oversight

The State of New Jersey Did Not Fully Comply With Federal Procurement and Cost Principle Requirements in Implementing Its Tourism Marketing Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-08-29.

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

 OFFICE OF AUDIT
 REGION 3
 PHILADELPHIA, PA




               The State of New Jersey, Trenton, NJ

         Community Development Block Grant
     Disaster Recovery-Funded Tourism Marketing
                       Program




2014-PH-1008                                     AUGUST 29, 2014
                                                        Issue Date: August 29, 2014

                                                        Audit Report Number: 2014-PH-1008




TO:            Stan Gimont, Deputy Assistant Secretary for Grant Programs (Acting), DG
               //signed//
FROM:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA


SUBJECT:       The State of New Jersey Did Not Fully Comply With Federal Procurement and
               Cost Principle Requirements in Implementing Its Tourism Marketing Program


    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 New Jersey’s Community
Development Block Grant Disaster Recovery-funded tourism marketing 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
215-430-6730.
                                          August 29, 2014
                                          The State of New Jersey Did Not Fully Comply With
                                          Federal Procurement and Cost Principle Requirements in
                                          Implementing Its Tourism Marketing Program



Highlights
Audit Report 2014-PH-1008


 What We Audited and Why                   What We Found

We audited the State of New Jersey’s      The audit found nothing improper in the content of the
Community Development Block Grant         State’s marketing campaign. The State was challenged
Disaster Recovery-funded tourism          to quickly launch the campaign before the 2013
marketing program. We conducted the       summer beach season. However, although the State
audit based on a congressional request    complied with HUD instructions by certifying that its
to review the State’s Hurricane Sandy     policies and procedures were equivalent to Federal
tourism marketing contract bidding        procurement requirements, it did not procure services
process and the appropriateness of the    and products for its tourism marketing program in a
content of its marketing campaign. Our    manner that fully met the intent of the Federal
objectives were to determine whether      requirements. It did not immediately address the need
the content of the marketing campaign     for a required independent cost estimate and cost
was proper and whether the State          analysis before awarding a contract with a budget of up
procured services and products for its    to $25 million for marketing and outreach services.
tourism marketing program in              The regulations required the State to make independent
accordance with applicable Federal        estimates before receiving bids or proposals. They
procurement and cost principle            also required the State to perform a cost analysis.
requirements.                             Also, it could not demonstrate that purchases of
                                          marketing services and products were made
                                          competitively and that the winning contractor had
 What We Recommend
                                          timesheets to support wages and salaries it charged to
                                          the program. These deficiencies occurred because the
We recommend that HUD’s Deputy            State was not fully aware of Federal procurement and
Assistant Secretary for Grant Programs    cost principle requirements. As a result, the State
determine whether corrective actions      needed to fully demonstrate that the budgeted contract
and documentation the State began         amount was fair and reasonable and that $23 million it
providing at the end of the audit are     had disbursed under the contract was adequately
adequate to show that (1) the overall     supported.
contract price was fair and reasonable,
(2) $19.5 million disbursed under the     The State began taking corrective actions at the end of
contract for marketing costs was fair     the audit and began providing some documentation to
and reasonable, and (3) $3.5 million      resolve these deficiencies. HUD needs to assess the
disbursed under the contract for labor    documentation to determine the appropriateness of all
costs was allowable and supported or      contract costs.
direct the State to repay HUD from non-
Federal funds for any amount that it
cannot support.
                           TABLE OF CONTENTS

Background and Objectives                                                    3

Results of Audit
      Finding: The State Did Not Fully Comply With Federal Procurement and
      Cost Principle Requirements in Implementing Its Program                5

Scope and Methodology                                                        14

Internal Controls                                                            16

Appendixes
A.    Schedule of Questioned Costs                                           18
B.    Auditee Comments and OIG’s Evaluation                                  19
C.    Summary of Audit Issues                                                59




                                           2
                       BACKGROUND AND OBJECTIVES

On October 29, 2012, Hurricane Sandy made landfall near Atlantic City, NJ. The storm caused
unprecedented damage to New Jersey’s housing, business, infrastructure, health, social service,
and environmental sectors. On October 30, 2012, President Obama declared all 21 New Jersey
counties major disaster areas. The U.S. Department of Housing and Urban Development (HUD)
identified the following nine counties as New Jersey’s most impacted areas: Atlantic, Bergen,
Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, and Union.

Through the Disaster Relief Appropriations Act of 2013, 1 Congress made available $16 billion in
Community Development Block Grant funds for necessary expenses related to disaster relief,
long-term recovery, restoration of infrastructure and housing, and economic revitalization. In
accordance with the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1974,
these disaster relief funds were to be used in the most impacted and distressed areas affected by
Hurricane Sandy and other declared major disaster events that occurred during calendar years
2011, 2012, and 2013.

On March 5, 2013, HUD issued Federal Register Notice 5696-N-01, which advised the public of
the initial allocation of $5.4 billion in Block Grant funds appropriated by the Disaster Relief
Appropriations Act for the purpose of assisting recovery in the most impacted and distressed
areas declared a major disaster due to Hurricane Sandy. 2 The notice allowed for pre-award costs
to be reimbursable as long as the costs were incurred after the date of the storm. HUD awarded
the State of New Jersey $1.8 billion from this initial allocation of funds. On April 29, 2013,
HUD approved the State’s action plan. The action plan identified the purpose of the State’s
allocation, including criteria for eligibility, and how it uses addressed long-term recovery needs.
On May 13, 2013, HUD approved a grant agreement that obligated more than $1 billion of the
initial $1.8 billion allocation. The Disaster Relief Act required the State to expend obligated
funds within 2 years of the date of obligation.

Through the notice, HUD issued a waiver, which allowed the State to spend no more than $25
million of its disaster recovery grant to fund a tourism marketing program. The State planned to
provide disaster recovery assistance to its tourism industry and promote travel to communities in
the disaster-impacted areas. By way of comparison, HUD issued a waiver to the State of New
York to spend no more than $30 million on advertising and marketing activities using Disaster
Relief Act funds. HUD also issued waivers to the States of Louisiana and Mississippi to
promote tourism after Hurricane Katrina hit the Gulf Coast in 2005. HUD granted these waivers
because the grant funds can be a useful recovery tool in a damaged regional economy that
depends on tourism for many of its jobs and tax revenues. Without the waivers, tourism industry
support, such as a national consumer awareness advertising campaign, would have been
ineligible for regular Block Grant assistance.


1
 Public Law 113-2, dated January 29, 2013
2
 Areas impacted by Hurricane Sandy included Connecticut, Maryland, New Jersey, New York City, New York
State, and Rhode Island.

                                                    3
The governor of New Jersey designated the State’s Department of Community Affairs as the
responsible entity for administering its disaster recovery grant. The Department of Community
Affairs entered into a subrecipient agreement with the State’s Economic Development Authority
to administer the tourism marketing program. The Economic Development Authority is a
component unit of the State government. The State was challenged to quickly launch a tourism
marketing campaign before the 2013 summer beach season to support its tourism industry,
specifically in the communities that were hardest hit by the storm. On April 23, 2013, the
Authority entered into a contract with MWW Group LLC, 3 to implement a tourism marketing
program with a budget of up to $25 million, including the contractor’s fees and any pass-through
marketing costs.

As of February 2014, the State had disbursed $23 million for its tourism marketing program. Of
that amount, it disbursed $19.5 million for marketing costs, which included public relations event
costs; television, radio, billboards, and Internet advertising costs; and the contractor’s placement
fees. It disbursed the other $3.5 million to pay for the contractor’s labor costs.

In a letter to the HUD Inspector General, dated August 8, 2013, Congressman Frank Pallone, Jr.,
requested that we review and investigate the contract bidding process used by the State, and the
appropriateness of the content of its marketing campaign to promote the New Jersey Shore and
encourage tourism.

Our objectives were to determine whether the content of the marketing campaign was proper and
whether the State procured services and products for its tourism marketing program in
accordance with applicable Federal procurement and cost principle requirements.




3
  MWW Group LLC, a full-service public relations firm, partnered with Brushfire, Inc., a full-service marketing
firm. MWW was the lead contractor.

                                                         4
                                RESULTS OF AUDIT


Finding: The State Did Not Fully Comply With Federal Procurement
and Cost Principle Requirements in Implementing Its Program
The audit found nothing improper in the content of the State’s marketing campaign. However,
the State did not procure services and products for its tourism marketing program in a manner
that met the intent of all Federal procurement requirements. Also, it did not comply with all
Federal cost principle requirements for supporting salary and wage compensation. It did not
immediately address the need for an independent cost estimate and cost analysis before awarding
a contract with a budget of up to $25 million for marketing and outreach services. Also, it could
not demonstrate that it acquired marketing services and products competitively and that the
winning contractor had timesheets to support labor costs charged by its employees. These
conditions occurred because the State was not fully aware of Federal procurement and cost
principle requirements. It (1) believed that it was not required to complete an independent cost
estimate and analysis, (2) was not fully aware of Federal procurement requirements, and (3) was
unaware of the Federal cost principle requirements for supporting time charges. As a result, the
State needed to fully demonstrate that the budgeted contract amount was fair and reasonable and
that the $23 million it disbursed under the contract was adequately supported.


 The Content of the Marketing
 Campaign Was Proper

              The congressional request asked us to review the appropriateness of the content of
              the State’s marketing campaign. In particular, we were asked to review whether
              having the governor in the advertisements was appropriate. During 2013, the
              State launched its “Stronger than the Storm” marketing campaign to promote
              tourism in the aftermath of Hurricane Sandy. The campaign, produced under the
              contract awarded to MWW Group, portrayed the State as being resilient and
              having recovered from the impact of the hurricane. It included billboards, radio
              spots, and television commercials featuring the New Jersey Shore and including
              appearances by the governor and his family. The audit showed that the
              governor’s appearance in the commercials did not violate Federal procurement
              requirements. The commercials did not identify the governor or his family by
              name or title, mentioned no State race or office, did not solicit funds for any
              purpose, and included no political message.

              In addition, there was no evidence that Federal and State election laws had been
              violated as a result of contributions to the governor’s political campaign. Federal
              election laws were not applicable because according to Federal election
              regulations, Federal election laws apply to State campaigns only if there is some
              connection to a Federal election. There was nothing in the commercial in which


                                                5
                 the governor appeared that would bring it under the jurisdiction of Federal
                 election laws. With regard to State election laws, government contractors are
                 prohibited from contributing to State campaigns. State law also prohibits
                 contracting with any business entity (in which the value of the contract would
                 exceed $17,500) if the entity had made a contribution in the previous 18 months
                 to a candidate committee or election committee of any candidate for the office of
                 the governor or any State or county political party committee of a political party
                 nominating the governor. MWW Group made monetary contributions to national
                 Republican and Democratic Party committees and candidates. However, it did
                 not contribute to the governor’s campaign or the State Republican Party.

                 Lastly, the congressional request asked us to address concerns that the winning
                 proposal had the governor in the advertisements, while the lower bid that was not
                 selected did not. The audit showed, however, that the proposal submitted by the
                 losing bidder, Weber Shandwick, proposed using the governor in social media,
                 while the proposal by the winning bidder, MWW Group, made no mention of
                 using the governor in any media.

    The State Followed Several Key
    Procurement Requirements


                 The State’s process for awarding a contract for marketing and outreach services
                 complied with several key procurement requirements. The HUD notice 4 required
                 the State to either adopt the specific procurement standards identified in 24 CFR
                 (Code of Federal Regulations) 85.36 or have a procurement process and standards
                 that were equivalent to the procurement standards at 24 CFR 85.36. 5 The State
                 acknowledged in its procurement policy for Block Grant disaster recovery grants
                 that it was required as a grantee to adhere to the requirements at 24 CFR 85.36.
                 Accordingly, it complied and certified that its policies and procedures were
                 equivalent to HUD’s procurement regulations at 24 CFR 85.36.

                 The regulations for competitive proposals at 24 CFR 85.36(d)(3)(i) required the
                 State to publicize requests for proposals. Also, 24 CFR 85.36(d)(3)(ii) required
                 the State to solicit proposals from an adequate number of qualified sources. The
                 State met these requirements by using the U.S. General Services Administration’s
                 Web site, known as “eBuy,” to issue a request for quotation to 260 contractors.
                 The State received bids from four contractors as shown below.



4
  Federal Register Notice 5696-N-01, dated March 5, 2013
5
  In audit report 2013-FW-0001, dated March 28, 2013, we recommended that HUD include the procurement
standards in 24 CFR 85.36 in its future disaster recovery grant terms and provide procurement training and technical
assistance to ensure that future disaster recovery grantees are aware of and follow Federal procurement
requirements. HUD agreed to specifically reference these requirements in future grant agreements and include this
topic in future conference and webinars, and post information on specific topics on the Block Grant disaster
recovery Web site.

                                                         6
                                                                         Estimated
                                                                         marketing
                         Contractor                Bid amount 6            costs 7               Total
                    Winning Strategies               $6,500,000          $18,003,350           $24,503,350
                    Sherry Matthews, Inc.            $5,575,000          $19,500,000           $25,075,000
                    MWW Group                        $5,255,321          $17,765,000           $23,020,321
                    Weber Shandwick                  $2,811,250          $24,750,000           $27,561,250

                  Regulations at 24 CFR 85.36(d)(3)(iii) required the State to have a method for
                  conducting technical evaluations of the proposals received and for selecting
                  awardees. The State established an evaluation committee to perform a technical
                  review and price comparison of the bids it received based on the bidders’
                  personnel, experience, and ability to complete the scope of work. The evaluation
                  committee consisted of eight members: six voting members and two nonvoting
                  members. The evaluation committee was responsible for performing a technical
                  review and price comparison of the quotes received. The focus of the technical
                  review was the strengths and weaknesses of the quotes as they related to the
                  bidders’ ability to undertake and successfully complete the work required. The
                  request for quotation indicated that the technical evaluation criteria would include
                  the following factors: personnel, experience of the firm, and ability of the firm to
                  complete the scope of work based on its technical proposal.

                  The evaluation committee determined that two of the four bidders, MWW Group
                  and Weber Shandwick, were clearly in a competitive technical range based upon
                  the technical scoring. The following table shows the scores.

                                                                             Overall
                                            Contractor                        score
                                     MWW Group                                 953
                                     Weber Shandwick                           733
                                     Winning Strategies                        550
                                     Sherry Matthews, Inc.                     445

                  The State invited the top two bidders to make an oral presentation to the
                  evaluation committee based upon a written script and later to submit their best
                  and final offer. The two bidders submitted their best and final offers.




6
  Total contractor labor costs related to implementing a tourism marketing activity with a budget of $25 million that
included the contractor’s fees and any pass-through marketing costs
7
  Contractors were required to submit an estimate of the pass-through marketing costs related to their proposed
advertising and marketing campaigns. Marketing costs include public relations event costs, such as ribbon-cutting
ceremonies and celebrity appearances, and media costs, such as television, radio, print, billboard, and Internet
advertising.

                                                          7
                                                        Estimated
                                                        marketing
                Contractor            Bid amount          costs            Total
             MWW Group                  $4,682,375      $17,765,000      $22,447,375
             Weber Shandwick            $2,533,500      $24,750,000      $27,283,500

           Regulations at 24 CFR 85.36(d)(3)(iv) required the State to make awards to the
           responsible firm with the proposal that was most advantageous to the program,
           with price and other factors considered. MWW Group had the highest overall
           technical score. Also, considering the contractor costs (bid amounts) and
           estimated marketing costs submitted, MWW Group submitted the lowest initial
           and overall bids, and best final offer. The evaluation committee recommended
           that the State award MWW Group a contract to perform marketing and outreach
           services relative to the State’s recovery from Hurricane Sandy. Consistent with
           its request for quotation which indicated that the resulting contract would be
           based on a budget of up to $25 million, the State awarded MWW Group a
           contract with a budget of up to $25 million. The State paid the contractor’s costs
           on a reimbursable basis.

           Although the State complied with the key procurement requirements discussed
           above, it did not implement some key requirements before awarding the contract
           as discussed below.

The State Did Not Prepare an
Independent Cost Estimate and
Analysis Before Awarding a
Contract

           Contrary to regulations at 24 CFR 85.36(f), the State did not prepare an
           independent cost estimate and cost analysis before receiving bids or proposals and
           awarding a contract. The regulations required the State to make independent
           estimates before receiving bids or proposals. They also required the State to
           perform a cost analysis. An independent cost estimate serves as a yardstick for
           evaluating the reasonableness of the contractor’s proposed costs or prices. An
           independent cost analysis consists of evaluating the separate elements (for
           example, labor, materials, etc.) that make up a contractor’s total cost proposal to
           determine whether they are allowable, directly related to the requirement, and
           reasonable. Although the State did not adopt the Federal procurement standards,
           it needed to ensure that its alternate policies and procedures met the intent of the
           Federal requirements. Therefore, it needed to demonstrate that it developed a
           yardstick for evaluating the reasonableness of contractors’ proposed costs or
           prices, and evaluated the separate elements that made up the contractors’ total
           costs.




                                            8
The State asserted that its $25 million budget for its tourism marketing activity
was reasonable and justified based on a comparison it performed with the State of
Louisiana’s $30 million Economic Revitalization Small Tourism Business
Support Program, established in the aftermath of Hurricanes Katrina and Rita in
2005. HUD had granted Louisiana a waiver in the amount of $30 million to
conduct marketing and outreach services activities. In our opinion, this
comparison of summary budget information did not satisfy the requirement to
perform an independent cost estimate and analysis because it did not consider the
contractors’ proposed costs before it received bids or proposals and did not
determine whether the pricing of the separate elements that made up the total
costs in the contractors’ proposals were fair and reasonable.

This condition occurred because the State believed that it was not required to
complete an independent cost estimate and analysis. Because the State did not
perform an independent cost estimate and a cost analysis, HUD and the State had
no assurance that the budgeted contract amount was fair and reasonable.

The State Began To Take Action To Resolve Deficiencies

At the end of the audit, the State provided us an independent cost estimate report
related to its contract award. The report, dated May 13, 2014, was prepared by
ICF International, a technology, policy, and management consulting firm. The
report incorrectly stated that the State had a waiver for the requirement to develop
an independent cost estimate. However, the report provided a high-level
breakdown of estimated costs that would be associated with executing a similar
campaign for the State’s tourism marketing program. The estimates from the
report are presented in the schedule below.


   Cost category               Specific costs             Estimated amount
 Consulting              Direct labor                        $ 3,783,900
                         Indirect labor                    To be determined
 Purchases               Television                            8,540,000
                         Radio                                 3,920,000
                         Outdoor media                         3,475,000
                         Internet and social media             3,500,000
                         Print media                             330,000
 Other direct costs      Event supplies                          395,000
                         Promotional items                       100,000
 Travel                  Approximately 60 trips                    60,000
 Total estimate                                              $24,103,900

We could not determine the validity of the estimated costs because the report did
not include sufficient backup detail information related to the specific cost
categories. Also, the cost categories presented did not match the cost categories
in MWW Group’s proposal. In addition, the schedule of the estimated costs was

                                 9
           incomplete because it indicated that indirect labor costs were yet to be
           determined. The State should have used information such as this to evaluate the
           bids before awarding the contract.

The State Did Not Ensure That
Marketing Services Were
Procured Competitively

           The State could not demonstrate that marketing services and products totaling
           $19.5 million were acquired competitively. More than half of the amount spent
           was for media advertising on television and radio as shown in the schedule below.

                                Category                     Amount
                     Television advertising                 $ 9,547,960
                     Radio advertising                        3,230,710
                     Billboard advertising                    1,752,070
                     Digital advertising                        745,690
                     Other                                    4,222,590
                     Total                                  $19,499,020

           The State’s contract with MWW Group required the contractor to provide copies
           of at least three quotes or proposals when submitting invoices for payment.
           However, shortly after the State awarded the contract, it waived the requirement
           because the contractor claimed that it would hinder its ability to move quickly on
           certain activities. Although the State had the authority to waive the specific
           contract requirement, since this action changed the terms of the contract, it should
           have formalized the change and issued a contract modification because the
           regulations at 24 CFR 85.36 (b)(9) required the State to maintain records
           sufficient to detail the significant history of the procurement. The regulations at
           24 CFR 85.36(c) required the State to conduct all procurement transactions in a
           manner providing full and open competition. Also, the regulations at 24 CFR
           85.36(d) required the State to obtain bids from an adequate number of sources
           regardless of the procurement method unless the noncompetitive proposal method
           was selected. The State could not provide adequate documentation to show that it
           met the intent of these requirements. This occurred because the State was not
           fully aware of Federal procurement requirements. As a result, HUD had no
           assurance that marketing services and products were acquired competitively, and
           that associated disbursements totaling $19.5 million were supported.

           The State Began To Take Action To Resolve Deficiencies Regarding Procurement
           of Marketing Services

           After we notified the State of this problem, it began providing additional
           documentation that it believed demonstrated that funds it disbursed for marketing
           costs were fair and reasonable. HUD needs to assess whether the documentation

                                            10
           the State provided at the end of the audit and any additional documentation it
           provides after the audit are sufficient to demonstrate that the prices the contractor
           paid for marketing services and products were fair and reasonable.

Contract Labor Costs Were Not
Fully Supported

           When submitting invoices for payment, the contract required the contractor to
           provide copies of weekly timesheets for employees assigned to do the work
           referenced in the invoice. The State did not have timesheets to support $3.5
           million in labor costs charged by the contractor’s employees. For MWW Group,
           the State provided billing worksheets that identified the employee, the number of
           hours worked by date and activity, the hourly rate, and the total amount due. For
           Brushfire, Inc., a subcontractor to MWW Group, the State provided backup
           worksheets for its invoices that identified the employee, the employee’s job title,
           the number of hours worked by date, and the daily total cost.

           In addition to not meeting the terms of the contract, these billing worksheets and
           backup worksheets did not meet Federal cost principle requirements for
           supporting salary and wage compensation for personal services because they did
           not account for all the activities for which the employee was compensated and
           they were not signed by the employees. Federal cost principle requirements at 2
           CFR Part 225, appendix B(8)(h), required the State, in instances in which
           employees worked on multiple activities or cost objectives, to have personnel
           activity reports or equivalent documentation to support the distribution of their
           salaries or wages. This documentation was required to reflect an after-the-fact
           distribution of the actual activity of each employee, account for all activities for
           which each employee was compensated, be prepared at least monthly and
           coincide with one or more pay periods, and be signed by the employee. The State
           did not provide documentation that met these requirements.

           The State should have had weekly timesheets or equivalent personnel activity
           reports in its possession when it paid invoices as required by the terms of the
           contract. Also, regulations at 24 CFR 570.490(a)(1) required the State to
           establish and maintain such records as may be necessary to facilitate review and
           audit by HUD of its administration of Block Grant funds under 24 CFR 570.493.

           The problem noted occurred because the State was unaware of the Federal cost
           principle requirements and believed that documents it accepted to support
           contractor employee time charges were subject to its discretion rather than the
           contract requirements. As a result, HUD had no assurance regarding how much
           time the contractor’s employees spent working on the program, and the $3.5
           million that the State disbursed to the contractor for public relations and
           marketing costs performed by its employees was unsupported.



                                            11
             The State Began To Take Action To Resolve Deficiencies Regarding Labor Costs

             After we notified the State of this problem, it contacted the contractors and
             provided us reports and excerpts from MWW Group’s automated timekeeping
             system, and for Brushfire, it provided copies of documents labeled as employee
             timesheets from its automated timekeeping system. However, these documents
             alone did not satisfy the requirements of the contract and Federal cost principles.
             The contract required copies of weekly timesheets. The regulations at 2 CFR Part
             225 required that personnel activity reports or equivalent documentation account
             for the total of all activities for which each employee was compensated and be
             signed by the employee. Additionally, the Brushfire timesheets had fields
             designated for the employee and supervisor to sign and date, but none had been
             signed and dated by either the employee or the supervisor.

Conclusion

             The content of the State’s marketing campaign was proper, and it followed
             several key Federal procurement requirements. However, the State did not
             procure services and products for its tourism marketing program in full
             compliance with Federal procurement and cost principle requirements (a
             summary of the audit issues is presented in appendix C). This condition occurred
             because the State was not fully aware of applicable requirements. As a result,
             HUD had no assurance that the budgeted contract amount was fair and
             reasonable, that marketing products and services were acquired competitively,
             and that labor costs were supported. Although the State began taking corrective
             action at the end of the audit to resolve most of the deficiencies, we did not
             perform a detailed review of documentation it later provided. HUD needs to
             assess whether the State’s corrective action and related documentation are
             adequate to ensure that all disbursements are reasonable and supported.

Recommendations

             We recommend that HUD’s Deputy Assistant Secretary for Grant Programs

             1A.    Determine whether the documentation the State provided is adequate to
                    show that the overall contract price was fair and reasonable and if not,
                    direct the State to repay HUD from non-Federal funds for any amount that
                    it cannot support (excluding any amounts repaid as a result of
                    recommendations 1B and 1C).

             1B.    Determine whether the documentation the State provided is adequate to
                    show that the $19,499,020 disbursed for marketing costs was fair and
                    reasonable and if not, direct the State to repay HUD from non-Federal
                    funds for any amount that it cannot support.


                                             12
1C.   Determine whether the documentation the State provided is adequate to
      support $3,487,461 disbursed for wages and salaries charged to the
      program by the contractors’ employees and if not, direct the State to repay
      HUD from non-Federal funds for any amount that it cannot support.

1D.   Direct the State to update its procurement processes and standards to
      ensure that they are fully aligned with applicable Federal procurement and
      cost principle requirements.




                               13
                        SCOPE AND METHODOLOGY

We conducted the audit from September 2013 through March 2014 at the State’s offices located
at 101 South Broad Street and 33 and 36 West State Street, Trenton, NJ, and our office located in
Philadelphia, PA. The audit covered the period January 2013 through February 2014.

To accomplish our objectives, we reviewed

   •   Relevant background information;

   •   Applicable regulations, HUD notices, and the State’s policies and procedures;

   •   The Disaster Relief Appropriations Act, Public Law 113-2;

   •   The funding agreement between HUD and the State, dated May 13, 2013;

   •   The subrecipient agreement between the State’s Department of Community Affairs and
       its Economic Development Authority, dated May 21, 2013;

   •   Correspondence prepared by HUD, the State, and other related parties;

   •   Audited financial statements for the State and its Economic Development Authority for
       the periods ending June 30, 2011, and December 31, 2012, respectively;

   •   Organizational charts for the State’s Department of Community Affairs and its Economic
       Development Authority;

   •   The State’s request for quotations;

   •   Bids, proposals, and other supporting documentation submitted by contractors;

   •   The State’s bid evaluation documentation;

   •   The State’s contract with MWW Group;

   •   Contractor invoices and supporting documentation;

   •   Reports from the contractor’s automated timekeeping systems;

   •   Documentation provided by the State to address its noncompliance with the competition
       requirement in HUD’s procurement regulations;

   •   A contractor-prepared independent cost estimate report related to the State’s contract
       award;

                                               14
   •   Contractor analyses conducted by the Federal Recovery Accountability and Transparency
       Board;

   •   A HUD management review, dated September 13, 2013; and

   •   Information entered by the State into HUD’s Disaster Recovery Grant Reporting system.

We conducted interviews with responsible employees of the State and HUD staff located in
Philadelphia, PA; Fort Worth, TX; and Washington, DC.

To achieve our audit objective, we relied in part on the State’s computer-processed data. We
used the computer-processed data to select a sample of disbursements to review. Although we
did not perform a detailed assessment of the reliability of the data, we did perform a minimal
level of testing and found the data to be adequate for our purposes.

As of October 2013, the beginning of the audit, the State had made 10 disbursements totaling
$21.8 million for its tourism marketing activity. That amount included costs for advertising,
which included television, radio, billboards, and the Internet. It also included the contractor’s
public relations and marketing costs, which included salaries and wages for its employees. We
selected 3 of the 4 largest of the 10 disbursements made during the period April to October 2013
for review. The value of the three disbursements was $14.4 million (about 66 percent of the total
disbursed). We reviewed the disbursements to determine whether they were eligible and
supported by adequate documentation. Of that amount, the State disbursed $12.5 million for
advertising and $1.9 million for public relations and marketing. During the period November
2013 to February 2014, the State made two additional disbursements to the contractor totaling
$1.2 million and had disbursed a total of $23 million for its tourism marketing activity as of
February 2014.

We accessed a database operated by the Center for Responsive Politics and a database operated
by the New Jersey Election Law Enforcement Commission to determine whether MWW Group
had made corporate contributions to the governor’s campaign or to any State or county political
party committee.

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.




                                               15
                              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:

               •   Validity and reliability of data – Policies and procedures that management has
                   implemented to reasonably ensure that valid and reliable data are obtained,
                   maintained, and fairly disclosed.

               •   Compliance with laws and regulations – Policies and procedures that
                   management has implemented to reasonably ensure that the use of resources is
                   consistent with laws and regulations.

               We assessed the relevant controls identified above.

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

 Significant Deficiencies

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

               The State did not


                                                 16
•   Establish and implement procedures to ensure that it complied with all
    applicable procurement and cost principle requirements.




                                17
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                           Recommendation
                                                  Unsupported 1/
                               number

                                  1B                $19,499,020
                                  1C                  3,487,461
                                 Total              $22,986,481



1/   Unsupported costs are those 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




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         19
Comment 2

Comment 3

Comment 4



Comment 5




            20
Comment 6



Comment 7




Comment 8


Comment 9




Comment 10




             21
Comment 9



Comment 11




             22
Comment 1




Comment 1




            23
24
25
Comment 1




            26
27
Comment 2




            28
Comment 3
Comment 4



Comment 5




Comment 6
Comments 7
and 12


Comment 5




             29
Comment 6




            30
Comment 5

Comment 13




Comment 13




Comment 6




             31
Comment 6




Comment 14




Comment 7




             32
Comment 7




            33
Comment 7




Comment 7




Comment 7




Comment 8




            34
Comment 5


Comment 5




Comment 15


Comment 16




             35
Comments 2,
5, and 12




Comments 5
and 17




              36
Comments 2
and 5



Comments 6
and 13


Comments 7,
8, and 12




Comments 3,
9, and 10




              37
Comment 18




Comments 3
and 10




             38
Comment 3


Comments 10
and 19




              39
40
Comments 10
and 19




              41
Comments 10
and 19




              42
Comments 10
and 19




Comments 10
and 19




              43
Comments 10
and 19




              44
Comment 5




Comment 20


Comment 20



Comment 20




             45
Comment 19



Comment 20




             46
Comment 19




Comment 19




Comments
11 and 21




             47
48
Comment 22




Comment 22




Comment 23




             49
50
                         OIG Evaluation of Auditee Comments


Comment 1   The State contended that its tourism marketing campaign was implemented in
            compliance with applicable laws and regulations. We found, however, that the
            State did not procure services and products for its tourism marketing program in a
            manner that met the intent of all Federal procurement requirements.

Comment 2   The State contended that it was not required to conduct a pre-bid cost estimate or
            post-bid cost analysis for its tourism marketing campaign. It also contended that,
            had it been required to conduct a pre-bid cost estimate or post-bid cost analysis,
            its efforts to estimate and evaluate costs were sufficient to meet State and Federal
            standards. As stated in the audit report, the State was required to conduct a pre-
            bid cost estimate and post-bid cost analysis. The State certified to HUD that its
            procurement policies and procedures were equivalent to the Federal procurement
            requirements. However, its actions did not demonstrate compliance with the
            intent of the Federal standards.

Comment 3   The State contended that it provided documentation demonstrating cost
            reasonableness and in all respects complied with applicable Federal and State
            laws and regulations. As stated in the audit report, the State began providing
            documentation that it believed demonstrated that costs were fair and reasonable
            after we notified it of the problem. Actions taken to resolve audit issues require
            input from HUD. Therefore, HUD needs to assess whether the documentation
            provided at the end of the audit and any additional documentation the State
            provides after the audit are sufficient to demonstrate that costs were fair and
            reasonable.

Comment 4   The State believed that it had sufficient documentation justifying all contract
            labor costs when it paid invoices associated with those costs. As stated in the
            audit report, the contract required the contractor to provide copies of weekly
            timesheets when submitting invoices for payment. The State, however, did not
            have the required timesheets at the time of the audit. As required by the terms of
            the contract, the State should have had weekly timesheets or equivalent personnel
            activity reports in its possession when it paid invoices as required by the terms of
            the contract.

Comment 5   The State contended that a finding of non-compliance was not proper because it
            did not adopt the procurement requirements of 24 CFR Part 85, and therefore was
            not bound by its provisions. However, for this disaster recovery effort, unlike
            previous disaster recovery efforts, HUD required the State to either adopt the
            specific procurement standards identified in 24 CFR 85.36 or have a procurement
            process and standards that were equivalent to the procurement standards at 24
            CFR 85.36. The reason for this requirement was our recommendation to HUD, in
            our audit report 2013-FW-0001, dated March 28, 2013, on HUD’s State
            Community Development Block Grant Hurricane Disaster Recovery program for

                                             51
            hurricanes that hit the Gulf Coast States from August 2005 through September
            2008. Based on our prior audits and a review of the program’s data, we identified
            several lessons to be learned including in the area of procurement. To improve
            the effectiveness and efficiency of the program, we recommended that HUD
            include the procurement standards in 24 CFR 85.36 in its future disaster recovery
            grant terms and provide procurement training and technical assistance to ensure
            that future disaster recovery grantees are aware of and follow Federal
            procurement requirements. HUD agreed with our recommendation.

            Also, the State acknowledged in its procurement policy for Block Grant disaster
            recovery grants that it was required as a grantee to adhere to the requirements
            at 24 CFR 85.36. Accordingly, it complied and certified to HUD that its policies
            and procedures were equivalent to the procurement standards at 24 CFR 85.36.
            Furthermore, a State Executive Order, dated February 19, 2013, required that all
            proposed procurements funded with Sandy-related Federal funds be submitted to
            the Office of the State Comptroller for review. The Office of the State
            Comptroller required that all proposals for procurement be accompanied with a
            description of the goods or services to be provided and an estimate of the cost of
            the goods or services to be procured.

Comment 6   The State contended that HUD expressly affirmed the adequacy of its
            procurement policy, including aspects relating to 24 CFR 85.36, when it approved
            the State’s action plan and it justifiably relied on HUD’s approval of its
            procurement policy when it went forward with the procurement process for the
            tourism marketing activity. It also contended that during two monitoring visits by
            HUD, HUD did not raise any concerns about its procurement policy during either
            visit. However, HUD relied on the State’s certification that its procurement
            policies and procedures were equivalent to the Federal procurement requirements.

            HUD’s monitoring reviews did not focus on the State’s compliance with the
            specific Federal procurement and cost principle requirements with which we took
            issue. In its July 2013 monitoring visit, HUD reviewed certain aspects of the
            State’s procurement process. HUD spoke with staff from the State’s Department
            of Community Affairs about its general protocol before awarding Block Grant
            disaster recovery-funded contracts. HUD noted that the process involved drafting
            the scope of work and a Request for Quotation, identifying the applicable Block
            Grant program, timeframe for completion of the work and a formal evaluation
            process for reviewing bids. HUD noted that the State’s process appeared to be
            compliant with Block Grant requirements, and Federal Register notices. HUD
            noted that given the workload, additional staff and resources were needed to
            adequately accomplish contract management responsibilities. HUD also noted
            that the State generally complied with procurement transparency requirements but
            that some information was not easily obtainable from the State’s Web site.
            Lastly, HUD reviewed four contracts, not including the $25 million contract with
            MWW Group, for compliance with 24 CFR 85.36, the relevant Federal Register
            notices, and other authorities. HUD reported that all four contracts appeared to be

                                            52
            in compliance. Specifically, the contracts had a clear statement of work,
            provisions detailing Federal requirements, a proper method of procurement,
            complied with the Department of Community Affairs’ procurement guidelines,
            and did not contain prohibited contract pricing, such as cost plus a percentage of
            cost.

            In March 2014, HUD reviewed eligibility criteria and provided on-site technical
            assistance to the staff overseeing the “Stronger than the Storm” advertising
            campaign, including assistance to help the staff understand the audit process and
            purpose of our information requests. HUD noted that the State had disbursed
            $23.5 million of the $24.4 million it allocated for the campaign and listed the
            accomplishments that the State credited to the advertising campaign. HUD
            reported no findings and concerns related to the State’s tourism efforts during this
            visit. HUD also reviewed the area of procurement. It noted that the State had
            adopted 24 CFR 85.36 with regard to Federal procurement standards and
            followed the procurement provisions found in the Federal Register Notice for
            Hurricane Sandy recovery grants. HUD reviewed seven sample procurement
            transactions including the $25 million contract with MWW Group. HUD reported
            that the responsible staff was knowledgeable of the procurement process and
            walked the HUD staff through a contract file upon discussion of procurement
            (although it did not indicate which contract file was used during the discussion).
            HUD made several observations including that the contract files were extensive,
            well-organized, and easy to follow. The files contained an overall procurement
            checklist, along with documents such as the Request for Proposals and Request
            for Quotation with typical related information, and a copy of the executed
            contract. Additional contract file documents included the scoring and evaluation
            of the proposals along with a narrative and justification for selecting a particular
            vendor. Overall, HUD’s review of procurement contained no findings or
            concerns. In general, we made the same conclusion. As stated in the audit report,
            the State’s process for awarding a contract for marketing and outreach services
            complied with several key procurement requirements.

Comment 7   The State contended that it complied with the provisions of 24 CFR 85.36(f) and
            estimated the costs for its tourism marketing campaign before receiving bids by
            (1) meeting with Louisiana disaster relief officials and reviewing actions taken by
            that State following Hurricanes Katrina and Rita, (2) conferring with and
            receiving the assent of HUD as to the appropriate amount of funds that should be
            included in a waiver application that the State submitted, (3) conducting an
            analysis of the costs incurred by the State for a previous tourism campaign, and
            (4) applying for and receiving a waiver from HUD for the estimated $25 million
            cost of the tourism marketing campaign. However, these four actions do not
            demonstrate compliance with the provisions of 24 CFR 85.36(f). The State also
            contended that Federal regulations did not necessitate a post-bid cost analysis
            because the bids submitted to the State provided sufficient price competition.
            However, these actions, though prudent and required, did not satisfy the
            requirement to perform an independent cost estimate and analysis because the

                                             53
              State did not consider the contractors’ proposed costs before it received bids or
              proposals and it did not determine whether the pricing of the separate elements
              that made up the total costs in the contractors’ proposals were fair and reasonable.
              The State’s request for $25 million did not qualify as a cost estimate.

Comment 8     The State contended that a cost estimate conducted at our request confirmed the
              reasonableness of its expenditures for the tourism marketing campaign and there
              was no basis for our finding as to the technical requirements of 24 CFR 85.36 (f).
              We did not request that the State conduct a post-hoc cost estimate. In February
              2014, we presented the State a draft finding outline, which is part of the normal
              audit process, to inform it of our results and obtain feedback on the audit issues.
              The draft finding outline included a draft recommendation to HUD to direct the
              State to conduct an independent cost analysis. The cost report the State provided,
              dated May 13, 2014, incorrectly stated that the State had a waiver for the
              requirement to develop an independent cost estimate. It provided a high-level
              breakdown of estimated costs that would be associated with executing a similar
              campaign for the State’s tourism marketing program. We could not determine the
              validity of the estimated costs because the cost report did not include sufficient
              backup detail information related to the specific cost categories. Also, the cost
              categories presented did not match the cost categories in MWW Group’s
              proposal. In addition, the schedule of the estimated costs was incomplete because
              it indicated that indirect labor costs were yet to be determined. The State should
              have used information such as this to evaluate the bids before awarding the
              contract.

Comment 9     The State believed that it demonstrated cost reasonableness in its procurement of
              goods and services for its tourism marketing campaign. As stated in the audit
              report, HUD needs to assess whether documentation the State provided at the end
              of the audit and any additional documentation it provides after the audit is
              sufficient to demonstrate that the prices the contractor paid were fair and
              reasonable for the marketing services and products. If not, we recommended that
              HUD direct the State to repay from non-Federal funds any amount that it cannot
              support.

Comment 10 The State contended that it was not feasible, instructive or consistent with
           industry standards to require the contractor to solicit competitive bids from
           vendors before buying media advertising space due to the uniqueness of each
           respective media buy option. The State showed in the early stages of its
           procurement process that it was important for the contractor to solicit competitive
           bids because, in the contract with MWW Group, the State required the contractor
           to provide copies of at least three quotes or proposals when submitting vendor
           invoices for payment. However, shortly after the State awarded the contract, it
           waived the requirement because the contractor claimed that it would hinder its
           ability to move quickly on certain activities. Given the need to move quickly and
           the uniqueness of the availability and cost for products and services within the
           industry, the State should have documented a justification for non-competitive

                                               54
              procurements to explain why competition was limited before purchases were
              made. Federal cost principle requirements at 2 CFR Part 225, appendix
              A(C)(1)(a), required that in order to be allowable under a Federal award, costs
              must be necessary and reasonable.

Comment 11 The State contended that it had detailed documentation to support the labor costs
           invoiced by the contractor at the time that it paid the invoices. As stated in the
           audit report, for MWW Group, the State provided billing worksheets that
           identified the employee, the number of hours worked by date and activity, the
           hourly rate, and the total amount due. For Brushfire, Inc., a subcontractor to
           MWW Group, the State provided backup worksheets for its invoices that
           identified the employee, the employee’s job title, the number of hours worked by
           date, and the daily total cost. This documentation did not meet the terms of the
           contract because the contract required the contractor to provide copies of weekly
           timesheets for employees when submitting invoices for payment. At the time of
           the audit, the State did not have the weekly timesheets to support labor costs
           charged by the contractor’s employees at the time it paid invoices. In addition to
           not meeting the terms of the contract, these billing worksheets and backup
           worksheets did not meet Federal cost principle requirements for supporting salary
           and wage compensation for personal services because they did not account for all
           the activities for which the employees were compensated. In addition, they were
           not signed by the employees. Federal cost principle requirements at 2 CFR Part
           225, appendix B(8)(h), required the State to have personnel activity reports or
           equivalent documentation to support the distribution of employees’ salaries or
           wages in instances in which they worked on multiple activities or cost objectives.
           This documentation was required to show an after-the-fact distribution of the
           actual activity of each employee. This included accounting for all activities for
           which each employee was compensated, being prepared at least monthly to
           coincide with one or more pay periods, and being signed by the employee. The
           State did not provide documentation that met these requirements.

Comment 12 The State contended that, even if it was required to strictly comply with the
           Federal requirements, it estimated the costs of its tourism marketing campaign
           before receiving bids and did not need to perform a cost analysis because the bids
           it received provided sufficient price competition. While the Federal regulations at
           24 CFR 85.36(f) provide that a cost analysis is necessary when price competition
           is lacking, the regulations also state that a cost analysis must be performed when
           the offeror is required to submit the elements of his estimated cost (for example,
           under professional, consulting, and architectural engineering services contracts).
           In this case, the bids the State received from contractors included the components
           of their total costs. Therefore, the State should have performed a cost analysis.

Comment 13 The State contended that HUD expressly affirmed the adequacy of its
           procurement policy when it approved the State’s action plan. However, HUD
           relied on the State’s certification that its policies and procedures were equivalent



                                               55
              to the procurement standards at 24 CFR 85.36. The State was responsible for the
              accuracy of its certification to HUD.

Comment 14 The State contended that equivalent does not mean identical and that it advised
           HUD of equivalent State-level regulations, made good faith efforts to
           communicate with HUD before issuing a Request for Quotation, and HUD did not
           assert that either a cost estimate or cost analysis was required. HUD relied on the
           State’s certification that its procurement policies and procedures were equivalent
           to the Federal procurement requirements. Although the State did not adopt the
           Federal procurement standards, it needed to ensure that its alternate policies and
           procedures met the intent of the Federal requirements. Therefore, it needed to
           demonstrate that it developed a measure for evaluating the reasonableness of
           contractors’ proposed costs or prices, and evaluated the separate elements that
           made up the contractors’ total costs.

Comment 15 The State contended that, in February 2014, we recommended it obtain a post-hoc
           independent cost estimate. We did not recommend that the State obtain a post-
           hoc independent cost estimate. In February 2014, we presented the State a draft
           finding outline, which is part of the normal audit process, to inform it of our
           results and obtain feedback on the audit issues. The outline included a draft
           recommendation to HUD to direct the State to conduct an independent cost
           analysis. We commend the State for being proactive and having an independent
           cost estimate completed. However, the issue related to the timing of the
           contractor’s cost estimate report was not that it was 3 months after the February
           meeting but that the cost estimate was not completed before the State received
           bids or proposals. Additionally, we deleted the word “finally” from the report.

Comment 16 The State contended that backup detail information relating to the contractor’s
           cost estimate report was readily available before we issued our report and that we
           did not request it. However, the main issue raised in the audit report was that the
           State did not complete an independent cost estimate before it received bids or
           proposals. In addition, actions taken to resolve audit issues require input from
           HUD. Therefore, HUD needs to assess whether the documentation the State
           provided was sufficient to show that the overall contract price was fair and
           reasonable.

Comment 17 The State contended that it should be given flexibility and latitude in establishing
           and interpreting its own procedures and standards for procurement in accordance
           with Block Grant program regulations. The State was granted flexibility to
           implement its tourism marketing program in that it received a waiver to spend
           Block Grant disaster recovery funds on activities that were otherwise ineligible.
           Also, the State had the flexibility to implement its own standards and procedures
           for procurement. However, since it acknowledged in its procurement policy that
           it was required to adhere to Federal procurement requirements at 24 CFR 85.36, it
           should have ensured that its procurement standards and procedures met the intent
           of the Federal requirements.

                                              56
Comment 18 The State contended that there was no three bid requirement because it waived the
           contractual provision requiring three bids for purchases. As stated in the audit
           report, shortly after the State awarded the contract, it waived the requirement
           because the contractor claimed that it would hinder its ability to move quickly on
           certain activities. Although the State had the authority to waive the specific
           contract requirement, it should have formalized the change and issued a contract
           modification because this action changed the terms of the contract and the
           regulations at 24 CFR 85.36(b)(9) required the State to maintain records sufficient
           to detail the significant history of the procurement. Moreover, in light of the lack
           of an independent cost estimate, the removal of the three bid requirement resulted
           in a lack of assurance that the contractor’s expenditures totaling nearly $20
           million were reasonable.

Comment 19 The State contended that the procurement methods it used for its marketing
           campaign were reasonable given the unique circumstances of the program. The
           State provided a detailed explanation as to why it believed the various purchases
           were reasonable. Given the need to move quickly and the uniqueness of the costs
           for products and services within the industry, the State should have documented a
           justification, such as the explanation it provided in its response to the audit report
           with documentation to support the explanation, for non-competitive procurements
           to explain and show why competition was limited before purchases were made.

              Also, at the end of the audit, the State provided documentation that it believed
              supported some of the $19.5 million in expenditures. This included
              documentation that it asserted was for production costs related to a similar
              campaign produced for the New Jersey Division of Travel and Tourism several
              years ago that cost more than the State’s “Stronger than the Storm” commercial;
              an April 2013 invoice from a vendor to MWW Group for copywriting services for
              another client which showed that the hourly rate for this service at that time was
              the same hourly rate charged to the “Stronger than the Storm” campaign for
              copywriting services in August 2013; and rate cards for print ads in the New York
              Giants’ yearbook and an ad in the 2013 Major League Baseball All-Star Game
              program with an explanation that it negotiated rates better than the rates
              advertised on the cards. Some quotes the State provided were obtained after we
              raised this issue with the State. To conduct a proper audit of the expenditures, an
              auditor would need to follow the trail from the State’s disbursement, to the
              contractor’s invoice, to the specific cost on the invoice, to the source
              documentation. We were not able to do this during the audit because the State did
              not have the source documentation readily available.

              Actions taken to resolve audit issues require input from HUD. Therefore, HUD
              needs to assess whether documentation the State provided at the end of the audit
              and any additional documentation it provides after the audit is sufficient to
              demonstrate that the prices the contractor paid for marketing services and
              products totaling $19.5 million were fair and reasonable.



                                               57
Comment 20 The State contended that Federal procurement guidelines contained in HUD
           Handbook 7460.8, REV 2, Procurement Handbook for Public Housing Agencies,
           applied to it. However, the handbook applies only to public housing agencies.
           The applicable regulations at 24 CFR 85.36 do not address micro purchases.
           Rather, for purchases that do not cost more than the small purchase threshold,
           currently set at $100,000, price or rate quotations shall be obtained from an
           adequate number of qualified sources.

Comment 21 The State recognized our concern and acknowledged that it did not fully comply
           with Federal regulations and stated that it would adhere to requirements going
           forward.

Comment 22 The State believed that the documentation it provided was adequate to show that
           the overall contract price and funds disbursed for marketing costs were fair and
           reasonable and that it was not necessary for it to make any repayment. However,
           OIG recommendations are addressed to HUD program officials. Therefore, HUD
           program officials are ultimately responsible for ensuring that corrective actions
           satisfy the intent of the audit recommendations.

Comment 23 The State believed that it had detailed documentation to support the contractor’s
           labor costs at the time it paid the invoices. It recognized our concern and
           acknowledged that it did not fully comply with Federal regulations and stated that
           it would adhere to requirements going forward. However, HUD program officials
           need to determine whether the State’s documentation is adequate to support $3.5
           million it disbursed for wages and salaries charged to the program by the
           contractors’ employees.




                                             58
Appendix C

                     SUMMARY OF AUDIT ISSUES


                                                          Was adequate
                                                          documentation
                                                           available in
                     When should                            the State’s When did the
                      action have                          files during   State begin
    Audit issue      been taken?            Criteria        the audit?  taking action?
Lack of a cost     Before receiving    24 CFR                   No         May 2014
estimate           bids or proposals   85.36(f)(1)
Lack of a cost     Before awarding     24 CFR                  No              -
analysis           a contract          85.36(f)(1)
Lack of evidence   Before making a     24 CFR 85.36(c)         No        February 2014
of competitive     purchase            and (d)
procurement of
services and
products
Lack of employee   Timesheets          Section 5 of the        No        February 2014
timesheets         should have         State’s contract
                   accompanied         with MWW
                   invoices for        Group
                   payment.            2 CFR Part 225,
                                       appendix B(8)(h)




                                            59