oversight

The Harris County Community Services Department Needs to Improve Procurement and Subrecipient Oversight in Its CDBG Program Activities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-27.

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

     Harris County Community Services
         Department, Houston, TX
              Community Development Block Grant




Office of Audit, Region 6       Audit Report Number: 2016-FW-1008
Fort Worth, TX                                  September 27, 2016
To:            Sandra H. Warren, CPD Director, Houston Field Office, 6ED

               //signed//
From:          Tracey Carney, Acting Regional Inspector General for Audit, 6AGA
Subject:       The Harris County Community Services Department Needs to Improve
               Procurement and Subrecipient Oversight in Its CDBG Program Activities




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 Community Services Department of Harris
County’s Community Development Block Grant (CDBG) 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
817-978-9309.
                    Audit Report Number: 2016-FW-1008
                    Date: September 27, 2016

                    The Harris County Community Services Department Needs to Improve
                    Procurement and Subrecipient Oversight in Its CDBG Program Activities



Highlights

What We Audited and Why
We audited the Harris County Community Services Department’s Community Development
Block Grant (CDBG) program based on our risk analysis and as part of our annual audit plan to
review community planning and development funds. The audit objective was to determine
whether the Department properly administered and adequately documented its CDBG program
activities in accordance with U.S. Department of Housing and Urban Development (HUD)
regulations and spent CDBG funds for eligible activities.

What We Found
In general, the Department properly administered and adequately documented its CDBG
program activities in accordance with HUD regulations and spent CDBG funds for eligible
activities. However, there were instances of noncompliance with procurement regulations and
inadequate subrecipient oversight. Specifically, the Department did not (1) include required
procurement language in its contracts, (2) include required eligibility restrictions in its
subrecipient agreements, and (3) update its prequalified list of contractors. These conditions
occurred because the Department was unaware of some requirements, believed other
requirements were unnecessary, and was satisfied with its list of contractors. The Department
agreed to correct the deficiencies as we identified them.

What We Recommend
We recommend that the Director of the Houston Office of Community Planning and
Development require the Department to confirm that it has implemented procedures to ensure
that its future contracts and subrecipient agreements address the procurement and eligibility
issues identified in this report.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Harris County Department of Community Services Needs to Improve
         Its Compliance With Procurement Regulations and Subrecipient Oversight ............ 4

Scope and Methodology ...........................................................................................6

Internal Controls ......................................................................................................8

Appendixes ................................................................................................................9
         A. Auditee Comments and OIG’s Evaluation ............................................................... 9




                                                             2
Background and Objective
The Community Development Block Grant (CDBG) program was established by Title I of the
Housing and Community Development Act of 1974, Public Law 93-383 as amended, 42 United
States Code 5301. Under the CDBG program, the U.S. Department of Housing and Urban
Development (HUD) awards grants to State and local governments to aid in the development of
viable urban communities. Recipients are required to use grant funds to provide decent housing
and suitable living environments and to expand economic opportunities, principally for persons
of low and moderate income. In addition, each CDBG-funded activity must meet one or more of
the following three national objectives:

   •   Benefit low- and moderate-income persons,
   •   Aid in preventing or eliminating slums or blight, or
   •   Address a need with a particular urgency because existing conditions pose a serious and
       immediate threat to the health or welfare of the community.

Harris County is a political subdivision of the State of Texas, and the Commissioners Court is
the governing body of the County. The Community Services Department of Harris County is a
division within the County located at 8410 Lantern Point Drive, Houston, TX. The Department
receives funds through formula grants issued by HUD. Between 2013 and 2015 the Department
received the following CDBG funding:

                  Program year                          CDBG allocation amount
                      2013                                  $11,799,679
                      2014                                    11,844,232
                      2015                                    11,932,841
                  Total funding                               35,576,752


The Department receives funds to cover all of unincorporated Harris County in addition to 14
smaller cities within the County that agree to allow services within their jurisdictions. There are
four entitlement jurisdictions within Harris County that receive HUD funds: Harris County and
the Cities of Houston, Pasadena, and Baytown.
The objective of the audit was to determine whether the Department properly administered and
adequately documented its CDBG program activities in accordance with HUD regulations and
spent CDBG funds for eligible activities.




                                                 3
Results of Audit

Finding 1: The Harris County Department of Community Services
Needs to Improve Its Compliance With Procurement Regulations
and Subrecipient Oversight
Although the Harris County Community Services Department generally administered and
documented its CDBG program activities in accordance with HUD regulations and spent CDBG
funds for eligible activities, it did not (1) include required procurement language in its contracts,
(2) include required eligibility restrictions in its subrecipient agreements, and (3) update its
prequalified list of contractors. These conditions occurred because the Department was unaware
of the required procurement language and eligibility restrictions, believed some requirements to
be unnecessary, and its procurement staff was satisfied with an old list of contractors. Although
the audit did not identify any effects from lack of compliance with procurement requirements
and with inadequate subrecipient oversight, or any consequences of not updating the pre-
qualified list of contractors, continued deficiencies could result in an ineligible use of Federal
funds. The Department agreed to correct all deficiencies as we identified them.

Contracts Did Not Include Required Language
The Department did not include energy efficiency and access and retention of records language
in its contracts as required by 24 CFR (Code of Federal Regulations) 85.36(i)11 and 13. Of the
22 contracts reviewed, 21 did not contain the required language. These conditions occurred
because the Department believed the language to be unnecessary since the contractors were not
grantees or subgrantees. Since the Department did not comply with the requirements, it could be
liable for any energy efficiency or record retention violations. The Department agreed that it
would add this language to future contracts, but we could not confirm that it had done so because
there were no recent contracts to review.

Subrecipient Agreements Did Not Address Eligibility Restrictions
All five of the Department’s subrecipient agreements reviewed failed to address eligibility
restrictions for some resident aliens as required by 24 CFR 570.613. While the Department had
a non-U.S. citizen’s policy, it was unaware that the resident alien restriction criteria applied. As
a result, it could have assisted ineligible applicants. The Department agreed to amend its policy
and contract forms to include the eligibility restrictions in all future subrecipient agreements, but
we could not confirm that it had done so because there were no recent agreements to review.
The Prequalified List of Contractors Was Not Updated
The Department did not update its prequalified list of contractors between 2013 and 2015 as
required by 24 CFR 85.36(c)4. The Department stated that it did not update the list because its
procurement staff was overburdened with the Hurricane Ike Disaster Recovery Program and its
procurement department was satisfied with an old list of contractors. However, there was open
competition because the Department advertised for all bid requests. The Department updated the
list for 2016 and provided a copy to us.


                                                  4
Conclusion
The Department did not (1) include required language in its contracts, (2) address some
eligibility restrictions in its subrecipient agreements, and (3) update its prequalified list of
contractors between 2013 and 2015 because it was unaware of required procurement language
and restrictions, believed some requirements to be unnecessary, and it was satisfied with its old
list of contractors. Although the audit did not identify any effects of these deficiencies,
continued procurement and subrecipient oversight deficiencies could result in an ineligible use of
Federal funds. The Department stated that it would correct the issues identified in the report.
However, we were unable to determine whether it had implemented the corrective actions
because we did not review additional contracts and subrecipient agreements after the audit
period.
Recommendations
We recommend that the Director of the Houston Office of Community Planning and
Development require the Harris County Department of Community Services to
       1A.     Confirm that it has implemented procedures to ensure that its future contracts
               contain the energy efficiency and access and retention of records language
               required by 24 CFR 85.36(i)11 and 13.
       1B.     Confirm that it has implemented procedures to ensure that its future subrecipient
               agreements address eligibility restrictions required by 24 CFR 570.613.




                                                5
Scope and Methodology
We conducted our audit at the Harris County Community Services Department and the HUD
Office of Inspector General’s (OIG) office in Houston, TX, between February and June 2016.
Our audit scope generally covered the Department’s CDBG program for the period January 1,
2013, through December 31, 2015. We expanded the scope as necessary to accomplish our audit
objective.
To accomplish our objective, we reviewed
    •   Relevant laws, regulations, and program guidance.
    •   The Department’s organizational structure and written policies for the program.
    •   The Department’s audit and HUD monitoring reports.
    •   The Department’s grant agreements and action plans.
    •   The Department’s subrecipient agreements and monitoring documentation.
    •   Expenditure and project reports from HUD’s Integrated Disbursement and Information
        System (IDIS). 1
    •   The Department’s files for the sampled CDBG-funded projects to determine whether
        program national objectives were adequately documented.
    •   The Department’s files for the sampled CDBG-funded procurements to determine
        whether the Department complied with Federal procurement rules and regulations.
    •   The Department’s administrative expenditures to determine whether the expenditures
        exceeded a 20 percent threshold 2 and the funds were used for allowable purposes.
We also interviewed the Department’s staff and subrecipients.
From a universe of 100 projects administered between January 1, 2013, and December 31, 2015,
we selected for review a nonstatistical sample of 5 projects based on the following qualifications:
(1) multiple funding years, (2) services in which two or more vendors provide the same type of
service, (3) lead-based removal or home repair services, and (4) high dollar amount. We
reviewed the Department’s file documentation for the five sampled projects to determine
whether the Department maintained documentation to support its basis for meeting one or more
of the three program national objectives and subrecipient oversight. We compared HUD’s IDIS
data to the Department’s data but did not perform a complete assessment of computer-processed
data regarding the national objective review because we did not rely on computer data to develop


1
    IDIS is the drawdown and accomplishment reporting system for CDBG grantees. IDIS also provides HUD with
    current information regarding CDBG and other activities underway across the nation. HUD uses this
    information to report to Congress and to monitor grantees.
2
    24 CFR 570.200(g) limits the amount of yearly CDBG funds obligated for planning and administration to 20
    percent of its entitlement grant made for that year plus any program income.



                                                     6
our conclusions. The test results are limited to the 5 projects reviewed and cannot be projected
to the universe of 100 projects.
From a universe of 135 contracts procured between January 1, 2013, and December 31, 2015, we
selected for review a random, nonstatistical sample of 22 contracts totaling $1.9 million. 3 We
selected a random sample of 17 contracts valued at $50,000 or less from a list of 85 contracts
provided by the Department, while ensuring that we had at least one contract from each of the
program years (2013-2015). We selected 5 additional contracts, every 10th contract from a list of
50 contracts, valued at $50,000 or more provided by the Department. We reviewed the
Department’s and Harris County’s file documentation for the 22 sampled contract files to
determine whether they were procured in accordance with Federal regulations. We did not
assess computer-processed data for the procurement review because we did not rely on computer
data to develop our conclusions. The test results are limited to the 22 contracts reviewed and
cannot be projected to the 135 contract universe.
From a universe of 1,283 Department drawdowns 4 in IDIS between January 1, 2013, and
December 31, 2015, we extracted all drawdowns that were more than $100,000 and selected a
nonstatistical sample of 7 drawdowns with expenditures totaling $2.9 million. We selected the
oldest drawdown on the list, the highest dollar amount, and then every seventh drawdown for the
last five drawdowns. We reviewed the drawdowns to determine whether they were reasonable,
eligible, and adequately supported. We determined that the IDIS data were reliable for our test
purposes, but our reliability assessment was limited to the data reviewed and reconciled to the
Department’s data. The test results are limited to the 7 drawdowns reviewed and cannot be
projected to the 1,283 drawdown universe.
We compared administrative expenditure data, covering program years 2013 through 2015, from
IDIS with the total grant amount and determined that costs did not exceed the 20 percent limit.
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.




3
    We pulled the sample from two listings. The Harris County purchasing agent procured all goods and services
    for the Department when the total of those goods and services exceeded $50,000. The Department procured
    goods and services for itself when the total of those goods and services was at or less than $50,000.
4
    The drawdowns were for expenses the Department incurred and were done on a reimbursable basis.



                                                       7
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:

•   Effectiveness and efficiency of operations-Policies and procedures implemented by the
    Department to ensure that it effectively administered its CDBG program activities, including
    meeting program national objectives and procuring necessary contracts.
•   Effectiveness and efficiency of operations-Policies and procedures implemented by the
    Department to ensure that it used its CDBG grant funds efficiently, including ensuring that
    such use of funds was reasonable and necessary with respect to subrecipient and contractor
    payments and administrative expenditures.
•   Compliance with applicable laws and regulations-Policies and procedures implemented by
    the Department to ensure that it administered and adequately documented its CDBG program
    activities in compliance with HUD requirements regarding program national objectives,
    procurements, and administrative expenditures.
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.
We evaluated internal controls related to the audit objectives in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal structure as a whole. Accordingly,
we do not express an opinion on the effectiveness of the Department’s internal control as a
whole.




                                                  8
Appendixes

Appendix A
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1
Comment 2
Comment 3


Comment 4


                               9
Ref to OIG   Auditee Comments
Evaluation




Comment 5




Comment 6




                            10
                          OIG Evaluation of Auditee Comments


Comment 1:   The Department confirmed that it amended its contract form to ensure that it
             included the required access, retention of records, and energy efficiency clauses.
             The Department stated that it has issued 16 contracts with the required clauses
             since June 30, 2016, and that those contracts were available for review.
             We appreciate the Department’s efforts in correcting the issues identified in the
             report. We did not review contracts dated after June 30, 2016, and cannot
             conclude whether they contain the required clauses. The Department will need to
             provide the appropriate documentation to HUD during the audit resolution
             process to satisfy the recommendation.
Comment 2:   The Department stated that missing access and record retention clauses in prior
             agreements would not result in violations because the Department’s standard
             practice and policy was to retain all records for five years.
             We disagree. The Department’s standard practice and policy may ensure that it
             retains the necessary records; however, since the Department did not include the
             missing access and record retention clauses in prior agreements, it may have
             difficulty enforcing access and record retention standards with its contractors.
             Therefore, we stand by our original conclusion and recommendation.
Comment 3:   The Department stated that the missing energy efficiency clauses in prior
             agreements would not result in violations because the Department maintained
             affordable housing rehabilitation standards in compliance with the mandatory
             State of Texas Energy Conservation Plan standards and policies for energy
             efficiency. It concluded that the contractors were held to energy efficiency
             standards and that the projects were inspected to such standards.
             We did not verify whether the Department held contractors accountable for
             complying with the State energy efficiency standards or whether it inspected the
             projects to ensure that they met those standards. However, since the Department
             did not include the missing energy efficiency clauses in prior agreements, it may
             have difficulty enforcing the standards with its contractors. Therefore, we stand
             by our original conclusion and recommendation.
Comment 4:   The Department stated that it notified the subrecipients of the resident alien
             restrictions.
             We appreciate the Department’s efforts to resolve the issues identified in the
             finding. However, the Department did not provide documentation to support its
             claim. The Department will need to provide the appropriate documentation to
             HUD during the audit resolution process to satisfy the recommendation.
Comment 5:   The Department stated that the Harris County Attorney’s Office has been unable
             to find a definition for the term “newly legalized alien.”


                                               11
             We encourage the Department to work with HUD to obtain clarification on the
             requirement.
Comment 6:   The Department stated it had revised its program guidelines and increased
             management oversight to ensure updates of its pre-qualified contractors.
             We appreciate the Department’s efforts to resolve the issues identified in the
             finding. However, the Department did not provide documentation to support its
             claim. The Department will need to provide the appropriate documentation to
             HUD during the audit resolution process to satisfy the recommendation.




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