oversight

The Fresno Housing Authority's Procurement of Goods and Services Did Not Always Comply With HUD Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-11.

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

         The Fresno Housing Authority,
                  Fresno, CA
   Public Housing Capital and Operating Fund Programs




Office of Audit, Region 9     Audit Report Number: 2015-LA-1007
Los Angeles, CA                               September 11, 2015
To:            Jesse Wu, Acting Director, Office of Public Housing, San Francisco, 9APH
               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       The Fresno Housing Authority’s Procurement of Goods and Services Did Not
               Always Comply With HUD Regulations


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 Fresno Housing Authority’s public housing
capital and operating funds.
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
213-534-2471.
                    Audit Report Number: 2015-LA-1007
                    Date: September 11, 2015

                    The Fresno Housing Authority’s Procurement of Goods and Services Did Not
                    Always Comply With HUD Regulations




Highlights

What We Audited and Why
We audited the Fresno Housing Authority due to a complaint alleging that the Authority steered
contracts, did not seek competition for all of its required procurements, and did not maintain
adequate supporting documentation. The objective of the audit was to determine whether the
Authority used its operating and capital funds in accordance with U.S. Department of Housing
and Urban Development (HUD) requirements when procuring goods and services.

What We Found
We did not find evidence that the Authority steered its Public Housing Operating Fund and
Capital Fund contracts. However, other aspects of the complaint had merit. The Authority did
not maintain adequate documentation to support its procurement of security services, financial
audit services, window retrofits, and heating and air conditioning upgrades. Additionally, it did
not conduct all of its procurement transactions in a manner providing full and open
competition. Specifically, the Authority did not seek competition for legal services. Also, it did
not seek competition for a change order, which was outside the scope of a renovation project.
These conditions occurred because the Authority misinterpreted HUD procurement regulations.
Also, the Authority’s informal procurement practices did not ensure that it maintained required
documentation. As a result, the Authority was at risk of not being able to support that the capital
and operating funds it spent on HUD contracts were fair and reasonable and of the best value to
the program.

What We Recommend
We recommend that the Acting Director of HUD’s San Francisco Office of Public Housing
require the Authority to (1) develop written procedures to ensure that adequate documentation is
maintained to support the significant history of each procurement and (2) develop written
procedures to ensure that adequate competition is obtained for all of its required procurements.
Table of Contents
Background and Objective......................................................................................4

Results of Audit ........................................................................................................5
         Finding 1: The Authority Did Not Always Comply With HUD’s Procurement
         Requirements..................................................................................................................... 5

Scope and Methodology ...........................................................................................9

Internal Controls ....................................................................................................10

Appendixes ..............................................................................................................11
         A. Auditee Comments and OIG’s Evaluation ............................................................. 11




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Background and Objective
The City and County of Fresno established housing authorities in 1940 and 1946, respectively.
Each housing authority is governed by a seven person board, two of whom are residents of the
housing authority's programs. In 1995, the two Boards of Commissioners signed a joint
resolution agreeing to cooperate for the purposes of effectiveness and efficiency. The Authority
is managed by the same executive director and staff, but each authority maintains its own
financial records. In 2012, the Authority began consistently using the name "The Fresno
Housing Authority" to refer to the joint entity for communications purposes, even though the two
entities remain legally separate.
The U.S. Department of Housing and Urban Development (HUD) established the public housing
program to provide decent and safe rental housing for eligible low-income families, the elderly,
and persons with disabilities. HUD provides funds to local housing agencies that manage
housing for low-income residents at rents they can afford. The Public Housing Operating Fund
program was developed under section 9(e), and the Public Housing Capital Fund program was
developed under section 9(d) of the Housing Act of 1937 as amended. Capital and operating
funds are made available to housing authorities to carry out capital and management activities.

HUD authorized the Authority the following assistance for its Public Housing Operating and
Capital Fund programs for calendar years 2013 and 2014:

                Calendar year          Operating Fund            Capital Fund
                                          program                  program
                     2014                $6,023,823               $3,037,098
                     2013                $5,751,427               $3,206,494
                     Total              $11,775,250               $6,243,592


We received a complaint alleging that the Authority potentially awarded millions of dollars in
contracts improperly. The complainant alleged that the Authority steered contracts through
biased scoring, preselection of contractors, and improper relationships. The complainant also
alleged that the Authority maintained inadequate supporting documentation for its procurements
and did not always seek adequate competition.

The objective of the audit was to determine whether the Authority used its operating and capital
funds in accordance with HUD requirements when procuring goods and services.




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Results of Audit

Finding 1: The Authority Did Not Always Comply With HUD’s
Procurement Requirements
The Authority did not always follow HUD requirements or its own procurement policies.
Specifically, it did not always maintain adequate documentation to support its procurements and
did not always seek competition. These conditions occurred because the Authority
misinterpreted HUD procurement regulations. Also, the Authority’s informal decentralized
procurement practice did not ensure that it maintained required documentation. As a result, the
Authority was at risk of not being able to support that the capital and operating funds it spent on
HUD contracts were fair and reasonable and of the best value to the program.

The Authority Did Not Always Maintain Adequate Documentation To Support Its
Procurements
The allegation that the Authority did not maintain adequate records had merit. We reviewed a
sample of 12 contracts with a total not to exceed amount of more than $23 million. The
Authority did not maintain all required documents for 4 of the 12 procurements reviewed.
According to HUD regulations, the Authority must maintain records sufficient to detail the
significant history of a procurement, which include the rationale for the method of procurement,
the solicitation, the selection of contract pricing, contractor selection or rejection (including
evaluation reports and price analysis), the basis for the contract price, and contract administration
issues or actions. 1

      •   The Authority did not maintain supporting documentation for its intergovernmental
          agreement with the police department for security services totaling $263,400 per year. It
          believed that it did not need to maintain supporting documentation because the police
          services were unique. However, the Authority must maintain records sufficient to detail
          the significant history of each procurement action. This documentation must include the
          rationale for the method of procurement and the basis for the contract price. HUD
          regulations recommend, as a best practice, that the Authority’s procurement file contain a
          copy of the intergovernmental agreement and documentation showing that the cost and
          availability of the identified supplies or services on the open market were evaluated
          before the agreement was executed. 2 As a result of our audit inquiries, the Authority
          prepared an evaluation of cost and availability with supporting documentation during our
          audit fieldwork. Since that documentation was sufficient to meet program requirements,
          we did not question the associated costs; however, the Authority should have performed
          the required steps before entering into the intergovernmental agreement.




1
    HUD Handbook 7460.8, REV-2, paragraph 3.3(A)
2
    HUD Handbook 7460.8, REV-2, paragraphs 14.2(A)(1) and (A)(4)



                                                      5
      •   The Authority did not maintain all of the supporting documentation for its financial
          services contract totaling $534,360. Specifically, it did not have an independent cost
          estimate, all documents used to make the contractor selection, and documents to support
          contract modifications in the procurement file. As a result of the audit, the Authority
          accessed the files of its former finance director to obtain a summary of evaluations to
          support the contract award decision. The summary worksheet provided during the audit
          contained sufficient details to support the Authority’s award decision. However, the
          Authority was unable to provide the independent cost estimate, one of the evaluator’s
          evaluation forms, and notes from the interviews.
          Also, each year, the Authority modified the contract by exercising its option to extend the
          contract through engagement letters. Each year, the engagement letters included contract
          amounts higher than those agreed upon in the original contract. The engagement letters
          and letters to the boards of directors did not identify the additional services performed to
          support these higher amounts. HUD regulations recognize that it is occasionally
          necessary to modify a contract to reflect changes in the required efforts. These
          modifications are made by issuing change orders or in this case, engagement letters.
          These change orders should include a detailed description of the proposed change in
          work, a price for the change in contract work, and the contractor’s itemized breakdown of
          the cost of materials and labor. 3 During our audit, the Authority obtained detailed
          invoices from its contractor supporting the additional services performed. However, the
          engagement letters should identify the additional services and the cost of services that are
          above and beyond those initially contracted for.

      •   The Authority did not have the independent cost estimate, invitation for bids, or bid
          documents for its window retrofit and heating and air conditioning upgrade contracts.
          The total contract amount for both contracts was more than $1.4 million. Since the
          Authority did not maintain the required information, we contacted the companies listed
          on the bid sheet to verify bid information. This outside documentation showed that the
          bid sheets were accurate so we did not question the costs; however, the Authority must
          ensure that it maintains documentation in accordance with HUD requirements.
The Authority stated that the lack of supporting documentation for these procurements was a
result of its using a decentralized procurement method and a lack of formal written procedures.
During this period, various persons handled procurement responsibilities, and each person
maintained his or her own files, resulting in missing or misplaced documents. In June 2013, the
Authority hired a procurement analyst. In September of 2014, it hired a second procurement
specialist to assist in meeting its procurement needs and centralizing its procurement method.
The Authority had begun maintaining all procurement documents electronically in one central
location. However, it continued to lack written procedures. Written procedures ensure that
documentation retained is consistent for each procurement even when the Authority experiences




3
    HUD Handbook 7460.8, REV-2, paragraphs 11.4(A) and (B)(4)



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staff turnover. The Authority needs to develop written procedures to ensure continuity in its
retention of required documentation.
The Authority Did Not Seek Competition for Two of Its Procurements
The Authority did not comply with HUD regulations when it procured legal services. HUD
requires that all procurement transactions be conducted in a manner providing full and open
competition. 4 Contracts must not exceed a period of 5 years, including options for renewal or
extension. Contracts that exceed 5 years are restrictive of competition. 5 The Authority exceeded
the 5-year maximum contract requirement when it did not competitively award its legal contract
between 1985 and 2014. This condition occurred because Authority management misinterpreted
HUD procurement requirements for legal services. The Authority’s general counsel advised it
that it did not have to competitively procure the legal contract. The Authority reprocured its
general counsel contract in fiscal year 2014 and complied with HUD regulations for this
procurement. To determine whether the amounts the Authority’s legal counsel charged were fair
and reasonable, we compared the fees on recent purchase orders and engagement letters to the
fees in the recently awarded legal contract and found them to be reasonable. As a result, there
were no questioned costs associated with the Authority’s noncompliance with HUD regulations.
The Authority also violated HUD’s competition requirements when procuring construction
services for the renovation of housing units totaling more than $3.2 million. The original scope
of the project was to renovate a total of 56 units. However, due to tight American Recovery and
Reinvestment Act obligation deadlines, the Authority broke the renovation project into two
procurement phases. It funded the renovation of 18 units in phase I with a Capital Fund
Recovery Act competitive grant.
The Authority potentially limited competition in the first phase by requiring contractors to
provide evidence of $15 million (aggregate) bonding capacity on the $1.5 million phase of the
project. HUD regulations consider excessive bonding to be restrictive of competition. 6 There
were 12 companies that attended the mandatory site walk. One company stated that it was not
possible to obtain such a high bond for a project of that size. The Authority received only two
bids for the rehabilitation project. Neither of the bidders had the required bonding amount, and
the Authority used this fact to support its determination that both bidders were nonresponsive.
As a result, the Authority entered into a sole-source contract with a company that was present at
the site walk but did not respond to the invitation for bid. Since Recovery Act requirements
allowed the Authority to follow noncompetitive procedures, 7 it did not violate HUD
requirements by sole-source awarding in the first phase of the contract.
When the Authority finalized funding for phase II of the project, it issued a change order to add
the additional 38 units to the original contract. The funding for this phase included capital funds
but no Recovery Act funds. The contracting officer may issue a change order after the award of



4
  24 CFR (Code of Federal Regulations) 85.36(C)(1)
5
  HUD Handbook 7460.8, REV-2, paragraphs 10.8(C)(1) and (2)
6
  24 CFR 85.36(C)(1)(ii)
7
  Office of Public and Indian Housing Notice PIH-2010-34, section VI, paragraph 5, Noncompetitive Proposals



                                                       7
a contract as long as it is within the scope of the contract. 8 In its board meeting minutes, the
Authority noted that adding the additional 38 units fell outside the scope of the original contract.
However, it believed that the funds saved by not going through the competitive process justified
issuing the change order to the original contract. HUD policy permits noncompetitive
procurements only when the item is available from only a single source; there is a public need
that will not permit delay; the awarding agency authorizes it; or after soliciting a number of
sources, the agency determines that competition is inadequate. 9 Therefore, the Authority should
have sought competition for phase II of the project. We compared the contractor’s bid with the
Authority’s independent cost estimate and determined that the cost of the project appeared to be
reasonable.
Conclusion
The complaint had some merit. We did not find that the Authority steered contracts, but it did
not always maintain adequate documentation to support its procurements and did not always
seek competition. This condition occurred because the Authority misinterpreted HUD
procurement policies and did not maintain written procurement procedures. As a result, it was at
risk of not being able to support that the capital and operating funds it spent on HUD contracts
were fair and reasonable and of the best value to the program.

Recommendations
We recommend that the Acting Director of HUD’s San Francisco Office of Public Housing
require the Authority to

          1A.     Develop and implement written procedures to ensure that adequate documentation
                  is maintained to support the significant history of each procurement.
          1B.     Develop and implement written procedures to ensure that adequate competition is
                  obtained for all of its procurements.




8
    HUD Handbook 7460.8, REV-2, paragraph 11.4(B)
9
    24 CFR 85.36(d)(4)



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Scope and Methodology
We performed our audit work at the Authority’s office in Fresno, CA, from January 20 to May
15, 2015. Our audit covered the period October 1, 2012, through September 30, 2014. To
accomplish our objective, we performed the following:
•   Reviewed the applicable rules and regulations pertaining to the use of operating and capital
    funds;
•   Reviewed the Authority’s 5-year Capital Fund plan to ensure that capital-funded projects
    were included in the plan;
•   Reviewed the Authority’s procurement and ethics policies and procedures;
•   Interviewed Authority personnel and HUD Office of Public Housing staff;
•   Reviewed the Authority’s financial documentation, including its general ledger and
    disbursement journal;
•   Reviewed the Authority’s procurement log;
•   Reviewed a sample of contract files;
•   Reviewed purchase orders to ensure that the Authority obtained sufficient competition for
    small purchases; and
•   Performed Accurint searches to determine whether potential conflicts of interests existed.
We selected a nonstatistical sample of 12 contracts to review, which the Authority paid for with
operating and capital funds. We selected our sample based on (1) information provided by the
complainant, (2) the dollar amount, and (3) the timing of the procurement. The Authority’s
contract log showed that it awarded a total not to exceed amount of more than $58.3 million. Of
the 12 contracts selected for review, 9 were from the contract log with a total not to exceed
amount of more than $23.4 million, which represented 40.2 percent of the total not to exceed
amount. We selected an additional three contracts from the Authority’s purchase order log.
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 objective.




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

•   Effectiveness and efficiency of operations,
•   Reliability of financial reporting, and
•   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

•   Policies and procedures to ensure that the Authority used its public housing operating and
    capital funds in accordance with HUD requirements.

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 Authority did not maintain adequate documentation to support its procurements
    (finding).

•   The Authority did not seek competition for its legal and construction services (finding).




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Appendixes

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                               11
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               12
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               13
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




Comment 3




                               14
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




                               15
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 5




                               16
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 7




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 8




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               21
                           OIG Evaluation of Auditee Comments

Comment 1   Although the Authority was able to provide some documentation, it did not
            maintain this documentation in its contracting file as required. In the report we
            identified the supporting documentation the Authority provided, however, it was
            unable to provide all supporting documentation required by HUD regulations.
Comment 2   HUD Handbook 7460.8, paragraph 3.3(A), states that supporting documentation
            shall be placed in the procurement file. The lack of documentation in a
            procurement file is a violation of HUD requirements.
Comment 3   We did not state that the Authority should have used a competitive process. We
            understand that by using an intergovernmental agreement that Authority is
            allowed to bypass competitive procedures. However, the Authority is still
            required to maintain documentation to support its procurement. The Authority’s
            procurement file contained the contract only. There was no documentation in the
            file to support the Authority’s decision to use the intergovernmental agreement,
            the basis for the contract price and contract administration actions.
Comment 4   We disagree with the Authority that additional analysis is not needed. As stated
            in Comment 3 the Authority must document its decision to use the
            intergovernmental agreement. This may be as simple as using the letter from the
            chief of police attached to its response. Also, the Authority must analyze the
            contract price and provide documentation to support the contract price. However,
            when the Authority provided the contract file it did not include documentation to
            support the contract. As a result of our audit, the Authority obtained a letter from
            the chief of police, compiled recent crime statistics, and prepared a cost analysis.
            In the future the Authority should include this supporting documentation in the
            contract file to comply with HUD regulations.
Comment 5   We understand that HUD required the Authority to provide two separate audits.
            We did not question the dollar increase for this new requirement. However, the
            Authority increased the contract amount on three additional occasions. On these
            occasions the Authority did not have adequate supporting documentation to
            support the increases in the contract amount.
Comment 6   We disagree that the Authority maintained the supporting documentation in its
            finance department. The Authority provided invoices to support the payments
            made to its contractor. However, the invoices did not identify the additional
            services provided which resulted in the higher contract amount.
            During the audit we requested documentation to support the additional services
            provided. The Authority contacted its contractor and the contractor was able to
            provide invoices which identified the additional services provided and the number
            of hours charged. As a result, we did not question the increases in contract
            amount. However, the change orders or engagement letters in the contract file




                                              22
            should identify the additional services and cost of the services that are above and
            beyond those initially contracted.
Comment 7   We disagree with the Authority that the Pacific Gardens project was done in one
            phase. We understand that the Authority’s intention was to perform the
            rehabilitation of all 56 units under one contract. However, the Authority broke
            the project into two different procurement phases when it had to award a contract
            for 18 units to ensure it did not lose its Capital Fund Recovery Competition funds.
            As a result, the Authority should have followed competitive procedures for the
            second phase of the project.
Comment 8   The report states that a change order may be used after the award of a contract, as
            long as, it is within the scope of the contract. The additional 38 units the
            Authority added by a change order were not within the scope of the original
            contract. As a result, the Authority should have used competitive procedures to
            procure rehabilitation services for the 38 units.




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