oversight

The Mobile Housing Board Did Not Comply With HUD Regulations for Its Financial Operations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-08-04.

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

    Mobile Housing Board, Mobile, AL
                            Public Housing Program




Office of Audit, Region 4                Audit Report Number: 2016-AT-1010
Atlanta, GA                                                  August 4, 2016
To:            Robert Kenner, Director, Public and Indian Housing, Birmingham Field Office,
               4APH
               Craig T. Clemmensen, Director, Departmental Enforcement Center, CACB



               //signed//
From:          Nikita N. Irons, Regional Inspector General for Audit, 4AGA
Subject:       The Mobile Housing Board, Mobile, AL, Did Not Disclose an Apparent Conflict
               of Interest and Occupy One-Third of Its Public Housing Units


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 Mobile Housing Board’s financial operations.
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 404-
331-3369.
                    Audit Report Number: 2016-AT-1010
                    Date: August 4, 2016

                    The Mobile Housing Board Did Not Disclose an Apparent Conflict of Interest
                    and Occupy One-Third of Its Public Housing Units




Highlights

What We Audited and Why
We audited the Mobile Housing Board’s financial operations. We selected the Housing Board
based on concerns from the U.S. Department of Housing and Urban Development’s (HUD)
Alabama State Office of Public Housing, following a Real Estate Assessment Center (REAC)
financial assessment of the Housing Board for fiscal years 2009 to 2013. The REAC assessment
showed that the Housing Board’s financial condition had deteriorated over those 5 years. The
objective of our audit was to determine whether the Housing Board complied with HUD’s
financial management requirements for its Low Income Public Housing and Capital Fund
programs.

What We Found
The Housing Board did not comply with HUD regulations for its financial operations.
Specifically, it did not inform HUD of the instrumentality status of its nonprofit, which
prevented HUD from identifying an apparent conflict of interest that led to the potential payment
of more than $1.2 million to a related party. Additionally, it did not comply with its Public
Housing Capital Fund agreement by failing to use its capital funds to rehabilitate 1,194 of its
low-income public housing units and allowing 824 units to remain vacant from 1 to 16 years,
including two developments that were 100 and 73 percent vacant. These conditions occurred
because the Housing Board’s lack of critical oversight prevented it from using funds to renovate
its vacant units in a timely manner.

What We Recommend
We recommend that the Director of the Birmingham Office of Public Housing require the
Housing Board to (1) provide support showing that a conflict of interest did not exist or
reimburse $1,241,958 from non-Federal funds; (2) update its books, records, and policies and
procedures to identify Mobile Development Enterprises as an instrumentality per applicable
HUD regulations, to prevent a future, actual or apparent conflict of interest; and (3) work with
HUD to ensure that it meets the conditions of its RAD approval to ensure that the Housing
Board’s units are renovated and available to eligible families. We recommend that the Director
of the Departmental Enforcement Center, in coordination with the Director of the Birmingham
HUD Office of Public Housing, take appropriate enforcement action against the Housing
Board’s management staff for failing to disclose the instrumentality relationship between the
Housing Board and the Mobile Development Enterprises, if a conflict of interest exists.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Mobile Housing Board Did Not Comply With HUD Regulations for
         Its Financial Operations ................................................................................................... 4

Scope and Methodology .........................................................................................12

Internal Controls ....................................................................................................14

Appendixes ..............................................................................................................15
         A. Schedule of Questioned Costs ................................................................15

         B. Auditee Comments and OIG’s Evaluation ..........................................16

         C. Photos of Vacant Unit Conditions.........................................................64




                                                                 2
Background and Objective
The Mobile Housing Board was incorporated in 1937 under the laws of the State of Alabama. Its
mission is to provide decent, safe, and sanitary housing for eligible families to promote
serviceability, economy, efficiency, and stability in low-income developments and the economic
and social well-being of tenants in Mobile, AL. The Housing Board is responsible for
administering 3,409 low-income public housing units in 13 developments.

The Housing Board is governed by a consolidated annual contributions contract between it and
the U.S. Department of Housing and Urban Development (HUD). Its oversight is the
responsibility of a five-member board of commissioners appointed to a 5-year term by the mayor
of Mobile. Board members are responsible for approving the Housing Board’s bylaws, mission
statements, resolutions, and policies. The board also appoints the Housing Board’s executive
director, who serves as the board secretary and provides strategic day-to-day leadership,
including oversight of Housing Board activities and initiatives.

The Housing Board administers its low-income public housing program with the assistance of its
nonprofit the Mobile Development Enterprises. The Mobile Development Enterprises was
created in April 2003 to provide business skills to low-income and minority Housing Board
tenants. In addition to program management activities, it also participates in the evaluation and
selection of Housing Board’s contractors for construction involving the renovation of its vacant
units. In addition, it works directly with vendors to ensure the quality and completion of task
order activities. As entities of the same organization, the Housing Board and Mobile
Development Enterprises share office space, bank accounts, and executive staff. The Housing
Board’s operation and improvement of its developments are funded through its consolidated
annual contributions contract. In addition to providing operating funds, the contract provides
capital funds for capital and management activities. These funds assist the Housing Board in
carrying out development, capital, and management activities at public housing projects and
ensuring that the developments are available to low-income families. The Authority is permitted
to combine its operating and capital funds and may use its capital funds according to Public
Housing Operating Fund requirements. HUD awarded the Housing Board more than $77 million
for fiscal years 2011 through 2015, which included more than $51 million in operating subsidies
and more than $26 million in capital funds.

HUD’s Alabama State Office of Public Housing in Birmingham, AL, is responsible for
overseeing the Housing Board. In March 2015, HUD placed the Housing Board’s accounts and
procurement actions under manual review in its Electronic Line of Credit Control System
because of concerns about its transparency and accountability for Federal expenditures.

Our audit objective was to determine whether the Housing Board complied with HUD’s financial
management requirements for its low-income public housing and Public Housing Capital Fund
programs.



                                                3
Results of Audit

Finding: The Mobile Housing Board Did Not Comply With HUD
Regulations for Its Financial Operations
The Housing Board did not comply with HUD regulations for its financial operations.
Specifically, it did not inform HUD of the instrumentality status of its nonprofit, or submit a
conflict-of-interest waiver to HUD prior to the execution of a contract between itself and a
construction company owned by the senior vice president of the nonprofit’s half-brother. The
Housing Board’s failure to inform HUD of the instrumentality prevented HUD from identifying
an apparent conflict of interest. Additionally, it did not comply with its Capital Fund agreement
by failing to use its capital funds to rehabilitate 1,194 of its low-income public housing units and
allowing 824 units to remain vacant from 1 to 16 years. This housing included two
developments that were 100 and 73 percent vacant. These conditions occurred because the
Housing Board failed to apply applicable regulations regarding affiliate and instrumentality
relationships when procuring its nonprofit for services 1. The Housing Board’s failure to apply
applicable regulations resulted in it potentially exposing HUD to more than $1.2 million in
ineligible costs. Additionally, the Housing Board’s lack of critical oversight prevented it from
using its funds to renovate its vacant units in a timely manner. As a result, the Housing Board
failed to provide decent, safe, and sanitary housing for more than 824 families from 1 to 16
years.

Apparent Conflict of Interest
The Housing Board failed to comply with HUD’s conflict-of-interest regulation for public
housing authorities and entities identified as instrumentalities 2. An instrumentality is an entity
related to a public housing authority whose assets, operations, and management are legally and
effectively controlled by the public housing authority. Instrumentalities utilize public housing
funds, or assets for the purpose of carrying out public housing development functions. Entities
classified as public housing authority instrumentalities must abide by the same requirements
applicable to the public housing authority. The Housing Board identified its nonprofit; Mobile
Development Enterprises as an affiliate entity which is treated as an independent third party.
However, prior to the procurement of the construction company; Superior Masonry, owned by
the nonprofit’s senior vice president’s half-brother, the Housing Board did not notify HUD of a
potential related party. However, it did notify the sitting board chairman at the time of Superior
Masonry’s procurement. He stated that he was made aware of the relationship between Mobile
Development Enterprises’ senior vice president and the owner of Superior Masonry and
determined that there was no conflict. HUD defines an affiliate entity as an entity, other than an
instrumentality, formed by a housing authority under state law in which the housing authority



1
    Notice: PIH-2007-15 (HA)
2
    Notice: PIH-2007-15 (HA), I. Introduction, paragraph D, Program Requirements, and E, Terms, 1 and 2



                                                         4
has a financial or ownership interest or participates in their governance, and is treated like an
unrelated third party contractor 3. The Housing Board did not notify HUD of the relationship that
resulted in payments of more than $1.2 million from August 1, 2013, to October 31, 2015, to the
owner of a construction contractor who is the half-brother of the senior vice president of the
Housing Board’s nonprofit. This failure prevented HUD from identifying an apparent or an
actual conflict of interest.

In addition, the Housing Board may have violated its consolidated annual contributions contract
conflict-of-interest provision 4 when it entered into the contract with the senior vice president of
its nonprofit’s half-brother. The annual contributions contract states that a Housing Authority
may not enter into any contract or arrangement in connection with a project under the annual
contributions contract in which any employee of the Housing Authority who formulates policy or
who influences decisions with respect to the project(s), or any member of the employee’s
immediate family, or the employee’s partner. The Housing Board created the nonprofit, the
Mobile Development Enterprises, in April 2003. The Mobile Development Enterprises provides
housing counseling, public relations, strategic planning, resource development, asset
management, construction, administration services, and procurement services to the Housing
Board. The Mobile Development Enterprises’ board consists of a president, vice president, and
secretary-treasurer. These positions are held by the board chairman, vice chairman, and
executive director of the Housing Board, respectively (see table 1).

Table 1: Relationship Between Housing Board, Board of Commissioners, and Mobile
Development Enterprises Board of Directors Board of Directors
  Mobile Housing Board          Relationship       Mobile Development Enterprises
 Board of Commissioners                                   Board of Directors
           Board Chairman                        Same as                         Board President
           Vice Chairman                         Same as                     Board Vice President
         Executive Director                      Same as                    Secretary and Treasurer


In addition to its board, the Housing Board and the Mobile Development Enterprises share
executive staff, including the senior vice president, vice president of asset management and
compliance, and several managers and directors of the Housing Board’s programs (see table 2).




3
    Notice: PIH-2007-15 (HA), I. Introduction, paragraph E. Terms, 1
4
    Consolidated Annual Contributions Contract; Section 19- Conflict of Interest (A)(1)(ii)



                                                            5
Table 2: Relationship Between Housing Board Executive Staff and Mobile Development
                             Enterprises Executive Staff
  Mobile Housing Board                           Mobile Development Enterprises
       Executive Staff        Relationship
                                                         Executive Staff
        Executive Director                 Same as                     President and CEO
     Senior Vice President of
     Business and Community                                 Senior Vice President of Business and
            Relations                      Same as                  Community Relations
     Senior Vice President and                                 Senior Vice President and Chief
      Chief Financial Officer              Same as                    Financial Officer
      Vice President of Asset                                Vice President of Asset Management
    Management and Compliance              Same as                     and Compliance


Furthermore, the Housing Board and Mobile Development Enterprise offices are both located at
the Housing Board’s central office. They also share the same bank accounts and executive staff.

In 2013, HUD’s Birmingham Office of Public Housing conducted an onsite review of the
Housing Board’s operations. The review identified concerns regarding its financial operations,
vacancies, and governance, including concerns over the Mobile Development Enterprises’ role in
the Housing Board’s activities. As a result, HUD recommended that the Housing Board solicit
other vendors for services provided by the Mobile Development Enterprises.
To ensure that the Housing Board addressed HUD’s concerns, HUD provided it with a
sustainability plan. The plan recommended that the Housing Board conduct formal solicitation
for the services provided by the Mobile Development Enterprises to benefit the Housing Board’s
organizational structure and make reporting relationships more transparent. In response, the
Housing Board awarded a contract for program management services to the Mobile
Development Enterprises, its nonprofit affiliate, in September 2013. Based on the understanding
that the Mobile Development Enterprises was an affiliate entity of the Housing Board, HUD did
not dispute its decision to select the Mobile Development Enterprises for services after a formal
procurement process.
We reviewed the Housing Board’s June 2013 request for proposals, as well as the proposal
packet the Mobile Development Enterprises submitted to the Housing Board in July 2013 to
comply with HUD’s procurement requirements, which required them to allow open competition
for all procurement transactions 5. In the proposal, the Mobile Development Enterprises
identified itself as a wholly owned entity whose relationship would cause an apparent or actual
conflict of interest with respect to the Housing Board; and not an affiliate as the Housing Board




5
 24 CFR (Code of Federal Regulations) Part 85, Subpart 36, Administrative Requirements for Grants and
Cooperative Agreements to State, Local, and Federally Recognized Indian Tribal Governments, (c) and (d)(3)



                                                        6
had stated to HUD. According to HUD regulations an affiliate is treated like an unrelated third
party contractor 6. The Housing Board provided the Mobile Development Enterprises an award
acceptance letter, dated September 2013, which was signed by the executive director. The
executive director also signed the letter on behalf of the Mobile Development Enterprises as its
president. Further, in an attachment to a tax exempt form for the Internal Revenue Service
submitted in 2013, the Mobile Development Enterprises identified itself as a wholly owned
nonprofit instrumentality of the Housing Board. Therefore, the Housing Board was aware that
its nonprofit was not an affiliate to be treated as an independent third party contractor, but did not
notify HUD. HUD regulations state that an instrumentality assumes the role of the Housing
Board, and must abide by the public housing requirements applicable to the Housing Board
including conflict of interest regulations 7. By identifying its nonprofit as an affiliate, the
Housing Board was able to contract with Superior Masonry, which was owned by the half-
brother of the senior vice president of the Mobile Development Enterprises, for vacancy
reduction and other construction contract services without disclosing the relationship to HUD.
Since the Housing Board did not notify HUD of the apparent conflict of interest, it potentially
made inappropriate payments of more than $1.2 million to a related party.


Management Failed to Occupy Vacant Units
The Housing Board failed to adequately manage its low-
income public housing developments in accordance with its
Capital Fund agreement 8. As a result, as of October 15, 2015, One-third of the Housing Board’s
it had 824 units that had extensive renovation needs that        low-income public housing units
caused them to remain vacant from 1 to 16 years. Extensive       were vacant
rehabilitation needs forced the Housing Board to vacate all of
its Josephine Allen public housing development and 73
percent of its Roger Williams development. In addition to failing to properly operate two of its
public housing developments, it received a substandard management Public Housing Assessment
System (PHAS) score for fiscal years 2012 to 2015 and continued to increase its number of
vacancies.
On January 13, 2011, the Housing Board had 1,071 vacancies. To reduce the number of vacant
units, it submitted a vacancy reduction plan to HUD to decrease its longstanding vacancies. In
its plan, the Housing Board stated that its vacancies were a result of a systemic lack of critical
oversight and strategy for its housing operations. As a result of this deficiency, the Housing
Board lost rental revenue and its ability to generate adequate funding to staff its properties and



6
  Notice: PIH-2007-15 (HA), I. Introduction, paragraph E, Terms, 1
7
  Notice: PIH-2007-15 (HA), I. Introduction, paragraph E, Terms, 2
8
  The Capital Fund program amendment to the consolidated annual contributions contract (form HUD-53012),
section 7, states, “The PHA [public housing agency] shall continue to operate public housing projects as low-income
housing in compliance with the annual contributions contract, as amended, the Act (United States Housing Act of
1937) and all HUD regulations for a period of twenty years after the last disbursement of Capital Fund amendment
assistance for modernization activities for each public housing project or portion thereof and for a period of forty
years after the last distribution of Capital Fund Program.”



                                                         7
provide resources necessary to maintain a decent, safe, sanitary community. To meet the plan
objective, it conducted a needs assessment of its vacant units (appendix C). Based on this
assessment, it determined that about $7 million would be needed to meet the plan objective by
rehabilitating vacant units. The Housing Board anticipated using capital funds, operational
reserves, bond and insurance proceeds, and private funding, along with funds from its central
office cost center, to fund this endeavor. It also submitted a request to HUD to use American
Recovery and Reinvestment Act funds. Additionally, it requested that HUD approve 542 units
for modernization status, which would allow the Housing Board to receive an operating subsidy
for these units while they were vacant. The operating subsidy would partially fund the vacancy
reduction plan and replenish operating reserves.
HUD approved the Housing Board’s plan on January 27, 2011. As a condition of the approval,
HUD allowed the Housing Board to use Recovery Act funds to repair units that required repairs
substantially greater than would occur during the normal turnover of units. However, HUD did
not approve its request to place all 542 units in modernization status. HUD also required the
Housing Board to update the plan to account for routine turnover vacancies and include
strategies to ensure that sufficient applications would be available to allow the repaired units in
the developments to be occupied. The Housing Board resubmitted the plan on June 24, 2011. In
the revised plan, it stated that since its January 2011, plan, it had returned 100 units to rentable
status. However, as of the June revision, it had identified 1,057 vacant units. Out of 1,057 units,
it planned to return 477 back to rentable status with HUD-approved Recovery Act funds, capital
funds, operating reserves, and other sources totaling more than $7 million. Additionally, the
Housing Board identified 2,432 families on its waiting list, which meant that there were 1,375
more families in need of housing than vacant units. To ensure that families were placed into the
units as they became available, it stated that it would implement a unit forecast tracking process
that would provide its leasing professionals estimated ready dates for each unit. This process
would allow units to be leased 1 to 3 days after a unit was ready.
Since the submission of its June 2011 plan, the Housing Board had increased its vacant units
from 1,057 to 1,194 as of October 15, 2015. It had also increased the number of families on its
waiting list from 2,432 to 9,987 as of March 2016. Additionally, HUD designated the Housing
Board as one with substandard management, based on a failing PHAS audited management score
of 63 of 100 for the fiscal year ending December 31, 2012. To address its failing score, HUD
provided guidance to the Housing Board to improve its PHAS score and performance for long-
term sustainability. HUD’s suggestions included that the Housing Board evaluate its waiting list,
assess occupancy policies, evaluate turnaround time of vacant units for occupancy, and consider
contracting property management of its public housing to another entity. Further, the Housing
Board was required to provide a proposed recovery plan to HUD for review. The Housing Board
submitted its final recovery plan on August 13, 2014. In its plan, the Housing Board stated that
it had instituted a vacancy reduction plan and was engaged in an occupancy initiative. Both
plans sought to renovate its least costly long-term vacant units using third-party contractors and
its own internal workforce. According to the Housing Board, the plans were not successful
because of 1,426 move-outs from 2011 to 2013. However, the Housing Board’s March 2016
waiting list contained more than 9,000 names and an average wait time from 2 months to more
than 5 years.



                                                  8
Since the Housing Board submitted its 2011 vacancy reduction plan, it had received more than
$18.4 million in capital funds plus $3.2 million in Recovery Act funds. It also had access to
more than $27 million in Capital Fund revenue bond proceeds starting in 2003. From 2011 to
2015, it paid its nonprofit more than $5.3 million for services directly related to its vacancy
reduction plans and paid the half-brother of the nonprofit’s senior vice president, who is the
owner of Superior Masonry, more than $3.6 million for capital improvement construction
services. Although it had received and spent substantial funding for capital improvements, the
Housing Board had 1,194 vacant units, or one-third of its 3,409 low-income public housing units.
As a result of the Housing Board’s failure to renovate its units in a timely manner, it was forced
to substantially vacate two of its largest public housing developments so that they could be
demolished or sold.
The Housing Board submitted a demolition/disposition application for its 292-unit Josephine
Allen development on September 30, 2011. As of the application date, 260 units were vacant,
168 of which had been vacant from 1 to 12 years. The Housing Board did not receive approval
of its application until February 13, 2015. The application approval was delayed because it
failed to provide HUD with information regarding the potential disposition. Although HUD
identified several environmental conditions at the property including an underground river and
possible contamination from an adjacent industrial plant, HUD approved the application for
demolition or disposition but informed the Housing Board that it must disclose the
environmental conditions. The development site is also located in a 100-year or 500-year
floodplain. The Housing Board chose to sale the property because it calculated that it would cost
more than $1 million to demolish the property but it could potentially receive more than $2
million to sale it. While the application was approved in February 2015, as of October 15, 2015,
the Housing Board’s mismanagement had prevented it from providing housing for 292 families
in its Josephine Allen development from 4 to 16 years.
The Housing Board also submitted a demolition application for its Roger William development
on July 7, 2014. As of the application date, 292 of its 452 units were vacant. On August 4,
2015, HUD approved the demolition application. As of October 15, 2015, the Housing Board’s
mismanagement had prevented it from housing 303 families from 1 to 15 years. The Housing
Board’s failure to use its funds to renovate its units in a timely manner allowed many units to
deteriorate to a condition that required costly and extensive rehabilitation. As a result of its
mismanagement, the Housing Board’s Josephine Allen and Roger Williams low-income public
housing developments were 100 percent and 73 percent vacant, respectively, as of October 15,
2015. This condition occurred because the Housing Board failed to adequately operate these
low-income public housing developments as required by section 7 of its Capital Fund agreement
to its annual contributions contract. Further, as of October 15, 2015, despite a demolition
approval, the Housing Board had not presented HUD a viable plan to demolish or sell the
developments.
During the exit conference, the Housing Board informed us that in order to address its vacant
units, it plans to use the Rental Assistance Demonstration (RAD) program by converting its low-
income public housing into voucher based and mixed-income multifamily housing. The RAD
program was created to give public housing authorities a tool to preserve and improve public
housing properties and address deferred maintenance.


                                                9
The Housing Board submitted a RAD application to HUD for approval in October 2013 for all of
its 13 low-income public housing developments (see table 3)

Table 3: Housing Developments Approved for Rental Assistance Demonstration (RAD)
             Housing development                  Number of converting units
            Frank W. Boykin Towers                            122
               Central Plaza Towers                                   465
                 Emerson Gardens                                       94
                   Gulf Village                                       200
                  Josephine Allen                                     292
                 Oaklawn Homes                                        100
                   Orange Grove                                       247
              Roger Williams Homes                                    452
                    RV Taylor                                         450
               Thomas James Place                                     796
              Downtown Renaissance                                     57
               Renaissance Gardens                                     48
                Renaissance Family                                     87


In response to its application, HUD rejected the Housing Board’s request based on its failure to
be classified in PHAS as a standard or high performer. At the time of the rejection, the Housing
Board was classified as a substandard performer. Additionally, it failed to meet specific
requirements of its HUD sustainability plan including increasing occupancy, reducing expenses,
and governance compliance. The Housing Board reapplied and received conditional RAD
approval in October 2015. However, its approval can be revoked or amended by HUD at any
time prior to the closing of the last project included in the RAD award if HUD determines that
the Housing Board is not meeting the requirements of its conditions. As of May 2016,
the Housing Board has failed to demonstrate to HUD that it can continue to operate its low-
income public housing units and improve unit conditions with its capital funds through the
implementation of RAD. Additionally, the Housing Board has failed to timely request an
extension for modernization status of units at its Thomas James Place development.
Furthermore, the Housing Board’s total expenses have exceeded its total revenue from 2012
through 2015, which further supports HUD’s concern that the Housing Board cannot adequately
manage its funds to sustain its low income housing during the completion of the RAD
implementation.




                                                10
Conclusion
The Housing Board did not comply with HUD regulations for its financial operations. It failed
to comply with HUD regulations by misrepresenting its nonprofit as an affiliate entity. This
action prevented HUD from identifying an apparent conflict of interest, which resulted in
payments of more than $1.2 million to the owner of a construction company who was the half-
brother of the senior vice president for the Housing Board’s nonprofit. Additionally, it did not
comply with its Capital Fund amendment to its annual contributions contract. This
noncompliance included failing to use its capital funds to lease 1,194 of its low-income public
housing units as well as allowing 824 units to remain vacant from 1 to 16 years. The Housing
Board’s failure to disclose the instrumentality relationship to HUD led to the Housing Board to
potentially use more than $1.2 million in Federal funds for ineligible purposes. Additionally, the
Housing Board’s mismanagement prevented it from providing low-income families with decent,
safe, and sanitary housing for many years.
Recommendations
We recommend that the Director of the Birmingham Office of Public Housing
       1A.     Require the Housing Board to provide support showing that a conflict of interest
               did not exist between the Mobile Development Enterprises and Superior Masonry
               or reimburse HUD $1,241,958 from non-Federal funds.

       1B.     Require the Housing Board to update its books, records, and policies and
               procedures to identify its nonprofit; Mobile Development Enterprises as an
               instrumentality per applicable HUD regulations, to prevent a future, actual or
               apparent conflict of interest between the Housing Board, its nonprofit, and other
               contractors

       1C.     Require the Housing Board to work with HUD to ensure that it meets the
               conditions of its RAD approval to ensure that the Housing Board’s units are made
               available for eligible families.

We recommend that the Director of the Departmental Enforcement Center, in coordination with
the Director of the Birmingham HUD Office of Public Housing,
       1D.     Take appropriate enforcement action against the Housing Board’s management
               staff for failing to disclose the instrumentality relationship between the Housing
               Board and the Mobile Development Enterprises, if a conflict of interest exists.




                                                 11
Scope and Methodology
We performed our audit from September 2015 through January 2016 at the Housing Board,
Mobile, AL. Our review generally covered the period October 1, 2013, through August 31,
2015, and was adjusted as necessary.
To accomplish our objective, we
   •   Reviewed a sample of the Housing Board’s expenditures related to low-income public
       housing and Capital Fund activities, as well as the contracts, invoices and canceled
       checks, to verify that all expenses were paid for eligible and supported activities.
   •   Interviewed Housing Board staff to obtain an understanding of the controls significant to
       the audit objective and assist in our review of its files.
   •   Reviewed applicable laws, regulations, and relevant HUD program requirements to
       determine whether the Housing Board complied with financial management
       requirements.
   •   Reviewed HUD documents and reports related to the Housing Board’s financial
       operations.
   •   Reviewed the Housing Board’s internal reports to analyze and gain an understanding of
       the Housing Board’s written policies and procedures, relevant laws and regulations, the
       Housing Board’s bylaws and consolidated annual contributions contract with HUD, and
       HUD guidance.
   •   Conducted a site visit to the Housing Board’s Thomas James development.

Our universe consisted of 3,050 statistically valid transactions related to low-income public
housing and capital funds during the period October 1, 2013, through August 31, 2015. The
sampling method used would allow the audit team to project on the universe if necessary.
During the audit scope, the Housing Board disbursed more than $6.3 million in operating and
capital funds. To review the eligibility of each transaction to determine whether the Housing
Board used HUD funds in accordance with HUD regulations and its own policies and
procedures, we developed a statistical sample of 16 of 121 transactions. The total amount of
disbursements reviewed totaled more than $591,000. We also reviewed procurement
information and determined whether contracts were awarded in accordance with HUD
regulations and Housing Board policies and procedures. We documented the condition of
several Thomas James development units that needed extensive renovation.

To achieve our audit objective, we relied in part on computer-processed data. We used the data
to select for review a sample of recipients that were awarded grants for infrastructure. Although
we did not perform a detailed assessment of the reliability of the data, we performed a minimal
level of testing and found the data to be generally reliable for our purposes.




                                                12
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.




                                                13
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:

•   Program operations – Policies and procedures that management has implemented to provide
    reasonable assurance that a program meets its objectives, while considering cost
    effectiveness and efficiency.
•   Relevance and reliability of information – Policies and procedures that management has
    implemented to reasonably ensure that operational and financial information used for
    decision making and reporting externally is relevant, reliable, and fairly disclosed in reports.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that program implementation 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 Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The Housing Board did not properly manage its financial operations (finding).




                                                  14
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 2/
                               number
                                   1A              $ 1,241,958

                                 Totals            $1,241,958



2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              15
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               16
Ref to OIG
Evaluation




Comment 3


Comment 4




Comment 5




Comment 6




             17
Comment 7




Comment 8




Comment 2




Comment 5




            18
Comment 2




Comment 5




Comment 2



Comment 5




            19
Comment 5

Comment 7




Comment 9




Comment 9




Comment 9




            20
Comment 10




Comment 11




Comment 8



Comment 12




             21
Comment 2




Comment 2




Comment 2




Comment 13




             22
Comment 2




Comment 14




             23
24
25
26
27
28
Comment 1



Comment 9




Comment 9




Comment 2

Comment 2




            29
Comment 15




Comment 16




             30
Comment 9




            31
Comment 9




Comment 9




            32
Comment 17




Comment 17



Comment 17



Comment 17




Comment 17




             33
Comment 17




Comment 17



Comment 9




             34
Comment 18




Comment 18

Comment 19




Comment 9




             35
36
Comment 2




Comment 7




Comment 2



Comment 20




             37
Comment 21




Comment 7




             38
Comment 7




            39
Comment 22




             40
Comment 7




            41
42
Comment 2




Comment 23




Comment 23




Comment 8




             43
Comment 1




Comment 8




            44
Comment 8




Comment 24




Comment 25




             45
Comment 5




            46
Comment 2




Comment 5




            47
Comment 26




             48
Comment 4




Comment 27




Comment 9




             49
Comment 9




Comment 2




Comment 2




            50
Comment 1




Comment 1




            51
52
                          OIG Evaluation of Auditee Comments


Comment 1   The Housing Board’s comments state that it adamantly disagrees with the scope,
            content, tone and magnitude of the draft audit’s findings, conclusions, and
            recommendations and requests that we reconsider issuing the draft report. It also
            states that the findings are incorrect, skewed, and punishes the Housing Board for
            following the regulations and guidance of HUD Program offices. It urges us to
            reconsider issuing this draft report in its current form given that both findings and the
            recommendations are based on an incorrect or incomplete understanding of the facts,
            erroneous legal analysis, and flawed conclusions. It does not believe there is any
            basis for any of the findings in the draft report. It further states that it believes that
            we should have the final report withdrawn and not issue a final audit. However, if it
            is issued, the draft audit needs substantial correction and needs to be viewed in the
            context of the Housing Board’s accomplishments to date.

            We disagree with the Housing Board’s assertions. The Housing Board did not
            comply with HUD regulations for its financial operations. Specifically, it identified
            Mobile Development Enterprises, its nonprofit as an affiliate entity to be treated as an
            independent third party to HUD. This action prevented HUD from identifying an
            apparent conflict of interest, which resulted in payments of more than $1.2 million to
            the owner of a construction company who was the half-brother of the senior vice
            president for the Housing Board’s nonprofit. We determined that the Housing Board,
            and its nonprofit share bank accounts, office space and both use the same executive
            staff. Based on these facts, we determined that the Housing Board’s procurement of
            its nonprofit’s senior vice president’s half-brother’s company is an apparent conflict
            of interest. Furthermore, we recommend that HUD pursue enforcement action
            against the Housing Board staff based on its failure to notify HUD of its relationship
            with its nonprofit Mobile Development Enterprises which led to an apparent conflict
            of interest.

            Additionally, the Housing Board did not comply with its Capital Fund amendment to
            its annual contributions contract which states that the Housing Board shall continue
            to operate each public housing project as low-income public housing in compliance
            with the Annual Contributions Contract (ACC), and all HUD regulations for a period
            of twenty years after the last disbursement of Capital Fund program funds assistance
            for modernization activities for each public housing project or portion thereof and for
            a period of forty years after the last distribution of Capital Fund program funds. This
            noncompliance included failing to use its capital funds to repair and rehabilitate 1,104
            of its low-income public housing units as well as allowing 824 units to remain vacant
            from 1 to 16 years that prevented it from providing low-income families with decent,
            safe, and sanitary housing for many years.

Comment 2   The Housing Board’s comments state that OIG completely ignores the fact that it is
            seeking to reposition its entire public housing inventory by undertaking a strategic
            portfolio conversion pursuant to the RAD program which directly addresses the long-
            term vacancy issues. In addition, it states that the OIG criticizes and seems to



                                                53
             punish the Housing Board for devising an approach to address its housing,
             receiving HUD approval for that, and then following its plan.
             After discussions with the Housing Board during the exit conference, we added
             details to the report regarding the Housing Board’s transformation plan to use the
             RAD program to revitalize its low-income public housing. Although the Housing
             Board devised an approach to address its housing, it has not been able to fully
             implement or complete its plan. As of May 2016, the Housing Board has failed to
             demonstrate to HUD that it can continue to operate its low-income public housing
             units and improve unit conditions through the implementation of RAD.
             Additionally, the Housing Board’s total expenses have exceeded its total revenue
             from 2012 through 2015, which further supports HUD’s concern that the Housing
             Board does not have enough funds to sustain its low-income housing during the
             completion of the RAD implementation.

 Comment 3 The Housing Board’s comments state that no government money was misspent.
           It further states that the OIG’s audit confirmed that the Housing Board
           appropriately accounted for and used all public housing capital funds for HUD-
           eligible purposes, specifically fixing properties, and housing units.

             We did not question the eligibility of the Housing Board’s use of funds.
             Specifically, the audit report finding regarding the Housing Board’s use of its
             capital funds is based on its failure to reduce long standing vacancies in
             accordance with its HUD approved vacancy reduction plan. In its June 2011
             vacancy reduction plan to HUD, the Housing Board stated that it would use HUD-
             approved Recovery Act funds, capital funds, operating reserves, and other sources
             totaling more than $7 million to decrease its long standing vacancies. Since its
             submission, the Housing Board’s vacancies increased from 1,057 to 1,194;
             although, it received more than $18.4 million in capital funds, plus $3.2 million in
             Recovery Act funds. The Housing Board received more than $14.6 million than it
             estimated and was still unable to decrease its long standing vacancies.

Comment 4    The Housing Board’s comments state that no conflict of interest exits. It further
             states that they demonstrate in their response that, based on the facts, there was
             absolutely no conflict of interest under any HUD conflict of interest standard.
             Therefore the Housing Board correctly procured Superior Masonry.

             The annual contributions contract states that a Housing Authority may not enter
             into any contract or arrangement in connection with a project in which any
             employee of the Housing Authority who formulates policy or who influences
             decisions with respect to the project(s), or any member of the employee’s
             immediate family, or the employee’s partner. Because of the Housing Board’s
             close relationship with its nonprofit, Mobile Development Enterprises, it allows
             the senior vice president to act as a Housing Board employee which can
             potentially influence policy related to its low-income public housing



                                               54
            developments. We determined that the nonprofit participates in procurement of
            the Housing Board’s contractors. Its procurement activities include the evaluation
            and selection of potential Housing Board contractors for construction involving
            renovation of vacant units. Upon vendor selection, Mobile Development
            Enterprises works directly with vendors to ensure the quality and completion of
            task order items. Additionally, the Housing Board and the Mobile Development
            Enterprises share office space, bank accounts, and the same executive staff. As a
            result, we determined that by entering into a contract with the senior vice
            president of its nonprofit’s half-brother there is an appearance of a conflict-of-
            interest which would lead to a violation of its consolidated annual contributions
            contract conflict-of-interest provision.

            During our review, we were unable to determine whether an actual conflict of
            interest exists because we were denied access to the nonprofits files; therefore, we
            are recommending that the Housing Board provide documentation to support that
            an actual conflict of interest did not exist between the Mobile Development
            Enterprises and Superior Masonry or reimburse HUD $1,241,958.

Comment 5   The Housing Board’s comments state that the draft audit advocates that old,
            vacant, and obsolete units should be constantly renovated at huge costs to the
            taxpayers, instead or torn down and replaced. It further states that it respectfully
            disagrees with our draft report because low-income families would not thrive if our
            approach was embraced.

            We disagree with the Housing Board’s assertions. Our draft report does not
            advocate for the Housing Board to renovate old, vacant, and obsolete units at
            huge costs to the taxpayers, instead of tearing them down or replacing them. The
            report finding focuses on the Housing Board’s failure to effectively and
            efficiently use its capital funds, and despite a vacancy plan, and demolition and
            disposition approval the Housing Board’s vacancy rates have increased along with
            its annual capital fund allocation. Although we updated the report to include the
            status of the Housing Board’s RAD application, HUD stated the Housing Board
            has failed to demonstrate that it can continue to operate its low-income public
            housing units and improve unit conditions with its capital funds through the
            implementation of RAD.

Comment 6   The Housing Board’s comments state that while we took nearly 9 months to
            conduct our audit of the Housing Board’s activities, they were given the draft
            report on Friday, April 29, 2016, barely two business days in advance of the exit
            conference on Tuesday, May 3, 2016.
            We provided the draft finding to the Housing Board on March 8, 2016, and
            discussed the results with staff on March 9, 2016. The Housing Board provided a
            written response on April 12, 2016. Although its response stated it disagreed, the
            Housing Board did not provide documentation to support revision of the finding.
            The draft findings provided in March 2016 were the same issues included in the


                                               55
            draft report with more detail. In addition, the Housing Board was updated on a
            continuous basis throughout the audit process regarding any changes and
            additions via email or phone conversations. The Housing Board provided their
            comments on May 13, 2106, after receiving an extension from May 9, 2016.
            Therefore, the Housing Board was afforded more than 65 days to respond to the
            draft report.
Comment 7   The Housing Board’s comments state that we neglect to mention the fact that its
            funding levels continue to be reduced and have been for years. In addition, the
            Housing Board stated that it has $96 million in current capital needs, but only
            receives $5 million from HUD for capital needs each year, which is 5 percent of
            the total need. It further states that we ignore the fact that the Housing Board has
            an obligation to its entire housing portfolio and, as is the case with many larger
            housing authorities, insufficient capital funds to address all capital needs of its
            portfolio.
            We do not dispute the Housing Board’s assertion that HUD cannot fully fund all
            of its capital needs. However, the Housing Board did not provide documentation
            to support that it lacked funds to meet its capital needs. In the Housing Board’s
            June 2011 vacancy reduction plan to HUD, it stated that it would use HUD-
            approved Recovery Act funds, capital funds, operating reserves, and other sources
            totaling more than $7 million to decrease its long standing vacancies. Since its
            submission, the Housing Board has increased its vacancies from 1,057 to 1,194,
            as of October 15, 2015.
Comment 8   The Housing Board’s comments state that we neglect to mention that 90 percent
            of vacancies are in properties that need to be torn down. Additionally, two
            properties contain substantial numbers of the vacancies and have received official
            approval from HUD for demolition or disposition. Also, one of the sites is a
            current recipient of a CHOICE Neighborhoods Initiative Planning grant which
            provides funding for to support communities that have undergone a
            comprehensive local planning process and are ready to implement their
            transformation plan to redevelop their neighborhood. Furthermore, it states we
            suggest renovation should still be in effect, which goes against the regulations of
            HUD’s demolition and disposition approval. It also states that we attempt to use
            vacancy levels, primarily at older developments slated for demolition, disposition,
            and redevelopment under HUD’s RAD program as evidence that the Housing
            Board failed to adequately manage its low-income public housing developments.
            We disagree with the Housing Board’s assertions. We identified two developments
            with 532 units that have been vacant from 1 to 12 years prior to the Housing
            Board’s submission of a demolition or disposition application. These
            developments were approved for demolition and disposition in 2015 but as of
            May 2016, the Housing Board has not demolished or sold either development. To
            ensure that the Housing Board addresses the needs of its units approved for
            demolition or dispositions, we revised recommendation 1C to require HUD to



                                              56
              work with the Housing Board to ensure that it meets the conditions of its RAD
              approval so that its units are made available for eligible families.
              Although, we did not discuss the Housing Board’s Choice Neighborhoods
              Initiative Planning grant, the details of the grant only further supports the position
              that the Housing Board failed to occupy its vacant units when it had adequate
              resources. This includes its demolition and disposition application approvals.

Comment 9     The Housing Board’s comments state that it believes we should not substitute our
              own subjective opinions as to how the Housing Board should reposition its
              crumbling and aging housing stock. Rather we should give due deference to the
              Housing Board’s reliance on the plain meaning and language of HUD Notice
              PIH-2007-15 as it applies to entities engaged in development activities and not
              Mobile Development Enterprises’ engagement in administrative and managerial
              activities. Additionally, the Housing Board’s comments state that the HUD
              Notice PIH-2007-15 only covers development activities and activities related
              thereto and it is clear that the maintenance and make ready activity by one
              contractor, Superior Masonry, was not for “development” purposes.

              We disagree with the Housing Board’s assertions. Mobile Development
              Enterprises does not just participate in program management activities; it
              participates in all Housing Board activities including those related to development
              including the redevelopment of its low-income public housing units under the
              RAD transformation plan. Mobile Development Enterprises employees attend
              Housing Board meetings and have participated in all aspects of RAD planning
              and implementation starting in 2013. Based on these facts and several other
              factors including that the Housing Board and the Mobile Development Enterprises
              share office space, an organizational chart, and bank accounts, we have
              determined that Mobile Development Enterprises’ activities apply to HUD Notice
              PIH-2007-15. The notice applies to entities involved in public housing
              development activities pursuant to 24 CFR Part 941, which covers public housing
              development activities. The relationship between the Housing Board and Mobile
              Development Enterprises’ is an instrumentality relationship and not a third party
              affiliate as the Housing Board described it to HUD.

Comment 10 The Housing Board’s comments states that it was surprised that the draft report
           states that it conducted its survey review because of a HUD Birmingham Field
           Office referral request following HUD’s Real Estate Assessment Center (REAC)
           financial assessment of the Housing Board for fiscal years 2009 to 2015.
           Although during the entrance conference we stated that it was conducting the
           survey of the Housing Board’s use of Capital Fund program grant funds as a part
           of its routine audit plan and had been randomly selected for the survey, and
           potential further audit.




                                                 57
              We selected potential auditees the Mobile Housing Board based on our routine
              audit plan and risk assessments conducted on several potential auditees. As a
              result of the analysis of risk assessments, the Mobile Housing Board was selected
              based on several risk factors including concerns from the HUD Alabama State
              Office of Public Housing following the REAC financial assessment.

Comment 11 The Housing Board’s comments state that it has been the subject of numerous
           HUD audits, none of which have suggested the level of concern, to the Housing
           Board’s knowledge, that dictated the current survey by the OIG. In fact, the
           Housing Board’s Financial Assessment Subsystem scores for the last three years
           have been extremely high.
              The Financial Assessment Subsystem reviews the annual financial statements
              submitted by public housing agencies to assess their financial conditions.
              Although the Housing Board’s scores were high during the periods 2011 through
              2015, HUD’s REAC Quality Assurance Operations (QASS) financial assessment
              identified financial statement figures that overstated the Housing Board financial
              position. The QASS financial assessment concluded that the Housing Board’s
              financial condition has been deteriorating for at least five years from 2009 to
              2013.
Comment 12 The Housing Board’s comments state that it never received a copy of the REAC
           financial assessment despite repeated requests, or has been briefed on the contents
           of the assessments and its conclusions or recommendations.
              The Housing Board should make their request to HUD because the financial
              assessment is an internal HUD document and is releasable at HUD’s discretion.

Comment 13    The Housing Board’s comments state that we disregarded the financial
              environment for public housing authorities from 2008 through 2012. Specifically,
              in 2012, HUD recaptured $566,605 from the Housing Board.

              We disagree with the Housing Board’s statement. The Housing Board was not
              included in a recapture; however, even if it were, in its 2011 vacancy reduction
              plan, it stated that it would cost more than $7 million to renovate 477 vacant units.
              Since it submitted its 2011 plan, the Housing Board received more than $18.4
              million in capital funds plus $3.2 million in Recovery Act funds. It also had
              access to more than $27 million in capital fund revenue bond proceeds starting in
              2003. Even with a recapture of $566,605 based on the Housing Board’s own
              estimates, it had more than enough funding to reduce its vacancies by at least 477
              units. However, its vacancies increased.

Comment 14 The Housing Board’s comments state that the draft audit incorrectly refers to
           Mobile Development Enterprise throughout the report.




                                                58
               We have corrected the title throughout the report to Mobile Development
               Enterprises.

Comment 15 The Housing Board’s comments state that the draft report does not mention
           Section 13 of the Housing Board Act of 1937, as amended or the implementing
           regulations set forth at 24 CFR 943 Subpart C that are applicable to Mobile
           Development Enterprises in the context of the Housing Board’s procurement of
           Mobile Development Enterprises for program management services.

               We acknowledge that the draft report did not mention the references. We did not
               question the Housing Board’s procurement of Mobile Development Enterprises;
               therefore, it was not necessary for us to include the criteria referenced in the
               Housing Board’s comment.

Comment 16 The Housing Board’s comments state that at the exit conference, in response to its
           detailed refutation of this finding, we stated that it had legal opinions from OIG
           counsel and from HUD counsel in support of our position. The Housing Board’s
           attorneys requested that the legal opinions, but we stated that neither legal opinion
           could be released and its request to talk to the OIG attorney was denied. It further
           states that this is an indication that we are not interested in clarifying and possibly
           resolving issues.

               We disagree with the Housing Board’s interpretation and the finding explains our
               position; therefore, releasing the legal opinions is unnecessary. The Housing
               Board has not provided additional information to dispute our finding and
               recommendations; therefore, we did not change the finding.

Comment 17 The Housing Board’s comments state that our emphasizing that the Housing
           Board’s alleged misrepresenting of Mobile Development Enterprises as an
           “affiliate” rather than an “instrumentality” led to a failure to disclose an alleged
           apparent conflict of interest to HUD. Our logic is erroneous on a number of
           fronts. It also states that Mobile Development Enterprises was being engaged for
           program management services, which are not covered by PIH 2007-15.
           Additionally, even if Mobile Development Enterprises were involved with
           procurement related to development activities and the Housing Board had
           characterized Mobile Development Enterprises as an instrumentality, PIH 2007-
           15 does not require procurements for a public housing authority to engage an
           instrumentality. Therefore, whether PIH 2007-15 is applied or not to the Housing
           Board’s procurement of Mobile Development Enterprises, there is no basis in
           HUD regulations or guidance as to why HUD would have intervened to dispute
           the engagement of Mobile Development Enterprises to perform program
           management services for the Housing Board.

               We do not agree with the Housing Board’s assertions. The Housing Board should
               have identified the Mobile Development Enterprises to HUD as a nonprofit entity



                                                59
              that shares office space, an organizational chart, and bank accounts with the
              Housing Board, not as an affiliate entity that would be treated as an independent
              third party. When HUD was notified of the true nature of the relationship
              between the Housing Board and Mobile Development Enterprises, it determined
              the Mobile Development Enterprises was an instrumentality. HUD defines an
              instrumentality as an entity related to a public housing authority whose assets,
              operations, and management are legally and effectively controlled by the PHA,
              through which public housing authority functions or policies are implemented and
              that utilize public housing funds or public housing assets for the purpose of
              carrying our public housing development functions of the public housing
              authority. The procurement of Superior Masonry created the appearance of a
              conflict of interest because the owner of Superior Masonry is the half-brother of
              the Mobile Development Enterprises senior vice president.
              Additionally, we agree with the Housing Board’s statement that PIH 2007-15
              does not require procurements for a PHA to engage an instrumentality. The draft
              report does not question the Housing Board’s procurement of Mobile
              Development Enterprises or their participation in program management and
              development activities. The finding specifically questions the Housing Board’s
              identification of Mobile Development Enterprises as an affiliate entity to be
              treated as an independent third party despite the two organizations sharing office
              space, executive staff, and bank accounts.
Comment 18 The Housing Board’s comments state that the apparent conflict of interest focuses
           on the fact that the senior vice president of business and community relations for
           Mobile Development Enterprises has a half-brother who owned Superior
           Masonry. However, the senior vice president had no role whatsoever in any
           contracting decision related to the request for proposal pursuant to which the
           Housing Board selected Superior Masonry along with two other contractors. It
           further states that the senior vice president never worked for the Housing Board,
           and was paid solely by Mobile Development Enterprises, and was an at-will
           employee of Mobile Development Enterprises, and had no ability to influence
           policy or decision making with regard to construction related services such as
           were at issue with the request for proposal.

              At the start of our review, the Housing Board told us that Mobile Development
              Enterprises was an affiliate treated as an independent third party entity. Based on
              this information we did not request Mobile Development Enterprises’ records
              because the scope of our review was Mobile Housing Board financial
              transactions. However, later we determined Mobile Development Enterprises was
              not an independent third party entity but instead an instrumentality. We also
              determined that Mobile Development Enterprises participated in the procurement
              of Superior Masonry. Its procurement activities included evaluation and
              selection, and upon selection it worked directly with Superior Masonry to ensure
              the quality and completion of the task order items. Furthermore, the senior vice
              president of Mobile Development Enterprises signed the Mobile Development


                                               60
              Enterprises contract with the Housing Board that agrees to all construction
              management activities, including those related to vacancy reduction, which were
              subsequently carried out by Superior Masonry. The senior vice president’s
              relationship with the owner of Superior Masonry, and the relationship of the
              Housing Board and Mobile Development Enterprises create the appearance of a
              conflict of interest. We recommended that the Housing Board provide
              documentation to HUD to support that an actual conflict does not exist.

Comment 19 The Housing Board’s comments state that in Table 2 of the draft report, we
           incorrectly characterize both the senior vice president of business and community
           relations and the vice president of asset management and compliance as being
           directly employed by the Housing Board. Both are solely employees of Mobile
           Development Enterprises and have never been employees of the Housing Board.

              The organizational chart provided by the Mobile Development Enterprises
              showed the senior vice president of business and community relations and the
              vice president of asset management and compliance as employees of the Housing
              Board. Mobile Development Enterprises shares office space, executive staff, and
              bank accounts with the Housing Board.

Comment 20 The Housing Board’s comments state that we substitute our own judgment in
           place of the policy decisions made by the Housing Board in consultation with and
           the approval of the HUD field office. It further states that our alternative view of
           how public housing capital funds might have been expended is isolated from the
           local factors on the ground.

              Our findings are based on interviews with the Housing Board and HUD staff and
              analysis of documents provided by both agencies that included information
              related to the local factors on the ground. We have also presented our findings to
              the HUD staff and they agree with the information presented in the draft report.

Comment 21 The Housing Board’s comments state that we attempt to blame the Housing
           Board for Congressional timing in lifting the unit cap under HUD’s RAD
           program, which the Housing Board identified as a path to systematically and
           comprehensively address its long-term capital needs and corresponding vacancy
           problems. It further states that it should not be blamed for not receiving more
           funds from HUD, and that such a position makes housing authorities vulnerable
           for activities far outside of their control.

              We do not agree with the Housing Board’s assertions. Our draft report does not
              blame the Housing Board for any outside factors, including budget restrictions
              due to a government wide sequestration, that may have impacted the timing of its
              RAD program. Of the 491 units vacant as of November 2011 when the RAD
              program came into existence, 347 had been vacant from 1 to 12 years. These
              units remained vacant even after the Housing Board implemented its 2011



                                               61
              vacancy reduction plan and HUD’s approval to allow the Housing Board to use
              Recovery Act funds to reduce its long-standing vacancies by 477 units.
              Additionally, the Housing Board’s failure to renovate and lease its long standing
              vacant units prevented it from receiving operating funds and rental revenue which
              may have reduced the impact environmental factors that may have led to a
              reduction in Housing Board funds.

              The draft report did not discuss the Housing Board’s RAD program; however, we
              have included a discussion in the final report.

Comment 22 The Housing Board’s comments state that within the assessed period, the Housing
           Board was encouraged by the HUD field office to focus on units that were more
           easily made-ready to increase occupancy rates at a faster rate. It further states that
           this methodology turned the focus away from costly long-standing vacant units
           that are the subject of the draft report.

              The Housing Board’s statements are not accurate. The HUD field office directed
              the Housing Board to utilize its own staff to prepare recently vacated units that
              required minimal maintenance as quickly as possible. It did not direct the
              Housing Board to stop working on reducing long-standing vacancies.

Comment 23 The Housing Board’s comments state that the draft report’s suggestion that it has
           run afoul of section 7 of the Capital Fund agreement to the ACC is baseless and
           without merit. It further states that section 7 of form HUD-52840-A states
           implementation or use of funding assistance provided under this amendment is
           subject to the attached corrective action order(s). There were no corrective action
           orders and, therefore, the Housing Board is unclear how it could have violated
           this section. It does not agree section 7 of form 52840-A is applicable.

              The Housing Board’s response is not based on the criteria used in the draft report.
              The draft report finding regarding the Housing Board’s failure to renovate its
              vacant units with operating and capital funds reference section 7 of the Capital
              Fund agreement (form HUD-53012). Based on this criterion, we determined that
              the Housing Board failed to meet the requirements of is Capital Fund agreement.

Comment 24 The Housing Board’s comments state that while the public housing waiting list
           did increase, it did not increase by the amount indicated in the draft report. It
           states that a glitch in the software causing two properties to over-report waiting
           list numbers.

              The Housing Board did not provide a revised waiting list; therefore, we did not
              make revisions to the report.




                                                62
Comment 25 The Housing Board’s comments dispute that its RAD application delay was the
           fault of the Housing Board and that it did everything it could to get movement
           from HUD on the demolition and disposition applications.

              The Housing Board’s statements are not correct. The draft report did not include
              information regarding the Housing Board’s RAD program. The Housing Board’s
              failure to provide supplemental information requested by the Special Applications
              Center is documented in REAC’s Quality Assurance Assessment report. The
              report states that the Special Applications Center requested supplemental
              information on December 2, 2011. As of August 6, 2014, the Housing Board had
              failed to provide the documentation requested. Also despite approvals, as of May
              2016, the Housing Board’s demolition and disposition developments have not
              been either demolished or sold.

 Comment 26 The Housing Board’s comments state that it is currently participating in the RAD
            protocol to receive permission to proceed in accordance with its transformation plan.
            During the Choice Neighborhood Initiative Planning process, there was unanimity of
            opinion that its Josephine Allen property should not be renovated, but rather torn
            down and revitalized. The Housing Board estimates the cost of constructing mixed-
            income, multifamily, rental, and homeownership housing at $67 to $85 million.

              At the exit conference, the Housing Board requested that we include information
              in the report that acknowledges its participation in the RAD program. We
              honored the Housing Board’s request, but in order to fully analyze its
              participation we also discussed HUD’s concerns with the Housing Board’s RAD
              program. Therefore, we have updated recommendation 1C to require HUD to
              work with the Housing Board to ensure that it meets the conditions of its RAD
              approval so that its units are made available for eligible families.
Comment 27 The Housing Board’s comments state that there was no conflict of interest real or
           apparent in the Housing Board procurement of Superior Masonry and we should
           withdraw our recommendation.

              We determined that the Housing Board may have violated its consolidated annual
              contributions contract’s conflict of interest provision, HUD Notice PIH-2007-15
              (HA), by entering into a contract with the senior vice president of its nonprofit’s
              half-brother. The annual contributions contract states that a Housing Authority
              may not enter into any contract or arrangement in connection with a project under
              the annual contributions contract in which any employee of the Housing
              Authority who formulates policy or who influences decisions with respect to the
              project(s), or any member of the employee’s immediate family, or the employee’s
              partner. Mobile Development Enterprises and the Housing Board share office
              space, executive staff, and bank accounts. These factors in addition to the familial
              relationship between Mobile Development Enterprises’ senior vice president and
              the owner of Superior Masonry create the appearance of a conflict of interest.



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Appendix C
                               Photos of Vacant Unit Conditions


To determine the nature and extent of each identified vacancy, the Housing Board physically
inspected each vacant unit and rated the units from A to F, indicating the amount of resources
needed to return the unit to a rentable status. Under the Housing Board’s system, the A units
needed the least amount of resources to return them to rentable status, and the F units needed the
greatest amount of resources.
The photos below show the various conditions of the Housing Board’s vacant units rated A to F.

A Units
The Housing Board planned not to use capital funds for the renovation of the units below. The
renovation time would range from 2 to 4 days, with a cost of $500 to $3,000 per unit.




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B Units
The Housing Board planned not to use capital funds for the renovation of the units below. The
renovation time would range from 2 to 4 days, with a cost of $1,500 to $4,000 per unit.




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C Units
The Housing Board planned to use capital funds, Recovery Act funds, and other available funds
for renovation of the units below. The renovation time would range from 3 to 4 days, with a cost
of $2,500 to $5,000 per unit.




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D Units
The Housing Board planned to use capital funds, Recovery Act funds, and other available funds
for the renovation of the units below. The renovation time would range from 4 to 5 days, with a
cost of $3,500 to $6,000 per unit.




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E Units

The Housing Board planned to use capital funds, Recovery Act funds, and other available funds
for the renovation of the units below. The renovation time would range from 4 to 6 days, with a
cost of $4,500 to $7,000 per unit.




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F Units
The Housing Board planned to use capital funds, Recovery Act funds, and other available funds
for the renovation of the units below. The renovation time would range from 10 to 20 days, with
a cost of $10,000 to $45,000 per unit.




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