Housing Authority of the
City of Los Angeles,
Los Angeles, CA
Housing Choice Voucher Program Legal Services
Office of Audit, Region 9 Audit Report Number: 2018-LA-1008
Los Angeles, CA September 27, 2018
To: Marcie Chavez, Director, Office of Public Housing, Los Angeles, CA, 9DPH
//SIGNED//
From: Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject: The Housing Authority of the City of Los Angeles, Los Angeles, CA, Did Not
Always Manage Its Legal Services in Compliance With HUD 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 Housing Authority of City of Los Angeles’
legal services.
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 website. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
213-534-2471.
Audit Report Number: 2018-LA-1008
Date: September 27, 2018
The Housing Authority of City of Los Angeles, Los Angeles, CA, Did Not
Always Manage Its Legal Services in Compliance With HUD Requirements
Highlights
What We Audited and Why
We audited the Housing Authority of City of Los Angeles’ legal services due to a hotline
complaint alleging that the Authority did not properly procure its legal services and alleging
questionable legal expenses that violated U.S. Department of Housing and Urban Development
(HUD) requirements. Our audit objective was to determine whether the Authority procured,
contracted, and managed its legal services in compliance with HUD requirements.
What We Found
The allegations about procurement had some merit. While we did not find issues with the
Authority’s competitive procurements, the Authority did not always follow HUD requirements
and its intergovernmental agreement when it managed its legal services with the City of Los
Angeles. From July 1993 to June 2018, the Authority did not obtain the required board-
approved annual amendments, which would have allowed increased attorney rates for legal
services as required by its intergovernmental agreement. In addition, it did not perform the
required annual cost analyses for its intergovernmental legal services agreement with the City.
We attributed these conditions to the Authority’s lack of oversight to ensure compliance with
HUD requirements and its intergovernmental agreement. Of the $983,670 in reviewed legal
expenses, the Authority did not ensure that $793,101 in legal services was cost beneficial.
What We Recommend
We recommend that the Director of HUD’s Los Angeles Office of Public Housing require the
Authority to (1) provide documentation to show a cost savings benefit for $793,101 in legal
services billed by the City and (2) follow intergovernmental agreements to ensure it’s in
compliance with the requirements.
Table of Contents
Background and Objective......................................................................................3
Results of Audit ........................................................................................................4
Finding: The Authority Did Not Always Follow HUD Requirements and Its
Intergovernmental Agreement To Manage Legal Services .......................................... 4
Scope and Methodology ...........................................................................................7
Internal Controls ......................................................................................................9
Appendixes ..............................................................................................................10
A. Schedule of Questioned Costs .................................................................................. 10
B. Auditee Comments and OIG’s Evaluation ............................................................ 11
C. Criteria ...................................................................................................................... 20
2
Background and Objective
In 1938, the City of Los Angeles established the Housing Authority of the City of Los Angeles.
The Authority has grown to become one of the Nation’s largest and leading public housing
agencies, providing the largest supply of quality affordable housing to the residents of Los Angeles.
The Authority’s annual budget is more than $1 billion. Its funds come from five main sources: the
U.S. Department of Housing and Urban Development’s (HUD) annual operating subsidy, HUD’s
annual Public Housing Capital Fund, HUD’s Housing Choice Voucher Program (commonly known
as Section 8), administrative fees, and rent from public housing residents, plus other program and
capital grants from various sources. The Authority owns and manages a citywide portfolio of 9,375
housing units and administers monthly housing assistance payments to more than 56,000 families
throughout the City. The Authority is governed by a seven-member board of commissioners, which
is responsible for policy, fiscal management, and the appointment of the president and chief
executive officer.
The Authority’s Department of General Services oversees its procurement activities. The Authority
procures millions of dollars in supplies, equipment, construction, and other professional services
each year in compliance with applicable Federal and State laws and its own procurement policy.
All contracting above $150,000 is conducted formally by sealed bids or competitive proposals. The
Authority advertises these procurements for the public to view. The Authority’s board approves
contracts above $150,000.
The Authority used an intergovernmental agreement to contract with the City for legal services.
Public housing agencies enter into intergovernmental agreements with governmental agencies for
common supplies and services, such as accounting, legal, and security services. These agreements
also provide for greater economy and efficiency, which results in cost savings to the Authority. The
Authority’s board of commissioners and a senior official from the government agency approve
these agreements. Since February 1985, the Authority has contracted with the City to serve as its
general counsel to provide legal services, such as providing legal advice and written opinions;
recommending changes in policies and procedures; reviewing and approving contracts, leases, and
regulations; and providing other legal services (appendix C). The City assigned six of its
employees, including four attorneys and two legal secretaries, to work solely for the Authority. The
Authority entered into this agreement without a formal end date. However, it was required to obtain
annual board approval for all amendments that affected the agreement. These amendments included
changes to the City’s legal rates charged to the Authority. In addition, the Authority was required to
conduct an annual cost analysis, which compared rates charged by the City with those through
competitive proposals. These cost analyses helped the Authority determine whether the City’s rates
for legal services were cheaper than those of private legal firms.
Our objective was to determine whether the Authority procured, contracted, and managed its legal
services in compliance with HUD requirements.
3
Results of Audit
Finding: The Authority Did Not Always Follow HUD Requirements
and Its Own Intergovernmental Agreement To Manage Legal
Services
The Authority did not always follow HUD requirements and its own intergovernmental
agreement when it managed its legal services. The Authority generally procured, contracted, and
managed its competitive proposals in legal services as required by HUD and its procurement
policy. However, it did not manage its intergovernmental agreement for legal services in
compliance with HUD requirements and the terms of its agreement. Specifically, the Authority
did not obtain board approval to execute annual written amendments, and it did not perform the
annual cost analyses as required by HUD and its intergovernmental agreement. We attributed
these conditions to the Authority’s lack of oversight to obtain board approval for increased
attorney rates and to document annual cost analyses as required by HUD and its
intergovernmental agreement. As a result, the Authority did not ensure that it obtained $793,101
in intergovernmental legal services as a cost benefit.
The Authority Generally Followed HUD Requirements for Its Competitive Proposals To
Obtain Legal Services
The Authority generally procured, contracted, and managed its legal services for its competitive
proposals in compliance with HUD requirements. For this procurement, the Authority sought
general legal services, including labor and employment, governmental regulations, and HUD-
related expertise. We identified a minor administrative issue in that the Authority did not notify
vendors of the results of the procurement for legal services as required by HUD regulations at 2
CFR (Code of Federal Regulations) 200.318(h) 1 and HUD Handbook 7460.8, REV-2, paragraph
7(S)(2) (appendix C). The Authority acknowledged the issue and took corrective action to
ensure that vendors would be notified of all bidding results.
The Authority Did Not Obtain Board Approval To Pay Higher Attorney Rates for Legal
Services
The Authority did not obtain board approval to pay increased attorney rates for legal services as
required by section 14 of its intergovernmental agreement. Section 14 of the agreement between
the City and the Authority states that all amendments must be in writing and approved by the
board. Before July 1993, the Authority had executed six amendments, which included increased
attorney rates for payment of legal services and expenses. The board had approved each of these
amendments. However, the Authority did not obtain the board’s approval through annual
1
In December 2014, HUD regulations at 2 CFR 200.318(h) replaced 24 CFR 85.36(8). However, HUD regulations at
24 CFR 85.36(8) were relevant for our audit period, October 1 to December 25, 2014. HUD regulations at 2 CFR
200.318(h) were relevant for our audit period, December 26, 2014 to the present.
4
amendments to support rate increases for City attorneys from July 1993 to June 2018. We
attributed this condition to the Authority’s lack of oversight to ensure that it paid increased
attorney rates as required by board-approved amendments. Without the annual board-approved
amendments, the Authority had been unable to justify paying increased attorney rates since July
1993. From October 1, 2014, to December 31, 2017, the Authority paid the City $793,101 in
program funds for legal services without the required board-approved annual amendments.
The Authority Did Not Perform the Required Annual Cost Analyses
The Authority did not perform annual cost analyses of its intergovernmental agreement for legal
services as required by HUD. Specifically, the Authority did not have documented annual cost
analyses for program years 2015, 2016, and 2017. HUD Handbook 7460.8, REV-2, paragraph
14.2(A)(4), states that the Authority is to provide documents to support that the cost and
availability of government services have been evaluated before an agreement is executed.
Further, the Authority should review and compare these factors at least annually with those in the
agreement (appendix C). HUD encourages grantees and subgrantees of program funds to enter
into State and local intergovernmental agreements for the procurement or use of common goods
and services to foster greater economy and efficiency in compliance with HUD regulations at 2
CFR 200.318(e) 2 (appendix C). In other words, HUD encourages the Authority to obtain
services that are cheaper to allow it to maximize program funds and its operation. Instead of
performing the required cost analyses, the Authority provided a spreadsheet that projected a cost
comparison of the City’s legal fees from 2015 to 2017, using its 2014 independent cost
comparison. However, the use of a projection does not consider various factors that may affect
the annual cost of goods and services. The Authority could have shown annually that obtaining
legal services with the City was cheaper than through competitive procurement. For example, at
a minimum, its cost analysis could have included the following information for use in its cost
comparison of intergovernmental legal services to other similar services:
• names of vendors,
• type of service,
• rates,
• potential cost savings, and
• dates of when the analysis was performed.
Without this information, the Authority did not ensure that its use of City attorneys was more
cost beneficial than that of private-sector attorneys. We attributed this condition to the
Authority’s lack of oversight to ensure that it documented annual cost analyses as required by
HUD. Because the Authority used a 5-year cost projection, it was unable to document changes
that would have affected potential cost savings annually. As a result, its projection did not
justify using City attorneys as a cost-saving measure for the period October 2014 to December
2017.
2
On December 26, 2014, HUD regulations at 2 CFR 200.318(e) replaced 24 CFR 85.36(5). However, HUD
regulations at 24 CFR 85.36(5) were relevant for our audit period, October 1 to December 26, 2014. HUD
regulations at 2 CFR 200.318(e) were relevant for our audit period, December 26, 2014, to the present.
5
On June 30, 2018, the City terminated its agreement with the Authority for legal services. The
City’s termination letter was submitted after we met with the Authority about this issue.
According to the Authority, the City terminated the agreement due to the Authority’s plan to hire
in-house legal staff to replace the City attorneys.
Conclusion
The Authority did not always follow HUD requirements and its intergovernmental agreement to
manage its legal services. While the Authority managed its competitive proposals in compliance
with HUD requirements, it did not do so for its intergovernmental agreement with the City for
legal services. We attributed these conditions to the Authority’s lack of oversight to obtain board
approval for increased attorney rates and to document annual cost analyses as required by HUD
and its intergovernmental agreement. As a result, the Authority did not ensure that $793,101 in
program funds paid to the City for intergovernmental legal services was cost beneficial to its
operations.
Recommendations
We recommend that the Director of HUD’s Los Angeles Office of Public Housing require the
Authority to
1A. Provide documentation to show that $793,101 paid to the City for legal services
was cost beneficial. Based on the documentation, it should reimburse its Housing
Choice Voucher Program from non-Federal funds for any amount that exceeded
the cost savings.
1B. Follow the terms of the agreement, HUD requirements, and its own policies and
procedures to ensure that any intergovernmental agreements for goods and
services are in compliance.
6
Scope and Methodology
We performed our audit work at the Authority’s office in Los Angeles, CA, from January 24 to
May 31, 2018. Our review covered the period October 1, 2014, to December 31, 2017.
To accomplish our objective, we
• Reviewed relevant background information, including the Authority’s administrative plan
and agency plan.
• Reviewed applicable HUD guidance and requirements.
• Reviewed Authority procurement files and program expenses related to sampled legal
services.
• Obtained an understanding of the Authority’s internal controls.
• Interviewed Authority officials to obtain an understanding of its program processes;
specifically, its procurement for legal services.
• Interviewed HUD officials to obtain an understanding of the use of intergovernmental
agreements.
• Reviewed HUD funding and monitoring reports.
• Reviewed the Authority’s audited financial statements for fiscal years 2015 and 2016.
• Reviewed the Authority’s general ledgers.
• Reviewed the Authority’s board minutes.
We selected a nonstatistical 3 sample of two contractors from an audit universe that consisted of
four legal services contractors totaling more than $1 million between October 1, 2014, and
December 31, 2017. Using the Authority’s disbursement journals, we identified payments to
legal services contractors that were paid more than $150,000 during the period of review. For
our audit, we selected two contractors – Joseph Stark & Associates and the City of Los Angeles
– which received a total of $983,670 from the Authority. Overall, our audit sample represented
98 percent ($983,670/$1,005,019) of the total expenses that the Authority incurred for legal
services using program funds.
3
A nonstatistical sample is appropriate when the auditor knows enough about the population to identify a
relatively small number of items of interest.
7
The sampled expenses from the two legal services contractors included 313 disbursements made
between October 1, 2014, and November 30, 2017. Of the 313 disbursements, 301 were from
Stark, and 12 were from the City. From each contractor, we selected the two largest
disbursements from each year, which totaled $537,418 in legal expenses. Overall, our review
sample represented 55 percent ($537,418/$983,670) of the total expenses that the Authority
incurred for legal services. The sampling method did not allow us to project to the universe, but
it was sufficient to meet the audit objective.
We relied in part on computer-processed data from the Authority, such as its vendor list, contract
register, and disbursement journals. We used the data to determine the audit universe, contracts
for review, and selection of disbursements. We, therefore, assessed the computer data to be
sufficiently reliable to meet the audit objective.
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.
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:
• Effectiveness and efficiency of operations – Implementation of policies and procedures to
reasonably ensure that program funds are used for eligible purposes.
• Reliability of financial information – Implementation of policies and procedures to
reasonably ensure that relevant and reliable information is obtained to support eligible
program expenditures.
• Compliance with laws and regulations – Implementation of policies and procedures to
reasonably ensure that the monitoring of and expenditures for program activities comply with
applicable 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 a significant deficiency:
• The Authority did not follow HUD requirements and the terms of its agreement to ensure that
it executed its intergovernmental agreement for legal services with the City (finding).
9
Appendixes
Appendix A
Schedule of Questioned Costs
Recommendation
Unsupported 1/
number
1A $793,101
Total 793,101
1/ 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.
10
Appendix B
Auditee Comments and OIG’s Evaluation
Ref to OIG
Evaluation Auditee Comments
Comment 1
Comment 2
Comment 3
11
Comment 4
12
13
Comment 5
14
15
16
17
18
OIG Evaluation of Auditee Comments
Comment 1 We appreciate the Authority’s courtesy to our audit team during the review. We
recognize the Authority’s efforts to work with HUD in resolving the finding
mentioned in the report.
Comment 2 We appreciate that the Authority acknowledged not executing its contract
amendments or conducting formal annual costs analyses. While it believed there
was oversight of its agreement, we identified weaknesses related to obtaining the
required amendments and documenting the cost analyses as required by HUD.
Comment 3 We disagree with the Authority that it received annual board approval for City
attorney rates. As stated in the report, the Authority did not provide any
documentation to show that it obtained the annual board approvals as required by
section 14 of the agreement with the City (appendix C). Specifically, the
Authority did not perform this required task for increased attorney rates from July
1993 to June 2018. In addition, the Authority claimed its board approved the City
attorney rates through its annual operating budget. However, the annual operating
budget did not indicate that program funds were allocated for the City’s legal
services. Specifically, the budget showed the total amount of legal services, but it
did not show the allocation of program funds to pay for the City’s legal services.
The Authority states that it provided oversight of its agreement. However, there
was no documentation to show the board’s approval for the years in question.
This lack of documentation raises concerns about the oversight of the City’s legal
services.
Comment 4 We appreciate that the Authority acknowledged not conducting formal annual
cost analyses during program years 2015 to 2017. We acknowledge that the legal
services through the City may be cheaper than through private law firms.
However, the Authority did not document the required annual cost analyses for
program years 2015 to 2017 as required by HUD Handbook 7460.8, REV-2,
paragraph 14.2(A)(4) (appendix C). We also noted that the cost comparison chart
in the Authority’s response was not the version provided to us during the
fieldwork. On January 31 and July 23, 2018, we received cost comparison charts
that showed different costs and rates for city attorneys and outside counsel. In
addition, these charts provided to us did not reference the source of the costs and
rates for the legal services. During the audit resolution, the Authority will have
the opportunity to work with HUD in addressing this issue.
Comment 5 We acknowledge the Authority’s concerns about questioned costs for non-related
legal expenses such as paid leave incurred by the City. Based on further
evaluation of the relevant HUD requirements and the agreement itself, we agree
that there were no explicit HUD requirements that prohibited the Authority from
paying for such paid leave. As a result, we have removed the finding and
recommendations from this report.
19
Appendix C
Criteria
The following sections of the Procurement Handbook for Public Housing Agencies 7460.8,
REV-2; 24 CFR Part 85; 2 CFR Part 200; and the Intergovernmental Agreement Between the
City of Los Angeles and the Housing Authority of the City of Los Angeles for General Legal
Counsel Services, signed February 22, 1985, were relevant to our audit of the Authority’s legal
services.
Procurement Handbook for Public Housing Agencies 7460.8, REV-2
Chapter 7, Competitive Proposals, Section 7.2, Competitive Proposal Process
(S) Contract Award:
(2) Notice to Unsuccessful Offerors. The Contracting Officer should notify each
unsuccessful offeror and the awardee price in writing. In accordance with any
applicable State or local law, the notice should identify the successful offeror and the
contract price, and the basis for the offeror not being selected for contract award. The
basis should clearly describe the offer’s salient weaknesses and deficiencies that
resulted in it not being considered for award (e.g., not simply state that the offeror’s
proposal did not receive a high enough score).
Chapter 14, Cooperative Business Relationships, Section 14.2, Intergovernmental Agreements
for Procurement Activity
(A) Requirements. A PHA [public housing agency] may enter into intergovernmental or
interagency purchasing agreements without competitive procurement provided the following
conditions are met:
(4) A PHA’s procurement files should contain a copy of the Intergovernmental
Agreement and documentation showing that cost and availability were evaluated
before the agreement was executed, and these factors are reviewed and compared at
least annually with those contained in the agreement.
24 CFR Part 85, Administrative Requirements for Grants and Cooperative Agreements to State,
Local, and Federally Recognized Indian Tribal Governments, Section 85.36, Procurement
(b) Procurement Standards
(5) To foster greater economy and efficiency, grantees and subgrantees are encouraged to
enter into State and local intergovernmental agreements for procurement or use of
common goods and services.
20
(8) Grantees and sub grantees will make awards only to responsible contractors possessing
the ability to perform successfully under the terms and conditions of a proposed
procurement. Consideration will be given to such matters as contractor integrity,
compliance with public policy, record of past performance, and financial and technical
resources.
2 CFR Part 200, Uniform Administrative Requirements, Cost Principles, and Audit
Requirements for Federal Awards, Section 200.318, General Procurement Standards
(e) To foster greater economy and efficiency, and in accordance with efforts to promote cost-
effective use of shared services across the Federal government, the non-Federal entity is
encouraged to enter into state and local intergovernmental agreements or inter-entity
agreements where appropriate for procurement or use of common or shared goods and
services.
(h) The non-Federal entity must award contracts only to responsible contractors possessing the
ability to perform successfully under the terms and conditions of a proposed procurement.
Consideration will be given to such matters as contractor integrity, compliance with public
policy, record of past performance, and financial and technical resources.
Agreement Between the City of Los Angeles and the Housing Authority of the City of Los
Angeles for General Legal Counsel Services, Signed February 22, 1985
Section 1
The City Attorney shall serve as General Counsel for HACLA [the Authority]. The duties of
General Counsel, shall include the following:
1. Attendance at meetings of the Board, and the review and approval as to form those
proposed actions of the Board requiring such approval.
2. Providing general legal consultation with HACLA officers and staff upon reasonable
notice.
3. Attendance at meetings of the Housing Commission of the City of Los Angeles
(hereinafter “Housing Commission”), and the review and approval as to form those
proposed Housing Commission agenda items requiring such approval.
4. Recommending changes in HACLA policies and procedures as the City Attorney finds
necessary or appropriate.
5. Recommending and reviewing qualifications of consultants or experts as may from time
to time be necessary.
6. Reporting upon the progress of HACLA legal matters as directed to, or as may become
necessary from time to time.
21
7. Advising HACLA on, and if the City Attorney determines it is necessary then,
representing HACLA at hearings or grievances, pre-disciplinary actions, civil service
disputes, unemployment disputes and labor disputes.
8. Representing HACLA with respect to litigation affecting HACLA, except unlawful
detainer actions or as otherwise provided in accordance with Section II of the Agreement.
9. Reviewing and approving as to form all contracts, leases, conveyances, applications,
rules, guidelines, regulations, procedures or amendments thereto before the same are
submitted to the Board, Housing Commission, HACLA officer or any governmental
agency for approval.
10. Giving advice or written opinions to any officer, the Housing Commission, or the Board
upon a written request therefor.
11. Except as otherwise provided herein, performing any and all other legal duties requested
by the Board or the Housing Commission.
Section 6
B. Payment for Services and Expenses. HACLA shall reimburse the City for the services
performed and all expenses reasonably incurred hereunder. The fees for such services
shall be based upon the time expanded to provide the required services… Said rates hall
be subject to renegotiation on July 1, 1984 and on each July 1, thereafter.
Section 14
E. Amendments. All amendments hereto shall be in writing and signed by the persons
authorized to bind the parties thereto.
22
The Housing Authority of the City of Los Angeles, Los Angeles, CA, Did Not Always Manage Its Legal Services in Compliance With HUD Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)