oversight

The State of Texas' Contractor Did Not Perform Adequate Hurricane Dolly Damage Inspections and Failed To Meet Critical Performance Benchmarks

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-07-15.

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

OFFICE OF AUDIT
REGION 6
FORT WORTH, TX




                    State of Texas
                     Austin, TX

       State Community Development Block Grant
               Disaster Recovery Program




2014-FW-1004                              July 15, 2014
                                                        Issue Date: July 15, 2014

                                                        Audit Report Number: 2014-FW-1004




TO:      Tennille Parker, Director, Disaster Recovery and Special Issues Division, DGBD

      //signed//
FROM: Gerald R. Kirkland, Regional Inspector General for Audit, Fort Worth Region, 6AGA


SUBJECT:       The State of Texas’ Contractor Did Not Perform Adequate Hurricane Dolly
               Damage Inspections and Failed To Meet Critical Performance Benchmarks


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the State of Texas’ Disaster Recovery
Program.

    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.

    The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
(817) 978-9309.
                                            July 15, 2014
                                            The State of Texas’ Contractor Did Not Perform
                                            Adequate Hurricane Dolly Damage Inspections for Some
                                            Homes and Failed To Meet Critical Performance
                                            Benchmarks


Highlights
Audit Report 2014-FW-1004


 What We Audited and Why                     What We Found

We audited the State of Texas’           Except for assisting ineligible homes, we could not
Community Development Block Grant        substantiate the allegations. The State, the
Disaster Recovery Program based on a     Development Council, and its contractor generally
hotline complaint, which alleged         ensured that homeowners met most eligibility
mismanagement of the Lower Rio           requirements, and they supported the homes’ costs.
Grande Valley Development Council’s      However, our testing showed the State’s contractor did
Disaster Recovery housing program.       not adequately document Hurricane Dolly damages for
The complainant also made allegations    15 assisted homes costing $1.6 million. The
concerning excessive home costs and      contractor’s 15 inspections did not clearly show the
ineligible homeowners.                   damage or identify the repairs needed related to
                                         Hurricane Dolly as required. This condition occurred
Our audit objectives were to determine because the State prioritized the funding to
whether the State (1) ensured that the   affirmatively further fair housing and did not
contractor limited the award of Disaster adequately monitor the contractor. In addition, the
Recovery grant funds to eligible         contractor did not perform its inspections in a timely
homeowners and homes, (2) ensured        manner, performed the inspection as the last step in the
that the contractor met critical         eligibility process, and did not use the Federal
performance benchmarks in the            Emergency Management Agency or other sources to
Development Council’s housing            verify Hurricane Dolly damage. Projecting the results
programs, and (3) adequately monitored of our statistical sample to the 700 homes that the State
the Development Council’s housing        expects to complete by December 31, 2014, showed
programs.                                that the State could fund at least 84 ineligible
                                         homeowners, costing at least $8.6 million, if its
                                         contractor does not correct the inspection process.
  What We Recommend
                                            The State also did not ensure its contractor met critical
We recommend that HUD’s Acting              performance benchmarks. This condition occurred
Director of the Disaster Recovery and       because the State did not establish a policy for
Special Issues Division require the State   implementing the program in a timely manner and its
to repay $1.6 million for homes not         contract lacked penalty provisions. In addition, the
eligible for assistance, ensure that the    contractor appeared to have capacity issues, and its
contractor adequately inspects for and      subcontractor did not appear to adequately staff the
documents Hurricane Dolly damage,           program. As result, the contractor had missed all of its
monitor its contractor, and continue to     benchmarks, and it had constructed only 137 (17
withhold payments until the contractor      percent) of the 815 estimated homes required to be
meets benchmarks.                           completed.
                            TABLE OF CONTENTS

Background and Objectives                                                    3

Results of Audit
      Finding 1: The State’s Contractor Performed Inadequate Hurricane       5
                 Damage Inspections for Some Homes
      Finding 2: The State Did Not Ensure That Its Contractor Met Critical   13
                 Performance Benchmarks

Scope and Methodology                                                        17

Internal Controls                                                            21

Follow-up on Prior Audits                                                    22

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use         23
B.    Auditee Comments and OIG’s Evaluation                                  24




                                             2
                         BACKGROUND AND OBJECTIVES

On September 30, 2008, Congress enacted the Consolidated Security, Disaster Assistance, and
Continuing Appropriations Act of 2009. 1 The Act appropriated $6.1 billion through the U.S.
Department of Housing and Urban Development’s (HUD) State Community Development Block
Grant (CDBG) program for necessary expenses related to disaster relief and long-term recovery
for presidentially declared disasters occurring during 2008. 2 The State of Texas 3 received more
than $3 billion in State CDBG Disaster Recovery funding authorized by the Act through two
allocation rounds.

The State’s method of distribution used the Council of Governments to distribute the funds in the
areas designated by the Federal Emergency Management Agency (FEMA) and the State as being
hardest hit by disasters. In March 2009, the State implemented its $1.3 billion Round I Action
Plan, through which the Lower Rio Grande Development Council received $55 million. In
August 2009, HUD announced the second round of funding; however, HUD rejected the State’s
amended Round II Action Plan. Before the State provided a revised Round II Action Plan,
complainants filed a fair housing complaint with HUD. Ultimately, the State entered into a
conciliation agreement with the complainants and HUD. HUD accepted the State’s amended
Round II Action Plan in June 2010. For Round II, the State’s approved method of distribution
provided more than $1.7 billion to affected regions, and the Development Council received more
than $185 million of those funds.

    Table 1: Total State Disaster Recovery funding provided
           Lower Rio Grande Development Council Disaster Recovery funding
                             Housing              Nonhousing        Total
     Round I                  $7,479,993             $47,520,007   $ 55,000,000
     Round II                122,034,387              63,481,528   185,515,915
     Total                  $129,514,380            $111,001,535  $240,515,915

For Round I, the State notified the City of Brownsville that the Development Council would
complete the City’s $1.6 million housing program. The Development Council contracted with
URS Corporation (contractor) in December 2011 for management services to complete the City’s
housing program.

Before the start of Round II, the Development Council contracted with the contractor in
September 2011 to prepare a fair housing activity statement form and conduct a needs
assessment in accordance with Round II program guidelines and the conciliation agreement. For

1
    Public Law 110-329
2
    The 2008 presidentially declared disasters that struck Texas included Hurricanes Dolly, Gustav, and Ike.
3
    In 2008, the Governor of Texas designated grant administration to the Texas Department of Rural
    Affairs, which partnered with the Texas Department of Housing and Community Affairs to administer
    the grant funds. In July 2011, the Governor changed the responsible agency to the Texas General Land
    Office.



                                                        3
Round II, the State approved 18 contractors as grant administrators for the Disaster Recovery
program. The Development Council selected three grant administrators. The State solicited the
three grant administrators, evaluated the two proposals received, and signed a contract with one
contractor which became the Development Council’s grant administrator. The contractor was
responsible for preparing weekly and quarterly reports, preparing the Outreach Plan, taking
applications, determining eligibility, performing inspections, conducting damage verifications
and environmental reviews, managing housing construction, performing project closeout, and
completing project setups in the State’s Housing Contract System. For the Round II Program,
the contractor reported to the State, and the State was responsible for the oversight of the
contractor.

For Round II, the State had to abide by the conciliation agreement before any funds could be
used on housing projects. The State’s program was delayed for more than a year as it negotiated
the complaint and completed the Analysis of Impediments to fair housing for the hurricane-
affected communities as required by the conciliation agreement. The conciliation agreement also
required the State to implement new programs to further fair housing. The State’s analysis and
needs assessment redefined the requirements to participate in the program based on
concentration of poverty, protected class, and hurricane-damaged areas. These requirements led
to the creation of targeted zones where the contractor conducted outreach to the disaster
applicants. The analysis restricted the use of funds to only administration and planning expenses
until the analysis was accepted or until January 2011, whichever came first. The State also had
to train the grant recipients on affirmatively furthering fair housing, complying with civil rights,
and reporting their actions to the fair housing advocates.

Our audit objectives were to determine whether the State (1) ensured that the contractor limited
the award of Disaster Recovery grant funds to eligible homeowners and homes, (2) ensured that
the contractor met critical performance benchmarks in the Development Council’s housing
programs, and (3) adequately monitored the Development Council’s housing programs.




                                                 4
                                        RESULTS OF AUDIT


Finding 1: The State’s Contractor Performed Inadequate Hurricane
Damage Inspections for Some Homes
The State’s contractor did not perform adequate home inspections of 15 4 Disaster Recovery-
assisted homes. The inspections did not clearly show Hurricane Dolly damage or identify the
repairs needed related to the hurricane as required by the Act or the State’s contract. This
condition occurred because the State prioritized the funding to affirmatively further fair housing
and did not adequately monitor the contractor’s inspection process. In addition, the contractor
did not perform its inspections in a timely manner due to circumstances beyond its control, 5
performed the inspection as the last step in the eligibility process, and did not use FEMA or other
sources to verify Hurricane Dolly damage. As a result, the State must repay $1.61 million for the
15 ineligible homes. Further, projecting the results of our statistical sample to the 700 homes
that the State expects to complete by December 31, 2014, showed that the State could fund at
least 84 ineligible homeowners, costing at least $8.6 million, if its contractor does not correct its
inspection process.


    Initial Testing Identified Four
    Ineligible Homeowners

                   Initial testing of 16 homes showed that the State and the Development Council
                   provided ineligible Disaster Recovery assistance totaling $403,918 to 4
                   homeowners. The homes were ineligible because the contractor’s inspector did
                   not properly evaluate the homes. All four of the homeowners received FEMA
                   assistance for damages caused by Hurricane Alex in 2010, which was not an
                   eligible storm under the Act. The contractor’s inspections stated that Hurricane
                   Dolly caused all of the homes’ damage and failed to attribute any damage to
                   Hurricane Alex. However, the contractor knew of the Hurricane Alex damages
                   because it used FEMA’s database of Hurricane Alex assistance to calculate
                   duplication of benefits for three of the homeowners. In addition, the three
                   homeowners disclosed in their applications that they received FEMA assistance
                   for Hurricane Alex and provided the contractor FEMA’s letters. Further, the
                   contractor’s file for one of the three homes contained an invoice for repairs
                   related to Hurricane Alex damages. For the fourth home, the contractor did not
                   properly determine that the homeowner received Hurricane Alex assistance


4
      The 15 homes consisted of 4 ineligible homes identified during our survey and 11 ineligible homes identified as
      a result of our statistical sample testing.
5
      The contractor did not start the first inspections until almost 4 years after Hurricane Dolly due to the State’s
      delay in implementing the program. See the Background and Objectives section and finding 2.


                                                           5
           because it failed to detect that FEMA provided assistance to the applicant’s son,
           who lived at the same address.

The State Funded an Additional
11 Ineligible Homeowners


           The State funded 11 ineligible homeowners of the 50 statistically selected homes
           reviewed. Initially, we found that the contractor did not adequately document
           Hurricane Dolly damages for 19 of the 50 homes sampled. For 8 of the 19 homes,
           we used other sources to verify Hurricane Dolly damage, making the homes
           eligible even though the contractor performed inadequate inspections. We noted
           that FEMA had Hurricane Dolly claims for seven of the eight homeowners and a
           private insurance carrier had paid a claim to the eighth homeowner.

           The State provided ineligible assistance totaling $1.21 million to the 11
           homeowners because the contractor’s inspectors did not adequately inspect the
           homes. For example, other storms damaged 2 of the 11 homes, yet the
           contractor’s inspection reports and pictures attributed the damage to only
           Hurricane Dolly. A tornado damaged one of the two homes on June 30, 2011,
           and the contractor’s file contained a private insurance claim filed by the applicant.
           The contractor’s file showed the homeowner received a check, dated July 2011,
           for wind damage to the roof and water damage to the ceilings. The contractor
           inspected the home on October 28, 2013, 2 years after the tornado and 5 years
           after Hurricane Dolly. The contractor’s inspection and pictures attributed all of
           the roof and ceiling damage to Hurricane Dolly and did not identify any damages
           caused by the tornado.

           For the second home, a hail storm damaged the home on April 20, 2012. The
           contractor’s file showed that the homeowner filed a private insurance claim and
           received a check in February 2013 to repair the roof, siding, and interior walls and
           ceilings in the kitchen and laundry room. The contractor inspected the home for
           Hurricane Dolly damages on August 6, 2013, 1 year after the hail storm, 5 years
           after Hurricane Dolly, and after a private contractor had replaced the roof (see
           figure 1). The contractor’s inspections stated that Hurricane Dolly damaged the
           laundry room’s ceiling and did not identify any damages that the hail storm
           caused to the ceiling in 2012. Both applicants acknowledged having
           homeowner’s insurance at the time of Hurricane Dolly, but they did not file a
           claim for Hurricane Dolly damages.




                                             6
Figure 1: Sample home 4. This home had just received a new roof due to a hail
storm. The inspector did not mention the hail storm in his inspection.

In addition, the contractor generalized the hurricane damage to the remaining 9 of
the 11 homes in its inspections, pictures, and estimates of costs to repair. The
exterior and interior pictures also did not support the inspector’s narrative
comments regarding the damage. For example, in various instances, the
contractor’s inspection reports stated that the wind damaged the roof, yet the
contractor’s files did not include roof pictures, or the inspector took the pictures
from a distance so that the damage, if it existed, could not be seen.




Figure 2: Sample home 1. The inspection stated that wind damaged the roof
covering. This roof picture did not identify the Hurricane Dolly wind damage.

                                  7
Figure 3: Sample home 18. The inspection stated that the home had one foot of
water in it from storm surge and that the foundation, piers, and flooring were
damaged. This poor-quality picture was the only photo of the foundation and
piers, and it did not show hurricane damage.




Figure 4: Sample home 18. This picture of the flooring in the living room did not
show hurricane storm surge damage. The file did not contain pictures that
showed storm surge damage to the flooring or walls.




                                8
                   Figure 5: Sample home 44. The inspection stated that Hurricane Dolly damaged
                   the interior ceiling and walls; however, the pictures did not identify the hurricane
                   damage. 6

                   Since the contractor demolished and rebuilt the 11 homes, it will not be able to
                   reinspect them to document the Hurricane Dolly damage, making the homes
                   ineligible for Disaster Recovery assistance.

    The State’s Priority Appeared
    To Meet the Conciliation
    Agreement Requirements

                   Because the State entered into the conciliation agreement, it designed its program
                   guidelines and outreach to prioritize the funding to affirmatively further fair
                   housing. Thus, the State’s housing program focused on first finding participants
                   who met certain income brackets as agreed to in the conciliation agreement, and
                   determining whether the home had eligible Hurricane Dolly damage was the last
                   step in the process. However, the Act’s purpose was to pay for necessary
                   expenses to areas impacted by Hurricane Dolly, with at least 50 percent of the
                   funds benefiting persons of low to moderate income. Thus, the State’s primary
                   emphasis on income targeting appeared to negatively affect its inspection process.




6
      The file contained several pictures, none of which supported damages to the ceilings or walls.


                                                           9
The State Performed
Insufficient Monitoring of the
Contractor

            The State did not perform sufficient monitoring of its contractor. The State’s
            program manager periodically visited the contractor to provide technical
            assistance and discuss program progress. However, the State performed only
            limited reviews of the contractor’s inspections and damage assessments. During a
            technical assistance visit to the contractor’s office in March 2013, the State found
            that a home inspection lacked proper photographic support of hurricane damage.
            Specifically, the photos did not include captions for hurricane damage or the room
            locations. The State recommended that each photo should include a caption for
            the room and identify the hurricane damage. The State provided additional
            documentation of its monitoring and technical assistance; however, it did not
            include a follow-up or additional review of the inspections to determine whether
            the contractor addressed the concerns or implemented the recommendation.

            Our reviews performed from September 2013 to January 2014 also determined
            that the contractor’s home inspections and pictures did not adequately document
            Hurricane Dolly damages. In addition, we identified obvious errors that the State
            did not detect or correct. For example, one home inspection stated that Hurricane
            Ike caused the damage, but Hurricane Ike did not impact this area of the Gulf
            Coast. Further, the contractor’s files contained information about other storm
            damage, but the State did not question why the contractor did not include the
            other storm damage in the homes’ inspections.

The State’s and Development
Council’s Perceptions of
Contractor Oversight Differed

            The State and the Development Council disagreed about responsibility for the
            contractor’s oversight. The State approved 18 contractors as grant administrators
            for the Disaster Recovery program. The Development Council selected three
            grant administrators. The State solicited the three grant administrators, evaluated
            the two proposals received, and signed a contract with one contractor, which
            became the Development Council’s grant administrator. The Development
            Council was not a party to the State’s contract, and the contract terms did not give
            it oversight responsibility. However, during interviews with staff from the State
            and the Development Council, each side said that the other party had oversight
            responsibility for the contractor.




                                             10
    The State Restricted Payment
    to the Contractor


                  The State restricted payment to the contractor. The State’s contract required it to
                  pay the contractor a percentage of the administrative fee in incremental amounts
                  with billing caps tied to the benchmarks, including applicants approved,
                  applicants identified, and homes constructed. The contractor did not verify or
                  inspect hurricane damage until the applicant met the first five criteria of
                  eligibility, which were (1) income, (2) ownership at time of hurricane, (3) current
                  on child support, (4) current or on a payment plan on property taxes, and (5)
                  residency at time of hurricane. According to the contractor, it received payment
                  of a percentage of the administrative fee only after an applicant was approved and
                  the home was constructed. Thus, it was in the contractor’s best interest to
                  determine that Hurricane Dolly damaged the home. Otherwise, the State would
                  not pay the contractor.

    The State Must Correct the
    Process To Avoid Funding
    Additional Ineligible Homes

                  The State must correct the contractor’s inspection process to ensure that the
                  contractor properly identifies and documents Hurricane Dolly damages and uses
                  other available sources of damage verification. Projecting the results of our 11
                  ineligible homeowners to the 700 homes that the State expects to complete by
                  December 31, 2014, showed that if the State does not correct the Hurricane Dolly
                  assessment and inspection progress, it could fund at least 84 ineligible
                  homeowners costing at least $8.6 million.7

    Conclusion

                  The State’s contractor did not perform adequate home inspections of 15 Disaster
                  Recovery-assisted homes as required by the Act or the State’s contract. This
                  condition occurred because the State prioritized the funding to affirmatively
                  further fair housing and did not adequately monitor the contractor’s inspection
                  process. In addition, the contractor did not perform inspections in a timely
                  manner due to circumstances beyond its control, performed the inspection as the
                  last step in the eligibility process, and did not use FEMA or other sources to
                  verify hurricane damage. As a result, the State will need to repay $1.61 million
                  for the 15 ineligible homes. Further, projecting the results of the statistical
                  sample to the 700 homes that the State expects to complete by December 31,
                  2014, the State could fund at least 84 ineligible homeowners, costing at least $8.6
                  million, if its contractor does not correct the inspection process.
7
      For information on our sampling methodology and projection, see the Scope and Methodology section.


                                                       11
Recommendations

          We recommend that HUD’s Acting Director of the Disaster Recovery and Special
          Issues Division require the State to

          1A. Repay $1,609,580 in State CDBG Disaster Recovery funds spent on
              ineligible homeowners or use other State CDBG housing program funds to
              assist homeowners if the homes qualify under the program requirements.

          1B. Ensure that its contractor adequately inspects homes and documents
              Hurricane Dolly damage, including using other sources of information such
              as FEMA data, and documents the specific repairs related to the storm as
              specified in the contract. This change could result in as much as $8,624,700
              being put to better use.

          1C. Monitor its contractor to ensure that it adequately documents inspections
              and detects and corrects errors.

          1D. Clarify contractor oversight responsibility with the Development Council.




                                         12
Finding 2: The State Did Not Ensure That Its Contractor Met Critical
Performance Benchmarks
The State did not ensure that its contractor met the critical performance benchmarks for the
number of applicants approved and homes completed. This condition occurred because the State
did not establish program implementation policies that complied with the conciliation agreement
in a timely manner and its contract lacked penalty provisions. In addition, the contractor may not
have had the capacity to administer the program, and its subcontractor did not appear to
adequately staff the program. As of March 2014, the contractor had completed only 203 (25
percent) of the 815 participants’ applications when the contract required 100 percent completion
by April 11, 2014. Further, it had constructed only 137 (17 percent) of the 815 estimated homes
when the contract required 100 percent to be completed by August 11, 2014.


    The Contractor Did Not Meet
    Its Benchmarks

                   As of March 31, 2014, the contractor had not met its contractual benchmarks as
                   required by its May 2012 contract with the State. The contract required the
                   contractor to identify 100 percent of the disaster applicants, complete eligibility
                   approval setups, and construct homes in incremental percentages based upon the
                   contractually established period in table 2. In addition, the contract’s 22-month
                   benchmark required the contractor to construct 100 percent of the homes by
                   August 11, 2014, but the State and contractor did not anticipate meeting this
                   benchmark.

Table 2: Comparison of contract benchmarks to contractor’s accomplishments
                           12 month (October 11, 2013)                     18 month 8 (April 11, 2014)

    Benchmark        Identify       Approve        Complete         Identify       Approve           Complete
                     disaster      applicants’    construction      disaster      applicants’       construction
                    applicants      eligibility     of homes       applicants      eligibility        of homes
    Goal              100%             50 %           None           None            100%               50 %
    Accomplished       78%             25%             2%            100%             25%                17%



    The State’s Implementation of
    the Program Caused Delays

                   The State, Development Council, and contractor explained that the State’s new
                   Housing Opportunity Program caused delays in the implementation of its Disaster
                   Recovery Housing Assistance Program. The State had to develop policies for the
                   complicated Housing Assistance Program, and it did not complete its initial
8
      The contractor’s accomplishments were determined using data available as of March 31, 2014.


                                                        13
                  guidance until October 2012. The Housing Assistance Program was complicated
                  because the State agreed to abide by the conciliation agreement, which contained
                  many requirements. For example, the State had to prepare an analysis of
                  impediments and a needs assessment and use this information to prepare its
                  guidance. In addition, the State had to vet the guidance through the communities
                  to be served and seek approval from housing advocates. Further, the State had to
                  formally instruct its Council of Governments and the contractor on
                  implementation of the guidance. As a result, the State took almost 2.5 years 9 to
                  analyze, develop, and implement its Round II Housing Assistance Program.

                  However, the State’s Housing Assistance Program continued to evolve. To
                  participate, the State required all participants to determine whether they wanted to
                  participate in the Housing Opportunity Program and go through counseling. The
                  State also changed its method of determining eligibility for housing assistance and
                  revised its standard operating procedures to speed up and simplify participation in
                  the Housing Opportunity Program. In August 2013, the State authorized a new
                  method to calculate income qualifications. This change sped up the participants’
                  income calculation process; however, the Housing Assistance Program stalled
                  while the contractor retroactively applied the new income verification process to
                  all participants. In addition, the State implemented requirements for real estate
                  titles and commercial real estate transactions in July 2013 and January 2014,
                  respectively.

    The State’s Contract Lacked
    Penalty Provisions

                  The State was aware of its contractor’s inability to meet benchmarks. The State
                  had regular meetings with the contractor, provided technical assistance to the
                  contractor, and withheld payment from the contractor. However, the State’s
                  contract did not contain penalty provisions for nonperformance or failure to meet
                  benchmarks. Thus, the State had limited options to enforce its contract
                  benchmarks.

    The Contractor Appeared To
    Lack Capacity

                  Based on its statements and inability to meet benchmarks, the contractor and its
                  subcontractor appeared to lack the capacity to administer the Program. According
                  to the contractor, it was unable to meet the benchmarks because it did not fully
                  understand how the State’s Housing Opportunity Program would impact its ability
                  to carry out the program and the difficulty it would have in obtaining applicants’
                  eligibility documents. The Program’s complex rules required the contractor to

9
     The State signed the conciliation agreement in May 2010 and conducted its first outreach in October 2012, 2
     years and 5 months later.


                                                        14
                   conduct targeted outreach for a certain number of disaster applicants within
                   specific income brackets. Due to cultural and language barriers, the contractor
                   eventually subcontracted with a local subcontractor to speed up outreach.
                   Further, the contractor said that verifying duplication of benefits through
                   commercial entities, such as insurance providers, proved difficult as they did not
                   always respond promptly or provide the requested information. Eventually, the
                   State allowed the applicants to self-certify, which sped up the eligibility process.

                   In addition, the subcontractor appeared not to have sufficient staff to review the
                   applicants’ information. The subcontractor had only four staff members,
                   including its program director, to conduct the eligibility processing of 791
                   applications obtained in the first 90 days of outreach. Thus, applicants’ eligibility
                   determinations appeared to stall after the initial contact.

     The Contractor Completed
     Only a Limited Number of
     Homes

                   As of March 31, 2014, the contractor had completed eligibility approval of only
                   203 (25 percent) applicants, rather than the 815 estimated to be completed.
                   Further, it had constructed only 137 of the 815 (17 percent) estimated homes
                   when the contract required 50 percent to be completed. Also, no applicant had
                   successfully completed the Housing Opportunity Program 10. Although the
                   contract required construction of all homes to be completed by August 11, 2014,
                   the State and the contractor estimated that they would complete construction of all
                   homes by December 31, 2014 11.

     Conclusion

                   The contractor did not meet the benchmarks because the conciliation agreement
                   between HUD, the housing advocates, and the State required the implementation
                   of a new program and it contained requirements to further fair housing, which had
                   additional reporting and eligibility requirements that the contractor was
                   unprepared to meet. Therefore, as of March 31, 2014, the contractor had
                   approved only 227 applications for assistance and constructed 137 of the 815
                   estimated homes to be completed.




10
      The Housing Opportunity Program is a separate housing program that allows income-qualified applicants who
      live in a high risk or high poverty concentrated area to relocate to a safer and higher opportunity area or have
      their home reconstructed or rehabilitated.
11
      The Development Council and the contractor estimated that 815 homes would be assisted. The 815 estimated
      homes included both homes completed under the Housing Assistance Program and additional homes completed
      under the Housing Opportunity Program.


                                                          15
Recommendations

          We recommend that HUD’s Acting Director of the Disaster Recovery and Special
          Issues Division require the State to

          2A. Continue to hold the contractor accountable and continue to withhold
              payments until the contractor meets its contract requirements.

          2B. Add penalties to the contract to enforce agreed-upon benchmarks and add
              realistic goals if it amends the contract.

          2C. Ensure that future State CDBG Disaster Recovery-funded contracts have
              clear performance goals and penalties for failure to meet them.




                                         16
                        SCOPE AND METHODOLOGY

We conducted our audit work at the State’s office in Austin, TX; the Development Council’s, the
contractor’s, and the subcontractor’s offices in Weslaco, TX; FEMA’s office in Denton, TX; and
the HUD Office of Inspector General’s (OIG) offices in San Antonio and Fort Worth, TX,
between August 26, 2013, and April 25, 2014. The audit generally covered the period January 1,
2009, through March 31, 2014.

Initially, we reviewed and summarized the information provided by the complainant to identify
the issues. The complainant’s issues mainly focused on mismanagement of the program,
participant eligibility, and excessive costs incurred for home rehabilitation and reconstruction.
Based on prior contracting problems found with the State, we reviewed the Development’
Council’s procurement of its grant administrator for the Round I Program. We also reviewed the
State’s procurement of the various grant administrators and builders for Round II. Since we did
not find any deficiencies with the contract awards, we did not include contracting as part of our
audit objectives. For the survey, we selected 16 homes out of 58 homeowners approved for
funding obtained from the State’s database. We focused on selecting homes for which FEMA’s
data indicated that the homes either had other storm damage or insufficient damage. We
reviewed the Development Council’s housing project electronic files in the State’s Housing
Contract System and the hardcopy format files for the 16 homes to determine whether the homes
were eligible for assistance. We also performed a site visit to five of the homes.

To accomplish our objectives, we performed the following steps as they related to the State’s
CDBG Disaster Recovery Program contracts with its contractor and grants with the Development
Council:

   •   Reviewed relevant public laws, regulations, and HUD guidance.
   •   Reviewed the State’s and the Development Councils’ Disaster Recovery Program
       guidelines.
   •   Reviewed the State’s Action Plans, the State’s conciliation agreement, the Development
       Council’s needs assessment, and other documents related to the State’s Disaster Recovery
       Program.
   •   We conducted data validation and reliability testing of the State’s Disaster Recovery
       general ledger, which contained expense transactions for HUD’s 2008 Disaster Recovery
       grant funds. Based on that testing, we concluded that the expense data were generally
       reliable for the purposes of our audit objectives.
   •   Selected and reviewed a statistical sample of 50 housing projects to determine eligibility
       as explained below in our sampling methodology.
   •   Reviewed 50 housing project electronic files in the State’s Housing Contract System.
   •   Reviewed 50 sample housing project electronic files in the contractor’s management
       system.
   •   For the 50 sample homes, we entered the home address and the assisted family’s name
       into the State’s database, which checked the information against FEMA’s database of
       homes that received FEMA assistance for Hurricanes Dolly and Alex. If FEMA assisted
       a home, we obtained the determination letter from FEMA.

                                               17
     •   For the 50 sampled homes, we visited each home and contacted the homeowner if the
         homeowner was present. For 13 homes that the contractor had not demolished, we
         performed a visual inspection of the home. For the remaining 37 homes, which the
         contractor had rebuilt, we observed the exterior of the home.
     •   We interviewed 25 of the 50 sample homeowners to discuss the damage to the home and
         the impact caused by various storms.
     •   We projected our sample results to the universe as detailed in the sampling methodology
         below.
     •   We interviewed the State’s Disaster Recovery Program, Development Council’s,
         contractor’s, subcontractor’s, HUD’s, and FEMA’s staff.

Sampling Methodology
Our audit universe, as of January 14, 2014, consisted of 120 households (contracts) that had
received or were approved to receive more than $12.8 million in Disaster Recovery Program
funds from the Development Council as a result of Hurricane Dolly damage. We obtained the
universe of 120 homes and the corresponding household data from both the State’s Housing
Contract System (101 homes) and the Development Council’s construction activity reports (23
homes). The State’s Housing Contract System data included the approved amounts for the
Disaster Recovery funds for 101 homes that the contractor had already demolished. We selected
an additional 23 homes from the Development Council’s data, which included homes that were
not demolished or reconstructed and could be inspected for hurricane damage. However, we
removed four homes from the audit universe as we had already questioned these homes’
eligibility in the survey. The 120 households either had (1) a housing contract signed, (2) been
assigned a building contractor, (3) a pending notice to proceed, (4) a home under construction, or
(5) a home completed. The Development Council expected to serve 700 contracts by December
31, 2014. 12 Therefore, we determined that the universe for making a statistical projection was
700 contracts.

We obtained records for 50 households that received funds as a result of damage caused by
Hurricane Dolly. We used a 6-strata sample design to control for variance based on the dollar
amount of the CDBG contract.

We found a sample size of 50 to be the best size for providing meaningful audit results without
an unnecessary risk of spurious error. With the frequent occurrence of null values in audits,
possible audit findings follow a lognormal distribution, which approximates a bell curve. We
used replicated sampling to proof-test the sample design and model the true sampling
distribution, thereby confirming the performance of the sample design. The data were sampled
using a computer program written in SAS® using the survey select procedure with a
random-number seed value of seven. The sample design was stratified as shown in table 3.




12
     The contractor provided the 700 home completion number in an interview, and it was used for our universe.
     Note that the 700 Housing Assistance Program home figures did not equal the 815 estimated homes in the
     contract.


                                                        18
Table 3: OIG’s sample stratification
   Strata          Contract            Sampling    Sample count   Probability of   Sampling
                  amount per         frame count                    selection       weight
                   household
  0-10pct          <$88,308              12              5           0.4167          2.40
 10-10pct     >88,308 to < 103,076       24             10           0.4167          2.40
 30-50pct      >103,076<105,798          24             10           0.4167          2.40
 50-70pct      >105,798<111,740          24             10           0.4167          2.40
 70-90pct      >111,740<121,806          24             10           0.4167          2.40
 90-100pct         >121,806              12              5           0.4167          2.40
   Total              NA                120             50             NA            NA

There were no spares used, hence the sampling weights did not need to be recalculated. The
measures provided in this report were projected based on traditional means or proportions and
their standard errors, and we used the survey means and survey frequency procedures provided
by SAS®. A traditional Taylor series was used to estimate the variance. We reduced the
average amount of the CDBG contract that was found to have inadequate documentation
showing that Hurricane Dolly caused property damage by the margin of error (that is, the
standard error) associated with this sample design and then extended that to the expected contract
count of 700. The formulas for our calculations are in table 4:

Table 4: OIG’s sample calculations
Calculations
   𝐴𝑚𝑜𝑢𝑛𝑡𝐿𝐶𝐿 = N * (µ - 𝑡𝛼/2 𝑆𝐸$ )
   𝐶𝑜𝑢𝑛𝑡𝐿𝐶𝐿 = N * (pct - 𝑡𝛼/2 𝑆𝐸% )
Definitions
       𝐴𝑚𝑜𝑢𝑛𝑡𝐿𝐶𝐿           = Total audit finding amount after deducting a margin of error.
      𝐶𝑜𝑢𝑛𝑡𝐿𝐶𝐿             = Total number of sampling units with the error after deducting a
                           margin of error.
      N                    = Number of sampling units in the universe
      µ                    = Average value of the error per unit.
      pct                  = Weighted percent of sampling units with the error in the sampling
                           frame.
      𝑆𝐸$                  = Standard error per unit, as applies to projecting dollars.
      𝑆𝐸%                  = Standard error per unit, as applies to projecting proportions.
       𝑡𝛼/2                = Student’s - t for projecting a one-sided confidence interval for a
                           sample of this size.

We found that in 11 of the 50 statistically selected contracts, the contractor inadequately
documented that the Disaster Recovery-assisted homes had damage caused by Hurricane Dolly
as required by the Act. This amounts to an average of $24,113 per CDBG contract. Deducting
for statistical variance to accommodate the uncertainties inherent in statistical sampling, we can
still say – with a one-sided confidence interval of 95 percent – that this amounted to at least
$12,321 per CDBG contract, and it could be more. Extrapolating this amount to the 700
contracts that the disaster assistance funds are expected to serve by December 31, 2014, we can
say that at least $8.6 million in disaster assistance funds could be disbursed for contracts on
homes that inadequately documented Hurricane Dolly damage. Additionally, this deficiency was


                                                   19
found across many CDBG contracts, and we can also say – with a one-sided confidence interval
of 95 percent – that at least 84 CDBG contracts could be affected, and it could be more.

   Sample projection:       $24,113 – 1.68 ⨉ $7,018.33 = $12,321LCL
   Universe projection:     700 ⨉ $12,321 = $8,624,700LCL
   Contracts affected:      700 ⨉ (22% – (5.927% ⨉ 1.680)) = 84.298LCL

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               20
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

               •      Contracting
               •      Damage assessments and inspections
               •      Monitoring

               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 Deficiencies

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

               •      The State’s contractor did not perform adequate home inspections of 15
                      Disaster Recovery-assisted homes (see finding 1).
               •      The State did not monitor the contractor to ensure that the home inspections
                      supported Hurricane Dolly damage and the contractor met the contract
                      benchmarks (see findings 1 and 2).


                                                 21
                           FOLLOW-UP ON PRIOR AUDITS

The State of Texas Did Not
Follow Requirements for Its
Infrastructure and
Revitalization Contracts
Funded With Disaster Recovery
Program Funds, 2012-FW-1005


     Our previous audit, issued on March 7, 2012, found that the State did not follow Federal
     and State requirements and best practices for its infrastructure and revitalization
     professional services and project management service contracts. The following
     recommendations are still open:

        •   Reimburse the Disaster Recovery program from non-Federal funds $919,570,
            which was improperly paid to the contractor for amounts billed using the
            ineligible cost plus a percentage of cost payment method.

        •   Reimburse from non-Federal funds or provide support for the estimated
            $74,599,747 in unsupported inflated labor costs.

        •   Reimburse from non-Federal funds or provide support for the $542,477 paid for
            unnecessary and unreasonable inflated labor costs.

     We are continuing to work with HUD in an attempt to resolve these recommendations.




                                            22
                                    APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                   Recommendation                             Funds to be put
                                           Ineligible 1/
                       number                                 to better use 2/

                           1A                  $1,609,580
                           1B                                      $8,624,700


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/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. These amounts include
     reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
     implementing recommended improvements, avoidance of unnecessary expenditures
     noted in preaward reviews, and any other savings that are specifically identified. In this
     case, if HUD implements our recommendation, it could help to ensure that funds incurred
     by the State are only for homes damaged by Hurricane Dolly. Our estimates reflected
     only the costs that the State could incur for homes approved for Disaster Recovery
     assistance by December 31, 2014.




                                             23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         25
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 6




                         27
Ref to OIG Evaluation   Auditee Comments

1




Comment 7




                         28
                         OIG Evaluation of Auditee Comments

Comment 1   The State said its process was more than adequate and exceeded all regulations
            and guidance provided by HUD. The State provided additional attachments
            including the Lower Rio Grande Valley Needs Assessment and various maps,
            which are not included in this report, but are available upon request. We agree
            the State had a process and policy, which required that eligibility for assistance
            include documenting the actual hurricane damage with photos in its files.
            However, as indicated in the report, some of the files reviewed did not have
            adequate photos or a description of the hurricane damage to support eligibility.

Comment 2   The State said there are no Federal guidelines for assessing and documenting
            disaster damage. It stated that the only Federal requirement was in the Federal
            register, which stated that expenses had to be “related” or “affected” by the event.
            We agree there are no Federal guidelines; however, the State’s comments
            concerning expenses be related to or affected by an event take the guidance
            provided by both the statute and register out of context. Both the statute and
            register require that the funds be used “for necessary expenses related to disaster
            relief, long-term recovery, and restoration of infrastructure, housing, and
            economic revitalization in areas affected by hurricanes, floods, and other natural
            disasters occurring during 2008.”

Comment 3   The State asserted that it was not improper for them not to use FEMA data
            because FEMA’s data was limited and its use was not required by Federal
            regulations. We agree using FEMA data was not a requirement; however, such
            data could have provided the State and its contractor a starting point for
            identifying impacted but unassisted homeowners. Additionally, we noted that the
            State’s contractor was using this information for duplication of benefits
            calculations for later storms, but it was not using the information to determine if
            Hurricane Dolly or another storm caused the damage while performing its
            inspections, which appeared problematic.

Comment 4   The State said that its pictures are used for more than documenting hurricane
            damage. It stated that damage might not be able to be evaluated by a picture and
            admitted that subsequent disasters have occurred. Further, the State indicated it
            relied on studies and maps to target those who suffered hurricane damage.
            Although we agree that pictures can be used for more than documenting hurricane
            damage, the primary purpose of the Disaster funding and the State’s program was
            to assist homeowners with damage caused by Hurricane Dolly. Thus, the
            questioned files should have contained pictures that identified the damage, clearly
            showed that Hurricane Dolly caused the damage, or used an inspection technique
            that correlated the damage to Dolly. Merely relying on a map to show an area is
            affected is not sufficient as assistance may not be needed if the homeowner had
            no damage or had already made repairs.

Comment 5   The State argued that conducting damage assessments before determining
            eligibility would result in assessing many ineligible homes and it would be costly

                                             29
            to inspect homes not served. The State misinterpreted our concern. We believe
            that the inspection should be a concurrent part of eligibility. However, our
            primary concern was that the inspection process was not performed until after a
            family was eligible and the State limited payment to its contractor only to
            approved homes. Thus, the State created a risk that the contractor might perform
            a less than adequate damage assessment.

Comment 6   The State said it was not required to document damage from subsequent weather
            events as long as they can show that the home was related to or affect by
            Hurricane Dolly. It further stated OIG lacked sufficient evidence to reach the
            conclusion that there was no Hurricane Dolly damage. We agree that only
            Hurricane Dolly damage needed to be documented. However, if the State’s
            contractor had documentation that attributed a home’s damage to a subsequent
            storm, the file needed to contain information that clearly correlated damage to
            Hurricane Dolly. The State’s position that if a home was in a mapped area, then
            the home was assuredly damaged by Dolly is not sufficient evidence that a home
            needed assistance. A prudent person needs evidence that the damage was caused
            by Dolly in 2008 because only Dolly affected homes were eligible to receive
            assistance under the statute.

Comment 7   The State indicated that it had amended the contract. It said that CDBG
            requirements did not require it to spend the funds in a timely manner; however, it
            found it practical to include benchmarks and goals. The State had not amended
            the contract while our audit work was ongoing. Further, even though the statute
            did not require it to timely expend the funds, the State has a responsibility to be a
            prudent steward of these funds and provide timely assistance to individuals
            impacted by the 2008 storms. Thus, its contracts should include benchmarks,
            goals, and penalties when those goals are not met.




                                             30