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 3 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. 4 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) 6 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) 8 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. 9 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). 10 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. 23
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)