oversight

Final Audit Report: The Lucas Metropolitan Housing Authority, Toledo, OH, Did Not Always Follow HUD's or Its Own Procurement Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-30.

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

            Lucas Metropolitan Housing
                    Authority,
                   Toledo, OH
                            Public Housing Program




Office of Audit, Region 5                Audit Report Number: 2016-CH-1013
Chicago, IL                                              September 30, 2016
To:            Kevin J. Laviano, Director of Public and Indian Housing Hub, 5DPH

               //signed//
From:          Kelly Anderson, Regional Inspector General for Audit, 5AGA

Subject:       The Lucas Metropolitan Housing Authority, Toledo, OH, Did Not Always Follow
               HUD’s or Its Own Procurement Requirements




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 Lucas Metropolitan Housing Authority’s
public housing program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
312-353-7832.
                          Audit Report Number: 2016-CH-1013
                          Date: September 30, 2016

                          The Lucas Metropolitan Housing Authority, Toledo, OH, Did Not Always
                          Follow HUD’s or Its Own Procurement Requirements



Highlights

What We Audited and Why
We audited the Lucas Metropolitan Housing Authority’s public housing program as part of the
activities in our fiscal year 2016 annual audit plan. We selected the Authority based on the
results of a risk assessment of housing agencies in Region 5’s1 jurisdiction. Our objective was to
determine whether the Authority complied with the U.S. Department of Housing and Urban
Development’s (HUD) and its own procurement requirements.

What We Found
The Authority did not always comply with HUD’s and its own procurement requirements.
Specifically, it did not (1) competitively award two contracts and (2) include the required
minimum and maximum amounts in its indefinite-quantity contracts. As a result, (1) the
Authority inappropriately spent more than $276,000 on contracts that were awarded without
competition and (2) HUD and the Authority lacked assurance that nearly $410,000 in capital
funds would be used appropriately.

What We Recommend
We recommend that the Director of HUD’s Cleveland Office of Public and Indian Housing
require the Authority to (1) reimburse its Public Housing Capital Fund program $240,413 from
non-Federal funds for the contracts that were awarded without competition, (2) deobligate
$409,663 in capital funds from its task letters for its housing units and kitchen renovation
projects, (3) reimburse its program $36,264 for the Capital Fund disbursements in excess of its
indefinite-quantity contract, and (4) implement adequate procedures and controls to ensure that
its contracts are procured and executed in accordance with HUD’s and its own requirements.




1
    Region 5 includes the States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Authority Did Not Always Comply With HUD’s and Its Own
                  Procurements Requirements ........................................................................... 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 10

         B. Auditee Comments and OIG’s Evaluation ............................................................. 11

         C. HUD's and the Authority's Procurement Requirements………………………...18




                                                            2
Background and Objective
The Toledo Metropolitan Housing Authority is a public housing agency created in 1933 by the State
of Ohio to provide decent, safe, and sanitary housing for low-income households. Its name was
changed to the Lucas Metropolitan Housing Authority in 1975. The Authority’s mission is to
create quality housing opportunities, build communities through collaborative partnerships, and
develop the neighborhoods of tomorrow for the people of today.
The U.S. Department of Housing and Urban Development (HUD) established the public housing
program to provide decent and safe 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 2014 and 2015:

                                        Operating Fund         Capital Fund
                  Calendar year            program              program

                        2014            $10,774,768            $4,208,671

                        2015              10,805,378            4,124,123

                       Totals             21,580,146            8,332,794



The objective of the audit was to determine whether the Authority complied with HUD’s and its
own procurement requirements.




                                                3
Results of Audit

Finding: The Authority Did Not Always Comply With HUD’s and
Its Own Procurement Requirements
The Authority did not always comply with HUD’s and its own procurement requirements.
Specifically, it did not (1) competitively award two contracts and (2) include the required
minimum and maximum amounts in its indefinite-quantity contracts. These deficiencies
occurred because the Authority disregarded HUD’s and its own procurement requirements. As a
result, (1) the Authority inappropriately spent more than $276,000 on contracts that were
awarded without competition and (2) HUD and the Authority lacked assurance that nearly
$410,000 in capital funds would be used appropriately.
The Authority Did Not Competitively Procure Two Projects
We reviewed 26 contracts2 totaling more than $2.5 million to review for compliance with HUD’s
and the Authority’s procurement requirements. Of the 26 contracts reviewed, 2 projects
(housing unit renovations and air conditioning installations) were not competitively procured.
Housing Unit Renovation Project
On June 4, 2015, the Authority issued an invitation for bids for its housing unit renovation
project. However, when it became aware that there would be only one potential bidder, it
canceled the solicitation before the public bid opening. The Authority then negotiated a task
letter,3 under its ongoing indefinite-quantity contract4 with the same potential bidder.
The indefinite-quantity contract included a not to exceed amount of $250,000.5 On September
22, 2015, the Authority’s board approved a resolution to increase the not to exceed amount of the
indefinite-quantity contract to $500,000. On October 1, 2015, the Authority’s director of real
estate development and modernization approved the task letter for the housing unit renovations
project in the amount of $488,605 without approval from the Authority’s board as required by its
own policies.6 Further, the Authority did not prepare a cost analysis7 to ensure that the price it
paid for the housing unit renovations was reasonable. See the table below for a summary of
funds that had not been disbursed as of July 21, 2016, for the housing unit renovations awarded
under indefinite-quantity contract.


2
  Our methodology for the selection of the contract is explained in the Scope and Methodology section of this audit
report.
3
  HUD Handbook 7460.8, REV-2, paragraph 1.9
4
  The indefinite-quantity contract was executed on June 8, 2015, after evaluating proposals. The contract was for
maintenance and small construction services for the Authority’s vacant and occupied units. Under the contract, the
Authority would award work to the contractor through negotiated task letters.
5
  HUD Handbook 7460.8, REV-2, paragraph 10.1.C.3.a.iii
6
  Section III.B.1 of the Authority’s procurement policy
7
  HUD Handbook 7460.8, REV-2, paragraph 10.3.C.7

                                                          4
                                                                 Housing unit
                                                                 renovations

                                   Task letter amount             $488,605
                                   Less: funds disbursed            84,479
                                   through July 21, 2016
                                   Funds not disbursed
                                                                   404,126
                                   through July 21, 2016


Further, the Authority awarded four additional task letters to the same contractor for kitchen
renovations at several of its housing projects under the indefinite-quantity contract. The four
task letters totaled $53,196. Although the task letters were appropriately awarded, along with the
task letter for the housing unit renovations, the amount of work awarded to the contractor was
$541,801 ($488,605 + $53,196), exceeding the indefinite-quantity contract’s limit by $41,801.
Of the $41,801, the Authority paid $36,264 and obligated $5,537 as of July 21, 2016.
Air Conditioning Installation Project
For the Authority’s air conditioning installation project, it initially awarded an indefinite-quantity
contract after evaluating quotations for heating, ventilation, and air conditioning services. The
Authority entered into a firm fixed-price contract for $155,934, which required it to use the
sealed bids procurement method.8 The Authority believed it could award the air conditioning
unit installations contract without competition because it had an indefinite-quantity contract in
place with the same contractor. Further, the Authority’s construction manager stated that the
Authority did not realize that the contractor’s services were initially procured through a request
for quotations when they needed to use a sealed bid process. As a result, the Authority paid
$155,934 for work that did not receive competition as required by its policy and HUD
regulations.
The Authority Did Not Include Minimum and Maximum Amounts in Its Indefinite-
Quantity Contracts
Contrary to HUD’s requirements,9 all of the Authority’s indefinite-quantity contracts we
reviewed did not state the minimum and maximum quantity of supplies and services that it
would be required to order. From January 1, 2014, through December 31, 2015, it had 141
active indefinite-quantity contracts. The Authority’s former executive director said that the
Authority had mistakenly overlooked HUD’s requirement. As a result of our audit, the Authority
had begun including the required amounts in its indefinite-quantity contracts.
The Authority Disregarded HUD’s and Its Own Procurement Requirements
The Authority disregarded HUD’s and its own procurement requirements. For instance,
regarding the housing unit renovation project, correspondence between the Authority’s manager


8
    Section III.B.4c of the Authority’s procurement policy
9
    Handbook 7460.8, REV-2, paragraph 10.1.C.3.a.iii(A)

                                                             5
of modernization and former deputy executive director expressed concern that HUD would not
approve the only bid received for the project because it would not consider the lack of
competition in an urban area as a valid reason to award a contract without competition. In
addition, the Authority was concerned that it would lose funding if it did not obligate its capital
funds before the obligation deadline. Therefore, the Authority bypassed HUD’s procurement
requirements and used task letters to award the work under an indefinite-quantity contract for
maintenance and small construction.
Conclusion
The weaknesses described above occurred because the Authority disregarded HUD’s and its own
procurement requirements. As a result, (1) the Authority inappropriately spent more than
$276,000 on contracts that were awarded without competition and (2) HUD and the Authority
lacked assurance that nearly $410,000 in capital funds would be used appropriately.
Recommendations
We recommend that the Director of HUD’s Cleveland Office of Public and Indian Housing
require the Authority to

       1A.     Reimburse its Public Housing Capital Fund program $84,479 from non-Federal
               funds for expenditures for its task letter that was issued for the housing unit
               renovations project.

       1B.     Deobligate the remaining $404,126 from its task letter for the housing unit
               renovations project.
       1C.     Reimburse its Public Housing Capital Fund program $36,264 from non-Federal
               funds for disbursements made for the kitchen renovations projects that exceeded
               the not to exceed amount of its indefinite-quantity contract.

       1D.     Deobligate the remaining $5,537 from its task letter for the kitchen renovations
               projects that exceeded the not to exceed amount of its indefinite-quantity contract.
       1E.     Reimburse its Public Housing Capital Fund program $155,934 from non-Federal
               funds for the air conditioning unit installation project that was not competitively
               procured.

       1F.     Implement adequate quality control policies and procedures, including but not
               limited to providing training to its staff to ensure that its contracts are procured
               and executed in accordance with HUD’s requirements and its own procurement
               policy.




                                                  6
Scope and Methodology
We performed our audit work from February through July 2016 at the Authority’s offices located
at 435 Nebraska Avenue and 201 Belmont Avenue, Toledo, OH. The audit covered the period
January 1, 2014, through December 31, 2015, and was expanded as necessary.
To accomplish our objective, we reviewed
        Applicable laws; the Federal Register; Federal regulations at 2 CFR (Code of Federal
         Regulations) Parts 200 and 225; HUD’s regulations at 24 CFR Parts 85, 905, 960, and
         990; Office of Public and Indian Housing notices; HUD Procurement Handbook 7460.8,
         REV-2; and HUD Guidebook 7510.1.
        The Authority’s 5-year and annual action plans; Capital Fund 5-year action plan;
         accounting records; annual audited financial statement for fiscal year 2014; bank
         statements; contract and procurement files; contract agreements; policies and procedures;
         organizational charts; board meeting minutes for January 2014 through December 2015;
         and program annual contributions contract with HUD and amendments.
        HUD’s files for the Authority.
In addition, we interviewed the Authority’s and HUD’s staff.
We selected a nonrepresentative sample of 2610 contracts to review, which the Authority paid for
using operating and capital funds. We selected our sample based on (1) the dollar amount of the
contract, (2) the timing of the procurement, and (3) a review of the Authority’s board of
commissioners’ meeting minutes.11 The Authority’s list of contracts included indefinite-quantity
contracts. Therefore, we reviewed the Authority’s check register and general ledger to determine
the amount and source of funds disbursed to each contractor that had at least one indefinite-
quantity contract during the audit period. We combined the disbursements made to each
contractor that were included in the Authority’s check register to establish the total amount of
operating and capital funds disbursed to contractors during the audit period. We determined that
based on the contractors included on the Authority’s list, the total amount of operating and
capital funds disbursed during the audit period totaled more than $11.6 million. The contracts
selected for review totaled more than $2.5 million, which represented 22 percent of the total
amount of operating and capital funds disbursed.




10
   We initially selected 18 contracts to review. However, the solicitations that were used to award five of the
contracts initially selected for review resulted in eight additional contracts awarded. We decided to review the
additional eight contracts, along with the 18 that were selected. Three contracts we reviewed had no funds
disbursed. We do not intend to project our results to the universe.
11
   We selected a nonrepresentative sample because we knew enough about the universe to select higher risk
procurements. In this case, high risk was determined based on amount and nature of the contract, board approval,
and timing of the procurement action.

                                                         7
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 finding 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.




                                                8
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 Deficiency
Based on our review, we believe that the following item is significant deficiency:

   The Authority lacked adequate controls to ensure it did not disregard HUD’s and its own
    procurement requirements.

Separate Communication of Minor Deficiencies
We reported minor deficiencies to both HUD and the auditee separately in a memorandum issued
on September 30, 2016.




                                                  9
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
                Recommendation                     Funds to be put
                                    Ineligible 1/  to better use 2/
                     number
                         1A              $84,479
                         1B                                  $404,126
                         1C               36,264
                         1D                                     5,537
                         1E              155,934

                       Totals            276,677              409,663



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, implementation of our recommendation
     will deobligate unreasonable amounts of capital funds and make them available for
     eligible uses.




                                             10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




                               11
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comments 2
and 3




Comment 4


Comment 2




                               12
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 5




Comment 6




                               13
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




                               14
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




                               15
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority contends that it did not agree with our calculation of the questioned
            costs regarding the air conditioning installation project. Specifically, the
            $155,934 ineligible for the project should be reduced by the maximum amounts
            allowable for small purchase procurements under the Authority’s own policy or
            HUD Handbook 7460.8 REV-2. The Authority’s small purchase threshold is
            $50,000 and the small purchase threshold specified in HUD Handbook 7460.8
            REV-2 is $100,000. 
            We disagree. As stated in the audit report, the Authority entered into a firm fixed-
            price agreement with a contractor to install air conditioning units without
            allowing for competition. According to the Authority’s procurement policy, the
            Authority was required to use the sealed bids method for procuring supplies and
            services in excess of its small purchase threshold of $50,000. This requirement
            applied to the entire amount of the procurement. It is done to ensure that the cost
            is reasonable. Reducing the amount that we question as reasonable defeats the
            purpose of setting the threshold. Without conducting this procurement in a
            manner that provided full and open competition, HUD and the Authority lacked
            assurance that the amount that the Authority paid for the contract was reasonable.
            Therefore, the amount of the entire contract (task letter) represented in the audit
            report will remain.

Comment 2   The Authority contends that it did not agree with our calculation of questioned
            costs regarding the housing unit renovations project. Specifically, the Authority
            stated that since it was originally authorized to spend up to $250,000 under its
            indefinite-quantity contract, the $120,743 that was disbursed ($84,479 for the
            housing unit renovations project and $36,264 for the kitchen renovations project)
            falls under the initial $250,000 limit and should not be questioned. The Authority
            provided a copy of the indefinite-quantity contract that was executed on June 8,
            2015, as exhibit B along with its comments.
            We disagree. The Authority did not comply with HUD’s and its own
            procurement requirements when it canceled the invitation for bids for the project
            and awarded it to the contractor as a task letter under the indefinite-quantity
            contract without competition. Although the task letter for the housing unit
            renovations project was awarded under the indefinite-quantity contract, the task
            letter itself was a separate contract. Since the amount of the task letter exceeded
            the Authority’s small purchase threshold of $50,000 the project should have been
            competitively procured. The amount of $120,743 questioned in the audit report
            will remain.

Comment 3   The Authority disputes that it did not prepare a cost estimate for its housing unit
            renovations project. The Authority referenced page 20 of exhibit A that was
            provided along with its comments.

                                              16
            The draft audit report did not state that the Authority did not prepare a cost
            estimate for its housing unit renovations project. However, the report did state
            that the Authority did not prepare a cost analysis to ensure that the price it paid for
            the housing unit renovations was reasonable. The Authority did not provide
            documentation to support that a cost analysis was conducted in accordance with
            HUD Handbook 7460.8 REV-2, paragraph 10.3.D.3.
            Page 20 of exhibit A, which was provided by the Authority, referred to a
            document that showed the starting and completion dates that were proposed by
            the contractor for the housing unit renovations project. We did not include page
            20 of exhibit A in the report because it was not necessary to understand the
            Authority’s comments. However, it is available upon request.
Comment 4   The Authority contends that it had intended to increase the indefinite-quantity
            contract limit to $500,000 to accommodate the entire housing unit renovations
            project. Exhibit A was provided along with the Authority’s comments.
            Page 2 of exhibit A showed that the Authority’s director of real estate
            development and modernization approved the housing unit renovations task letter
            on October 1, 2015. The director’s approval occurred after the Authority’s board
            approved the resolution to increase the indefinite-quantity contract limit to
            $500,000 on September 22, 2015. The task letter provided by the Authority did
            not impact the finding because the Authority still awarded the housing unit
            renovations project without competition. Nonetheless, the report was updated to
            reflect that the board approved the increase of the indefinite-quantity contract
            limit before the housing unit renovations task letter was approved by the director.
            We did not document page 2 of exhibit A in the report because it was not
            necessary to understand the Authority’s comments. However, it is available upon
            request.
Comment 5   The Authority contends that it did not agree with our calculation of funds to be
            put to better use. The amount reported as funds to be put to better use relates to
            capital funding that had been obligated, but not yet disbursed, for the housing
            units and kitchen renovation projects that did not fully comply with either HUD’s
            or the Authority’s procurement requirements. Therefore, the amount reported as
            funds to be put to better use will remain.
Comment 6   The Authority contends that it will take necessary steps to ensure that its contracts
            are procured and executed in accordance with its and HUD’s requirements. It
            provided exhibits C through F, along with its written comments. We commend
            the Authority for its willingness to implement our recommendations. The
            Authority should work with HUD to ensure that the actions taken will address the
            deficiencies cited in the audit report. We did not include exhibits C through F in
            the report because they were not necessary to understand the Authority’s
            comments. However, the exhibits are available upon request.



                                               17
Appendix C
                   HUD’s and the Authority’s Procurement Requirements


HUD’s regulations at 24 CFR 85.36(c)(1) state that all procurement transactions must be
conducted in a manner providing full and open competition.
HUD Handbook 7460.8, REV-2, paragraph 1.9, states that contracts include job orders or task
letters issued under basic ordering agreements, requirement contracts, or definite- or indefinite-
quantity contracts.
HUD Handbook 7460.8 REV-2, paragraph 10.1.C.3.a.iii, states that indefinite-quantity contracts
provide for delivery of an indefinite quantity, within stated limits (a minimum and maximum
quantity), of supplies or services during a fixed period. Quantity limits may be stated in the
contract as number of units or as dollar values. PHAs may use an indefinite-quantity contract
when they cannot predetermine, above a specified minimum, the precise quantities of supplies or
services that they will require during the contract period.
HUD Handbook 7460.8, REV-2, paragraph 10.1.C.3.a.iii(A), states that the indefinite-quantity
contract must require the public housing agency to order and the contractor to furnish at least a
stated minimum quantity of supplies and services. In addition, if ordered, the contractor must
furnish any additional quantities, not to exceed the stated maximum.
HUD Handbook 7460.8, REV-2, paragraph 10.3.C.7, states that construction contracts awarded
using any method other than sealed bidding and modifications to construction contracts require
cost analysis.
Section III.B.1 of the Authority’s procurement policy states any contract not exceeding $50,000
may be made in accordance with small purchase procedures. However, any contract exceeding
$50,000 must be approved by the board of commissioners.
Section III.B.4b of the Authority’s procurement policy states that for purchases between $10,001
and $50,000, a minimum of three price quotations submitted in writing is required.
Section III.B.4c of the Authority’s procurement policy states that purchases exceeding $50,000
must use the sealed bids procedure.




                                                 18