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)