclosures based on their positions,
who did not do so. Additionally, we reviewed the 109 financial disclosures filed
by the 45 Authority employees and 3 members of the board of commissioners for
calendar years 2007, 2008, 2009, and 2010 and found many deficiencies with the
disclosures.5
68 were not filed on time;
61 were incomplete or missing direct or indirect sources of income;
26 were incorrect or missing the year;
19 were inaccurate or missing the governmental entity;
17 were incomplete, inaccurate, or missing the public office;
6 were inaccurate or incomplete;
4 were undated; and
4 were missing the occupation or profession.
The Former Board Did Not
Comply With State Financial
Disclosure Requirements
Former members of the Authority’s board of commissioners did not file financial
disclosure statements as required by the Ethics Act. Authority officials informed
us that in years 2008, 2009, and 2010, they notified the five board members that
they were required to file financial disclosure statements for the prior calendar
year. However, the Authority was unable to provide disclosures filed by two
board members for those years. One of the two board members also served as a
5
Of the 109 financial disclosure forms reviewed, 65 contained multiple deficiencies.
7
member of the Philadelphia City Council during those years.6 The Authority
provided disclosures that were filed with the Authority by three of five board
members, but the disclosures filed by two of the three for each of the 3 years were
dated September 23, 2010, well beyond the filing deadlines.7 The third board
member was the former board chairman. His 2009 disclosure and a disclosure
that did not note the reporting year were also dated September 23, 2010, and his
2007 disclosure was not dated.
The Authority Lacked
Adequate Financial Disclosure
Policies and Procedures
HUD regulations at 24 CFR (Code of Federal Regulations) 85.36(b)(3) require
grantees to maintain a written code of standards of conduct governing the
performance of their employees engaged in the award and administration of
contracts. HUD Handbook 7460.8, REV-2, chapter 4, explains the specific
ethical requirements for a public housing authority’s contracting under HUD
regulations. Additionally, section 1.C. of the Authority’s Moving to Work
agreement with HUD, as amended, required the Authority to comply with State
and local laws. However, the Authority’s policies and procedures were not
adequate to ensure that it complied with HUD regulations and its Moving to Work
agreement related to financial disclosures.
The Authority’s New
Leadership Took Corrective
Action
The Authority’s new leadership took immediate corrective action during the audit
to develop financial disclosure statement policies and procedures. The
Authority’s board2 passed a resolution to approve the procedures on July 22,
2011. We reviewed the policies and procedures and determined that they were
comprehensive and would adequately address the deficiencies noted during the
audit if the Authority implements and enforces them. The Authority also told us
during the audit that it would take immediate action to ensure that appropriate
employees file the required disclosures for calendar year 2010.
6
Local public officials are required to file a disclosure with the governing authority of the respective local political
subdivision. However, when serving in multiple capacities, a copy of the form is required to be filed with each
entity.
7
Disclosures are due no later than May 1 of each year a position is held and of the year after leaving the position.
8
Recommendations
We recommend that the Acting Deputy Assistant Secretary for Public and Indian
Housing, Office of Field Operations, direct the Authority to
1A. Take immediate action to ensure that appropriate employees and board
members file the required financial disclosures for calendar year 2010 and
for the year following their termination of service if applicable.
1B. Fully implement and enforce the financial disclosure statement policies
and procedures approved by its board on July 22, 2011.
9
SCOPE AND METHODOLOGY
We performed our audit work from March through August 2011 at the Authority’s offices
located at 12 South 23rd Street, Philadelphia, PA, and at our office located in Philadelphia, PA.
The audit covered the period April 2008 through February 2011 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 accomplish our objective, we reviewed
Applicable laws, regulations, the Authority’s procurement policy, the Authority’s
Moving to Work agreement and amendments, the Authority’s Human Resources Manual,
employee position descriptions, HUD program requirements at 24 CFR Part 85, HUD
Handbook 7460.8, REV-2, the Pennsylvania Procurement Code, and the Pennsylvania
Public Official and Employee Ethics Act.
The Authority’s employee and contract listings, computerized database information from
public sources including personal and contractor data, organizational chart, board meeting
minutes, policies and procedures, and consolidated annual contributions contract.
We interviewed Authority officials involved with the oversight of employee financial disclosure
statement filings.
We identified 28 Authority personnel of interest based on information that the Authority
provided during our recently completed audit of its use of Recovery Act funds for its public
housing scattered site units.1 We determined that they were in a position to influence the award
of the Authority’s contract for rehabilitation of its scattered site units or the oversight and
management of the contract. We also identified 35 principal employees of the contracting firm
and its subcontractors based on a list provided by the Authority and supplemented by our
research of the firms through Dunn & Bradstreet, Lexis/Nexis, Experian, and the Pennsylvania
registered corporation databases. Using the Lexis/Nexis public records search, we further
identified household members of each Authority and contractor or subcontractor employee in our
selection. We also identified potential relatives, neighbors, and other associates for each of the
individuals in our selection and for each of their household members. We arrived at a database
containing a total of 5,037 individuals. We analyzed the database using computer-aided audit
tools to determine whether there was any commonality between or among the individuals which
would give us reason to believe an apparent conflict of interest existed.
We reviewed all statement of financial interest forms filed by Authority employees and members
of the Authority’s board of commissioners for calendar years 2007, 2008, 2009, and 2010 and all
requests for approval of outside employment forms filed with the Authority by 25 of the 28
employees on our list.
10
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.
11
INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to
Effectiveness and efficiency of operations,
Reliability of financial reporting, and
Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objective:
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.
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:
12
The Authority lacked adequate policies and procedures to ensure its
compliance with provisions in its Moving to Work agreement with HUD
that required it to comply with State and local laws.
13
Appendix A
AUDITEE COMMENTS
14
15
16
The Philadelphia Housing Authority, Philadelphia, PA, Did Not Have Conflicts of Interest Related to Recovery Act Rehabilitation but Failed To Comply With Financial Disclosure Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)