Issue Date
May 20, 1996
Audit Case Number
96-PH-241-1016
TO: Joyce Gaskins, Director, Office of Community
Planning and Development, 3AD
FROM: Edward F. Momorella, District Inspector General
for Audit, Mid-Atlantic, 3AGA
SUBJECT: Department of Housing Services
County of Montgomery
Norristown, Pennsylvania
We performed an audit of the Montgomery County Department of Housing Services (Grantee).
The purpose of the audit was to determine if the Grantee administered its HUD-funded residential
rehabilitation programs economically, effectively and in compliance with applicable regulations
and requirements, and with the terms and conditions of HUD grant agreements.
The audit disclosed that the Grantee needs to revise and strengthen procedures regarding
inspections of completed rehabilitation work, conflicts of interest, rehabilitation costs,
procurement of supplies and services, rents and occupancy, annual inspections, and contractors'
liability insurance coverage.
Within 60 days please give us, for each recommendation made in the report, a status report on:
(1) the corrective action taken; (2) the proposed corrective action and the date to be completed;
or (3) why action is considered unnecessary. Also, please furnish us copies of any
correspondence or directives issued because of the audit.
Should you or your staff have any questions, please contact Richard J. DeCarlo, Assistant District
Inspector General for Audit, at (215) 656-3401.
Management Memorandum
96-PH-241-1016 Page ii
Executive Summary
We performed an audit of the Montgomery County Department of Housing Services (Grantee)
to determine whether the Grantee administered its HUD-funded residential rehabilitation
programs economically, effectively and in compliance with applicable regulations and
requirements, and with the terms and conditions of HUD grant agreements.
Specific objectives were to determine whether the Grantee: (1) assured that rehabilitation work
was completed in accordance with its specifications and work write-ups; (2) verified that
properties met Section 8 Housing Quality Standards (HQS) and/or local codes after rehabilitation;
(3) obtained the documentation necessary to assure that rehabilitation costs were fully supported
and reasonable; (4) complied with applicable procurement requirements for purchasing supplies
and services; (5) ensured that rehabilitated rental properties were rented to low-and moderate-
income families at affordable rents; (6) determined that homeowners who received assistance
in rehabilitating their properties were eligible; and, (7) properly credited program income to the
applicable HUD program.
On the basis of our testing, we found that homeowners who
received assistance in rehabilitating their properties were
generally eligible and program income was properly
credited to the applicable HUD programs. However, we
found serious problems in the other areas of the Grantee's
administration of its HUD-funded residential rehabilitation
programs.
This report contains seven findings which detail the
following deficiencies:
• The Grantee did not ensure that contractors completed
Repair Work Not
all work specified in the rehabilitation work write-ups,
Completed and
due to weaknesses in the system for performing
Substandard Conditions
inspections before and after rehabilitation, and in
Not Corrected
supervising the performance of the inspectors. As a
result, 903 work items, with an estimated cost of
$138,347, were not completed or were not completed in
a workmanlike manner in 38 of the 39 properties which
we inspected. In addition, existing substandard housing
conditions were not always corrected, and rehabilitated
properties did not meet HQS and/or local codes in 33 of
the 39 properties inspected.
Page iii 96-PH-241-1016
Executive Summary
• There were apparent conflicts of interest involving
Conflicts of Interest
Grantee and subgrantee personnel, because of oversight,
lack of understanding as to the transactions and
conditions that constitute conflicts of interest, and
disregard for the requirements, thereby diminishing
public confidence in the objectivity of Grantee and
subgrantee staff responsible for administering HUD
funds.
• The Grantee did not obtain required cost documentation
Rehabilitation Costs Not
from rental property owners who performed
Reasonable
rehabilitation work on their own properties. Instead, the
Grantee reimbursed these owners on the basis of cost
estimates which, in many instances, were inflated. As
a consequence, the Grantee could not ensure the
reasonableness of costs and may have misspent a
substantial amount of HUD funds.
• The Grantee did not always obtain price quotations
Procurement
from an adequate number of sources, publicly advertise
Requirements Not
invitations for sealed bids or buy from the lowest priced
Followed
vendor, as required when purchasing construction
supplies and services for use in its Owner Occupied
rehabilitation program. The Grantee also paid
contractors for certain services even though the
contractors had actually provided price quotes for other
services. As a result, there was no assurance that the
lowest price was obtained for over $234,000 in supplies
and services purchased during the audit period.
• The Grantee did not ensure that low-and moderate-
Benefits to Low-and
income persons benefited from the Rental Rehabilitation
Moderate-Income
Program, as required, because the Grantee did not
Persons Not Assured
obtain the necessary documentation from property
owners to verify that rents were affordable and tenants
were qualified. In addition, we noted that four tenants
who paid their own utilities were overcharged for their
monthly rent.
96-PH-241-1016 Page iv
Executive Summary
• Because the Grantee did not maintain and update a
Rehabilitated Rental
complete list of rental properties to be inspected;
Units Not Inspected
coordinate with the Montgomery County Housing
Annually
Authority; or, adequately supervise the responsible
inspector, many of the required annual property
inspections were not performed. As a result, there was
no assurance that rental units were maintained in a
decent, safe and sanitary condition after rehabilitation.
• The Grantee did not obtain documentation that
Documentation Verifying
participating contractors had liability insurance
Contractors' Liability
coverage. The Grantee, therefore, had no assurance, in
Insurance Not Obtained
many cases, that it was adequately protected if the
actions of contractors resulted in property damage or
personal injuries.
Because the foregoing deficiencies call into question the
Grantee's ability to properly administer its HUD-funded
residential rehabilitation programs, we have provided
recommendations for corrective action, which will assist the
Grantee in complying with all requirements while providing
the much-needed housing rehabilitation assistance to
Montgomery County residents.
Recommendations We recommended that you direct the Grantee to:
• Require the contractors to reimburse the HUD-funded
programs for the work not done or not done in an
acceptable manner; reinspect all the rehabilitated
properties; develop a plan for correcting HQS
deficiencies; and implement and improve systems for
performing and documenting supervisory and
HQS/housing code inspections.
• Implement additional procedures to detect and prevent
conflicts of interest involving Grantee and subgrantee
personnel.
Page v 96-PH-241-1016
Executive Summary
• Obtain supporting documentation for costs incurred by
rental property owners who perform their own work and
reimburse such owners only on the basis of actual costs
and reasonable overhead and profit, and develop cost
estimates on the basis of actual prices charged by local
vendors.
• Implement written procurement procedures for its
HUD-funded activities that reflect HUD, State and local
requirements.
• Implement procedures to verify tenant income, utility
allowances and rents, to ensure that rehabilitated units
are occupied by low-and moderate-income tenants and
that rents are affordable.
• Strengthen procedures for scheduling and carrying out
annual inspections of rehabilitated properties.
• Strengthen the system for ensuring that contractors
submit evidence of liability insurance coverage.
Auditee Comments We discussed the draft findings with Grantee staff during
the audit and, where appropriate, incorporated their
comments into the findings. Written comments provided at
the conclusion of our field audit were also incorporated into
the findings, where appropriate.
We discussed the draft findings with the Montgomery
County Board of Commissioners during an exit conference
held on May 7, 1996. The Commissioners expressed their
concerns regarding the seriousness of the problems and
their willingness to work with HUD staff in order to correct
the problems and improve the HUD-funded property
rehabilitation programs for the benefit of Montgomery
County residents. They also discussed specific actions
which were being implemented to address our
recommendations.
On May 10, 1996 a letter from the Montgomery County
Solicitor, on behalf of the Commissioners, summarized
their position regarding the findings and recommendations
(Appendix E).
96-PH-241-1016 Page vi
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1 The Grantee Did Not Ensure That
Contractors Completed Rehabilitation
Work in Accordance With Specifications 5
2 The Grantee's Procedures Were Inadequate
to Prevent Conflicts of Interest
15
3 The Grantee Did Not Ensure that Rental
Rehabilitation Costs Were Fully
Supported and Reasonable 21
4 The Grantee Needs to Improve Procedures
for Purchasing Supplies and Services 27
5 Improvements Are Needed to Ensure
Rental Rehabilitation Benefits
Low-to Moderate-Income Households 31
6 The Grantee Needs to Improve Systems for
Scheduling and Conducting Annual
Inspections of Rental Units 35
Page vii 96-PH-241-1016
Table of Contents
7 The Grantee Should Verify Contractors'
Insurance Coverage 39
Internal Controls 41
Follow Up On Prior Audits 43
Appendices
A Schedule of Ineligible Costs 45
B Properties Inspected 47
C Selected Photographs 51
D Comparison of Grantee Price Estimates
with Local Retail Prices for Commonly-
Used Materials 57
E Auditee Comments 59
F Distribution 61
Abbreviations
CDBG - Community Development Block Grant
CFR - Code of Federal Regulations
HOME - HOME Investment Partnerships Program
HQS - Housing Quality Standards
HUD - U.S. Department of Housing and Urban Development
OIG - Office of Inspector General
RRP - Rental Rehabilitation Program
96-PH-241-1016 Page viii
Table of Contents
Introduction
The Montgomery County Department of Housing Services administers the HUD Community
Development Block Grant (CDBG), the HOME Investment Partnerships (HOME), and the
Emergency Shelter Grant (ESG) Programs. CDBG funds are used for a variety of activities such
as public facilities and improvements, and residential rehabilitation administered through
subrecipients. CDBG and HOME funds are also used for residential rehabilitation programs
administered directly by the Grantee. Emergency Shelter Grants fund rehabilitation, conversion
and operating costs of buildings used as emergency shelters for the homeless. The Grantee was
allocated the following amounts for these programs in three recent program years:
Year CDBG HOME ESG
1992 $ 3,467,000 $ 0 $ 75,000
1993 3,767,000 1,268,000 51,000
1994 4,089,000 1,017,000 110,000
Totals $11,323,000 $2,285,000 $236,000
Montgomery County is governed by a three-member Board of Commissioners. Mr. Mario Mele
is Chairman. Mr. Robert E. Wright, Sr. was the Director of the Department of Housing Services
until April 23, 1996. On May 2, 1996 the Montgomery County Commissioners engaged a
consultant, Mr. Gerald Nugent, to oversee the County's housing and community development
programs. Grantee records are maintained at One Montgomery Plaza, Suite 508, Airy and Swede
Streets, Norristown, Pennsylvania.
The HUD-funded residential rehabilitation programs administered directly by the Grantee are
detailed below.
This program provides financial assistance in the form of
Rental Rehabilitation
deferred payment loans forgiven in equal installments over
Program
a ten-year period for the repair and rehabilitation of rental
properties. The maximum subsidy per unit is as follows:
Page ix 96-PH-241-1016
Table of Contents
Unit Size Amount
Efficiency $ 7,000
1 Bedroom 13,000
2 Bedroom 15,500
3 Bedroom 17,000
4 Bedroom 20,000
Each loan must be matched by the owner. Costs that
exceed the maximum subsidy and the owner's matching
share must be paid entirely by the owner.
The terms of each loan agreement require that rehabilitated
units be used primarily for residential purposes and
maintained in accordance with local codes. Each loan is
interest-free, unless an owner violates the loan agreement
terms.
The Grantee has funded this program with CDBG, HOME
and funds previously authorized under Section 17 of the
United States Housing Act of 1937. Units rehabilitated
with HOME funds must be rented at affordable rates to low-
and very-low-income persons for specified periods, ranging
from 5 to 15 years.
This program provides grants to eligible homeowners to
Owner Occupied
correct serious housing code violations. Homeowners must
Program
meet the gross annual income limits to be eligible for
outright grants, which have a cost limitation of $17,000 for
the needed repairs. Matching grants are available for
households that do not meet the limitations for outright
grants. These grants require the homeowner to match each
dollar contributed by the Grantee toward the identified
needed repairs. The Grantee has funded this program
mainly through the CDBG program, supplemented with
some HOME funding.
These programs include the Acquisition, Rehabilitation and
Additional Rehabilitation
Resale Program, which provides affordable housing by
Programs
obtaining, rehabilitating and selling unoccupied houses,
and the Home Modification Program (Handicap Program)
which is designed to remove architectural barriers and
96-PH-241-1016 Page x
Table of Contents
provide ramps, transfers, showers, etc. The Grantee has
funded theses programs with CDBG and HOME funds.
Audit Objectives The overall objective of the audit was to determine whether
the Grantee administered its HUD-funded residential
rehabilitation programs economically, effectively and in
compliance with the regulations and requirements
pertaining to the Rental Rehabilitation, HOME and CDBG
programs, and with the terms and conditions of the HUD
grant agreements.
The specific objectives were to determine whether the
Grantee: (1) assured that rehabilitation work was
completed in accordance with its specifications and work
write-ups; (2) verified that rehabilitated properties met
Section 8 Housing Quality Standards and/or local building
codes; (3) obtained the documentation necessary to assure
that rehabilitation costs were fully supported and
reasonable; (4) complied with applicable procurement
requirements for purchasing supplies and services; (5)
ensured that rehabilitated rental properties were rented to
low-and moderate-income persons at affordable rents; (6)
determined that homeowners who received rehabilitation
assistance were eligible; and (7) properly credited program
income to the applicable HUD program.
Audit Methodology We selected 39, or 30 percent, of the 127 properties
rehabilitated under the various programs during the period
February 1992 through January 1995. The sample
consisted of 23 Rental Rehabilitation, 14 Owner Occupied
and two Additional Rehabilitation program properties. We
started with a small systematic sample of properties
completed during the audit period, and on the basis of the
results of this sample, we selected additional properties
based on property owners/contractors identified in the
initial sample whose properties had a large number of
deficiencies.
For all properties selected, we reviewed the case files and
inspected each property to determine whether all repair
work was satisfactorily completed and the properties
complied with HQS and/or local codes. Where possible, we
photographed repair work that was not performed or not
performed satisfactorily, and HQS violations. For Rental
Page xi 96-PH-241-1016
Table of Contents
Rehabilitation program properties, we also reviewed
occupancy records and interviewed tenants to determine
whether rent limitations and income eligibility requirements
were met. We also reviewed other pertinent Grantee
records and interviewed Grantee staff.
Audit Scope Audit work was performed between February 1995 and
November 1995, and covered the period February 1, 1992
through January 31, 1995. When appropriate, the review
was extended to include other periods.
We conducted the audit in accordance with generally
accepted government auditing standards.
96-PH-241-1016 Page xii
Finding 1
The Grantee Did Not Ensure That Contractors
Completed Rehabilitation Work in Accordance
With Specifications
The Grantee did not ensure that contractors completed all work as specified on work write-ups
for the Rental Rehabilitation, Owner Occupied and Additional Rehabilitation Programs, due to
weaknesses in the systems for performing inspections before and after rehabilitation, and in
supervising the performance of the inspectors. In a sample of 39 properties that we inspected,
representing 30 percent of 127 repaired properties, contractors did not perform 692 specified
work items and did not complete 211 other work items in an acceptable workmanlike manner.
The estimated cost for the work not done or done poorly for these 903 work items is $138,347.
In addition, substandard housing conditions were not always corrected or, in some cases,
worsened because work was either not done or done poorly. As a result, the Grantee did not
effectively meet its program objective of improving housing conditions for low-and moderate-
income families.
24 CFR 85.36 (b)(2) requires grantees and subgrantees to
Repair work must be
maintain a contract administration system which ensures
completed in an
that contractors perform in accordance with the terms,
acceptable manner
conditions, and specifications of their contracts or purchase
orders. The Grantee's "Program Guidelines and Eligibility
Criteria, Housing Rehabilitation Programs" handbook
provides specific procedures for carrying out initial
inspections to complete work write-ups and subsequent
quality control inspections to assure work is completed in
an acceptable manner. Work write-ups for each property
provide specific details and instructions on the work to be
done. The Grantee's "Performance Manual, Contractor
Guidelines, Contractor Application" provides general
specifications and guidance to participating contractors.
24 CFR 882.109 provides guidance on HUD's Housing
Rehabilitated properties
Quality Standards (HQS), which are the minimum
must meet HQS and/or
acceptable conditions necessary for the health and safety of
local codes
assisted housing residents. Each housing unit rehabilitated
with funds from HUD's Rental Rehabilitation Program and
HOME Investment Partnerships Program is required to
Page 5 96-PH-241-1016
Finding 1
meet these standards upon completion. In addition, it is the
Grantee's policy that, upon completion of rehabilitation, all
units must meet HQS and that rental units must meet local
housing codes.
We inspected 39 properties completed during the period
OIG inspected properties
November 1991 to July 1995, including properties
rehabilitated under the Grantee's Rental Rehabilitation,
Owner Occupied and Additional Rehabilitation Programs,
as follows:
Number of Number of
Program Properties Units
Rental
Rehabilitation 23 34
Owner Occupied 14 14
Additional
The Grantee's Additional Rehabilitation Programs include,
among others, the Home Modification Program (Handicap
Program) and the Acquisition Rehabilitation Resale
Program.
Of the 3,574 separate work items in the work write-ups for
Deficiencies were noted
these 39 properties, there were 903 work items that were
not completed, or were not completed in an acceptable
workmanlike manner in 38 of the 39 properties, as follows:
Number of
Number of Items Not
Items Not Acceptably
Program Completed Completed
Rental 613 141
Rehabilitation 75 69
Owner Occupied
Additional 4 1
96-PH-241-1016 Page 6
Finding 1
The work write-up for the
37 properties had
one property where there
multiple deficiencies
were no deficiencies,
which had been modified
under the Home
Modification Program
(Handicap Program), had
just two work items. On
the other hand, 37 of the
other 38 properties had
multiple work items not
completed or not
acceptably completed, and only six of these properties had
fewer than eight deficient items. In one property,
rehabilitated under the Rental Rehabilitation Program in
1993, 54 items were not completed and six items were not
acceptably completed, with the 60 items representing 41
percent of the 146 separate work items for this property.
Properties rehabilitated under the Rental Rehabilitation and
Owner Occupied Programs had an average of 33 and 10
deficient work items, respectively.
The estimated costs of work items not completed or not
Cost of repair work was
completed in an acceptable workmanlike manner totaled
estimated
$138,347, including $110,401 for the Rental Rehabilitation
Program, $26,981 for the Owner Occupied Program and
$965 for a property rehabilitated under the Acquisition
Rehabilitation Resale component of the Grantee's
Additional Rehabilitation Programs. Because a work item
could involve a number of individual steps and the use of
several different materials, our cost estimates are based on
a portion of the contract amount when only part of an item
was not completed or not acceptably completed. When
entire work items were not completed or not acceptably
completed, our estimates are based on the total contract
amounts. Details on the number and estimated costs of
work items not completed or not acceptably completed,
along with selected photographs, are presented on
Appendices B and C, respectively.
Page 7 96-PH-241-1016
Finding 1
Examples of work not
Repair work not
completed are as follows:
completed
• Contractor installed old
ductless range hoods that
con- tained extensive rust
and grease, instead of the
new hoods required by the
work write-up. In one
case, the contractor
installed an old 24-inch
range hood, although the
work write-up called for a new ductless 30-inch hood. The
old hood was designed to be vented to the exterior, even
though there were no ducts to the exterior. As a
consequence, it was virtually useless for either absorb- ing
or venting smoke and odors from the stove.
• Windows were not repaired as required by the work
write-up and specifications at one property. Sash rails
did not meet for weather tightness and locking. Pull
chains were missing, so that sashes would not stay in
place. Locks were broken. These are also serious HQS
violations, since occupants do not have adequate
security or protection from the elements. At other
properties deteriorated wood windows were simply not
replaced with new double hung or sliding vent
windows, as called for in the work write-ups.
• A new hot water heater in one unit was not installed and
placed on solid four-inch concrete blocks, as required
by the specifications. The water heater in the unit was
placed on the floor, and rust marks near the bottom of
the appliance indicated that it was not new. At other
properties new heaters and water heaters were installed,
but were not placed on the four-inch concrete blocks.
96-PH-241-1016 Page 8
Finding 1
• Instead of wooden hand railings for stairways, two-by-
four-inch lumber was installed. "Two by fours" cannot
be gripped as easily as standard railings, especially by
small children. They also have sharp edges and can
splinter easily. This is also an HQS violation.
• Single bulb wall-hung light fixtures were installed in
several units instead of the ceiling-hung fixtures called
for in the work write-up.
• Ceiling repairs were not made after installation of duct
work, which left rooms with new duct work in an
unsightly condition.
• A hallway wall was not finished and painted two coats
after an old door opening was enclosed in one property.
In another, the wall was not repaired around a new
electrical outlet, which was not grounded and, therefore,
an HQS violation.
• New plywood sheathing was not installed to the main
roof as required by the work write-up.
• New plywood mounting board was not installed to
support a new fuse box.
• Flue liner was not installed level with the concrete floor,
and a cover was not installed for the sump pump pit.
• Basement walls were not completely refinished, as
required by work write-ups.
• An old boiler was not removed after a new one was
installed, and in another property an old oil tank was not
replaced, as required by the work write-ups.
• New counter top ends were not finished with the same
laminate as the top, and the counter top was not sealed
along the wall, which is also an HQS violation.
• Subfloor was not installed in accordance with specifica-
tions and the carpet does not appear to be FHA-
approved. The file did not contain any statement or
Page 9 96-PH-241-1016
Finding 1
indication from the supplier that it was FHA-approved,
as required by the work write-up.
Repair work was classified as unacceptable workmanship
Repairs were completed
where the contractor performed some work but used sloppy
in an unacceptable
or inappropriate installation techniques, or shoddy
manner
materials.
Examples of unacceptable
workmanship are as
follows:
• Woodwork in a
bedroom was not
adequately painted,
leaving chipping and
peeling paint on the
woodwork, which is an
HQS violation.
• Discharge lines from hot water heaters were not
properly installed. The discharge line should extend to
approximately six inches from the floor, to prevent
injury should the water heater discharge. This is an
HQS violation.
• Electric outlets and switches installed in a kitchen were
not flush with the wall and the openings were not
sealed, or were too close to the sink. These are HQS
violations.
• New exterior wrought iron handrail was not installed.
Instead, the old railing was installed, with the rusting
areas partially covered with paint.
• Basement steps were not installed flush with the risers,
and the new wood was not painted two coats.
96-PH-241-1016 Page 10
Finding 1
• Front concrete sidewalk was not properly repaired and
was left dangerously sloped.
• Exterior door did not meet specifications, the dead bolt
was not in line, and the door did not receive two coats
of paint.
• New exterior steps made from pressure treated wood,
including a landing from the back door, were not
installed. Instead, one new wooden step was installed.
HQS violations which we identified related to conditions
Properties had HQS
existing before the rehabilitation occurred but not corrected,
violations after
or to conditions caused by the contractor's poor
rehabilitation
workmanship. We observed a total of 243 separate HQS
violations at 33 of the 39 properties inspected, as follows:
Number of
Number of HQS
Program Properties Violations
Rental 23 207
Rehabilitation 10 36
The following are examples of the conditions we observed:
HQS violations
• Electrical wiring to the basement, to exterior outlets and
to the kitchen garbage disposal were exposed. Wiring
in such areas should be placed in protective conduits to
prevent severing, which could lead to injuries and\or
fires. In another unit, a bedroom outlet was placed at
the end of the room near an existing outlet. Although
HQS requires only two electrical outlets per bedroom,
this installation will result in the resident using
hazardous extension cords in order to operate lamps or
appliances on the other side of the room.
• Exhaust fan in bathroom was not vented to the exterior.
HQS require either an operable window or an exhaust
fan for venting to the exterior.
Page 11 96-PH-241-1016
Finding 1
• Hand railings to the third floor and to the basement
were missing.
• Electrical switch box, junction box and cover plate were
missing.
• Large hole in the kitchen ceiling was not required to be
repaired and painted.
• Ceiling fixture and switch in a bedroom were not
replaced. The owner told us that they have been
inoperable for years.
• First floor windows do not have locking hardware,
which left the residents without adequate security.
• Exterior steps are a safety hazard because the top step is
10 inches below the door threshold. HQS and
Montgomery County guidelines require that no step be
more than eight inches high.
• Chipping and peeling paint on exterior wood surfaces
was required to be removed. Paint on old structures is
probably lead-based. Also, peeling paint on a bedroom
ceiling was not repaired after a roof leak was fixed.
• Water heater flue vent did not have an adequate up-flow
for exhaust gases to be vented to the exterior.
Grantee staff did not ensure that all work items were
Systemic weaknesses
completed in a workmanlike manner and that HQS
caused deficient repair
violations were identified and corrected because of:
work
• Weaknesses in the system for supervising the work site
performance of both the rehabilitation and the quality
control specialists. The former is responsible for
identifying substandard housing conditions and for
preparing work write-ups in order to correct each
deficiency, and the latter is responsible for ensuring that
each work item is completed in an acceptable manner.
The Director told us that follow-up inspections were
performed on a "spot" basis in order to verify that the
quality control specialist had performed adequately.
96-PH-241-1016 Page 12
Finding 1
However, these follow-up inspections were apparently
not performed on a routine basis and have not been
performed at all in several years.
• weaknesses in procedures for performing HQS
inspections before and after rehabilitation. Although
the rehabili- tation specialists are responsible for
carrying out these inspections, they do not formally
document each HQS and/ or code violation on a room
by room, system by system (i.e. roofing, plumbing,
electrical, heating and hot water systems) basis through
the use of a check- list. This increases the likelihood
that some violations will not be identified.
• weaknesses inherent in the Rental Rehabilitation
program, which relied largely on "owner contractors"
who performed contract work on their own properties.
Profit incentives for these participants came from their
roles both as contractors and as owners of rental
properties. As contractors, the less they spent on
materials and labor the higher the profit. Property
owners who are not also the contractors have no such
incentive.
The large number of work items not done or not done in an
acceptable workmanlike manner, and the extent of such
items in nearly every property inspected, as well as the
number and extent of HQS violations, indicate widespread
problems in the Grantee's residential rehabilitation
programs. As a result, it appears that these programs have
not been very effective in improving the housing conditions
of the low-and moderate-income residents they are intended
to serve.
Auditee Comments The Grantee acknowledged the deficiencies and assured
that they will take all steps necessary to correct the
problems.
Recommendations We recommend you direct the Grantee to:
Page 13 96-PH-241-1016
Finding 1
1A. Require the contractors to reimburse the HUD-
funded programs for the work not completed or not
acceptably completed.
1B. Reinspect all other properties in which rehabilitation
was completed during the period January 1992 to
the present and require contractors to reimburse the
program for work items not completed or not
acceptably completed.
1C. Implement a system for performing and
documenting supervisory inspections on a routine
basis to follow up on the work of both rehabilitation
and quality control specialists. The supervisors
performing these follow-up inspections should, if
practicable, be rotated on a regular basis in order to
increase the likelihood that more than one
supervisor visits each property and reviews the
performance of the rehabilitation and quality control
specialists.
1D. Develop a plan to assure that the HQS deficiencies
noted during our property inspections are corrected.
1E. Improve the system for performing HQS/housing
code inspections by documenting these inspections
on a room by room, system by system basis. After
the initial inspection is performed a work write-up
should be prepared to address each identified
violation.
96-PH-241-1016 Page 14
Finding 1
Page 15 96-PH-241-1016
Finding 2
The Grantee's Procedures Were Inadequate to
Prevent Conflicts of Interest
The Grantee's procedures were not adequate to prevent apparent conflicts of interest involving
Grantee and subgrantee personnel, because of oversights and a lack of understanding as to the
transactions and conditions that constitute conflicts of interest. It is also evident that certain
Grantee employees disregarded requirements governing conflicts of interest. Diminished public
confidence in the objectivity of Grantee and subgrantee staff responsible for administering HUD
funds can result when previously undisclosed conflicts become known.
The following are apparent conflicts of interest which we
Conflicts of Interest
observed during our review:
• The Director of the Department of Housing Services
hired two contractors, who actively participate in the
housing rehabilitation program either as general
contractors or subcontractors, to perform work on
properties that he owns, including his personal
residence.
One of the contractors told us that he performed repairs
on a number of properties owned by the Director,
including his personal residence. We identified at least
15 transactions, totaling over $40,000, between this
contractor and the Director occurring over the six-year
period from 1989 through 1995. Information
subsequently provided claimed that the contractors were
hired at arms-length, based on the quality of their work,
and were paid the full price.
• A relative of the Director of the Department of Housing
Services received a contract for roofing work in 1991.
Information subsequently provided claimed that the
individual was a distant relative. However, in our
opinion, any family relationship creates the appearance
of a conflict of interest.
Page 15 96-PH-241-1016
Finding 2
• A Housing Services Department rehabilitation specialist
who is involved with the administration of contracts
supported by HUD funds had a contractor perform
repairs on two properties that the employee owns in
Norristown. The contractor was an active participant in
the Grantee's residential rehabilitation programs.
• A Quality Control Inspector involved in the
administration of contracts supported by HUD funds
had a contractor perform repairs on his residence. The
contractor, who was an active participant in the
Grantee's residential rehabilitation programs, told us
that he provided this work at a discount.
• A board member of the Willow Grove Development
Corporation (WGDC), a non-profit subgrantee, was one
of four partners who sold seven town houses to the
subgrantee for $420,000. The properties were to be
rented to low-and moderate-income families. This
transaction was partially funded with $100,000 in
CDBG funds and $150,000 in HOME funds. Another
board member's firm received a $25,000 broker's
commission in connection with the subgrantee's
purchase of the town houses.
• Another WGDC board member's firm received a $2,750
real estate broker's commission in connection with the
subgrantee's purchase of a property using $50,000 in
CDBG funds. This property was also purchased in
order to be rented to a low-or moderate-income family.
• An officer of Community Housing Services (CHS), a
non-profit organization, rented a house from a for-profit
developer. CHS and the housing developer participated
in two projects that were partially supported with HUD
funds. In one project they were partners in a 24-unit
rental property which received a $65,000 low interest
deferred payment loan. In the other project, CHS
received $60,700 in CDBG funds to support the
purchase of a six-unit property in Norristown built by
the housing developer.
96-PH-241-1016 Page 16
Finding 2
• A relative of an officer of Habitat for Humanity, a
subgrantee non-profit organization, purchased a home
in Norristown from the Department of Housing
Services that had been rehabilitated under the
Department's Acquisition/Rehabilitation/Resale
program. Because the properties in this program are
sold at less than the cost of acquisition and
rehabilitation, the purchaser received a financial benefit.
In addition, for only this purchase the Grantee paid the
purchaser's share of the transfer tax as well as all
closing costs, totaling $3,696.
24 CFR 570.611(b), Conflicts Prohibited, provides that
Conflicts Prohibited
"except for the use of CDBG funds to pay salaries and other
CDBG Program
related admini-strative or personnel costs, the general rule
is that no persons described in paragraph (c) of this section
who exercise or have exercised any functions or
responsibilities with respect to CDBG activities assisted
under this part, or who are in a position to participate in a
decision making process or to gain inside information with
regard to such activities, may obtain a financial interest or
benefit from a CDBG assisted activity or with respect to the
proceeds of the CDBG assisted activity, either for
themselves or those with whom they have family or
business ties, during their tenure or for one year thereafter."
Paragraph (c) Persons Covered, provides that "the conflict
of interest provisions of paragraph (b) of this section apply
to any person who is an "employee, agent, consultant,
officer, or elected official or appointed official of the
recipient, or of any designated public agencies, or
subrecipients which are receiving public funds under this
part."
Paragraph (d) provides that HUD can grant exceptions
provided there is a public disclosure of the nature of the
conflict and an opinion from the recipient's attorney that no
state or local law would be violated if HUD granted the
exception.
Page 17 96-PH-241-1016
Finding 2
24 CFR 92.356 and 511.12 provide the same prohibitions
Conflicts Prohibited -
and exceptions for activities financed through the Home
HOME and RRP
Investment Partnerships (HOME) and Rental Rehabilitation
Programs. These provisions apply in all cases not governed
by 24 CFR 85.36, including the acquisition and disposition
of real property.
24 CFR 85.36 (b)(3) which applies to all three programs
Standards of Conduct
provides that " grantees and subgrantees will maintain a
Required
written code of standards of conduct governing the
performance of their employees engaged in the award and
administration of contracts. No employee, officer or agent
of the grantee or subgrantee shall participate in the
selection, or in the award or administration of a contract
supported by Federal funds if a conflict of interest, real or
apparent, would be involved".
The Commonwealth of Pennsylvania ethics requirements
Conflicts Prohibited -
for public officials and employees are set forth in Act 9,
State Law
passed in 1989. Specifically, Chapter 15, paragraph 403(a)
prohibits public officials and employees from engaging in
conduct that constitutes conflict of interest.
The Grantee also has its own requirements regarding
Conflicts Prohibited -
conflicts of interest in Section 6 of its Employee Handbook,
Grantee Requirements
which is provided to each employee in the Housing
Services Department. The Grantee also provides a
"Handbook for CDBG Subrecipients on Administrative
Systems" to each subgrantee. This handbook describes in
detail HUD requirements pertaining to conflicts of interest.
In addition, the Grantee provides technical assistance to its
subgrantees on all applicable HUD requirements.
There was no evidence that the Grantee requested that HUD
Waivers Not Requested
grant exceptions for any of these transactions. Apparently,
the officers of the non-profit organizations were not aware
that they were involved in conflicts of interest that must be
disclosed. However, supervisors and employees of the
Housing Services Department should have known that
ongoing business relationships with contractors who
participate in the Department's rehabilitation programs
constitute conflicts of interest. In this regard, Grantee staff
informed us that the WGDC and CHS were contacted
regarding the conflicts cited by our audit.
96-PH-241-1016 Page 18
Finding 2
The Grantee should provide subgrantee personnel with a
better understanding of conflicts of interest and encourage
public disclosure, where necessary, in order to help prevent
undisclosed conflicts from occurring. The Grantee should
also take appropriate action to deter its own employees
from engaging in business transactions that could result in
conflicts of interest.
Auditee Comments The Grantee acknowledged the deficiencies and assured us
that they will take all steps necessary to correct the
problems.
Recommendations We recommend that you direct the Grantee to:
2A. Submit a detailed plan of action to ensure that
Grantee officials and employees comply with all the
required Federal, State and local prohibition against
engaging in activities which result in conflicts of
interest. This plan should include the types of
conflicts detailed in this finding.
2B. Implement additional procedures to detect conflicts
of interest in subgrantee organizations, including
review of documents submitted by subgrantees to
determine if conflicts of interest exist; and,
appropriate follow-up action, such as disapproval of
proposed transactions that involve a conflict of
interest, or request that HUD grant an exception.
2C. Strengthen procedures to train Grantee and
subgrantee staff to identify and disclose or, when
appropriate, avoid activities that involve conflicts of
interest.
Page 19 96-PH-241-1016
Finding 2
96-PH-241-1016 Page 20
Finding 3
The Grantee Did Not Ensure That Rental
Rehabilitation Costs Were Fully Supported
and Reasonable
The Grantee did not obtain required cost documentation from rental property owners who
performed rehabilitation work on their own properties. Instead, the Grantee reimbursed the
owners based on cost estimates which, in many instances, were inflated. This reimbursement
method was apparently caused by a misunderstanding between a Grantee employee and a staff
member in HUD's Pennsylvania State Office who provided guidance by telephone. As a
consequence, the Grantee could not ensure the reasonableness of costs and may have misspent
a substantial amount of HUD funds in its Rental Rehabilitation program due to inflated estimates.
24 CFR 85.20(b), which is applicable to the CDBG, HOME
Programs should be
and Rental Rehabilitation programs, requires grantees to
charged for actual costs
follow applicable OMB cost principles and to maintain
accounting records supported by source documentation,
including paid bills. OMB Circular A-87, Cost Principles
for state and local governments, provides in Attachment A
for charging Federal programs on the basis of costs
incurred.
24 CFR 511.10 (f) (4) provides specific guidance to
Owners can perform
Grantees who permit participating owners to perform part
repair work on their
or all of the work on their properties under the HUD Rental
properties
Rehabilitation Program. It states that if the owner is not a
practicing, licensed contractor eligible rehabilitation costs
are limited to the costs of materials purchased by the owner
and used on the project, and the cost of other eligible work
performed by practicing, licensed contractors,
subcontractors or tradesmen on the project. When owners
are licensed, practicing contractors eligible costs can also
include the contractor's paid labor, overhead and profit,
similar to what these items would be on a project not owned
by the contractor.
Page 21 96-PH-241-1016
Finding 3
HUD policy regarding such owner/contractors had been set
Invoices for actual costs
forth in October 1988 in Notice CPD-88-37, Rental
must be submitted
Rehabilitation Program Policy for Assisting "Self Help"
Projects. Paragraph 4 of this Notice also provided that the
grantee must establish and implement adequate procedures
to ensure that owner/contractors submit proper
documentation for rehabilitation costs. It also provided that
invoices submitted in such cases must be from actual
materials suppliers and/or contractors/subcontractors, and
not merely an invoice from the owner to the grantee.
Nineteen of the 23 rental rehabilitation properties reviewed
Cost estimates were used
were rehabilitated by owner/contractors. In all 19 cases the
for reimbursing
Grantee used either an "in-house" cost estimate prepared by
owner/contractors
its rehabilitation specialist as a basis for reimbursment or
the owner/contractor's bid if it was within 15 percent of the
estimate, instead of actual, documented costs. The Grantee
did not obtain any source documentation such as invoices,
subcontracts, etc. from these owner/contractors, with one
exception.
According to the Grantee's rehabilitation specialist who
worked on the rental program, several years ago, he
attempted to obtain source documentation, including
invoices, from one owner/ contractor who was very active
in the program. The documentation that was provided,
however, was voluminous, unorganized and difficult to
relate to a specific property. He also said that in response
to his inquiry, a HUD staff member told him via telephone
that it was not necessary to obtain source documentation
from owner/contractors. However, he did not ask for or
receive this guidance in writing. Subsequently, the Grantee
did not request owner/contractors to provide source
documentation to support costs, but relied solely on cost
estimates as a basis for reimbursement.
The Grantee reimbursed owner/contractors for rehabilitation
Cost estimates were
work performed on the basis of inflated cost estimates.
inflated and based on
Because cost estimates for the Rental Rehabilitation
estimating manuals
program were developed using commercially available cost
estimating manuals (published annually) the estimated costs
for materials were generally well in excess of prices
charged by local retailers. In addition, the estimates
96-PH-241-1016 Page 22
Finding 3
included a large, poorly supported allowance for overhead
and profit. As a result, a substantial portion of HUD funds
used for housing rehabilitation were misspent.
The Grantee reimbursed owners who performed their own
work for the cost of materials, overhead and profit in
accordance with 24 CFR 511.10 (f)(4), as if they were
practicing, licensed contractors. In some cases,
owner/contractors were also reimbursed for labor costs.
The Grantee continued this practice for all rental
rehabilitation projects, including those funded through the
CDBG and HOME programs.
The Grantee's rehabilitation specialist who worked on the
Staff did not attempt to
Rental Rehabilitation program relied on two commercially-
determine current market
available estimating manuals which are published annually,
prices
in order to develop "in-house" cost estimates. The Grantee
reimbursed the amount an owner/contractor bid for a
particular project, providing it was within 15 percent of the
estimate. If the bid was not within this range, the Grantee
made the reimbursements based on the estimate. The
rehabilitation specialist did not attempt to determine the
current market prices of commonly-used materials in order
to establish a basis for estimating costs, nor did the Grantee
solicit bids from other contractors when owner/contractors
were involved.
Analysis and review of cost estimates developed during the
audit period disclosed the following:
• The estimated cost for commonly-used materials
Estimated costs exceeded
substantially exceeded current retail prices charged for
retail prices
these items. Specifically, our comparison of material
costs shown on "in-house" estimates prepared during
the audit period for 15 commonly-used items, including
drywall, range hoods, water heaters, etc., with current
prices charged by local retailers (Appendix D) indicated
that the local prices were generally lower. Of the 15
items compared, the local price of only one, drywall,
was currently higher than the Grantee's estimate.
For purposes of comparison the prices charged by local
retailers were adjusted by the same percentage (50
percent) provided in the estimating manual most often
used by the Grantee's rehabilitation specialist.
Page 23 96-PH-241-1016
Finding 3
• The Grantee gave owner/contractors a 50 percent
Overhead and profit
allowance for overhead and profit, as recommended in
based on manual
one of its cost estimating manuals, although it had no
evidence that these participants received such a
percentage on rehabilitation work on properties they
did not own.
• The Grantee did not have evidence that every
Evidence needed that
owner/contractor who was reimbursed for overhead and
owners were licensed,
profit was actually a licensed, practicing contractor, as
practicing contractors
required. Of the 23 rental rehabilitation properties
which we sampled, 19 were completed by five
differentowner/contractors. There was some evidence
that two were actually licensed, practicing contractors,
because they had participated in the Owner Occupied
program, and one owner/contractor claimed to be
licensed and presented a list of other contracts
completed. However, the Grantee had very little
evidence that the two others, including one owner who
had completed 12 of the 23 properties in our sample,
were licensed, practicing contractors.
As a consequence, Rental Rehabilitation program costs
were higher than necessary because the Grantee's estimating
methods resulted in materials costs that were higher than
prices charged by local suppliers for similar items and the
estimates included questionable and unsupported mark-ups.
In addition, some of the participating owner/contractors
may have been ineligible for these mark-ups.
During the audit, the Grantee's Director told us that:
Grantee staff attempted to
justify noncompliance
• The Grantee should not be held responsible if HUD
provides incorrect guidance.
• One of the most active owner/contractors usually
performed many more repair items than are shown on
the work write-ups, in order to bring properties up to
Housing Quality Standards. These additional items
were not reimbursed. Therefore, at least in regard to
these properties, the program achieved its purpose and
received value for the funds expended, even if some
items were overestimated.
96-PH-241-1016 Page 24
Finding 3
• Comparison of the Grantee's cost estimates to prices
charged by local building supply stores affiliated with
national chains is questionable, because contractors in
the program do not make purchases at such stores.
While we cannot be certain as to the guidance provided by
OIG opinion that
HUD staff over the telephone in this matter, HUD usually
noncompliances are not
issues all policy changes in writing. In this regard, the
justified
guidance that was supposedly given represented a
significant change in policy.
Although one or more owners may have made more repairs
than are shown on the work write-ups, the Grantee cannot
document the specific items that were done, or the cost or
necessity of this other work.
With regard to the building supply stores used by
owner/contractors, our review of copies of invoices from
the one instance in which an owner/contractor provided
them to the Grantee noted that they included some from a
nationally-affiliated chain. On the other hand, if an
owner/contractor prefers particular suppliers, we do not
believe the HUD-funded program should pay the additional
costs when these suppliers charge significantly higher
prices.
Auditee Comments The Grantee acknowledged the deficiencies and assured us
that they will take all steps necessary to correct the
problems.
Recommendations We recommend that you require the Grantee to:
3A. Obtain supporting documentation for the costs of
materials, labor, and subcontracts incurred by
owners who perform their own work under the
Rental Rehabilitation program.
3B. Reimburse contractors who perform work on their
own properties only for actual material and paid
labor costs, and for overhead and profit similar to
Page 25 96-PH-241-1016
Finding 3
what these costs would be for properties not owned
by such contractors.
3C. Develop material cost estimates on the basis of
actual prices charged by local vendors
supplemented, where necessary, by cost estimating
manuals. Estimates of installation costs should
likewise be developed on the basis of amounts
charged by arms-length contractors for similar work
items.
96-PH-241-1016 Page 26
Finding 4
The Grantee Needs to Improve Procedures for
Purchasing Supplies and Services
The Grantee did not always obtain price quotations from an adequate number of sources, publicly
advertise invitations for sealed bids or buy from the lowest-priced vendor, as required when
purchasing construction supplies and services for use in its Owner Occupied rehabilitation
program. In addition, the Grantee paid contractors for certain services even though the
contractors had actually provided price quotes for other services. Because the Grantee had no
written procurement procedures and staff responsible for purchasing these supplies and services
were not familiar with HUD procurement requirements, there was no assurance that the lowest
price was obtained for over $234,000 in supplies and services purchased during the audit period.
24 CFR 85.36(b) provides that Grantees will use their own
Grantee must comply
procurement procedures which reflect applicable State and
with Federal and State
local laws and regulations and will maintain records
procurement
sufficient to detail the significant history of a procurement.
requirements
Paragraph (c)(3) provides that Grantees must have written
selection procedures. Paragraph (d)(1) provides that, "small
purchase procedures are those relatively simple and
informal methods for securing services, supplies, or other
property that do not cost more than $25,000 in the
aggregate. If small purchase procedures are used, price or
rate quotations will be obtained from an adequate number
of qualified sources." The Commonwealth of
Pennsylvania, however, requires publicly advertised
solicitations and sealed bids for purchases of supplies or
equipment costing over $10,000.
The Grantee did not follow applicable requirements when
Grantee did not comply
purchasing construction supplies and services for properties
with requirements
undergoing rehabilitation under its Owner Occupied and
Acquisition/ Rehabilitation/Resale programs. Items
purchased included heating systems, kitchen cabinets and
appliances, storm doors, windows and certain inspection
services.
In the five-year period ended September 30, 1995, the
Grantee:
Page 27 96-PH-241-1016
Finding 4
• obtained price quotations from only one source for 14,
or approximately 40 percent, of 35 small purchase
contracts awarded.
• purchased construction items costing more than $10,000
in the aggregate without obtaining competitive sealed
bids in response to public advertisements.
• made awards to other than the lowest bidder for nine, or
approximately 25 percent, of the 35 contracts awarded.
There was no justification documented in the Grantee's
files for these actions.
• awarded supply contracts to the lowest bidder, but then
made purchases from other vendors in at least three
instances. Again, there were no written justifications
for these actions.
• continued purchasing supplies and services from
vendors after the expiration of contract periods, without
soliciting new price quotes.
• awarded contracts for certain inspection services to low
bidding vendors, but then also purchased other, more
expensive services from these same vendors without
soliciting any price quotes. For example, the vendor
who submitted the lowest bid and was awarded a
contract for wood-destroying insect inspections was
also paid for treatment services when the inspection
results indicated an insect infestation. However, the
Grantee had not solicited price quotes for treatment
services from this vendor or any others. The vendor
was paid $32,693 for inspection and treatment services
in this manner.
We noted the Grantee also obtained chimney cleaning
and insulation installation services on a non-competitive
basis in a similar manner after awarding contracts for
chimney and insulation inspection services.
The rehabilitation specialist who was responsible for
Grantee staff gave
ordering supplies and services for the Owner Occupied and
reasons for
Acquisition/ Rehabilitation/Resale programs told us that he
noncompliance
tried to obtain the most reasonable prices for the Grantee,
96-PH-241-1016 Page 28
Finding 4
but he did not use written procedures and was not familiar with HUD requirements
pertaining to procurement. He also said that the Grantee has discontinued direct buying of
construction supplies and services except for wood-destroying insect inspections. Additional
comments from Grantee staff offered detailed explanations for the individual situations cited
above, which, in our opinion, do not obviate the violations of the procurement requirements.
The Grantee did not obtain price quotes from an adequate
number of sources and, in some instances, did not obtain
any price quotes before buying supplies and services. As a
consequence, it not could assure that it had obtained the
most reasonable prices. We noted, for example, that the
price of oil-fired boilers increased twice when the Grantee
obtained price quotes from only one source. Subsequently,
the price decreased by nearly eight percent when the
Grantee solicited quotes from two suppliers.
Auditee Comments The Grantee acknowledged the deficiencies and assured us
that they will take all steps necessary to correct the
problems.
Recommendation We recommend you direct the Grantee to:
4A. Develop written procurement procedures for its
HUD-funded rehabilitation activities which include:
solicitation of price quotes from an adequate number
of sources when carrying out small purchase
transactions; advertisement of solicita- tions and
sealed bids when purchasing supplies costing over
$10,000; and, maintenance of records sufficient to
detail the significant history of a procurement,
including rationale for contractor selection or
rejection.
Page 29 96-PH-241-1016
Finding 4
96-PH-241-1016 Page 30
Finding 5
Improvements Are Needed to Ensure Rental
Rehabilitation Benefits Low-to Moderate-
Income Households
The Grantee is not ensuring that low-and moderate-income persons are benefiting from the Rental
Rehabilitation program, as required. Because the Grantee did not obtain the necessary
documentation from property owners to verify that rents were affordable and tenants were
qualified, there was no assurance that rehabilitated rental units benefited low-to moderate-income
households. In addition, we noted that four tenants who paid their own utilities were overcharged
for their monthly rent, based on the utility allowance for the Section 8 program.
24 CFR 92.252(a)(5) provides that units rehabilitated with
Rehabilitated units must
HOME funds must remain affordable for a minimum
remain affordable
specified period, which varies between 5 and 15 years,
based on the amount spent per unit. Paragraph (b) provides
that participating jurisdictions must review and approve
rents and monthly allowances for tenant-paid utilities and
services proposed by owners. The maximum monthly rent
must be recalculated by the owner and reviewed and
approved by the participating jurisdiction annually.
24 CFR 570.208 (a)(3) provides that an eligible CDBG
Occupancy by low-to
housing activity carried out for the purpose of providing or
moderate-income
improving permanent residential structures, upon
households at affordable
completion, will be occupied by low-and moderate-income
rents is required
households. For rental housing, occupancy by low-and
moderate-income households must be at affordable rents to
qualify under this criterion. The recipient must adopt and
make public its standards for determining affordable rents
for this purpose.
24 CFR 511.10 (a)(4) provides that benefit for lower
income families under the Section 17 Rental Rehabilitation
program will be considered to occur only where dwelling
units in projects rehabilitated with rental rehabilitation
grants are initially occupied by such families after
rehabilitation.
Page 31 96-PH-241-1016
Finding 5
The Grantee has attempted to comply with these
Grantee must obtain
requirements by including, in a package sent to each owner
tenant profiles, income
who applies for the Rental Rehabilitation program, a
verifications and leases
schedule showing maximum rents per unit. In addition, the
Grantee requires owners to send in with each application for
occupied units (1) tenant profiles which show occupants'
names, incomes, monthly rents and monthly utility
payments; (2) income verifications; and, (3) lease copies in
order to verify rents. For units that are vacant at the time
applications are submitted, owners must provide this
documentation as soon as each unit is occupied. The
Grantee requires owners to submit income verifications and
lease copies annually for the duration of each loan
agreement. For units rehabilitated with CDBG funds, the
Grantee adopted rent limits based on 65 percent of the area
median income, as defined by HUD as the affordable rent
standard in response to 24 CFR 570.208 (a)(3).
The Grantee did not always obtain tenant profiles, income
Occupancy Upon
verifications and lease copies before rehabilitation or after
Completion
initial occupancy. Some tenant profiles that were sent in
were not fully completed. Others were sent in late. The
following shows the results of a sample of occupancy
information obtained by the Grantee for 31 units
rehabilitated during the audit period.
Income
No Amounts
Total Lease Tenant Not Given on
No. of Income Not Not Profiles Tenant
Program Tenants Verified Obtained Received Profiles
HOME 9 4 4 0 0
CDBG 14 11 8 3 2
SECT 17 8 8 8 0 2
Owners did not always complete tenant profile information
Utility Allowances
pertaining to monthly payments for utilities and services.
As a consequence, the Grantee could not verify that owners
adhered to rent limitations when tenants paid for their
utilities. We noted that at least 19 tenants in our sample
paid for their own utilities. For purposes of comparison we
96-PH-241-1016 Page 32
Finding 5
calculated gross rents for these 19 tenants using the
Montgomery County Housing Authority's schedule of
utility allowances for the Section 8 program. This
comparison indicated that four tenants were overcharged as
follows:
Grantee staff commented that only one tenant, whose
property was rehabilitated with HOME funds, was
overcharged, since the other three tenants were CDBG-
funded properties which do not require rent caps. However,
in our opinion, the regulations provide that, upon
completion, the requirement for low-and moderate-income
occupancy includes consideration of tenant-paid utilities.
The Grantee did not obtain all tenant profiles for units in the
Occupancy After
HOME program, which are due each year after completion.
Completion
For the nine HOME units in our sample, there were four
already completed more than a year as of April 30, 1995.
However, the Grantee had obtained no tenant profiles for
any of these units as of June 2, 1995.
The Grantee's housing specialist who is responsible for
obtaining tenant profiles and leases told us that some
owners have been uncooperative, even though they agreed
to submit the documentation under the terms of the loan
agreements. She also told us there was no evidence tenant
profiles were obtained before she came to work for the
Grantee in 1993.
Auditee Comments The Grantee acknowledged the deficiencies and assured us
that they will take all steps necessary to correct the
problems.
Page 33 96-PH-241-1016
Finding 5
Recommendations We recommend you require the Grantee to:
5A. Develop and implement procedures to verify tenant
incomes to ensure they are low-to moderate-income
persons.
5B. Direct owners to establish utility allowance
amounts, where appropriate, and monitor the rents
being charged to verify tenants are not overcharged.
5C. Require the owners of the three properties cited in
this finding to reimburse the tenants for the
overcharged rents.
5D. Require the uncooperative owners to repay their
loans if they do not comply with the regulations.
96-PH-241-1016 Page 34
Finding 6
The Grantee Needs to Improve Systems for
Scheduling and Conducting Annual
Inspections of Rental Units
The Grantee did not complete all annual inspections of rental units after rehabilitation, as
required. Because the Grantee did not maintain and update a complete list of rental properties
to be inspected; coordinate with the Montgomery County Housing Authority; or, adequately
supervise the inspector responsible for carrying out the inspections, there was no assurance that
rental units were maintained in a decent, safe and sanitary condition after rehabilitation.
24 CFR 92. 504 provides that agreements must require that
Annual inspections of
owners of rental housing assisted with HOME funds
rental properties are
maintain the housing in compliance with Section 8 Housing
required
Quality Standards (HQS) and local code requirements for
the duration of the agreement. The Grantee's loan
agreements require owners to maintain properties in
accordance with local property codes and agree to annual
inspections to be conducted by the Grantee. The Grantee
included these same provisions in loan agreements for
properties rehabilitated with CDBG and Rental
Rehabilitation program funds.
The Grantee's listing of units due for annual inspection was
Listing of properties was
not complete. Specifically, the listing should have 157
incomplete and not all
properties. However, 24 properties were not on the listing.
properties were inspected
Also, the Grantee's inspector did not conduct inspections at
all of the properties on the listing. We identified six listed
properties that were not inspected, but should have been
inspected at least once. We also noted that:
• There was no system for ensuring that newly-
rehabilitated rental units were added to the listing during
the audit period. Twelve of the 24 units that should
have been on the listing were completed in 1993 and
1994. The inspector responsible for carrying out these
inspections told us that he was provided a listing when
Page 35 96-PH-241-1016
Finding 6
he began work in 1993, but that he has not yet added
units completed in 1993 and 1994.
• The Grantee had never compiled a complete listing of
units to be inspected. Twelve of the twenty four units
that should have been on the listing were completed
between 1985 and 1988.
• The Grantee relied on the Montgomery County Housing
Authority to inspect units whose tenants received
housing subsidies under the Authority's Section 8
program, but did not regularly obtain information on the
results of these inspections. Therefore, if a Section 8
tenant moved or if a unit repeatedly failed to pass
Section 8 HQS, the Grantee would not have the
information necessary to respond appropriately. We
noted at least one unit that the inspector told us was
occupied by a tenant receiving a Section 8 subsidy but
which, in fact, was not.
The Grantee did not complete all annual inspections as
Inspection system and
required because it had no system for updating the list of
supervision were
properties to be inspected or obtaining information on the
inadequate
results of inspections carried out by Housing Authority
inspectors. In addition, the inspector responsible for
carrying out inspections was not adequately supervised in
order to ensure that properties on the list were timely
inspected. As a consequence, the Grantee's annual
inspection system was not effective in ensuring that owners
maintained rehabilitated properties as required.
Grantee staff informed us that attempts were made to add
newly-rehabilitated units to the listing, and that the method
for inspecting units would be changed.
Auditee Comments The Grantee acknowledged the deficiencies and assured us
that they will take all steps necessary to correct the
problems.
Recommendations We recommend that you direct the Grantee to:
96-PH-241-1016 Page 36
Finding 6
6A. Develop a complete list of properties to be inspected
and establish a system to update the list on a regular
basis.
6B. Coordinate with the Housing Authority in order to
obtain the results of Authority inspections of
properties that are also in the Grantee's Rental
Rehabilitation program.
6C. Establish a system to supervise the inspector
responsible for annual inspections to ensure that all
inspections are performed timely.
Page 37 96-PH-241-1016
Finding 6
96-PH-241-1016 Page 38
Finding 7
The Grantee Should Verify Contractors'
Insurance Coverage
The Grantee did not obtain documentation assuring that contractors participating in the Owner
Occupied rehabilitation program had liability insurance coverage, as required. This occurred
because there was insufficient oversight and some confusion concerning the responsibility for
obtaining and reviewing insurance certificates. As a consequence, the Grantee had no assurance,
in many cases, that it was adequately protected from liability if the actions of participating
contractors resulted in property damage or personal injuries.
The Grantee's Contractor Instructions and Application
Evidence of liability
requires that participating contractors provide evidence of
insurance is required
comprehensive general and automobile liability coverage.
For each job under contract, the contractor must furnish a
Certificate of Insurance containing the appropriate
homeowner's name and address.
During the audit period, 43 Owner Occupied program
Evidence of liability
contracts were completed by 13 different contractors.
insurance was not
However, the Grantee's files indicated that 11 of these
obtained
contractors failed to provide Certificates of Insurance for
periods when rehabilitation jobs were completed. Only two
contractors provided Certificates covering periods when six
different rehabilitation jobs were completed. Therefore 37,
or 86 percent, of the Owner Occupied program
rehabilitation jobs were completed without evidence that
the contractors had sufficient insurance coverage. For the
two Certificates of Insurance that were submitted, neither
listed the homeowner's name and address, as required.
There was confusion among Grantee staff concerning who
Grantee staff was
is responsible for collecting and checking the documents, as
confused
well as insufficient supervision. Specifically, one
rehabilitation specialist told us that another staff member
obtains and checks insurance documents. However, the
supervisory rehabilitation specialist acknowledged that
rehabilitation specialists have this responsibility. In this
regard, Grantee staff provided a memorandum which was
recently issued to the rehabilitation staff reminding them
Page 39 96-PH-241-1016
Finding 7
that it is their responsibility to obtain valid contractors'
insurance certificates.
Auditee Comments The Grantee acknowledged the deficiencies and assured us
that they will take all steps necessary to correct the
problems.
Recommendation We recommend that you direct the Grantee to:
7A. Strengthen the system for ensuring that contractors
submit evidence of insurance coverage for each
rehabilitation job, by reemphasizing to staff
members assigned this task the necessity of
verifying insurance coverage and by providing the
necessary supervisory oversight.
96-PH-241-1016 Page 40
Internal Controls
In planning and performing our audit, we considered internal control systems of the Montgomery
County Department of Housing Services to determine our auditing procedures and not to provide
assurance on internal control. Internal control is the process by which an entity obtains
reasonable assurance as to achievement of specified objectives. Internal control consists of
interrelated components, including integrity, ethical values, competence, and the control
environment which includes establishing objectives, risk assessment, information systems,
control procedures, communication, managing change and monitoring.
We determined that the following internal control
Control Categories
categories were relevant to our audit objectives:
• Property Inspections
• Conflicts of Interest
• Cost Reasonableness
• Procurement
• Occupancy
• Contractor Qualifications
We evaluated all of the relevant control categories
Scope of Work
identified above by determining the risk exposure and
assessing control design and implementation.
A significant weakness exists if internal control does not
Significant Weaknesses
give reasonable assurance that the entity's goals and
objectives are met; that resource use is consistent with laws,
regulations, and policies; that resources
are safeguarded against waste, loss, and misuse; and that
reliable data are obtained, maintained, and fairly disclosed
in reports. Based on our review, we
believe the following items are significant weaknesses:
• Property Inspections (Findings 1 and 6)
• Conflicts of Interest (Finding 2)
• Cost Reasonableness (Finding 3)
Page 41 96-PH-241-1016
Internal Controls
• Procurement (Finding 4)
• Occupancy (Finding 5)
• Contractor Qualifications (Finding 7)
96-PH-241-1016 Page 42
Follow Up On Prior Audits
This was the first OIG audit of Montgomery County's HUD-funded residential rehabilitation
programs. Prior audits of Montgomery County operations performed by independent auditors
contained no findings pertaining to the HUD-funded programs.
Page 43 96-PH-241-1016
Follow Up On Prior Audits
96-PH-241-1016 Page 44
Appendix A
Schedule of Ineligible Costs
Finding Ineligible
1 $138,347
Ineligible amounts are not allowed by law, contract, HUD or local agency policies or regulations.
Page 45 96-PH-241-1016
Appendix A
96-PH-241-1016 Page 46
Appendix B
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Appendix B
96-PH-241-1016 Page 48
Appendix B
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Appendix B
96-PH-241-1016 Page 50
Appendix B
Appendix F
Distribution
Secretary's Representative, 3AS
Director, Office of Community Planning and Development, 3AD
Internal Control and Audit Resolution Staff, 3AFI
Director, Field Accounting Division, 3AFF
Assistant to the Secretary for Field Management, SC(Room 7106)
Audit Liaison Officer, COM (Room 7228) (3)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Associate General Counsel, Office of Assisted Housing and
Community Development, GC (Room 8162)
Assistant Director in Charge, US GAO, 820 1st ST. NE Union Plaza,
Bldg. 2, Suite 150, Washington, DC 20002
Attn: Mr. Cliff Fowler
Board of Commissioners (3)
County of Montgomery
Court House
Swede and Airy Streets
Norristown, PA 19404-0311
Page 61 96-PH-241-1016
Appendix F
96-PH-241-1016 Page 62
Appendix F
Page 63 96-PH-241-1016
Dept. of Housing Services, Norristown, PA
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-05-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)