oversight

The Malakoff Housing Authority, Malakoff, TX, Did Not Have Sufficient Controls Over Its Public Housing Programs, Including Its Recovery Act Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-26.

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

                                               U.S. DEPARTMENT OF
                              HOUSING AND URBAN DEVELOPMENT
                                       OFFICE OF INSPECTOR GENERAL




                                                    September 26, 2013
                                                                                            MEMORANDUM NO:
                                                                                                 2013-FW-1805




Memorandum
TO:           Regenia Hawkins
              Director, Public and Indian Housing, 6APH

              //signed//
FROM:         Gerald Kirkland
              Regional Inspector General for Audit, 6AGA

SUBJECT:      The Malakoff Housing Authority, Malakoff, TX, Did Not Have Sufficient
              Controls Over Its Public Housing Programs, Including Its Recovery Act Funds


                                          INTRODUCTION

In accordance with our regional plan to review public housing programs and because of
weaknesses identified by the U.S. Department of Housing and Urban Development’s (HUD)
Office of Public Housing, we reviewed the management and internal controls at the Malakoff
Housing Authority (Authority), Malakoff, TX. Our objective was to determine whether the
Authority’s controls were sufficient to ensure that it administered its HUD public housing
programs in accordance with regulations and guidance. In reviewing its controls, we also
reviewed the operations of the Authority to determine whether it complied with its consolidated
annual contributions contract (ACC) with HUD. We also reviewed the board of commissioners’
meeting minutes and actions taken by the board to determine whether they complied with the
State of Texas’ laws.

HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.




                                               Office of Audit (Region 6)
                                819 Taylor Street, Suite 13A09, Fort Worth, TX 76102
                                     Phone (817) 978-9309, Fax (817) 978-9316
                          Visit the Office of Inspector General Website at www.hudoig.gov
                               METHODOLOGY AND SCOPE

The scope of the review covered the Authority’s financial and procurement controls, board
meetings, and tenant rent collections for the period January 1, 2009, through December 31, 2012.
We expanded the scope as necessary to meet the review objectives. We conducted the review at
the Authority’s administrative offices in Malakoff, TX, and at HUD’s field office and our offices
in Fort Worth, TX, from January through August 2013.

To accomplish our objective, we performed the following:
   • Reviewed relevant laws, regulations, contracts, and other HUD requirements and
       guidance.
   • Reviewed the Authority’s procurement policy.
   • Reviewed the Authority’s board meeting minutes.
   • Reviewed the Authority’s general ledgers, bank statements, invoices, and receipts.
   • Tested, and analyzed data representing transactions in the Authority’s general ledger for
       the audit period.
   • Reviewed tenant records including rent registers, rent receipts, and rent deposits.
   • Interviewed HUD and Authority staff and board members.

                                        BACKGROUND

The Authority was established in 1961 pursuant to the laws of the State of Texas for the purpose of
providing quality, affordable housing to low-income families and individuals. The
policy-making body of the Authority is its board of commissioners and the powers of the
Authority are vested in its commissioners. It selects and employs the executive director, who is
responsible for the efficient day-to-day operations of the Authority. The mayor of Malakoff is
responsible for appointing the Authority’s five-member board of commissioners. At least one of
the commissioners must be a resident who is directly assisted by the Authority. In July 2012, the
employment of the executive director for the majority of our review period was terminated by
the Authority.

The Authority had 46 units of public housing and received HUD capital funds 1 and operating
funds annually. HUD allowed the Authority to use its capital funds for development, financing,
modernization, and management improvements for its public housing units. HUD allowed the
Authority to use operating funds for the operation and management of its public housing
program. In addition, the Authority received an American Recovery and Reinvestment Act grant
in 2009. The Authority received the HUD funding shown in table 1 for fiscal years 2009 through
2012.




1
    Via formula grant



                                                 2
        Table 1: Malakoff Housing Authority’s HUD funding
            Year           Capital          Operating  Recovery Act            Total
            2009            $ 62,914          $184,977      $80,054            $327,945
            2010              62,702           159,862                          222,564
            2011              51,769           163,567                          215,336
            2012              47,921           167,267                          215,188
          Total             $225,306          $675,673      $80,054            $981,033

The Authority was required to administer its public housing program pursuant to its ACC. The
ACC is a contract between HUD and the Authority containing the terms and conditions under
which HUD assisted the Authority in providing decent, safe, and sanitary housing for low-
income families.

During the review period, the Authority’s financial position significantly deteriorated. As shown
in table 2, the Authority’s cash reserves decreased by almost 39 percent.

                 Table 2: Analysis of the Authority’s cash reserves
                          Date                           Balance
                        01/01/2009                            $123,054
                        12/31/2012                               75,374
                     Total decrease                           $(47,680)

                                      RESULTS OF REVIEW

The Authority did not have sufficient controls in place to ensure that it administered its programs
in accordance with Federal regulations, guidance, and State law. Specifically, the executive
director violated the Authority’s ACC by contracting with and hiring family members and
another related party. The Authority also lacked financial and procurement controls to ensure
that it made transactions in compliance with Federal regulations and guidance. Testing found
significant deficiencies in the Authority’s controls over its bank accounts, fixed assets, and staff
compensation. In addition, the Authority failed to adhere to Federal regulations when procuring
goods and services. Further, the board violated State law and its own bylaws. The Authority
also failed to administer its tenant rent properly, accurately, or consistently.

These conditions occurred because the executive director failed to establish the necessary
controls, ignored or failed to follow requirements, and circumvented the board’s oversight.
Additionally, the board failed to properly oversee the executive director and the Authority’s
activities. As a result, the Authority incurred $577,367 in questioned costs. The Authority’s
general ledger also did not accurately reflect all transactions, and its board may have taken
invalid and unsupported actions. Further, the Authority lost revenue; failed to take action on
delinquent tenants; and could not show that it properly charged, collected, or deposited all rents.
These actions also placed undue strain on the Authority’s budget and depleted its cash reserves.
Due to these significant inadequacies, the Authority could not support that it properly expended
or managed the $981,033 in HUD funding provided.




                                                    3
The Authority’s Executive Director Violated Its ACC

The Authority’s executive director violated the Authority’s ACC. 2 Contrary to requirements, the
executive director contracted with or employed various family members and related parties. The
executive director improperly hired two members of her family as Authority employees and paid
them a total of $189,758 for 2009 through 2012 as shown in table 3.

        Table 3: Summary of payroll payments to the executive director’s family members
         Relationship               2009            2010           2011            2012            Total
         Daughter #1                $23,468         $23,980        $26,146         $16,581        $ 90,175
         Brother                     24,382          28,318         30,023          16,860          99,583
         Totals                     $47,850         $52,298        $56,169         $33,441        $189,758

As shown in table 4, the executive director also improperly contracted with other related parties. 3

    Table 4: Summary of the Authority’s contract payments to the executive director’s family members and
    another related party
     Relationship                   2008 4         2009           2010          2011          2012          Total
     Authority
     employee’s relative            $16,845       $69,235         $    0       $     0       $31,370      $117,450
     Daughter #2                         n/a        5,550          6,643         5,400         2,750        20,343
     Husband                             n/a        4,925          1,200           650             0         6,775
     Son-in-law #1                       n/a        2,250         10,219         1,570             0        14,039
     Son-in-law #2                       n/a            0              0         4,225           425         4,650
     Totals                         $16,845       $81,960        $18,062       $11,845       $34,545      $163,257

The improper payments occurred because the executive director failed to follow the requirements
and the board failed to oversee her actions. The executive director’s payments to her family and
other related parties placed undue strain on the Authority’s finances. For the 4 years reviewed,
the Authority received HUD funds totaling $981,033. It paid related parties a total of $353,015,
or 36 percent, of the total funds it received. Also, the executive director’s actions depleted the
Authority’s reserves by 39 percent. 5 HUD should require the Authority to repay the $353,015
improperly paid to family members and related parties. In addition, HUD should ensure that the
Authority receives training or technical assistance on the ACC and Federal regulations.




2
    Section 19 (A)(1) and Section 19 (B)(1) of the ACC, see appendix C
3
    For information on the Authority’s inability to support its procurements of related party contracts and contract
    payments, see the section “The Authority’s Executive Director Failed to Adhere to Procurement Regulations
    and Guidance.”
4
    We expanded the scope of our review for this individual to 2008, which was when the Authority began paying
    this individual for window replacements at its properties.
5
    See table 2.




                                                          4
The Authority’s Executive Director Failed To Implement Financial Controls

The Authority’s executive director failed to implement financial policies or procedures. Testing
found significant deficiencies in the Authority’s controls over its bank accounts, fixed assets, and
payroll, which opened the Authority’s assets to misappropriation, waste, and abuse. This
occurred because the executive director ignored Federal regulations and guidance. Due to the
egregiousness of these issues, the Authority could not show that it spent its funds on only
eligible, supported, and necessary items or that the funds it expended furthered its mission.
Instead, the Authority spent $76,357 on unsupported costs.

The Authority Did Not Effectively Manage Its Bank Accounts

The Authority ineffectively managed its bank accounts. During the review period, the Authority
had a general fund checking account, a money market account, and multiple certificates of
deposit. However, its executive director did not establish effective controls over them. As a
result, the executive director made unsupervised and questionable transactions, including one
totaling $1,739, through the Authority bank account, and failed to provide bank account
transactions to the fee accountant for recording in the Authority’s general ledger.

   The Executive Director Endorsed Unnumbered Checks
   The Authority did not use preprinted or prenumbered checks for expenditures paid out of its
   money market account. Analysis of the money market account revealed numerous
   unnumbered checks written for Authority expenditures. In most instances, the checks
   reflected a hand-written number. The Authority did not provide these checks to the fee
   accountant so that they could be properly recorded in the Authority’s general ledger. As a
   result, the Authority’s general ledger was inaccurate and misleading.

   The Executive Director Wrote a $4,200 Check to Cash
   The executive director wrote a $4,200 check on the Authority’s general fund account and
   deposited it into its money market account. The same day, she wrote an unnumbered check
   for $4,200 to cash on the money market account. The Authority had documentation from a
   home improvement store reflecting purchases totaling $4,491, of which $4,200 was paid with
   cash. The remainder was charged to the Authority’s credit card. However, it was unclear
   why the executive director would write multiple checks and obtain cash, as opposed to
   writing a check to the store, or charging the full amount to the Authority’s credit card.
   Further, the fee accountant did not have this documentation to record the purchase accurately
   in the general ledger, and the Authority’s files lacked a receipt for $1,739 of the purchases.
   Consequently, the Authority lacked proof that it received all goods purchased, and the
   executive director failed to ensure that the Authority’s general ledger accurately and
   completely reflected the purchase.




                                                 5
     The Executive Director Did Not Obtain the Required Signatures on Checks
     Contrary to the Authority’s procurement policy requirements, the executive director issued
     numerous checks with only one signature. 6 The executive director tendered checks with only
     her endorsement, which provided her with total discretion over the Authority’s funds.
     Therefore, she failed to adhere to any safeguards put in place to ensure that the Authority
     expended HUD funds on only reasonable, necessary, or supported items. Since the board did
     not review these checks, it lacked knowledge of the executive director’s activities, which
     allowed the executive director to pay for improper and ineligible costs.

     The Authority’s Bank Statements Reflected a Significant Number of Missing Checks
     The Authority did not maintain control of its checks as required. 7 Analysis of the
     Authority’s general fund checking account reflected thousands of unaccounted for checks.
     According to the fee accountant, the checks did not clear the bank account; however, due to
     the state of the records, testing could not be performed to confirm that all of the checks did
     not clear the bank. The Authority’s lack of controls over its unused checks substantially
     increased the risk that its funds could be misappropriated or diverted.

The Authority Lacked Controls Over Its Fixed Assets

The Authority lacked controls over its fixed assets. 8 This occurred because the executive
director failed to follow requirements. 9 The Authority’s executive director made several
questionable fixed asset purchases totaling at least $21,385. In addition, she purchased items
totaling $8,389 that could not be located on Authority property. Further, she improperly
exchanged equipment with a related party without documentation supporting the business
purpose of the equipment or the exchange.

     The Authority Improperly Purchased Equipment
     The Authority purchased a golf cart and a tractor that it did not need, as well as a metal
     building, a computer, and security lighting that it could not locate. All of these transactions
     lacked proper board approval and documentation supporting the business purpose or need for
     the equipment as required. 10 As a result, the Authority could not support these purchases
     totaling $21,385.

     In July 2010, the Authority purchased a golf cart for $4,485. According to the invoice, the
     executive director’s brother made the purchase with an Authority check. The Authority’s
     files contained no indication that the executive director discussed or received board approval
     for this purchase. Further, the Authority lacked documentation showing the need for a golf
     cart. Since the Authority had only 46 units, which were located at two sites, the size and
     location of its properties did not support the need for a golf cart. Since the Authority lacked


6
     The Authority’s policy specified that checks required two signatures. The following positions had the authority
     to sign checks: the executive director, chairman, vice chairman, and accountant. The Authority did not have an
     accountant.
7
     24 CFR (Code of Federal Regulations 85.20(b) (see appendix C)
8
     Fixed assets are those such as land, machines, office equipment, buildings, etc. See also footnote 7.
9
     24 CFR 85.20(b)
10
     2 CFR 225, appendix A, C.1 and C.2 (see appendix C)



                                                         6
     a canceled check for this transaction, testing could not determine whether the executive
     director obtained the required signatures for this purchase.

     Also, in July 2010 the executive director purchased a large farm tractor with numerous
     attachments and paid the amounts shown in table 5.
                          Table 5: Amounts the Authority paid for a tractor
                                      Item                         Price
                                Tractor                              $10,480
                                Front loader                           3,400
                                Box blade                                495
                                Rotary tiller                          1,450
                                Rotary cutter                          1,075
                                Total                                $16,900

     The Authority already had two riding lawn mowers in its inventory; therefore, this purchase
     appeared unwarranted. Authority staff indicated that the tractor was used on the Authority’s
     properties only a couple of times. In addition, the executive director did not discuss the
     purchase of the tractor with or obtain approval from the board in a timely manner. She
     presented the purchase to the board for approval in August 2011, over a year after she made
     the purchase. Further, Authority staff indicated that the Authority did not normally store the
     tractor at its properties.

     The Authority Could Not Locate Some Purchases
     The Authority made $8,389 in purchases that could not be located at the Authority’s
     properties. In February 2012, the Authority made a $5,974 purchase from a metal building
     supply company, but it lacked documentation showing what the purchase was and why it was
     needed. The Authority also purchased a computer in June 2009 for $1,078 and security
     lighting in April 2010 for $1,337. However, the Authority could not locate these items. The
     Authority had no documentation indicating that the executive director discussed these
     purchases with or had them approved by the board.

     The Executive Director Improperly Exchanged Equipment With a Family Member
     The executive director exchanged the golf cart previously discussed for a four-wheeler
     owned by her brother. 11 The Authority had no documentation verifying the value of the four-
     wheeler or why the Authority needed this type of equipment. Again, the executive director
     did not discuss this transaction with the board or obtain its approval.

The Authority’s General Ledger Reflected Unapproved and Irregular Payments to Staff

The Authority did not maintain documentation to show the board approved salaries for the
executive director or other staff. In addition, the executive director did not ensure that payments
occurred on a regular schedule. Therefore, testing could not determine whether the Authority
paid its staff the correct amounts. The executive director also received unexplained payments in
addition to her recurring salary payments. Further, she gave herself and other staff unapproved
11
     The general ledger reflected that it was an equal exchange and no money was included.



                                                        7
annual raises and bonuses. This occurred because the executive director ignored Federal
regulations and circumvented the board by unilaterally authorizing payments. These
unsupported payments totaling $44,844, further eroded the Authority’s financial position.

   The Authority Failed To Properly Document and Oversee Its Payroll
   The Authority lacked documentation showing the annual or hourly salaries of its executive
   director and other staff. Further, it lacked documentation that the board knew or approved
   the wage amounts. Compounding the issue, the executive director did not prepare payroll on
   a regular schedule. Generally, the executive director issued payroll checks biweekly. In
   some instances, though, the Authority’s records showed that she issued payroll checks as
   often as weekly or as infrequently as monthly. As a result, testing could not determine
   whether the Authority properly paid its staff.

   The Executive Director Paid Herself Additional Payments
   The executive director paid herself additional amounts, in excess of her usual salary. During
   the review period, the executive director paid herself a total of $13,991 for both
   “nontechnical salaries” and “inspection costs,” as shown in table 6.
                         Table 6: Additional amounts paid to the executive director
                                          Nontechnical        Inspection
                             Date           salaries             costs
                            01/14/09                               $ 452
                            03/30/09                                1,379
                            04/29/09             $ 1,796
                            07/01/09               2,338
                            10/08/09                                   356
                            11/24/09                    825
                            09/02/10                  1,947
                            01/11/10                                 1,350
                            11/22/10               1,275
                            12/10/10                 911
                            03/23/11                 793
                            03/12/12                 569
                             Total               $10,454            $3,537

   The Authority lacked documentation justifying these payments in excess of the salary paid to
   her to supervise and manage the Authority and its projects. Further, the board was not aware
   of these payments.

   The Executive Director and Staff Received Unapproved Raises and Bonuses
   The executive director paid herself and Authority staff yearly raises and bonuses that the
   board did not approve. In fact, the board meeting minutes did not reflect any discussion of
   the amounts. Thus, these payments occurred because the executive director circumvented the




                                                  8
     board. For the review period, the Authority paid unsupported bonuses totaling $6,500 12and
     raises in excess of $50,000. 13

HUD should require the Authority to implement financial policies and procedures covering, at a
minimum, bank account management, fixed asset controls, and staff compensation. HUD should
also require the Authority to obtain training or technical assistance on financial and internal
control procedures. In addition, HUD should require the Authority to repay $31,513 paid by the
Authority for the unsupported and unnecessary purchases and $44,844 in unsupported additional
compensation.

The Authority Failed to Adhere to Procurement Regulations and Guidance

The Authority failed to adhere to Federal regulations in its procurement of goods and services. 14
This occurred because the executive director ignored the regulations and circumvented the board
when making procurements. Because the executive director did not use sound management
practices, the Authority used its HUD funds ineffectively and inefficiently, incurred additional
questionable costs totaling $147,995, and did not maintain records documenting its
procurements.

     The Executive Director Did Not Maintain Procurement or Contract Documentation
     Contrary to requirements, 15 the Authority failed to maintain procurement or contract
     documentation. In fact, the Authority did not have any organized method of monitoring its
     procurements or purchases. The Authority lacked a contract register, contract files, contracts,
     or any documentation reflecting the significant history of its procurements. Further, it did
     not maintain invoices to support its purchases or payments.

     The Authority Lacked Independent Cost Estimates
     The Authority did not obtain cost estimates or perform any type of cost analysis for its
     procurements. While the majority of the Authority’s procurements fell under the small
     purchase threshold, 16 HUD still required the Authority to obtain price or rate quotations from
     an adequate number of sources to ensure that it paid reasonable amounts. 17 However, the
     Authority lacked any documentation showing it performed any cost or price analysis for the
     10 procurements reviewed.

     The Authority Lacked Evidence of Competition
     Testing of 10 purchases totaling $311,138 showed that the Authority lacked evidence to
     support that it competitively procured them in order to obtain the best price, as required. 18
     Nine of the purchases totaling $193,688 qualified as small purchases or micro purchases;

12
     The Authority paid out a total of $6,500 in unapproved bonuses. However, $3,900 was questioned earlier in
     this memorandum.
13
     The Authority paid out in excess of $50,000, but $21,981 was questioned earlier in this memorandum.
14
     2 CFR 225, appendix A, A.2.a.(1). 24 CFR 85.36 (see appendix C)
15
     24 CFR 85.36(b)(9)
16
     The Authority’s procurement policy stated that the small purchase threshold was $50,000 and that obtaining
     three quotes was preferable.
17
     24 CFR 85.36(d)(1)
18
     24 CFR 85.36 (c), 85.36(d), and 85.36(f)(1)



                                                         9
     however, the Authority improperly awarded $14,039 of that amount to related parties. It
     should have obtained quotes to ensure adequate competition.

     The executive director also did not ensure competition for the one procurement that exceeded
     the Authority’s small purchase threshold. For this procurement, the executive director paid
     $117,450 19 to a related party to replace all of the windows on the Authority’s properties.
     However, the Authority lacked any documentation that the executive director performed any
     cost or price analysis, solicited bids, or took any steps to determine whether the amount paid
     was reasonable or comparable to what it would have paid an unrelated vendor. 20 It also
     lacked a signed contract. In addition, the Authority lacked invoices for the windows.
     Current Authority staff stated they could not determine where the contractor purchased the
     windows or whether any type of warranty existed. The current executive director stated that
     the Authority had problems with the windows, but without invoices, it could not take any
     action. Due to the significance of the deficiencies noted with this purchase, the Authority
     could not show that the $117,450 paid to this contractor was a reasonable or efficient use of
     funds.

     The Authority Contracted With an Unlicensed Electrical Contractor
     In addition to violating Federal procurement regulations, the executive director violated State
     of Texas regulations, 21 by hiring and paying $18,660 to an unlicensed individual to install
     security lighting at the Authority’s properties. Since the Authority did not properly procure a
     licensed electrician to install the lights, it could not show that it handled the installation in
     accordance with requirements or that this expenditure was an efficient use of Federal funds.

HUD should require the Authority to support or repay $147,995 22 in unsupported procurements,
implement procurement policies and procedures, and require the Authority to obtain training or
technical assistance in procurement.

The Authority’s Executive Director and Board Violated State Law and Its Own Bylaws

The Authority’s meeting minutes showed the executive director and its board violated numerous
State regulations and its own bylaws. 23 Further, the board meeting minutes contained
inconsistent information and numerous inaccuracies. As the powers of an authority are vested in
the commissioners, it was crucial that the board adhere to regulations and maintain an accurate
record of its actions. This occurred because the executive director and the board ignored State
regulations and their own bylaws. As a result, the Authority may have taken invalid and
unsupported actions. Due to the significant inadequacies of the board and its minutes, the
Authority could not support that it expended or managed its $981,033 in HUD funding in
accordance with its ACC, Federal regulations, or other guidance.



19
     The Authority paid $100,605 during the audit period and an additional $16,845 in 2008.
20
     24 CFR 85.36(d) and 85.36(f)(1) (see appendix C)
21
     Texas Electrical Safety and Licensing Act, Title 8, Chapter 1305, Occupations Code, section 1305.151
22
     The total amount unsupported equaled $300,538; however, the memorandum questioned $152,543 earlier.
23
     State of Texas Housing Authority Law, Texas Local Government Code, title 12, subtitle C, chapter 392 (see
     appendix C)



                                                       10
     The Authority Did Not Properly Execute Certificates of Appointment for Commissioners
     Numerous individuals appeared in the Authority's board meeting minutes with no certificate
     or any other indication of how they came to be on the board. Each new commissioner must
     have a certificate of appointment filed with the clerk of the municipality, as conclusive
     evidence of his or her proper appointment. 24 During the period reviewed, the Authority’s
     board minutes identified 13 new members. However, the Authority only located three
     certificates for new commissioners. As the governing board of the Authority, it is imperative
     that each of the commissioners be properly appointed and that that appointment is properly
     documented. If the board took actions based upon votes by improperly appointed
     commissioners, those actions were invalid and unsupportable.

     The Commissioners Varied From Meeting to Meeting
     Contrary to Texas State law, 25 the board meeting minutes reflected that the board consisted
     of anywhere from three to six commissioners. In accordance with State law, the initial board
     appointed by the mayor in 1961 was comprised of five commissioners. State law also
     required 2-year appointments for commissioners. However, the Authority’s board meeting
     minutes reflected that individuals showed up or disappeared from meetings with no
     explanation or documentation. The minutes reflected instances where an individual
     identified as a commissioner would only be present for one meeting with no explanation of
     how they became a commissioner or why they did not attend subsequent meetings. For
     example, two commissioners reflected in the October 2009 minutes did not appear as
     commissioners in November 2009, but one of the two reappeared in March of 2010 with no
     explanation. If the board took actions based upon votes by improperly appointed
     commissioners, those actions were invalid and unsupportable.

     The Authority Allowed Related Parties on Its Board
     In violation of conflict-of-interest provisions in the Authority’s ACC and State law, 26 the
     executive director’s mother-in-law was appointed to the board and elected vice chairman in
     August 2011. She was subsequently elected chairman in November 2011. This action
     represented a significant breach of public trust and exacerbated the lack of controls and lax
     practices already in place at the Authority. Since the responsibility to sign and authorize
     Authority expenditures rested with the executive director and the chairman or vice chairman,
     this action increased the risk that HUD funds would be misappropriated, wasted, or misused
     as the individual responsible for reviewing and approving checks issued by the Authority had
     a conflict of interest.

     The Board Minutes Did Not Always Reflect a Quorum
     In violation of State law, 27 the board voted on and passed resolutions at two meetings when
     only two of the five board members attended according to the minutes. Further, the February
     9, 2010, meeting minutes did not contain a roll call or any other way to determine who
     attended the meeting. Therefore, it was unclear whether a quorum existed. Since the
     Authority was established with a five-member board, a quorum did not exist in these

24
     State of Texas Housing Authority Law, section 392.031(c) (see appendix C)
25
     State of Texas Housing Authority Law, section 392.031(a) (see appendix C)
26
     See footnotes 2 and State of Texas Local Government Code, title 5, subtitle C, chapter 171
27
     State of Texas Housing Authority Law, section 392.036 (see appendix C)



                                                         11
   instances. According to State law, the authority vested in a governmental body may be
   exercised only at a meeting of a quorum of its members. Thus, the board’s actions taken
   when a quorum was not present were not valid or binding.

   The Executive Director Did Not Maintain Consistent or Accurate Board Meeting Minutes
   As secretary for the board, the executive director prepared board meeting minutes that
   contained numerous inconsistencies and inaccuracies. Multiple board meeting minutes
   reflected voting by commissioners not listed in the roll call. In addition, the minutes
   reflected that an absent member declared motions carried and resolutions adopted even
   though she was not reflected on the roll call nor was her name reflected in any of the votes.
   The minutes also contained inconsistent information from page to page. For example, the
   board meeting minutes for June 6, 2011, listed tenant write offs in the amounts of $428 and
   $235 on the first page of the minutes; however, later in the minutes, the amounts changed to
   $376 and $323.

HUD should require the Authority to review past board meeting minutes and reapprove actions
adopted when a quorum was not present or where voting reflected in the minutes was inaccurate.
HUD should also require the Authority to obtain technical assistance on the responsibilities of its
board of commissioners. This technical assistance or training should include the responsibilities
of the chairman, vice chairman, and secretary.

The Authority’s Executive Director Did Not Properly Administer Tenant Rents

The Authority’s executive director did not accurately or consistently calculate, document or
collect tenant rents. Review of a sample of six tenants in the Authority’s rent records reflected
numerous irregularities, inaccuracies, and miscalculations. Additional testing showed the rent
registers and receipts contained similar issues. The Authority’s rent documentation reflected
inconsistent application of late fees, incorrect rent due balances carried forward, incomplete and
inaccurate receipts, and large tenant account write-offs. This occurred because the executive
director failed to properly perform rent collection activities. As a result, the Authority lost
revenue, failed to take action on delinquent tenants, and could not show that it properly charged,
collected, or deposited all rent due

   The Authority Did Not Consistently Charge or Apply Late Fees
   The Authority’s tenant records reflected inconsistent application of late fees. According to
   the Authority’s leases, it charged tenants a $35 late fee if they failed to pay their rent by the
   10th of the month. For the six tenants sampled, the Authority did not correctly charge a late
   fee 97 percent of the time. Of the 30 late payments identified in the review, the Authority
   correctly charged the late fee in only 1 instance. As a result, the Authority failed to collect
   $1,015 in late fees for 6 of its 46 units for 1-year. The Authority’s failure to charge late fees
   resulted in lost revenue and failed to discourage its tenants from making late payments and
   maintaining large outstanding rent balances.

   The Authority Did Not Maintain Accurate Rent Registers
   The Authority did not maintain accurate rent registers reflecting amounts owed by its tenants.
   For example, it did not always carry a tenant’s balance forward correctly. Table 7 lists for



                                                12
     one tenant reviewed, the rent charged, our corrected balance, the balances the Authority
     carried forward, and the difference between our amounts and the Authority’s.

          Table 7: Example of a tenant’s improperly calculated rent balance
                          Rent                      OIG calculated        Rent register
          Month           due           Paid          balance 28           balance 29          Difference
          Apr-11           $450           $450                 ($2)                ($2)                   $0
          May-11            485            550                 (67)                 (2)                 (65)
          Jun-11            329              0                  262                292                  (30)
          Jul-11            329              0                  591                621                  (30)
          Aug-11            294            300                  585                615                  (30)
          Sep-11            267            150                  702                697                     5
          Oct-11            267              0                  969                929                    40
          Nov-11            267            232               1,004                 929                    75
          Dec-11            267            432                  839                729                  110
          Jan-12            232            432                  639                529                  110
          Feb-12            232            432                  439                329                  110
          Mar-12            267            200                  506                361                  145

     Although this tenant’s account represented the worst case in our sample, testing disclosed
     balance issues with five of the six of the tenants reviewed. In addition, a review of the rental
     registers showed hand written adjustments to various tenants in the monthly rental registers.
     Therefore, the Authority’s executive director and staff made it difficult if not impossible to
     determine whether they properly charged, collected, or deposited all rent due.

     The Authority Wrote Off Large Tenant Balances
     The Authority’s rent records reflected large writeoff amounts for tenants. 30 In one instance,
     the Authority wrote off in excess of $3,000 for one tenant. Since the Authority did not
     correctly calculate tenant balances, it was unclear whether this amount was accurate.
     Further, testing found different amounts shown as written off for the tenant in the Authority’s
     rent register, receipts, general ledger, and board meeting minutes. As a result, the
     Authority’s rent records and its general ledger contained inaccurate amounts. Additionally,
     the Authority’s writeoff of this and another tenant may have been unwarranted as these
     tenants continued to live at the Authority, which made the Authority’s uncollectible
     determination questionable.

     The Authority Failed To Accurately Complete and Maintain Receipts
     The Authority used hand-numbered, duplicate, and altered receipts to record rent amounts
     received from tenants. It had preprinted and prenumbered receipts for its tenant rents, so its
     regular use of hand-numbered receipts was unwarranted. In addition, testing showed that the

28
     The Office of Inspector General (OIG)-calculated balance included late fees when applicable
29
     The tenant had a beginning balance of ($2).
30
     Write-offs normally reflect rent balances left unpaid by tenants and eventually written off the Authority’s books
     once it is determined that the rents are uncollectible.



                                                         13
   Authority did not record some prenumbered receipts in the rent registers, which raised
   questions as to whether it had issued a receipt and not recorded the rent in the register. The
   Authority also did not maintain all of its recorded receipts. For three of the six tenants
   reviewed, the Authority could not provide eight receipts, which raised questions about
   whether the amounts the Authority recorded in the register matched the receipts. Further, in
   one instance, the Authority issued two different tenants the same receipt number. However,
   it recorded only one of the receipts in its rental register. Thus, it could not account for the
   second $213 rent payment. Additionally, the Authority occasionally used correction fluid on
   receipts, thereby making it impossible to trace the transactions or determine what transpired
   at the time the Authority prepared the receipt or whether it made changes after giving the
   receipt to the tenant. Finally, the Authority failed to completely fill out the receipts, which
   impacted our ability to determine rent balances. Due to these irregularities, serious concerns
   exist as to whether the Authority properly collected, recorded, and deposited tenant rent.

   The Authority Staff Accepted Cash in Violation of Policy
   In volition of the Authority’s policy, its staff accepted and deposited cash. Cash is the asset
   most susceptible to improper diversion and use. By accepting cash, the staff increased the
   risk that funds could be diverted or improperly handled.

HUD should require the Authority to adopt and follow a clear rent policy to prevent irregularities
from continuing.

                                    RECOMMENDATIONS

We recommend that the Director, Office of Public Housing, Fort Worth, TX require the Authority
to

   1A.     Repay $287,655 paid to the executive director’s and another Authority employee’s
           family members to its public housing program. However, if the Authority made any of
           the expenditures from its 2008 capital fund grant, or if the Authority is unable to
           determine the source of funds used to pay expenditures, the Authority should repay
           HUD. Any repayments must be from non-Federal funds.

   1B      Repay $65,360 paid from Recovery Act funds to the executive director’s and another
           Authority employee’s family members to HUD for its transmission to the U.S. Treasury.
           Repayment must be from non-Federal funds.

   1C.     Support or repay $31,513 in unsupported equipment and supplies costs. The funds
           should be repaid to the Authority’s public housing program. However, if the Authority
           made any of the expenditures from its 2008 capital fund grant, or if the Authority is
           unable to determine the source of funds used to pay expenditures, the Authority should
           repay HUD. Any repayments must be from non-Federal funds.

   1D.     Support or repay $42,150 in unsupported additional compensation paid to Authority
           staff. The funds should be repaid to the Authority’s public housing program. However,
           if the Authority made any of the expenditures from its 2008 capital fund grant, or if the



                                                14
      Authority is unable to determine the source of funds used to pay expenditures, the
      Authority should repay HUD. Any repayments must be from non-Federal funds.

1E.   Support or repay HUD for its transmission to the U.S. Treasury $2,694 paid from
      Recovery Act funds for unsupported additional compensation paid to Authority staff.
      Repayment must be from non-Federal funds.

1F.   Implement financial policies and procedures, including, at a minimum, bank account
      management, fixed asset controls and compensation management.

1G.   Support or repay $135,995 for unsupported procurement expenditures. The funds
      should be repaid to the Authority’s public housing program. However, if the Authority
      made any of the expenditures from its 2008 capital fund grant, or if the Authority is
      unable to determine the source of funds used to pay expenditures, the Authority should
      repay HUD. Any repayments must be from non-Federal funds.

1H.   Support or repay HUD for its transmission to the U.S. Treasury $12,000 paid from
      Recovery Act funds for unsupported procurement expenditures.

1I.   Adopt and follow procurement policies and procedures.

1J.   Obtain and maintain certificates of appointment for all current and future board
      members.

1K.   Review past board meeting minutes and reapprove actions adopted when a quorum
      was not present or where voting reflected in the minutes was inaccurate.

1L.   Adopt and follow a clear rent policy to prevent irregularities from continuing.

1M.   Obtain training or technical assistance concerning its ACC, Federal regulations,
      financial management and internal controls, procurement, roles and responsibilities of
      the executive director and the board, and tenant rent collections and documentation.

1N.   Direct the Mayor of Malakoff to evaluate the board of commissioners and its
      effectiveness and remove and replace commissioners as appropriate.




                                           15
                                       APPENDIXES

Appendix A

                    SCHEDULE OF QUESTIONED COSTS

           Recommendation             Ineligible 1/                       Unsupported 2/
                  number
                1A               $287,655
                1B                  65,360
                1C                                             $ 31,513
                1D                                               42,150
                1E                                                2,694
                1G                                              135,995
                1H                                               12,000
       _________________________________________________________________
       TOTALS                     $353,015                     $224,352

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.




                                                 16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                                   Auditee Comments


                                                     Malakoff Housing Authority
                                                         347 Martin Plaza
                                                        Malakoff, TX 75148
                                                           Phone#: 903-489-1517
                                                             Fax#: 903-489-1731
                                           Email Inquirries: malakoffhousing2@embarqmail.com

              Mr. Gerald R. Kirkland
              Regional Inspector General for Audit
              Office of Audit (Region 6)
              819 Taylor Street, Suite 13A09
              Fort Worth, TX 76102

              SUBJECT:      The Malakoff Housing Authority, Malakoff, TX, Did Not Have Sufficient Controls Over
                            Its Public Housing Program

              Dear Mr. Kirkland: Please find our response to the aforementioned memorandum of the OIG Audit below:
                                                        Introduction
              The Malakoff Housing Authority (“MHA” or “Housing Authority”) in no way seeks to defend
Comment 1     any inappropriate actions of the former Executive Director and her office administration. Rather, the Housing
              Authority seeks to highlight the many positive reforms that have been made by the current
              administration that will prevent any similar problems in the future. These include: adoption of a
              significant number of policies that address each of the highlighted issues in the audit; dramatically
              reducing MHA’s administrative budget as well as employing a whole new office staff; and an
              implementation of an overall system of checks and balances that ensure proper Board oversight as well
              as public transparency.

              Although the audit recommends that, in addition to policy implementation, certain reimbursements to
Comment 2     accounts should be made, it would be detrimental to MHA’s recovery for HUD to adopt such
              recommendations. Requiring MHA to pay these funds would have a devastating financial impact on the
              agency and would punish the Housing Authority and its low-income clients twice for the poor decision
              made by the former Executive Director and her office administration.

              A full response to the audit and its finding follows. MHA looks forward to working with HUD and the OIG
              to further resolve the audit findings so that the Housing Authority can continue to move forward, grow
              and continue to serve the low-income families of Malakoff, TX.

                                                          Response

              For the duration of the former Executive Director’s employment, several aspects of MHA’s operations fell
              far short of the high standards that the Housing Authority sets for itself. In particular, certain action by
              the former Executive Director and her staff were inconsistent with applicable requirements and
              significantly strayed from MHA’s mission. In response, the former Executive Director was terminated in
Comment 1     July 2012 and a new Executive Director was appointed in August 2012. The Board of Commissioners also
              appointed two new members and elected a new chairperson. Following the dramatic changes in
              leadership, MHA took a number of actions to ensure that the inappropriate conduct which gave rise to
              the Audit would not be repeated.




                                                           17
                                                 Malakoff Housing Authority
                                                     347 Martin Plaza
                                                    Malakoff, TX 75148
                                                          Phone#: 903-489-1517
                                                            Fax#: 903-489-1731
                                          Email Inquirries: malakoffhousing2@embarqmail.com

            In the past 12 months, MHA has made significant changes that address the concern outlines in the Audit.
Comment 1   Detailing these actions provides the most appropriate resolution to the Audit’s findings. Although the
            Audit recommends repayment of MHA accounts in many cases as well, the implementation of those
            recommendations would take much needed resources away from low-income residents and further
            impede MHA’s ability to move forward and recover. We believe that a more practical course of action is
            for HUD to continue to work with the new MHA administration to assure that new policies and
            procedures already in place protect the agency from again becoming susceptible to such an outrageous
            abuse of power.

Comment 1   The new MHA administration has made great strides to restore the public’s trust in the Housing Authority
            and to improve MHA’s operations, particularly in the areas of financial management, conflict of interest,
            and procurement procedures. During this short period of time MHA has already:

                       • Engaged a new certified accountant with experience specifically in housing authority accounting.
                       • Implemented a new web-based computer software system, eliminating the need for hand
                       written records.
                       • Established a set waiting list.
                       • Established firm financial controls such as requiring two signatures on all checks.
                       • Established one bank account for the Housing Authority eliminating all other unnecessary bank
                       accounts.
                       • Adopted a “no cash” policy and began only accepting checks or money orders.
                       • Established a “repayment plan” to bring all residents current and up to date on their rent.
                       • Dramatically reduced administrative expenses from Fiscal Year (“FY”) 2012 to FY 2013.
                       • Held monthly Board Meetings where financials are presented to Board Members.
                       • Terminated or re-bid contracts that were past the term of the contract.
                       • Created and maintained an up to date inventory log and work order log system.
                       • Implemented a new application and lease agreement.
                       • Brought in any past due accounts receivables that could be collected.
                       • Instituted significant new financial controls, including policies, procedures and oversight.
                       • Engaged in training sessions to improve skills and stay current with HUD rules and regulations.
                       • Started distributing a monthly newsletter to keep tenants informed and connected.
                       • Began working towards bringing our community room up to code to hold resident events.
                       • Began organizing monthly resident events and making connections with the community to find
                       ways to better serve our clients

Comment 2   The new MHA’s administration has no desire to defend any of the inappropriate actions of the prior
            Executive Director or her administration. However, neither do we desire to be further punished for
            what was most certainly a shared failure of oversight. Our response contesting certain
            recommendations is not a defense of the former Executive Director or her administration. Instead, it
            flows from the new administration’s desire to ensure that MHA and its low-income residents are not




                                                         18
                                                   Malakoff Housing Authority
                                                       347 Martin Plaza
                                                      Malakoff, TX 75148
                                                           Phone#: 903-489-1517
                                                             Fax#: 903-489-1731
                                           Email Inquirries: malakoffhousing2@embarqmail.com

            burdened with three to four decades of debt that will cripple the agency’s ability to carry out its
            mission.

            MHA is currently compliant with all applicable HUD requirements regarding salaries. More
Comment 1   importantly, the Housing Authority has already significantly reduced its payroll expenditures to
            ensure that its funds are spent, not only for eligible purposes, but also consistent with its mission.
            MHA’s current salaries are consistent with local pay scales. Thus there are no issues regarding
            salaries.

Comment 1   Board oversight has significantly increased. Accurate records are now being kept including certificates
            of appointment. The Board of Commissioners must approve the annual budget, as well as review and
            approve the checks register and bank statement’s monthly for all administrative expenses. The Board
            of Commissioners and the Housing Authority have also increased public transparency by making
            Board minutes available to view in the office and strictly adhering to state law regarding public
            requests for information. The MHA Board of Commissioners is committed to responsible governance
            and takes very seriously its fiduciary responsibilities. The Board of commissioners has adopted or
            revised many policies to address and eliminate the infractions brought up in the Audit. The Board of
            Commissioners is also in the process of reviewing all policies and resolutions that were previously
            adopted or revised when a true quorum was not present. Currently the Board of Commissioners has
            adopted or revised several policies including:

                 •     Occupancy and Admissions Policy
                 •     Eviction Policy
                 •     Petty Cash Policy
                 •     Security Deposit Policy
                 •     Property Disposition Policy
                 •     Personnel Policy
                 •     Capitalization for Financial Controls Purpose Policy
                 •     MHA Bi-Laws

            Further information concerning the new financial safeguards, and new policies will be provided
            upon request.

                                                       Conclusion

            MHA does not seek to make any excuses for the actions of the prior Executive Director and her
            administration. Many of these actions were inconsistent with MHA’s mission to serve low-income
            families and were unethical and bad business decisions. During the past year, the new MHA
            administration has made significant strides to implement meaningful checks and balances that will
            ensure accountability, transparency, and adherence to HUD and local requirements. In short, these
            changes will prevent the events of the past from reoccurring.




                                                            19
                                                Malakoff Housing Authority
                                                    347 Martin Plaza
                                                   Malakoff, TX 75148
                                                         Phone#: 903-489-1517
                                                           Fax#: 903-489-1731
                                         Email Inquirries: malakoffhousing2@embarqmail.com



            MHA will continue to work with HUD and OIG, as well as the public and MHA clients, to resolve any
            issues and restore trust in the agency and its mission. The appropriate and most meaningful
            resolution to the Audit findings is one that will support the many changes that the current MHA
            administration has and is continuing to implement. MHA is open to other suggestions regarding
            policy changes that HUD or OIG may have which could further ensure the appropriate level of checks
Comment 2   and balances at the Housing Authority. To recommend repayment of such a large sum of money
            simply penalizes the low-income families served by the Malakoff Housing Authority again for the
            actions of the prior Executive Director and her administration, and will significantly hinder MHA’s
            ability to move forward and serve its clients.



            Sincerely,




            ArKita Dowell,
            Executive Director
            Malakoff Housing Authority




                                                         20
                           OIG Evaluation of Auditee Comments

Comment 1 OIG recognizes the Authority took the significant step of replacing the majority of
          its staff, including the executive director. The Authority should continue to work
          with HUD to ensure its changes address the issues noted in the audit
          memorandum, to improve its controls and processes, to implement additional
          policies as needed, and to educate its staff and board of commissioners concerning
          their roles and responsibilities.

Comment 2 We disagree that the repayment of funds is to punish or penalize the Authority.
          Instead, the recommendations seek a return of the ineligible and unsupported
          Federal funds so they can be used to benefit the Authority’s tenants. The
          Authority should work with HUD to determine a feasible and effective way to
          address the ineligible and unsupported amounts reflected in the audit
          memorandum.




                                             21
Appendix C

                                         CRITERIA

The Authority’s ACC with HUD
Section 19 - Conflict of Interest
(A)(1) In addition to any other applicable conflict of interest requirements, neither the housing
authority (HA) nor any of its contractors or their subcontractors may enter into any contract,
subcontract, or arrangement in connection with a project under this ACC in which any of the
following classes of people has an interest, direct or indirect, during his or her tenure or for one
year thereafter:
    (i) Any present or former member or officer of the governing body of the HA, or any
           member of the officer's immediate family. There shall be excepted from this
           prohibition any present or former tenant commissioner who does not serve on the
           governing body of a resident corporation, and who otherwise does not occupy a
           policymaking position with the resident corporation, the HA or a business entity.
    (ii) Any employee of the HA who formulates policy or who influences decisions with
           respect to the project(s), or any member of the employee's immediate family, or the
           employee's partner.
    (iii) Any public official, member of the local governing body, or State or local legislator, or
           any member of such individual's immediate family, who exercises functions or
           responsibilities with respect to the project(s) or the HA.
(2) Any member of these classes of persons must disclose the member's interest or prospective
interest to the HA and HUD.
(3) The requirements of this subsection (A)(1) may be waived by HUD for good cause, if
permitted under State and local law. No person for whom a waiver is requested may exercise
responsibilities or functions with respect to the contract to which the waiver pertains.
(4) The provisions of this subsection (A) shall not apply to the General Depository Agreement
entered into with an institution regulated by a Federal agency, or to utility service for which the
rates are fixed or controlled by a State or local agency.
(5) Nothing in this section shall prohibit a tenant of the HA from serving on the governing body
of the HA.

(B)(1) The HA may not hire an employee in connection with a project under this ACC if the
prospective employee is an immediate family member of any person belonging to one of the
following classes:
    (i) Any present or former member or officer of the governing body of the HA. There shall
          be excepted from this prohibition any former tenant commissioner who does not serve
          on the governing body of a resident corporation, and who otherwise does not occupy a
          policymaking position with the HA.
    (ii) Any employee of the HA who formulates policy or who influences decisions with
          respect to the project(s).
    (iii) Any public official, member of the local governing body, or State or local legislator,
          who exercises functions or responsibilities with respect to the project(s) or the HA.



                                                 22
(2) The prohibition referred to in subsection (B)(1) shall remain in effect throughout the class
member's tenure and for one year thereafter.
(3) The class member shall disclose to the HA and HUD the member's familial relationship to
the prospective employee.
(4) The requirements of this subsection (B) may be waived by the HA Board of Commissioners
for good cause, provided that such waiver is permitted by State and local law.


Administrative Requirements for Grants and Cooperative Agreements to State, Local and
Federally Recognized Indian Tribal Governments (24 CFR Part 85)
Subpart C—Post-Award Requirements, Financial Administration
§ 85.20 Standards for financial management systems.
…
(b) The financial management systems of other grantees and subgrantees must meet the
following standards:
(1) Financial reporting. Accurate, current, and complete disclosure of the financial results of
financially assisted activities must be made in accordance with the financial reporting
requirements of the grant or subgrant.
(2) Accounting records. Grantees and subgrantees must maintain records which adequately
identify the source and application of funds provided for financially-assisted activities. These
records must contain information pertaining to grant or subgrant awards and authorizations,
obligations, unobligated balances, assets, liabilities, outlays or expenditures, and income.
(3) Internal control. Effective control and accountability must be maintained for all grant and
subgrant cash, real and personal property, and other assets. Grantees and subgrantees must
adequately safeguard all such property and must assure that it is used solely for authorized
purposes.
(4) Budget control. Actual expenditures or outlays must be compared with budgeted amounts
for each grant or subgrant. Financial information must be related to performance or productivity
data, including the development of unit cost information whenever appropriate or specifically
required in the grant or subgrant agreement. If unit cost data are required, estimates based on
available documentation will be accepted whenever possible.
(5) Allowable cost. Applicable OMB cost principles, agency program regulations, and the terms
of grant and subgrant agreements will be followed in determining the reasonableness,
allowability, and allocability of costs.
(6) Source documentation. Accounting records must be supported by such source
documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract
and subgrant award documents, etc.
…

§ 85.36 Procurement.
…
(b) Procurement standards.
(1) Grantees and subgrantees will use their own procurement procedures which reflect applicable
State and local laws and regulations, provided that the procurements conform to applicable
Federal law and the standards identified in this section.




                                               23
(2) Grantees and subgrantees will maintain a contract administration system which ensures that
contractors perform in accordance with the terms, conditions, and specifications of their
contracts or purchase orders.
(3) Grantees and subgrantees will maintain a written code of standards of conduct governing the
performance of their employees engaged in the award and administration of contracts. 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. Such a conflict would arise when:
         (i) The employee, officer, or agent,
         (ii) Any member of his immediate family,
         (iii) His or her partner, or
         (iv) An organization which employs, or is about to employ, any of the above, has a
         financial or other interest in the firm selected for award. 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 sub-agreements.
         Grantee and subgrantees may set minimum rules where the financial interest is not
         substantial or the gift is an unsolicited item of nominal intrinsic value. To the extent
         permitted by State or local law or regulations, such standards or conduct will provide for
         penalties, sanctions, or other disciplinary actions for violations of such standards by the
         grantee's and subgrantee's officers, employees, or agents, or by contractors or their
         agents. The awarding agency may in regulation provide additional prohibitions relative
         to real, apparent, or potential conflicts of interest.
…
(8) Grantees and subgrantees will make awards only to responsible contractors possessing the
ability to perform successfully under the terms and conditions of a proposed procurement.
Consideration will be given to such matters as contractor integrity, compliance with public
policy, record of past performance, and financial and technical resources.
(9) Grantees and subgrantees will maintain records sufficient to detail the significant history of a
procurement. These records will include, but are not necessarily limited to the following:
rationale for the method of procurement, selection of contract type, contractor selection or
rejection, and the basis for the contract price.
…
(c) Competition.
(1) All procurement transactions will be conducted in a manner providing full and open
competition consistent with the standards of §85.36.
…
(d) Methods of procurement to be followed.
(1) Procurement by small purchase procedures. Small purchase procedures are those relatively
simple and informal procurement methods for securing services, supplies, or other property that
do not cost more than the simplified acquisition threshold fixed at 41 U.S.C. 403(11) (currently
set at $100,000). If small purchase procedures are used, price or rate quotations shall be
obtained from an adequate number of qualified sources.
(2) Procurement by sealed bids (formal advertising). Bids are publicly solicited and a firm-
fixed-price contract (lump sum or unit price) is awarded to the responsible bidder whose bid,
conforming with all the material terms and conditions of the invitation for bids, is the lowest in




                                                 24
price. The sealed bid method is the preferred method for procuring construction, if the
conditions in §85.36(d)(2)(i) apply.
       (i) In order for sealed bidding to be feasible, the following conditions should be present:
                 (A) A complete, adequate, and realistic specification or purchase description is
                 available;
                 (B) Two or more responsible bidders are willing and able to compete effectively
                 and for the business; and
                 (C) The procurement lends itself to a firm fixed price contract and the selection of
                 the successful bidder can be made principally on the basis of price.
       (ii) If sealed bids are used, the following requirements apply:
                 (A) The invitation for bids will be publicly advertised and bids shall be solicited
                 from an adequate number of known suppliers, providing them sufficient time
                 prior to the date set for opening the bids;
                 (B) The invitation for bids, which will include any specifications and pertinent
                 attachments, shall define the items or services in order for the bidder to properly
                 respond;
                 (C) All bids will be publicly opened at the time and place prescribed in the
                 invitation for bids;
                 (D) A firm fixed-price contract award will be made in writing to the lowest
                 responsive and responsible bidder. Where specified in bidding documents, factors
                 such as discounts, transportation cost, and life cycle costs shall be considered in
                 determining which bid is lowest. Payment discounts will only be used to
                 determine the low bid when prior experience indicates that such discounts are
                 usually taken advantage of; and
                 (E) Any or all bids may be rejected if there is a sound documented reason.
…
(f) Contract cost and price.
(1) Grantees and subgrantees must perform a cost or price analysis in connection with every
procurement action including contract modifications.


Cost Principles for State, Local, and Indian Tribal Governments OMB Circular A–87, 2
CFR Part 225
Appendix A – General Principles for Determining Allowable Costs
A. Purpose and Scope
…
2. Policy guides.
    a. The application of these principles is based on the fundamental premises that:
        (1) Governmental units are responsible for the efficient and effective administration of
            Federal awards through the application of sound management practices.
…
C. Basic Guidelines
1. Factors affecting allowability of costs. To be allowable under Federal awards, costs must
    meet the following general criteria:
    a. Be necessary and reasonable for proper and efficient performance and administration of
        Federal awards.



                                                 25
    b. Be allocable to Federal awards under the provisions of 2 CFR part 225.
    c. Be authorized or not prohibited under State or local laws or regulations.
    d. Conform to any limitations or exclusions set forth in these principles, Federal laws, terms
       and conditions of the Federal award, or other governing regulations as to types or
       amounts of cost items.
    e. Be consistent with policies, regulations, and procedures that apply uniformly to both
       Federal awards and other activities of the governmental unit.
    …
    j. Be adequately documented.
2. Reasonable costs. A cost is reasonable if, in its nature and amount, it does not exceed that
which would be incurred by a prudent person under the circumstances prevailing at the time the
decision was made to incur the cost. The question of reasonableness is particularly important
when governmental units or components are predominately federally-funded. In determining
reasonableness of a given cost, consideration shall be given to:
    a. Whether the cost is of a type generally recognized as ordinary and necessary for the
        operation of the governmental unit or the performance of the Federal award.
    b. The restraints or requirements imposed by such factors as: Sound business practices;
        arm’s-length bargaining; Federal, State and other laws and regulations; and, terms and
        conditions of the Federal award.
    c. Market prices for comparable goods or services.
    d. Whether the individuals concerned acted with prudence in the circumstances considering
        their responsibilities to the governmental unit, its employees, the public at large, and the
        Federal Government.
    e. Significant deviations from the established practices of the governmental unit which may
        unjustifiably increase the Federal award’s cost.
3. Allocable costs.
    a. A cost is allocable to a particular cost objective if the goods or services involved are
       chargeable or assignable to such cost objective in accordance with relative benefits
       received.

Texas Local Government Code, Title 12, Subtitle C, Chapter 392, Housing Authorities
Established by Municipalities and Counties
Sec. 392.001. SHORT TITLE. This chapter may be cited as the Housing Authorities Law.
…
SUBCHAPTER C. COMMISSIONERS AND EMPLOYEES
Sec. 392.031. APPOINTMENT OF COMMISSIONERS OF A MUNICIPAL HOUSING
AUTHORITY.
(a) Each municipal housing authority shall be governed by five, seven, nine, or 11
     commissioners. The presiding officer of the governing body of a municipality shall appoint
     five, seven, nine, or 11 persons to serve as commissioners of the authority. An appointed
     commissioner of the authority may not be an officer or employee of the municipality.
     Appointments made under this section must comply with the requirements of Section
     392.0331, if applicable.
(b) A commissioner may not be an officer or employee of the municipality. A commissioner
     may be a tenant of a public project over which the housing authority has jurisdiction.




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(c) A certificate of the appointment of a commissioner shall be filed with the clerk of the
     municipality. The certificate is conclusive evidence of the proper appointment of the
     commissioner.
…
Sec. 392.036. VOTE REQUIRED FOR ACTION. Unless the authority's bylaws require a larger
number, when a quorum is present an authority may take action on a vote of a majority of the
commissioners present.




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